The following tables present the Company’s loan and lease portfolio aging analysis of the recorded investment in loans and leases as of June 30, 2020 and December 31, 2019:
The following tables present the Company’s impaired loans and specific valuation allowance at June 30, 2020 and December 31, 2019:
The following tables present the Company’s average investment in impaired loans and interest income recognized for the three and six months ended June 30, 2020 and 2019.
The following table presents the Company’s nonaccrual loans and leases at June 30, 2020 and December 31, 2019:
During the three and six months ended June 30, 2020 and 2019, there were no newly classified troubled debt restructured loans or leases (“TDRs”). For the three and six months ended June 30, 2020 and 2019, the Company recorded no charge-offs related to TDRs. As of both June 30, 2020 and December 31, 2019, TDRs had a related allowance of $52,000. During the three and six months ended June 30, 2020, there were no TDRs for which there was a payment default within the first 12 months of the modification.
The Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.
In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. As of June 30, 2020, the Company had approved 752 loan and lease modifications related to the COVID-19 pandemic with an outstanding loan balance totaling $175.1 million in accordance with the CARES Act. Accordingly, the Company does not account for such loan modifications as TDRs. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.
At June 30, 2020 and December 31, 2019, the balance of real estate owned includes $32,000 and $0, respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At June 30, 2020 and December 31, 2019, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds were in process was $283,000 and $190,000, respectively.
The following lists the components of the net investment in direct financing leases:
The amount of leases serviced by First Bank Richmond for the benefit of others was approximately $336,000 and $715,000 at June 30, 2020 and December 31, 2019, respectively. Additionally, certain leases have been sold with partial recourse. First Bank Richmond estimates and records its obligation based upon historical loss percentages. At June 30, 2020 and December 31, 2019, First Bank Richmond has recorded a recourse obligation on leases sold with recourse of $0, and has a maximum exposure of $411,000 for these leases.
The following table summarizes the future minimum lease payments receivable subsequent to June 30, 2020:
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
The following tables present the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2020 and December 31, 2019:
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the six months ended June 30, 2020.
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy, which includes equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include agency securities, obligations of state and political subdivisions, and mortgage-backed securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2020 and December 31, 2019:
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results.
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.
Mortgage-servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, mortgage-servicing rights are classified within Level 3 of the hierarchy.
Mortgage-servicing rights are tested for impairment on a quarterly basis based on an independent valuation. The valuation is reviewed by management for accuracy and for potential impairment.
The following tables present the fair value measurement of assets recognized in the accompanying consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2020 and December 31, 2019:
Basic EPS is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted EPS includes the dilutive effect of additional potential common shares from stock compensation awards, but excludes awards considered participating securities. ESOP shares are not considered outstanding for EPS until they are earned. The following table presents the computation of basic and diluted EPS for the periods indicated:
As part of the corporate reorganization and related stock offering, the Company established an Employee Stock Ownership Plan (ESOP) covering substantially all employees. The ESOP acquired 1,082,130 shares of Company common stock at an average of $13.59 per share on the open market with funds provided by a loan from the Company. Accordingly, $14,706,000 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity. Shares are released to participants proportionately as the loan is repaid.
ESOP expense for the three and six months ended June 30, 2020 was $143,000 and $329,000, respectively.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management’s discussion and analysis of financial condition of the Richmond Mutual Bancorporation, Inc. (the “Company”) at June 30, 2020, and the consolidated results of operations for the three and six month periods ended June 30, 2020, compared to the same periods in 2019 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this Form 10-Q.
The terms “we,” “our,” “us,” or the “Company” refer to Richmond Mutual Bancorporation, Inc. and its consolidated subsidiary, First Bank Richmond, which we sometimes refer to as the “Bank,” unless the context otherwise requires.
Cautionary Note Regarding Forward-Looking Statements
Certain matters in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of words such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” These forward-looking statements include, but are not limited to:
·statements of our goals, intentions and expectations;
·statements regarding our business plans, prospects, growth and operating strategies;
·statements regarding the quality of our loan and investment portfolios; and
·estimates of our risks and future costs and benefits.
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These forward-looking statements are based on our current beliefs and expectations and, by their nature, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
Important factors that could cause our actual results to differ materially from the results anticipated or projected, include, but are not limited to, the following:
·the effect of the novel coronavirus disease of 2019 (“COVID-19”), including on the Company’ credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity;
·general economic conditions, either nationally or in our market areas, that are worse than expected;
·changes in the level and direction of loan or lease delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan and lease losses;
·our ability to access cost-effective funding;
·fluctuations in real estate values and both residential and commercial real estate market conditions;
·risks associated with the relatively unseasoned nature of a significant portion of our loan portfolio;
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·demand for loans and deposits in our market area;
·our ability to implement and change our business strategies;
·competition among depository and other financial institutions and equipment financing companies;
·the impact of the proposed termination of our defined benefit plan;
·the deductibility of our contribution to the charitable foundation for tax purposes;
·inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans and leases we have made and make;
·adverse changes in the securities or secondary mortgage markets;
·changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;
·changes in the quality or composition of our loan, lease or investment portfolios;
·technological changes that may be more difficult or expensive than expected;
·the inability of third-party providers to perform as expected;
·our ability to manage market risk, credit risk and operational risk in the current economic environment;
·our ability to enter new markets successfully and capitalize on growth opportunities;
·our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
·changes in consumer spending, borrowing and savings habits;
·changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
·our ability to retain key employees;
·our compensation expense associated with equity allocated or awarded to our employees;
·changes in the financial condition, results of operations or future prospects of issuers of securities that we own;
·other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") ; and
·the other risks detailed in this report and from time to time in our other filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”).
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We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.
Overview
On February 6, 2019, the Board of Directors of First Mutual of Richmond, Inc. (the “MHC”), the parent mutual holding company of Richmond Mutual Bancorporation-Delaware, adopted a Plan of Reorganization and Stock Offering (the “Plan”). The Plan was approved by the Board of Governors of the Federal Reserve System (the “FRB”) and by the Indiana Department of Financial Institutions (the “IDFI”), as well as the voting members of the MHC at a special meeting of members held on June 19, 2019. Pursuant to the Plan, upon completion of the transaction, the MHC would convert from a mutual holding company to the stock holding company corporate structure, the MHC and Richmond Mutual Bancorporation-Delaware would cease to exist, and First Bank Richmond would become a wholly owned subsidiary of the Company, a newly formed Maryland corporation. The transaction was completed on July 1, 2019. In connection with the related stock offering, which was also completed on July 1, 2019, the Company sold 13,026,625 shares of common stock at $10.00 per share, for gross offering proceeds of approximately $130.3 million in its subscription offering and contributed 500,000 shares and $1.25 million to a newly formed charitable foundation, First Bank Richmond, Inc. Community Foundation (the “Foundation”).
