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Section 1: S-1 (FORM S-1)

 

As filed with the Securities and Exchange Commission on March 11, 2019

Registration No. 333-_________

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

Richmond Mutual Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

  

 

 

Maryland 6022 36-4926041

(State or Other Jurisdiction of

Incorporation or Organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

31 North 9th Street

Richmond, Indiana 47374

(765) 962-2581

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

  

Garry Kleer

Chairman of the Board, President and Chief Executive Officer

Richmond Mutual Bancorporation, Inc.

31 North 9th Street

Richmond, Indiana 47374

(765) 962-2581

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

 

Copies to:

James Fleischer, Esquire
Martin L. Meyrowitz, P.C.
Michael S. Sadow, P.C.

Silver, Freedman, Taff & Tiernan LLP

3299 K Street, N.W., Suite 100

Washington, D.C. 20007

(202) 295-4500

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: x

 

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
       
Non-accelerated filer x Smaller reporting company ¨
       
    Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

 

 

 

CALCULATION OF REGISTRATION FEE 

  

Title of each class of

securities to be registered

 

Amount

to be
registered(1)

  Proposed
maximum
offering price
per share
  

Proposed
maximum
aggregate

offering price(2)

  

Amount of

registration fee

 
Common Stock, $0.01 par value per share  13,526,625 shares  $10.00   $135,266,250   $16,395 

 

(1) Includes 500,000 shares to be issued to the First Bank Richmond, Inc. Community Foundation.

 

(2) Estimated solely for the purpose of calculating the registration fee.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

PROSPECTUS

 

RICHMOND MUTUAL BANCORPORATION, INC.

(Proposed Holding Company for First Bank Richmond)

 

Up to 11,327,500 Shares of Common Stock

(Subject to increase to up to 13,026,625 shares)

 

Richmond Mutual Bancorporation, Inc., a newly formed Maryland corporation, is offering up to 11,327,500 shares of common stock for sale to the public at $10.00 per share on a best efforts basis in connection with the conversion and reorganization of First Bank Richmond from the mutual holding company form of organization, which we refer to in this document as the “reorganization.” When the reorganization is completed, all of the outstanding common stock of First Bank Richmond will be owned by the newly formed Richmond Mutual Bancorporation, Inc., and all of the outstanding common stock of Richmond Mutual Bancorporation, Inc. will be owned by public stockholders. In addition to the shares that we will sell in the offering, we intend to contribute a total of $6.25 million to a charitable foundation that we are establishing in connection with the reorganization, which contribution will consist of $1.25 million of cash and $5.0 million (500,000 shares) of common stock. Currently, there is no established trading market for our common stock. We expect that our common stock will be traded on the Nasdaq Capital Market under the symbol “RMBI” upon conclusion of the stock offering. We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.

 

The shares of common stock are first being offered in a subscription offering to eligible depositors and certain borrowers of First Bank Richmond and to First Bank Richmond’s tax-qualified employee benefit plans. Shares not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given to residents of the communities served by First Bank Richmond. Any shares of common stock not purchased in the subscription or community offerings may be offered for sale to the public in a syndicated offering through a syndicate of broker-dealers managed by Keefe, Bruyette & Woods, Inc., a Stifel company (“KBW”). The syndicated offering may commence before the subscription and community offerings (including any extensions) have expired. However, shares purchased in the subscription offering or the community offering will not be issued until the completion of any syndicated offering. The subscription, community and syndicated community offerings are sometimes collectively referred to as the “offering.”

 

We may sell up to 13,026,625 shares of common stock as a result of demand for the shares of common stock or changes in market conditions, without resoliciting subscribers. We must sell a minimum of 8,372,500 shares in order to complete the offering. KBW will use its best efforts to assist us in selling our common stock, but is not obligated to purchase any of the common stock that is being offered for sale. Subscribers will not pay any commissions to purchase shares of common stock in the offering.

 

The minimum order is 25 shares of common stock. Generally, no individual or individuals through a single account held jointly may purchase more than 30,000 shares of common stock, and no individual or other person, along with their associates and those with whom they are acting in concert, may purchase more than 40,000 shares of common stock.