In certain circumstances, where appropriate, the terms “we”, “us”, “our” and the “Company” refer collectively to (i) RMB-Delaware and First Bank Richmond with respect to discussions in this document involving matters occurring prior to completion of the corporate reorganization and (ii) the Company and First Bank Richmond with respect to discussions in this document involving matters occurring post-corporate reorganization, in each case unless the context indicates another meaning.
The Company is regulated by the FRB and the IDFI. Our corporate office is located at 31 North 9th Street, Richmond, Indiana, and our telephone number is (765) 962-2581.
First Bank Richmond is an Indiana state-chartered commercial bank headquartered in Richmond, Indiana. The Bank was originally established in 1887 as an Indiana state-chartered mutual savings and loan association and in 1935 converted to a federal mutual savings and loan association, operating under the name First Federal Savings and Loan Association of Richmond. In 1993, the Bank converted to a state-chartered mutual savings bank and changed its name to First Bank Richmond, S.B. In 1998, the Bank, in connection with its non-stock mutual holding company reorganization, converted to a national bank charter operating as First Bank Richmond, National Association. In July 2007, Richmond Mutual Bancorporation-Delaware, the Bank’s then current holding company, acquired Mutual Federal Savings Bank headquartered in Sidney, Ohio. Mutual Federal Savings Bank was operated independently as a separately chartered, wholly owned subsidiary of Richmond Mutual Bancorporation-Delaware until 2016 when it was combined with the bank through an internal merger transaction that consolidated both banks into a single, more efficient commercial bank charter. In 2017, the Bank converted to an Indiana state-chartered commercial bank and changed its name to First Bank Richmond. Mutual Federal Savings Bank continues to operate in Ohio under the name Mutual Federal, a division of First Bank Richmond.
First Bank Richmond provides full banking services through its seven full- and one limited-service offices located in Cambridge City (1), Centerville (1), Richmond (5) and Shelbyville (1), Indiana, its five full service offices located in Piqua (2), Sidney (2) and Troy (1), Ohio, and its loan production office in Columbus, Ohio. Administrative, trust and wealth management services are conducted through First Bank Richmond’s Corporate Office/Financial Center located in Richmond, Indiana. As an Indiana-chartered commercial bank, First Bank Richmond is subject to regulation by the IDFI and the Federal Deposit Insurance Corporation (“FDIC”).
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Our principal business consists of attracting deposits from the general public, as well as brokered deposits, and investing those funds primarily in loans secured by commercial and multi-family real estate, first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, direct financing leases and commercial and industrial loans. We also obtain funds by utilizing Federal Home Loan Bank (“FHLB”) advances. Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and agency and municipal bonds.
First Bank Richmond generates commercial, mortgage and consumer loans and leases and receives deposits from customers located primarily in Wayne and Shelby Counties, in Indiana and Shelby, Miami and Franklin (no deposits) Counties, in Ohio. We sometimes refer to these counties as our primary market area. First Bank Richmond’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Our leasing operation consists of direct investments in equipment that we lease (referred to as direct finance leases) to small businesses located throughout the United States. Our lease portfolio consists of various kinds of equipment, generally technology-related, such as computer systems, medical equipment and general manufacturing, industrial, construction and transportation equipment. We seek leasing transactions where we believe the equipment leased is integral to the lessee's business. We also provide trust and wealth management services, including serving as executor and trustee under wills and deeds and as guardian and custodian of employee benefits, and manage private investment accounts for individuals and institutions. Total wealth management assets under management and administration were $167.0 million at June 30, 2020.
Our results of operations are primarily dependent on net interest income. Net interest income is the difference between interest income, which is the income that is earned on loans and investments, and interest expense, which is the interest that is paid on deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), and fees from sale of residential mortgage loans originated for sale in the secondary market. We also recognize income from the sale of investment securities.
Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reduction in the targeted federal funds rate, until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in 2020 and possibly longer.
At June 30, 2020, on a consolidated basis, we had $1.1 billion in assets, $752.9 million in loans and leases, net of allowance, $739.1 million in deposits and $196.1 million in stockholders’ equity. At June 30, 2020, First Bank Richmond’s total risk-based capital ratio was 13.4%, exceeding the 10.0% requirement for a well-capitalized institution. For the six months ended June 30, 2020, net income was $5.0 million, compared with net income of $1.7 million for the six months ended June 30, 2019.
Critical Accounting Policies
Certain accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan and lease losses, the valuation of foreclosed assets, mortgage servicing rights, valuation of intangible assets and securities, deferred tax asset and income tax accounting.
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Allowance for Loan and Lease Losses. We maintain an allowance for loan and lease losses to cover probable incurred credit losses at the balance sheet date. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. A provision for loan and lease losses is charged to operations based on our periodic evaluation of the necessary allowance balance.
We have an established process to determine the adequacy of the allowance for loan and lease losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors, all of which may be susceptible to significant change.
Foreclosed Assets. Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. Management estimates the fair value of the properties based on current appraisal information. Fair value estimates are particularly susceptible to significant changes in the economic environment, market conditions and real estate market. A worsening or protracted economic decline would increase the likelihood of a decline in property values and could create the need to write down the properties through current operations.
Mortgage Servicing Rights (“MSRs”). MSRs associated with loans originated and sold, where servicing is retained, are capitalized and included in the consolidated balance sheet. The value of the capitalized servicing rights represents the fair value of the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as a reduction in loan servicing fee income.
Securities. Under Financial Accounting Standards Board (“FASB”) Codification Topic 320 (ASC 320), Investments-Debt, investment securities must be classified as held to maturity, available for sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and we have the ability to hold the securities to maturity. Securities not classified as held to maturity are classified as available for sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and which do not affect earnings until realized.
The fair values of our securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of our fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.
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We evaluate all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if any other-than-temporary-impairments (“OTTI”) exist pursuant to guidelines established in ASC 320. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our ability and intent to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
If management determines that an investment experienced an OTTI, we must then determine the amount of the OTTI to be recognized in earnings. If we do not intend to sell the security and it is more likely than not that we will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the value of these securities are recorded as an unrealized gain (as accumulated other comprehensive income (loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold.
From time to time we may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.
Deferred Tax Asset. We have evaluated our deferred tax asset to determine if it is more likely than not that the asset will be utilized in the future. Our most recent evaluation has determined that we will more likely than not be able to utilize our remaining deferred tax asset.
Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.
COVID 19 Response
In response to the COVID-19 pandemic, the Company is offering a number of options designed to support our customers and the communities that we serve.
Paycheck Protection Program ("PPP"). The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program called the Paycheck Protection Program, or PPP. The goal of the PPP is to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA. The deadline for PPP loan applications to the SBA has been extended to August 8, 2020. The Bank continued to accept new PPP applications based on this extended
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deadline and is assisting small businesses with other borrowing options as they become available, including SBA and other government sponsored lending programs, as appropriate.
As of June 30, 2020, we have processed 465 PPP loans totaling $64.3 million. There were $72,000 PPP loans approved awaiting funding as of June 30, 2020. Many of the PPP applications have been from our existing clients but we are also serving those who have not had a banking relationship with us in the past. In addition to the 1% interest earned on these loans, the SBA pays us fees for processing PPP loans in the following amounts: (i) five (5) percent for loans of not more than $350,000; (ii) three (3) percent for loans of more than $350,000 and less than $2,000,000; and one (1) percent for loans of at least $2,000,000. We may not collect any fees from the loan applicants.
We may utilize the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”), pursuant to which the Company would pledge its PPP loans as collateral to obtain FRB non-recourse loans. The PPPLF will take the PPP loans as collateral at face value. As of June 30,2020, we had not utilized the PPPLF.
Loan Modifications. Beginning in March 2020 we started receiving requests from our borrowers for loan and lease deferrals related to the effects of the COVID-19 pandemic. At June 30, 2020, 752 loans aggregating $175.1 million, or 22.9% of total loans and leases, were modified. Modifications include payment deferrals, interest only or principal and interest, of up to primarily 90 days, fee waivers, extensions of repayment terms of up to six months, or other delays in payment that are considered insignificant. These modifications were not classified as TDRs at June 30, 2020 in accordance with the guidance of the CARES Act and related regulatory banking guidance. The CARES Act provides that the short-term modification of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory banking guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.
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The following table summarizes information relating to forbearance requests granted at June 30, 2020 and March 31, 2020:
|
|
June 30, 2020
|
|
March 31, 2020
|
($ in thousands)
|
|
Number of Loans
|
|
Balance
|
|
Number of Loans
|
|
Balance
|
Commercial mortgage
|
|
70
|
|
$
|
98,010
|
|
21
|
|
$
|
27,050
|
Commercial and industrial
|
|
27
|
|
12,692
|
|
10
|
|
1,730
|
Construction and development
|
|
3
|
|
10,098
|
|
—
|
|
—
|
Multi-Family
|
|
13
|
|
21,197
|
|
5
|
|
4,465
|
Residential mortgage
|
|
88
|
|
11,198
|
|
8
|
|
1,379
|
Home equity
|
|
7
|
|
215
|
|
—
|
|
—
|
Direct financing leases
|
|
507
|
|
21,080
|
|
176
|
|
8,058
|
Consumer
|
|
37
|
|
597
|
|
—
|
|
—
|
Total Loans
|
|
752
|
|
$
|
175,087
|
|
220
|
|
$
|
42,682
|
|
|
|
|
|
|
|
|
|
|
|
Branch Operations and Additional Client Support
Many of our employees continue to work remotely or have flexible work schedules, and we have established protective measures within our offices to help ensure the safety of those employees who must work on-site. We have also taken steps to resume more normal branch activities with specific guidelines in place to ensure the safety of our clients and our personnel. This includes the installation of counter shields and hand sanitizing stations, limiting the number of clients in a branch at any one time, requiring social distancing and the wearing of masks within the branch, diligent disinfecting of common area high touchpoints and encouraging the use of our digital and electronic banking channels. We continuously monitor and conform our practices based on updates from the Center for Disease Control, World Health Organization, Financial Regulatory Agencies, and local and state health departments.
In addition, certain late fees are being waived for those customers experiencing a hardship as a result of the COVID 19 pandemic.
Comparison of Financial Condition at June 30, 2020 and December 31, 2019
General. Total assets increased $154.2 million, or 15.6%, to $1.1 billion at June 30, 2020 from $986.0 million at December 31, 2019. The increase was primarily a result of a $65.7 million, or 9.6%, increase in loans and leases, net of allowance, to $752.9 million at June 30, 2020 from $687.3 million at December 31, 2019, and a $70.0 million, or 172.5%, increase in cash and cash equivalents to $110.6 million at June 30, 2020, compared to $40.6 million at December 31, 2019. The increase in cash and cash equivalents primarily was the result of an increase in brokered deposits and FHLB borrowings as part of the Company’s strategy to increase liquidity.
Loans and Leases. Our loan and lease portfolio, net of allowance for loan and lease losses, increased $65.7 million, to $752.9 million at June 30, 2020 from $687.3 million at December 31, 2019. The increase in loans and leases was attributable to PPP loans, which accounted for $64.3 million of the $65.7 million increase. From December 31, 2019 to June 30, 2020, commercial and industrial loans increased $56.6 million or 67.0%, commercial real estate loans increased $12.6 million or 5.5%, and construction and development loans increased $8.9 million or 16.7%. PPP loans accounted for all of the increases in commercial and industrial loans offsetting a decline of $7.7 million of non-PPP loans. Partially offsetting these increases were decreases in multi-family real estate loans of $7.3 million or 11.0%, non-PPP commercial and industrial loans of $7.7 million, residential real estate loans, including home equity loans, of $5.6 million or 4.1%, and consumer loans of $984,000 or 7.3%. Leases grew $4.8 million, or 4.3%, from December 31, 2019 to June 30, 2020.
35
Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loans and leases more than 90 days past due, totaled $4.3 million or 0.57% of total loans and leases at June 30, 2020, compared to $4.3 million or 0.61% of total loans at March 31, 2020, and $3.8 million or 0.55% of total loans and leases at December 31, 2019. Accruing loans past due more than 90 days at June 30, 2020, totaled $3.3 million, compared to $3.1 million at March 31, 2020, and $2.6 million at December 31, 2019.