 

The subscription and community offerings are expected to expire at 2:00 p.m., Eastern Time, on [Date 1]. We may extend this expiration time and date, without notice to you, until [Date 2]. Once submitted, stock orders are irrevocable unless the subscription and community offerings are terminated or extended, with regulatory approval, beyond [Date 2], or the number of shares of common stock offered for sale is increased to more than 13,026,625 shares or decreased to less than 8,372,500 shares. If the subscription and community offerings are extended beyond [Date 2], we will notify all subscribers and give them an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest or cancel your deposit account withdrawal authorization. If the number of shares to be sold in the offerings is increased to more than 13,026,625 shares or decreased to less than 8,372,500 shares, we will resolicit subscribers, and all funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest. Funds received in the subscription and the community offerings will be held in a segregated account at First Bank Richmond and will earn interest at [•]% per annum until completion or termination of the offerings.

 

In addition, our officers, directors and employees may participate in the solicitation of offers to purchase common stock in reliance upon Rule 3a4-1 under the Securities Exchange Act of 1934, as amended. They will pay the same $10.00 per share offering price as paid by all other persons who purchase shares in the offering.

 

OFFERING SUMMARY

Price: $10.00 per share

 

   Minimum   Midpoint   Maximum   Adjusted Maximum 
Number of shares   8,372,500    9,850,000    11,327,500    13,026,625 
Gross offering proceeds  $83,725,000   $98,500,000   $113,275,000   $130,266,250 
Estimated offering expenses, excluding selling agent
fees and expenses
  $1,600,000   $1,600,000   $1,600,000   $1,600,000 
Estimated selling agent fees and expenses (1) (2)  $766,270   $902,200   $1,038,130   $1,194,450 
Estimated net proceeds  $81,358,730   $95,997,800   $110,636,870   $127,471,801 
Estimated net proceeds per share  $9.72   $9.75   $9.77   $9.79 

 

 

(1)See “The Reorganization and Offering − Plan of Distribution and Marketing Arrangements” for a discussion of KBW’s compensation for this offering and the compensation to be received by KBW and the other broker-dealers who may participate in a syndicated community offering.
(2)Excludes reimbursable expenses and records agent fees, which are included in estimated offering expenses.

 

This investment involves a degree of risk, including the possible loss of principal.

Please read the “Risk Factors” beginning on page 18.

 

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. None of the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Indiana Department of Financial Institutions, the Federal Deposit Insurance Corporation nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

For assistance, please contact the Stock Information Center at (___) ___-____.

 

The date of this prospectus is _____, 2019.

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

SUMMARY 1
RISK FACTORS 18
SELECTED FINANCIAL AND OTHER DATA 33
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 35
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING 37
OUR POLICY REGARDING DIVIDENDS 39
MARKET FOR THE COMMON STOCK 40
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE 41
CAPITALIZATION 42
PRO FORMA DATA 44
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT THE CHARITABLE FOUNDATION 48
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 50
BUSINESS OF RICHMOND MUTUAL BANCORPORATION, INC. (MARYLAND) 60
BUSINESS OF FIRST BANK RICHMOND 60
TAXATION 91
REGULATION AND SUPERVISION 93
MANAGEMENT 103
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS 115
THE REORGANIZATION AND OFFERING 116
FIRST BANK RICHMOND, INC.  COMMUNITY FOUNDATION 138
RESTRICTIONS ON ACQUISITION OF RICHMOND MUTUAL BANCORPORATION, INC. (MARYLAND) 141
DESCRIPTION OF CAPITAL STOCK OF RICHMOND MUTUAL BANCORPORATION, INC. (MARYLAND) 147
TRANSFER AGENT AND REGISTRAR 148
EXPERTS 148
LEGAL AND TAX OPINIONS 148
WHERE YOU CAN FIND ADDITIONAL INFORMATION 148
REGISTRATION REQUIREMENTS 149
INDEX TO FINANCIAL STATEMENTS F-1

 

 

 

 

SUMMARY

 

The following summary explains material information in this prospectus, but it may not contain all of the information that is important to you. Before making an investment decision, you should read carefully this entire document, including the consolidated financial statements and the notes thereto and the section entitled “Risk Factors.”