At June 30, 2020, TDRs totaled $569,000, compared to $598,000 at December 31, 2019. At June 30, 2020 and December 31, 2019, the Company had TDRs that were accruing and performing in accordance with their modified terms of $569,000 and $598,000, respectively. Performing TDRs are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status. The CARES Act amended generally accepted accounting principles with respect to the modification of loans to borrowers affected by the COVID-19 pandemic. Among other criteria, this guidance provided that short-term loan modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. As of June 30, 2020, the Company had approved 752 loan modifications qualifying under the CARES Act related to the COVID-19 pandemic with an outstanding loan balance totaling $175.1 million. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regards to determining whether or not a loan is deemed to be impaired.
Allowance for Loan and Lease Losses. The allowance for loan and lease losses increased $1.4 million, or 20.2%, to $8.5 million at June 30, 2020 from $7.1 million at December 31, 2019. At June 30, 2020, the allowance for loan and lease losses totaled 1.12% of total loans and leases outstanding compared to 1.02% at December 31, 2019. Excluding the $64.3 million of PPP loans from the $763.9 million of total loans and leases at June 30, 2020, the allowance for loan and lease losses to total loans and leases was 1.22% at June 30, 2020. PPP loans are fully guaranteed by the SBA and management expects that the vast majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven. Net charge-offs during the first six months of 2020 were $98,000 or 0.03% of average loans and leases outstanding, compared to net charge-offs of $329,000, or 0.10% of average loans and leases outstanding during the first six months of 2019. The allowance for loan and lease losses to non-performing loans and leases was 197.5% at June 30, 2020, compared to 186.0% at December 31, 2019.
Management regularly analyzes conditions within its geographic markets and evaluates its loan and lease portfolio. The Company evaluated its exposure to potential loan and lease losses as of June 30, 2020, which evaluation included consideration of potential credit losses due to the deteriorating economic conditions driven by the impact of the COVID-19 pandemic. The full impact of the pandemic on the Company’s deposit and loan and lease customers is still unknown. The Company has increased its qualitative factors when determining the adequacy of its allowance for loan and lease losses. Credit metrics are being reviewed and stress testing is being performed on the loan portfolio. Potentially higher risk segments of the portfolio, such as hotels and restaurants, are being closely monitored as are loan payment deferrals.
Deposits. Total deposits increased $121.9 million, or 19.8%, to $739.1 million at June 30, 2020, from $617.2 million at December 31, 2019. This increase in deposits was primarily due to an increase in brokered deposits (as the Company sought to increase its liquidity position) and an increase in demand deposit and savings accounts primarily related to disbursements of PPP loan funds to borrowers’ deposit accounts as well as reduced withdrawals reflecting changes in customer spending habits due to the COVID-19 pandemic. Brokered deposits increased $64.0 million to $120.7 million, or 16.3% of total deposits, at June 30, 2020, compared to $56.7 million, or 9.2% of total deposits, at December 31, 2019. Demand deposit and savings accounts increased $60.1 million to $395.9 million at June 30, 2020, compared to $335.8 million at December 31, 2019. At June 30, 2020, noninterest bearing deposits totaled $89.9 million, or 12.2% of total deposits, compared to $60.3 million or 9.8% of total deposits at December 31, 2019.
Borrowings. Total borrowings, consisting solely of FHLB advances, increased $26.0 million, or 16.9%, to $180.0 million at June 30, 2020 from $154.0 million at December 31, 2019 consistent with the Company’s strategy to increase liquidity.
36
Stockholders’ Equity. Stockholders’ equity totaled $196.1 million at June 30, 2020, an increase of $8.3 million, or 4.4%, from December 31, 2019. The increase in stockholders’ equity primarily was the result of net income of $5.0 million in the first half of 2020 and a $3.7 million improvement in accumulated other comprehensive income, partially offset by $623,000 in dividends paid to shareholders. The Company’s equity to asset ratio was 17.2% at June 30, 2020. At June 30, 2020, the Bank’s Tier 1 capital to total assets ratio was 13.4% and the Bank’s capital was well in excess of all regulatory requirements.
Comparison of Results of Operations for the Three Months Ended June 30, 2020 and 2019.
General. Net income for the three months ended June 30, 2020 was $2.5 million, a $2.2 million, or 647.8% increase from net income of $335,000 for the three months ended June 30, 2019. The $2.5 million in earnings equaled $0.20 diluted earnings per share for the second quarter of 2020. There is no comparison of earnings per share to the second quarter of 2019, as the Company’s reorganization from the mutual to stock form of ownership and related stock offering was not completed until July 1, 2019.
Interest Income. Interest income increased $100,000, or 1.0%, to $10.5 million during the quarter ended June 30, 2020, compared to $10.4 million during the quarter ended June 30, 2019. Interest income on loans and leases increased $145,000, or 1.6%, to $9.3 million for the quarter ended June 30, 2020, from $9.2 million for the comparable quarter in 2019, due to higher average loan and lease balances. The average outstanding loan and lease balance was $747.9 million for the quarter ended June 30, 2020, compared to $687.0 million for the quarter ended June 30, 2019. The average yield on loans and leases was 4.98% for the quarter ended June 30, 2020, compared to 5.33% for the comparable quarter in 2019. The yield on the loan and lease portfolio was impacted by the PPP loan activity during the second quarter of 2020 as PPP loans are originated at an interest rate of 1%, although the effective yield is slightly higher as a result of the origination fees paid to us by the SBA. The average yield on PPP loans was 3.22%, including the recognition of the net deferred fees, reducing average yield on loans and leases by 12 basis points for the three months ended June 30, 2020.
Interest income on investment securities, including FHLB stock, increased $222,000, or 23.2%, to $1.2 million during the quarter ended June 30, 2020, from $957,000 during the comparable quarter in 2019. The increase in interest income on investment securities from the comparable period in 2019 was due to higher average balances, partially offset by a lower weighted average yield. The average balance of investment securities, including FHLB stock, was $256.6 million for the quarter ended June 30, 2020, compared to $157.8 million for the quarter ended June 30, 2019. The average yield on investment securities, including FHLB stock, was 1.84% for the second quarter of 2020, compared to 2.45% for the second quarter of 2019. Interest income earned on cash and cash equivalents decreased to $11,000 in the second quarter of 2020 compared to $278,000 in the comparable quarter of 2019. This was due to the significantly lower yield earned on funds at the Federal Reserve after the rate reductions experienced in the second half of 2019 and in March 2020.
Interest Expense. Interest expense decreased $441,000, or 15.1%, to $2.5 million for the quarter ended June 30, 2020, from $2.9 million for the quarter ended June 30, 2019. Interest expense on deposits decreased $403,000, or 19.1%, to $1.7 million for the quarter ended June 30, 2020, from $2.1 million for the comparable quarter in 2019. This decrease in interest expense was attributable to the lower weighted average rate paid on interest-bearing deposits, partially offset by higher average deposit balances. The weighted average rate paid on interest-bearing deposits was 1.13% for the quarter ended June 30, 2020, compared to 1.40% for the quarter ended June 30, 2019. Average balances of interest-bearing deposits increased slightly to $602.3 million in the quarter ended June 30, 2020, compared to $600.1 million in the comparable quarter in 2019. Interest expense on FHLB borrowings decreased $38,000, or 4.7%, to $770,000 in the second quarter of 2020 compared to the same quarter in 2019. The average balance of FHLB borrowings totaled $181.8 million during the quarter ended June 30, 2020, compared to $147.4 million for the quarter ended June 30, 2019. The weighted average rate paid on FHLB borrowings was 1.69% for the quarter ended June 30, 2020, a 51 basis point decline from 2.20% for the comparable quarter in 2019.
37
Net Interest Income. Net interest income before the provision for loan and lease losses increased $541,000, or 7.2%, to $8.0 million in the second quarter of 2020, compared to $7.5 million for the second quarter of 2019. This increase was primarily due to an increase in average interest-earning assets during the second quarter of 2020 compared to the comparable period in 2019. Our net interest margin was 3.03% for three months ended June 30, 2020, compared to 3.27% for the three months ended June 30, 2019. The decrease in net interest margin was primarily due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities. The market’s response to lowering deposit pricing to reflect the targeted federal funds rate decrease over the past year typically lags declines in the yield on interest earning assets. The average yield on PPP loans was 3.22% during the three months ended June 30, 2020, including the recognition of the net deferred fees, resulting in a negative impact on net interest margin of 12 basis points for the three months ended June 30, 2020.
Average Balances, Interest and Average Yields/Cost. The following tables set forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using quarterly balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Loan fees are included in interest income on loans and are not material.
|
|
|
Three Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Average
Balance
Outstanding
|
|
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
|
Average
Balance
Outstanding
|
|
|
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases receivable
|
|
|
$
|
747,865
|
|
|
$
|
9,308
|
|
4.98
|
%
|
|
$
|
687,023
|
|
|
$
|
|
9,163
|
|
5.33
|
%
|
|
Securities
|
|
|
|
247,594
|
|
|
|
1,120
|
|
1.81
|
%
|
|
|
150,640
|
|
|
|
|
867
|
|
2.30
|
%
|
|
FHLB stock
|
|
|
|
9,035
|
|
|
|
58
|
|
2.57
|
%
|
|
|
7,143
|
|
|
|
|
91
|
|
5.10
|
%
|
|
Cash and cash equivalents and other
|
|
|
|
54,806
|
|
|
|
11
|
|
0.08
|
%
|
|
|
70,744
|
|
|
|
|
278
|
|
1.57
|
%
|
|
Total interest-earning assets
|
|
|
|
1,059,300
|
|
|
|
10,497
|
|
3.96
|
%
|
|
|
915,550
|
|
|
|
|
10,399
|
|
4.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and money market accounts
|
|
|
|
183,415
|
|
|
|
253
|
|
0.55
|
%
|
|
|
180,514
|
|
|
|
|
346
|
|
0.77
|
%
|
|
Interest-bearing checking accounts
|
|
|
|
115,091
|
|
|
|
66
|
|
0.23
|
%
|
|
|
102,280
|
|
|
|
|
98
|
|
0.38
|
%
|
|
Certificate accounts
|
|
|
|
303,805
|
|
|
|
1,385
|
|
1.82
|
%
|
|
|
317,299
|
|
|
|
|
1,663
|
|
2.10
|
%
|
|
Borrowings
|
|
|
|
181,824
|
|
|
|
770
|
|
1.69
|
%
|
|
|
147,375
|
|
|
|
|
809
|
|
2.20
|
%
|
|
Total interest-bearing liabilities
|
|
|
|
784,135
|
|
|
|
2,474
|
|
1.26
|
%
|
|
|
747,468
|
|
|
|
|
2,916
|
|
1.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
$
|
8,023
|
|
|
|
|
|
|
|
|
$
|
|
7,483
|
|
|
|
|
Net earning assets
|
|
|
$
|
275,165
|
|
|
|
|
|
|
|
|
$
|
168,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread(1)
|
|
|
|
|
|
|
|
|
|
2.70
|
%
|
|
|
|
|
|
|
|
|
|
2.98
|
%
|
|
Net interest margin(2)
|
|
|
|
|
|
|
|
|
|
3.03
|
%
|
|
|
|
|
|
|
|
|
|
3.27
|
%
|
|
Average interest-earning assets to
average interest-bearing liabilities
|
|
|
|
135.09
|
%
|
|
|
|
|
|
|
|
|
122.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_____________
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.
Provision for Loan and Lease Losses. The provision for loan and lease losses for the three months ended June 30, 2020 totaled $1.3 million compared to $485,000 for the three months ended June 30, 2019, a $835,000 or 172.2% increase. The increased provision was primarily due to the continued uncertainty of the economic impact of the COVID-19 pandemic on the Bank’s loan portfolio. Net charge-offs during the second quarter of 2020 were $106,000, compared to net charge-offs of $40,000 in the second quarter of 2019. As the COVID-19 pandemic continues, we expect to see continued pressure on asset quality. As management continues to monitor the loan portfolio, additional provisions may be required.
38
Non-Interest Income. Non-interest income increased $1.2 million or 131.4%, to $2.1 million for the quarter ended June 30, 2020, compared to $900,000 for the comparable quarter in 2019 The increase in noninterest income resulted primarily from the increase in the gain on sale of loans and leases, which increased $907,000, or 734.1%, to $1.0 million during the second quarter of 2020, compared to $124,000 during the first quarter of 2020 as a result of increased mortgage banking activity during the current quarter due to lower rates. Loan and lease servicing income increased $202,000, or 20.5%, to $301,000 for the second quarter of 2020 compared to $99,000 for the comparable quarter in 2019. In the second quarter of 2020, the Company recorded a recovery to the value of its mortgage servicing rights of $296,000, while no impairment recovery or charge was recorded in the second quarter of 2019. Other loan fees increased $156,000, or 176.8%, to $245,000 due to increased letter of credit fees of $58,000 and loan interest rate modification fees of $76,000. Service fees on deposit accounts decreased $146,000, or 58.1%, to $106,000 for the quarter ended June 20, 2020, compared to $252,000 for the quarter ended June 30, 2019 as a result of the waiving of overdraft fees.