 

Richmond Mutual Bancorporation, Inc., a Delaware corporation, which is referred to in this document as “Richmond Mutual Bancorporation-Delaware,” owns 100% of the outstanding shares of common stock of First Bank Richmond. Upon the completion of the reorganization Richmond Mutual Bancorporation-Delaware will cease to exist, and First Bank Richmond will be a wholly owned subsidiary of Richmond Mutual Bancorporation, our newly formed Maryland corporation, which is hereafter referred to in this document as “Richmond Mutual Bancorporation-Maryland.” In certain circumstances, where appropriate, the terms “we, “us” and “our” refer collectively to (i) Richmond Mutual Bancorporation-Delaware and First Bank Richmond with respect to discussions in this document involving matters occurring prior to completion of the reorganization and (ii) Richmond Mutual Bancorporation-Maryland and First Bank Richmond with respect to discussions in this document involving the offering and matters occurring post-reorganization, in each case unless the context indicates another meaning.

 

The Companies

 

Richmond Mutual Bancorporation, Inc. Richmond Mutual Bancorporation, Inc., a Maryland corporation, was incorporated in February 2019. The offering of common stock by means of this prospectus is being made by Richmond Mutual Bancorporation-Maryland in connection with the reorganization of First Bank Richmond from the mutual holding company form of organization. Upon completion of the reorganization and offering, Richmond Mutual Bancorporation-Maryland will become the bank holding company for First Bank Richmond by owning all of the outstanding shares of capital stock of First Bank Richmond, and will be regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the Indiana Department of Financial Institutions. Our corporate office is located at 31 North 9th Street, Richmond, Indiana, and our telephone number is (765) 962-2581.

 

To date, Richmond Mutual Bancorporation-Maryland has engaged in organizational activities only. Following the reorganization and offering, Richmond Mutual Bancorporation-Maryland’s primary business activity will relate to owning all of the outstanding shares of capital stock of First Bank Richmond. In the future, Richmond Mutual Bancorporation-Maryland will be authorized to pursue other business activities permitted by applicable laws and regulations for bank holding companies, which may include the acquisition of banking and financial services companies. We have no plans for any mergers or acquisitions, or other diversification of the activities of Richmond Mutual Bancorporation-Maryland at the present time.

 

Our cash flow will depend on earnings from the investment of the net proceeds received in the offering that we retain, and any dividends received from First Bank Richmond. Initially, Richmond Mutual Bancorporation-Maryland will neither own nor lease any property, but will instead use the premises, equipment and furniture of First Bank Richmond. At the present time, we intend to employ only persons who are officers of First Bank Richmond to serve as officers of Richmond Mutual Bancorporation-Maryland. We will also use the support staff of First Bank Richmond from time to time. These persons will not be separately compensated by Richmond Mutual Bancorporation-Maryland. Richmond Mutual Bancorporation-Maryland may hire additional employees, as appropriate, to the extent it expands its business in the future. The initial directors of Richmond Mutual Bancorporation-Maryland consist of the current directors of First Bank Richmond. See “Management.”

 

First Bank Richmond. 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 current holding company, acquired Mutual Federal Savings Bank headquartered in Sidney, Ohio, which it operated independently as a separately chartered, wholly owned subsidiary of Richmond Mutual Bancorporation-Delaware until 2016 when Mutual Federal Savings Bank 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.

 

 1 

 

 

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 Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation. At December 31, 2018, on a consolidated basis, we had total assets of $849.6 million, total deposits of $620.6 million and stockholders’ equity of $85.9 million.

 

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 $126.0 million at December 31, 2018.

 

Our corporate offices are located at 31 North 9th Street, Richmond, Indiana, and our telephone number is (765) 962-2581. Our website addresses are www.firstbankrichmond.com and http://www.mutualbancorp.com. Information on these websites should not be considered a part of this prospectus.