Non-Interest Expense. Non-interest expense decreased $2.0 million, or 25.7%, to $5.6 million for the three months ended June 30, 2020, from $7.6 million for the same period in 2019. Salaries and employee benefits decreased $2.0 million, or 38.5%, to $3.3 million for the quarter ended June 30, 2020 from $5.3 million for the quarter ended June 30, 2019. The $2.0 million decrease from the second quarter of 2019 was primarily attributable to the $1.7 million pre-tax expense related to the adoption of a nonqualified deferred compensation plan during the second quarter of 2019. Excluding this expense, salaries and employee benefits decreased $369,000, or 10.3%, for the three months ended June 30, 2020, compared to the three months ended June 30, 2019. Data processing expenses increased $48,000, or 11.3%, in the second quarter of 2020 compared to the second quarter of 2019, due to normal price increases associated with information technology services and additional digital services and products offered by the Company. Deposit insurance expense decreased $98,000, or 62.0%, to $60,000, in the second quarter of 2020 compared to the second quarter of 2019. The decrease from the second quarter of 2019 was due to the Bank’s higher capital ratios resulting from the Company’s injection of capital into the Bank in connection with our reorganization to a stock holding company and related stock offering. Legal and professional fees increased $118,000, or 56.4%, to $327,000 for the quarter ended June 30, 2020 from $209,000 for the comparable quarter in 2019. The increase in legal and professional fees was due to the establishment of an out-of-state subsidiary of First Bank for investment management purposes in the second quarter of 2020.
Income Tax Expense. Income tax expense increased $674,000 during the three months ended June 30, 2020, compared to the same period in 2019, primarily due to a $2.8 million increase in pre-tax income. The effective tax rate for the second quarter of 2020 was 20.2% compared to a 14.3% benefit for the same quarter a year ago.
Comparison of Results of Operations for the Six Months Ended June 30, 2020 and 2019.
General. Net income for the six months ended June 30, 2020 totaled $5.0 million, a $3.3 million or 190.4% increase from net income of $1.7 million for the comparable period in 2019. The $5.0 million in earnings equaled $0.40 diluted earnings per share for the first half of 2020. There is no comparison of earnings per share to the first half of 2019, as the Company’s reorganization from the mutual to stock form of ownership and related stock offering was not completed until July 1, 2019.
Interest Income. Interest income increased $795,000, or 3.9%, to $20.9 million during the six months ended June 30, 2020, compared to $20.2 million for the comparable period in 2019. Interest income on loans and leases increased $443,000, or 2.5%, to $18.4 million for the first six months of 2020, compared to $17.9 million for the comparable period in 2019, due to higher average loan and lease balances and a slightly higher average yield. The average outstanding loan and lease balance was $692.1 million for the first half of the year of 2020, compared to $677.7 million for the first half of 2019. The average yield on loans and leases was 5.31% for the first six months of 2020, compared to 5.29% for the first six months of 2019. The yield on the loan and lease portfolio was impacted by the PPP loan activity which occurred during the second quarter of 2020 as PPP loans are originated at an interest rate of 1%, although the effective yield is slightly higher as a result of the origination fees paid to us by the SBA. The average yield on PPP loans was 3.22% in the first half of 2020, including the recognition of the net deferred fees, reducing average yield on loans and leases by eight basis points during the six months ended June 30, 2020.
39
Interest income on investment securities, including FHLB stock, increased $543,000, or 28.6%, to $2.4 million during the six months ended June 30, 2020, compared to $1.9 million during the comparable period in 2019. The increase in the interest income on investment securities was due to higher average balances, partially offset by a lower weighted average yield. The average balance of investment securities, including FHLB stock, was $244.4 million for the first six months of 2020, compared to $153.6 million for the first six months of 2019. The average yield on investment securities, including FHLB stock, was 2.00% for the first half of 2020, compared to 2.47% for the first half of 2019. Interest income earned on cash and cash equivalents decreased to $136,000 in the first half of 2020 compared to $328,000 in the first half of 2019. This was due to the significantly lower yield earned on funds at the Federal Reserve after the rate reductions experienced in the second half of 2019 and in March 2020.
Interest Expense. Interest expense decreased $514,000, or 9.3%, to $5.0 million for the six months ended June 30, 2020, compared to $5.6 million for the six months ended June 30, 2019. Interest expense on deposits decreased $465,000, or 11.6%, to $3.5 million for the first half of 2020, compared to $4.0 million in the first half of 2019. This decrease in interest expense on deposits was primarily attributable to the lower weighted average rate paid on interest-bearing deposits, as well as a decline in average balances of interest-bearing deposits. The weighted average rate paid on interest-bearing deposits was 1.23% for the six months ended June 30, 2020, compared to 1.37% for the six months ended June 30, 2019. Average balances of interest-bearing deposits declined $12.5 million, or 2.1%, to $574.4 million in the first six months of 2020 compared to the first six months of 2019. Interest expense on FHLB borrowings decreased $49,000, or 3.2%, to $1.5 million in the first half of 2020 compared to the first half of 2019. The average balance of FHLB borrowings totaled $172.9 million during the first six months of 2020, compared to $141.7 million for the first six months of 2019. The weighted average rate paid on FHLB borrowings was 1.75% for the first half of 2020, a 45 basis point decline from 2.20% for the first half of 2019.
Net Interest Income. Net interest income before the provision for loan and lease losses increased $1.3 million, or 9.0%, to $15.9 million in the first half of 2020, compared to $14.6 million for the first half of 2019. This increase was primarily due to an increase in average interest-earning assets during the first half of 2020 compared to the same period in 2019. Our net interest margin was 3.25% for six months ended June 30, 2020, compared to 3.35% for the six months ended June 30, 2019. The decrease in net interest margin was primarily due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities. The market’s response to lowering deposit pricing to reflect the targeted federal funds rate decrease over the past year typically lags declines in the yield on interest earning assets. The average yield on PPP loans was 3.22% during the six months ended June 30, 2020, including the recognition of the net deferred fees, resulting in a negative impact on net interest margin of eight basis points for the six months ended June 30, 2020.
Average Balances, Interest and Average Yields/Cost. The following tables set forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using quarterly balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Loan fees are included in interest income on loans and are not material.
40
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Average
Balance
Outstanding
|
|
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
|
Average
Balance
Outstanding
|
|
|
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases receivable
|
|
|
$
|
692,055
|
|
|
$
|
18,372
|
|
5.31
|
%
|
|
$
|
677,688
|
|
|
$
|
|
17,929
|
|
5.29
|
%
|
|
Securities
|
|
|
|
235,947
|
|
|
|
2,302
|
|
1.95
|
%
|
|
|
146,667
|
|
|
|
|
1,715
|
|
2.34
|
%
|
|
FHLB stock
|
|
|
|
8,479
|
|
|
|
139
|
|
3.28
|
%
|
|
|
6,916
|
|
|
|
|
183
|
|
5.29
|
%
|
|
Cash and cash equivalents and other
|
|
|
|
43,541
|
|
|
|
136
|
|
0.62
|
%
|
|
|
40,379
|
|
|
|
|
328
|
|
1.62
|
%
|
|
Total interest-earning assets
|
|
|
|
980,022
|
|
|
|
20,949
|
|
4.28
|
%
|
|
|
871,650
|
|
|
|
|
20,155
|
|
4.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and money market accounts
|
|
|
|
173,352
|
|
|
|
545
|
|
0.63
|
%
|
|
|
171,736
|
|
|
|
|
628
|
|
0.73
|
%
|
|
Interest-bearing checking accounts
|
|
|
|
109,622
|
|
|
|
148
|
|
0.27
|
%
|
|
|
100,834
|
|
|
|
|
163
|
|
0.32
|
%
|
|
Certificate accounts
|
|
|
|
291,449
|
|
|
|
2,836
|
|
1.95
|
%
|
|
|
314,309
|
|
|
|
|
3,203
|
|
2.04
|
%
|
|
Borrowings
|
|
|
|
172,945
|
|
|
|
1,510
|
|
1.75
|
%
|
|
|
141,713
|
|
|
|
|
1,559
|
|
2.20
|
%
|
|
Total interest-bearing liabilities
|
|
|
|
747,368
|
|
|
|
5,039
|
|
1.35
|
%
|
|
|
728,592
|
|
|
|
|
5,553
|
|
1.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
$
|
15,910
|
|
|
|
|
|
|
|
|
$
|
|
14,602
|
|
|
|
|
Net earning assets
|
|
|
$
|
232,654
|
|
|
|
|
|
|
|
|
$
|
143,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread(1)
|
|
|
|
|
|
|
|
|
|
2.93
|
%
|
|
|
|
|
|
|
|
|
|
3.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(2)
|
|
|
|
|
|
|
|
|
|
3.25
|
%
|
|
|
|
|
|
|
|
|
|
3.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to
average interest-bearing liabilities
|
|
|
|
131.13
|
%
|
|
|
|
|
|
|
|
|
119.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
___________________
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.
Provision for Loan and Lease Losses. The provision for loan and lease losses for the six months ended June 30, 2020 totaled $1.5 million compared to $1.0 million for the six months ended June 30, 2019, a $520,000 or 51.5% increase. The increased provision was primarily due to the continued uncertainty of the economic impact of the COVID-19 pandemic on the Bank’s loan portfolio. Net charge-offs during the first half of 2020 were $98,000, compared to net charge-offs of $329,000 in the first half of 2019. As the COVID-19 pandemic continues, we expect to see continued pressure on asset quality. As management continues to monitor the loan portfolio, additional provisions may be required.
Non-Interest Income. Non-interest income increased $1.2 million, or 68.2%, to $3.0 million for the first six months of 2020, compared to $1.8 million for the same period in 2019. Gain on sale of loans and leases increased $1.0 million in the first half of 2020 to $1.3 million compared to $211,000 in the comparable period of 2019 as a result of increased mortgage banking activity due to lower rates. Service charges on deposit accounts declined $123,000, or 25.5%, in the first six months of 2020 compared to the first six months of 2019. This decrease was the result of waiving overdraft charges in the second quarter of 2020. Other loan fees increased $85,000, or 34.8%, in the first half of 2020, primarily due to a $58,000 increase in letter of credit fees and a $27,000 increase in loan processing fees. Trust income increased $46,000, or 21.5%, in the first six months of 2020 compared to the first six months of 2019 due to an increase in assets under management.
41
Non-Interest Expense. Non-interest expense decreased $2.2 million, or 16.7%, to $11.2 million during the first six months of 2020 compared to $13.4 million during the same period in 2019. Salaries and employee benefits declined $2.2 million, or 24.5%, in the first half of 2020 compared to the first half of 2019. This decrease was primarily due to the $1.7 million pre-tax expense related to the adoption of a nonqualified deferred compensation plan during the second quarter of 2019. Excluding this expense, salaries and employee benefits decreased $456,000, or 6.4%, for the first half of 2020 compared to the first half of 2019. Salary expense increased $49,000, or 1.1%, in the first half of 2020, while benefit expense declined $505,000 in the first half of 2020 compared to the first half of 2019 primarily due to the lower cost of the ESOP compared to the Company’s defined benefit plan which was frozen with the intent to terminate it in December 2019. The freezing of the plan is expected to reduce, but not eliminate, the ongoing expenses associated with the defined benefit plan until the plan is terminated. Data processing expenses increased $111,000, or 13.2%, in the first half of 2020 compared to the first half of 2019, due to normal price increases associated with information technology services and additional digital services offered by the Company. Deposit insurance expense decreased $177,000, or 60.4%, in the first six months of 2020 compared to the first six months of 2019 due to the Bank’s higher capital ratios resulting from the Company’s injection of capital into the Bank in connection with our reorganization to a stock holding company and related stock offering. We also experienced an increase of $62,000, or 12.3%, in legal and professional fees due to the establishment of an out-of-state subsidiary of First Bank for investment management purposes; and a $107,000, or 36.0%, decline in advertising expenses.
Income Tax Expense. Income tax expense increased $1.0 million during the first half of 2020, compared to the first half of 2019, primarily due to a $4.3 million increase in pre-tax income. The effective tax rate for the first half of 2020 was 20.6% compared to 14.1% in the first half of 2019.
Liquidity
We are required to have enough cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, liquid assets have been maintained above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained.
Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and our ability to manage those requirements. We strive to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance in short-term investments at any given time will cover adequately any reasonably anticipated immediate need for funds. Additionally, First Bank Richmond maintains a relationship with the FHLB of Indianapolis which could provide funds on short-term notice if needed.