 

Our Current Organizational Structure

 

In 1998, First Bank Richmond’s mutual predecessor reorganized into the mutual holding company form of organization by forming First Mutual of Richmond, Inc. (“First Mutual of Richmond-MHC”), a mutual holding company that has no stockholders and is controlled by its members. First Mutual of Richmond-MHC owns 100% of the outstanding shares of common stock of Richmond Mutual Bancorporation-Delaware. Richmond Mutual Bancorporation-Delaware owns 100% of the outstanding shares of common stock of First Bank Richmond.

 

Pursuant to the terms of our plan of reorganization and stock offering, First Mutual of Richmond-MHC will convert from a mutual holding company to the stock holding company corporate structure. Upon the completion of the transaction, First Mutual of Richmond-MHC and Richmond Mutual Bancorporation-Delaware will cease to exist, and First Bank Richmond will be a wholly owned subsidiary of Richmond Mutual Bancorporation-Maryland, our newly formed Maryland corporation.

 

 2 

 

 

The following diagram shows our current organization structure:

 

 

 

(1)First Mutual of Richmond-MHC owns all of the common stock of First Mutual of Richmond Statutory Trust (the “Trust”), which was formed to issue trust preferred securities to the public. All of the trust preferred securities issued by the Trust and outstanding following the reorganization will be redeemed with proceeds from the offering, after which the Trust will be dissolved.

 

After the reorganization and offering are completed, we will be organized as a fully public stock holding company, as follows:

 

 

 

Business Strategy

 

We are a community-oriented financial institution dedicated to serving the needs of customers in our primary market area. Our commitment is to offer a full array of consumer and commercial banking products and services to meet the needs of our customers. We offer mortgage lending products to qualified borrowers to give them the broadest access to home ownership in our markets. We offer commercial lending products and services tailored to complement their businesses. Our goal is to maintain asset quality while continuing to build our strong capital position while looking for growth opportunities in the markets we serve. To achieve these goals, we will focus on the following strategies:

 

Lending. We believe that commercial lending offers an opportunity to enhance our profitability while managing credit, interest rate and operational risk. We seek quality commercial loan opportunities in our existing markets and purchase loan participations that complement our existing portfolios. We will continue to focus our efforts on our existing markets as well as to further develop the Columbus, Ohio market through our loan production office. We anticipate that the majority of our commercial and multi-family real estate and commercial construction loan originations will range in size from $1.0 million to $8.0 million, while the majority of our commercial and industrial loan originations will range in size from $250,000 to $1.5 million.

 

 3 

 

 

Deposit Services. Deposits are our primary source of funds for lending and investment. We intend to continue to focus on increasing core deposits (which we define as all deposits except for certificates of deposit greater than $250,000 and brokered certificates of deposit) in our primary market area, with a particular emphasis on non-interest bearing deposits. We will continue to enhance our offering of retail deposit products to maintain and increase our market share, while continuing to build our product offering of commercial deposit products to strengthen our relationships with our business customers. Core deposits represented 75.0% of our total deposits as of December 31, 2018.

 

Balance Sheet Growth. As a result of our efforts to build our management and infrastructure, we believe we are well-positioned to increase the size of our balance sheet without a proportional increase in overhead expense or operating risk. Accordingly, we intend to increase, on a managed basis, our assets and liabilities, particularly loans and deposits.

 

Asset Quality. We believe that strong asset quality is a key to long-term financial success. Our strategy for credit risk management focuses on an experienced team of credit professionals, well-defined credit policies and procedures, appropriate loan underwriting criteria and active credit monitoring. Our non-performing loans to total loans ratio was 0.69% at December 31, 2018.

 

Capital Position. Our policy has always been to protect the safety and soundness of First Bank Richmond through credit and operational risk management, balance sheet strength, and sound operations. The end result of these activities has been a capital ratio in excess of the well-capitalized standards set by our regulators. We believe that maintaining a strong capital position safeguards the long-term interests of First Bank Richmond.