Liquidity management is both a daily and long-term function of the management of our business. It is overseen by the Asset and Liability Management Committee. Excess liquidity is generally invested in short-term investments, such as overnight deposits and holding excess funds at the Federal Reserve Bank. On a long-term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed and municipal securities. First Bank Richmond can also generate funds from borrowings, primarily FHLB advances. In addition, we have historically sold eligible long-term, fixed-rate residential mortgage loans in the secondary market in order to reduce interest rate risk and to create another source of liquidity. At June 30, 2020, the Bank had $204.1 million in cash and unpledged available-for-sale investment securities for its cash needs. The Bank had the ability to borrow an additional $41.7 million in FHLB advances based on existing collateral pledged. First Bank Richmond’s liquidity may be supplemented in the second half of 2020 if it participates in the FRB’s PPPLF pursuant to which First Bank Richmond would pledge PPP loans as collateral to obtain FRB non-recourse loans. At June 30, 2020, we had no borrowings from the PPPLF, with the ability to borrow up to $64.3 million based on PPP loans unpledged at that date.
42
First Bank Richmond uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits, fund deposit withdrawals and fund loan and lease commitments. At June 30, 2020, outstanding loan and lease commitments, including unused lines and letters of credit, totaled $133.9 million, including $55.6 million of undisbursed construction and land loans. Certificates of deposit scheduled to mature in one year or less at June 30, 2020, totaled $265.2 million. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Bank.
Liquidity, represented by cash, cash equivalents, and investment securities, is a product of our operating, investing and financing activities. Primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, excess funds are invested in short-term interest-earning assets, which provide liquidity to meet lending requirements. Cash is also generated through borrowings. FHLB advances are utilized to leverage our capital base and provide funds for lending and investment activities, as well as to enhance interest rate risk management.
Cash and cash equivalents increased $70.0 million to $110.6 million as of June 30, 2020, from $40.6 million as of December 31, 2019. Net cash provided by operating activities was $7.2 million for the six months ended June 30, 2020. Net cash used in investing activities totaled $84.5 million during the six months ended June 30, 2020 and consisted primarily of increases in net loans and available-for-sale securities. The $147.2 million of net cash provided by financing activities during the six months ended June 30, 2020 was primarily the result of a $121.9 million net increase in deposits and $26.0 million net increase in FHLB advances.
As a separate legal entity from the Bank, the Company must provide for its own liquidity. At June 30, 2020, the Company, on an unconsolidated basis, had $42.5 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs. The Company’s principal source of liquidity is dividends and ESOP loan repayments from the Bank.
Management believes that its primary liquidity sources of loan repayments, maturing investment securities, available FHLB borrowing, possible utilization of the PPPLF facility, and access to the brokered CD market are sufficient in the economic environment created by the COVID-19 pandemic.
Except as set forth above, management is not aware of any trends, events, or uncertainties that will have, or that are reasonably likely to have a material impact on liquidity, capital resources or operations. Further, management is not aware of any current recommendations by regulatory agencies, which, if they were to be implemented, would have this effect.
Off-Balance Sheet Activities
In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements, including commitments to extend credit and unused lines of credit. These transactions involve varying degrees of off-balance sheet risks. While these commitments are contractual obligations and represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At June 30, 2020, we had $133.9 million in loan and lease commitments and unused lines of credit.
43
Capital Resources
First Bank Richmond is subject to minimum capital requirements imposed by the FDIC. The FDIC may require us to have additional capital above the specific regulatory levels if it believes we are subject to increased risk due to asset problems, high interest rate risk and other risks. At June 30, 2020 First Bank Richmond’s regulatory capital exceeded the FDIC regulatory requirements, and First Bank Richmond was well-capitalized under regulatory prompt corrective action standards. Consistent with our goals to operate a sound and profitable organization, our policy is for First Bank Richmond to maintain well-capitalized status.
|
|
|
|
|
|
|
|
Required for
|
|
|
To Be Well
|
|
|
|
Actual
|
|
|
|
|
|
Adequate Capital
|
|
|
Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital (to risk weighted assets)
|
|
$
|
115,769
|
|
|
|
20.1
|
%
|
|
$
|
62,079
|
|
|
|
8.0
|
%
|
|
$
|
77,599
|
|
|
|
10.0
|
%
|
Tier 1 risk-based capital (to risk weighted assets)
|
|
|
147,248
|
|
|
|
19.0
|
|
|
|
46,559
|
|
|
|
6.0
|
|
|
|
62,079
|
|
|
|
8.0
|
|
Common equity tier 1 capital (to risk weighted assets)
|
|
|
147,248
|
|
|
|
19.0
|
|
|
|
34,920
|
|
|
|
4.5
|
|
|
|
50,439
|
|
|
|
6.5
|
|
Tier 1 leverage (core) capital (to adjusted tangible assets)
|
|
|
147,248
|
|
|
|
13.4
|
|
|
|
43,860
|
|
|
|
4.0
|
|
|
|
54,824
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital (to risk weighted assets)
|
|
$
|
149,137
|
|
|
|
19.5
|
%
|
|
$
|
61,304
|
|
|
|
8.0
|
%
|
|
$
|
76,629
|
|
|
|
10.0
|
%
|
Tier 1 risk-based capital (to risk weighted assets)
|
|
|
142,048
|
|
|
|
18.5
|
|
|
|
45,978
|
|
|
|
6.0
|
|
|
|
61,304
|
|
|
|
8.0
|
|
Common equity tier 1 capital (to risk weighted assets)
|
|
|
142,048
|
|
|
|
18.5
|
|
|
|
34,483
|
|
|
|
4.5
|
|
|
|
49,809
|
|
|
|
6.5
|
|
Tier 1 leverage (core) capital (to adjusted tangible assets)
|
|
|
142,048
|
|
|
|
14.6
|
|
|
|
39,027
|
|
|
|
4.0
|
|
|
|
48,784
|
|
|
|
5.0
|
|
Pursuant to the capital regulations of the FDIC and the other federal banking agencies, First Bank Richmond must maintain a capital conservation buffer consisting of additional common equity tier 1 (“CET1”) capital greater than 2.5% of risk-weighted assets above the required minimum levels of risk-based CET1 capital, tier 1 capital and total capital in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At June 30, 2020 the Bank’s CET1 capital exceeded the required capital conservation buffer.
For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the FRB expects the holding company’s subsidiary banks to be well capitalized under the prompt corrective action regulations. If Richmond Mutual Bancorporation was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at June 30, 2020, it would have exceeded all regulatory capital requirements.
Impact of Inflation
The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the economic value of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of inflationary changes in the economy coincides with changes in interest rates. Since virtually all of our assets and liabilities are monetary in nature, interest rates generally have a more significant impact on our performance than does inflation.