 

Interest Rate Risk Management. Changes in interest rates are our primary market risk as our balance sheet is almost entirely comprised of interest-earning assets and interest-bearing liabilities. As such, fluctuations in interest rates have a significant impact not only upon our net income but also upon the cash flows related to those assets and liabilities and the market value of our assets and liabilities. In order to maintain what we believe to be acceptable levels of net interest income in varying interest rate environments, we actively manage our interest rate risk and assume a moderate amount of interest rate risk consistent with board policies.

 

Reasons for the Reorganization and Offering

 

Our primary reasons for converting and raising additional capital through the offering are to:

 

Enhance our capital base to support continued growth on a prudent basis. We intend to continue to grow our franchise, both organically and through strategic transactions as opportunities arise, on a prudent basis. While we currently exceed all regulatory capital requirements, the offering proceeds will strengthen our capital position and support our planned growth.

 

Offer our customers, employees and directors an equity ownership interest in Richmond Mutual Bancorporation-Maryland. We believe that offering stock to our depositors will provide them with an economic interest in our future success should they decide to invest. The offering will also further enable us to attract and retain directors, management and employees through various stock-based benefit plans, including an employee stock ownership plan and one or more equity incentive plans.

 

Support our local communities through establishing and funding a charitable foundation. The contribution to the charitable foundation will complement our existing charitable activities, and should enable the communities that we serve to share in our long-term growth.

 

Facilitate future mergers and acquisitions, if available, on a prudent basis. Although we do not currently have any understandings or agreements regarding any specific transactions, the additional capital raised in the offering may be used to finance mergers with, and acquisitions of, other financial institutions, asset portfolios and branch offices when and if attractive opportunities arise.

 

 4 

 

 

Terms of the Offering

 

We are offering between 8,372,500 and 11,327,500 shares of common stock of Richmond Mutual Bancorporation-Maryland to eligible depositors and certain borrowers of First Bank Richmond and to our tax-qualified employee benefit plans, and, to the extent shares remain available, to the general public in a community offering. If necessary, we will also offer shares to the general public in a syndicated offering. The number of shares of common stock to be sold may be increased to up to 13,026,625 shares as a result of demand for the shares of common stock in the offering or changes in market conditions. Unless the number of shares of common stock to be offered is increased to more than 13,026,625 shares or decreased to fewer than 8,372,500 shares, or the subscription and community offerings are extended beyond [Date 2], subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the subscription and community offerings are extended past [Date 2], all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will cancel your order and promptly return your funds with interest at [•]% per annum or cancel your deposit account withdrawal authorization. If the number of shares to be sold is increased to more than 13,026,625 shares or decreased to less than 8,372,500 shares, all subscribers’ stock orders will be canceled, all withdrawal authorizations will be canceled, and all funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest at the same rate. We will then resolicit subscribers, giving them an opportunity to place new orders for a period of time. No shares purchased in the subscription offering and community offering will be issued until the completion of any syndicated offering.

 

Subscription priorities have been established for the allocation of common stock to the extent the subscription offering is oversubscribed. See “The Reorganization and Offering − Offering of Common Stock − Subscription Rights” for a description of allocation procedures in the event of an oversubscription.

 

The purchase price of each share of common stock offered for sale in the offering is $10.00. All investors will pay the same purchase price per share, regardless of whether the shares are purchased in the subscription offering, the community offering or the syndicated offering. Investors will not be charged a commission to purchase shares of common stock in the offering. KBW, our marketing agent in the subscription and community offerings, will use its best efforts to assist us in selling shares of our common stock in the subscription and community offerings but is not obligated to purchase any shares of common stock in the subscription and community offerings.

 

How We Determined the Offering Range and the $10.00 Price Per Share

 

The amount of common stock we are offering for sale is based on an independent appraisal of the estimated market value of Richmond Mutual Bancorporation-Maryland, assuming the offering has been completed and the charitable foundation has been established and the contribution of shares of common stock and cash to it has been made. RP Financial, LC., our independent appraiser, has estimated that, at February 8, 2019, and assuming we were undertaking the offering, this market value, including the shares to be issued to the charitable foundation, was $103.5 million. Based on applicable regulations, this market value forms the midpoint of a valuation range with a minimum of $88.7 million and a maximum of $118.3 million. Based on this valuation range and the offering price of $10.00 per share, Richmond Mutual Bancorporation-Maryland is offering for sale a range of shares of common stock, from 8,372,500 shares to 11,327,500 shares. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversion transactions undertaken by financial institutions. If demand for shares or market conditions warrant, the appraisal can be increased by 15%, which would result in an appraised value of $135.3 million, and we may sell up to 13,026,625 shares of common stock.

 

The appraisal is based in part on our financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of 10 publicly traded savings and loan holding companies that RP Financial considers comparable to Richmond Mutual Bancorporation-Maryland on a pro forma basis. See “The Reorganization and Offering – How We Determined the Stock Pricing and the Number of Shares to be Issued.” The appraisal peer group consists of the following companies, all of which are traded on the Nasdaq Stock Market. Total assets are as of December 31, 2018.

 

 5 

 

 

Company Name  Ticker
Symbol
  Headquarters  Assets 
         (In thousands) 
Elmira Savings Bank  ESBK  Elmira, NY  $590 
ESSA Bancorp, Inc.  ESSA  Stroudsburg, PA   1,862 
HMN Financial, Inc.  HMNF  Rochester, MN   712 
IF Bancorp, Inc  IROQ  Watseka, IL   664 
MSB Financial Corp.  MSBF  Millington, NJ   585 
Prudential Bancorp, Inc.  PBIP  Philadelphia, PA   1,115 
Severn Bancorp, Inc.  SVBI  Annapolis, MD   974 
Spirit of Texas Bancshares, Inc.  STXB  Conroe, TX   1,468 
Standard AVB Financial Corp.  STND  Monroeville, PA   972 
Wellesley Bancorp, Inc.  WEBK  Wellesley, MA   871 

 

The independent appraisal will be updated before we complete the reorganization and offering. If the pro forma market value of the common stock at that time is either below $88.7 million or above $118.3 million, then Richmond Mutual Bancorporation-Maryland, after consulting with the Federal Reserve Board, may terminate the plan of reorganization and return all funds promptly with interest; extend or hold a new subscription or community offering, or both; establish a new offering range and commence a resolicitation of subscribers; or take such other actions as may be permitted by the Federal Reserve Board and the Securities and Exchange Commission. If we resolicit subscribers in this instance, then all funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest.

 

Two measures investors use to analyze an issuer’s stock are the ratio of the offering price to the issuer’s tangible book value and the ratio of the offering price to the issuer’s annual net income. RP Financial considered these ratios, among other factors, in preparing its independent appraisal. Tangible book value is the same as total stockholders’ equity less any intangible assets, and represents the difference between the issuer’s assets and liabilities.

 

The following table presents a summary of selected pricing ratios for Richmond Mutual Bancorporation-Maryland (on a pro forma basis) at and for the 12-months ended December 31, 2018, and for the peer group companies based on earnings and other information at and for the 12-months ended December 31, 2018, with stock prices at February 8, 2019, as reflected in the appraisal report. Compared to the average pricing of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 42.4% on a price-to-book value basis, a discount of 47.1% on a price-to-tangible book value basis and a discount of 6.5% on a price-to-earnings basis.

 

  

Pro Forma
Price-to-Earnings
Multiple(1)

   Pro Forma
Price-to-Book
Ratio
   Pro Forma
Price-to-Tangible Book
Value Ratio
 
             
Richmond Mutual Bancorporation-Maryland               
Adjusted Maximum   20.41x   74.52%   74.52%
Maximum   17.86x   70.92%   70.92%
Midpoint   15.63x   67.20%   67.20%
Minimum   13.51x   62.89%   62.89%
                
Valuation of peer group companies (historical)               
Averages   16.71x   116.62%   127.09%
Medians   15.83x   115.44%   126.60%

 

 

(1)Price-to-earnings multiples calculated by RP Financial are based on reported earnings, and assumes all shares are outstanding, including shares owned by the ESOP, for purposes of earnings per share calculations. These ratios are different than those presented in “Pro Forma Data.”

 

The pro forma calculations for Richmond Mutual Bancorporation-Maryland include the following assumptions:

 

·A number of shares equal to 8% of the shares sold in the offering and contributed to the charitable foundation are purchased by the employee stock ownership plan, with the expense to be amortized over 20 years;

 

 6 

 

 

·A number of shares equal to 4% of the shares sold in the offering and contributed to the charitable foundation are purchased by a stock-based benefit plan, with the expense to be amortized over five years; and

 

·A number of options equal to 10% of the shares sold in the offering and contributed to the charitable foundation are granted under a stock-based benefit plan, with option expense of $2.95 per option amortized over five years; and

 

·offering expenses would equal 2.5% of the offering amount at the midpoint of the offering range.

 

The independent appraisal does not indicate market value. Do not assume or expect that Richmond Mutual Bancorporation-Maryland’s valuation as indicated above means that the common stock will trade at or above the $10.00 purchase price after the reorganization and offering. Furthermore, the pricing ratios presented in the appraisal were used by RP Financial to estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

 

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Reorganization and Offering − Stock Pricing and the Number of Shares to be Issued.”

 

How We Intend to Use the Proceeds from the Offering

 

We intend to (i) invest at least 50% of the net proceeds from the offering in First Bank Richmond, (ii) fund the loan to our employee stock ownership plan to finance its purchase of shares of common stock in the offering, (iii) contribute $1.25 million in cash to the charitable foundation, (iv) use approximately $5.0 million to redeem outstanding subordinated debentures and related trust preferred securities issued by First Mutual of Richmond-MHC which will be assumed by Richmond Mutual Bancorporation-Maryland in connection with the reorganization and (v) retain the remainder of the net proceeds from the offering at Richmond Mutual Bancorporation-Maryland. Therefore, assuming we sell 11,327,500 shares of common stock in the offering at the maximum of the offering range, resulting in net proceeds of $110.6 million, we intend to invest $55.3 million in First Bank Richmond, lend $9.5 million to our employee stock ownership plan to fund its purchase of shares of common stock (which may include, subject to market conditions, open market purchases after the completion of the reorganization and offering if the employee stock ownership plan is unable to purchase its shares in the subscription offering due to an oversubscription by our eligible account holders), use $1.25 million of the net proceeds to fund the cash contribution to the charitable foundation, use approximately $5.0 million to redeem outstanding subordinated debentures, and retain the remaining $39.6 million of the net proceeds at Richmond Mutual Bancorporation-Maryland.

 

Richmond Mutual Bancorporation-Maryland expects to initially invest the net proceeds it retains from the offering in interest-earning deposits and securities issued by the U.S. government and its agencies or government sponsored enterprises, and as otherwise permitted under our investment policy. Richmond Mutual Bancorporation-Maryland may use a portion of the net proceeds to repurchase shares of our common stock in the future, although we are generally not permitted to do so during the first year following our reorganization, and may use a portion of the net proceeds to finance the possible acquisition of other financial institutions or other financial service businesses. We may also use the net proceeds for other general corporate purposes.

 

First Bank Richmond intends to use approximately $13.3 million ($9.8 million after tax) of the funds it receives from Richmond Mutual Bancorporation-Maryland to terminate its participation in the Pentegra Defined Benefit Plan for Financial Institutions (the “Pentegra DB Plan”), an industry-wide, tax-qualified defined-benefit pension plan, and generally intends to use the remaining proceeds it receives to originate loans. Funds used to pay the termination expense related to the Pentegra DB Plan may be higher or lower depending on a number of factors, including but not limited to the interest rate environment and the valuation of plan assets. First Bank Richmond may also purchase securities as permitted under our investment policy, expand its banking franchise organically through de novo branching, or expand through acquisitions of other financial institutions, branch offices, or other financial service businesses. It may also use the proceeds it receives to support new loan, deposit or other financial products and services, and for general corporate purposes. Neither First Bank Richmond nor Richmond Mutual Bancorporation-Maryland has any plans or agreements for any specific acquisition transactions at this time.

 

See “How We Intend to Use the Proceeds from the Offering.”

 

 7 

 

 

Persons Who May Order Stock in the Offerings

 

We are offering the shares of common stock of Richmond Mutual Bancorporation-Maryland in a “subscription offering” in the following descending order of priority:

 

(1)To depositors who had accounts at First Bank Richmond with aggregate balances of at least $50 at the close of business on December 31, 2017;

 

(2)To our tax-qualified employee benefit plans (including First Bank Richmond’s employee stock ownership plan) which may subscribe for, in the aggregate, up to 10% of the shares of common stock sold in the offering and contributed to the charitable foundation. We expect our employee stock ownership plan to purchase 8% of the shares of common stock sold in the offering and contributed to the charitable foundation;

 

(3)To depositors who had accounts at First Bank Richmond with aggregate balances of at least $50 at the close of business on [SERD]; and

 

(4)depositors of First Bank Richmond at the close of business on [VRD] and borrowers of First Bank Richmond as of October 16, 1997 whose borrowings remained outstanding at the close of business on [VRD], to the extent not already included in a prior category.

 

Shares of common stock not purchased in the subscription offering will be offered for sale to the general public in a community offering, with a preference given first to natural persons (including trusts of natural persons) residing in Wayne, Fayette, Henry, Randolph, Shelby and Union counties, Indiana and Darke, Franklin, Miami, Preble and Shelby counties, Ohio. The community offering may commence concurrently with, during or promptly after the subscription offering. The community offering must be completed within 45 days of the end of the subscription offering, unless extended with Federal Reserve Board approval.

 

In addition, any shares of our common stock not purchased in the subscription offering or community offering are expected to be offered for sale to the general public in a syndicated community offering through a syndicate of selected dealers. We may begin the syndicated community offering at any time following the commencement of the subscription offering. The syndicated community offering will be managed by KBW acting as our agent. In such capacity, KBW may form a syndicate of other broker-dealers. Neither KBW nor any registered broker-dealer will have any obligation to take or purchase any shares of the common stock in the syndicated community offering; however, KBW has agreed to use its best efforts in the sale of shares in any syndicated community offering. See “The Reorganization and Offering - Syndicated Community Offering.”

 

We have the right to accept or reject, in our sole discretion, any orders received in the community offering or the syndicated community offering.

 

To ensure proper allocation of stock, each eligible account holder must list on his or her stock order form all accounts in which he or she had an ownership interest at December 31, 2017, [SERD] or [VRD], as applicable. Failure to list an account or providing incorrect information could result in the loss of all or part of a subscriber’s stock allocation. We will attempt to identify your ownership in all accounts, but cannot guarantee we will identify all accounts in which you had an ownership interest. Our interpretations of the terms and conditions of the stock issuance plan and of the acceptability of the order forms will be final.

 

If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. Shares of common stock will be allocated first to categories in the subscription offering in accordance with our plan of reorganization. A detailed description of share allocation procedures can be found in the section entitled “The Reorganization and Offering − Offering of Common Stock.”

 

 8 

 

 

Limits on the Amount of Common Stock You May Purchase

 

The minimum number of shares of common stock that may be purchased is 25 shares.

 

Generally, no individual, or individuals through a single account held jointly, may purchase more than 30,000 shares ($300,000) of common stock. If any of the following persons purchase shares of common stock, their purchases when combined with your purchases cannot exceed 40,000 shares ($400,000) of common stock:

 

·Any person who is related by blood or marriage to you and who either lives in your home or who is a director or officer of First Bank Richmond;

 

·Companies or other entities in which you are an officer or partner or have a 10% or greater beneficial ownership interest;

 

·Trusts or other estates in which you have a substantial beneficial interest or as to which you serve as a trustee or in another fiduciary capacity; and

 

·Any other persons who may be your associates or persons acting in concert with you.

 

Persons having the same address and persons exercising subscription rights through qualifying accounts registered to the same address will be subject to the overall purchase limitation of 40,000 shares ($400,000). We have the right to determine, in our sole discretion, whether prospective purchasers are associates or acting in concert.

 

Subject to regulatory approval, we may increase or decrease the purchase limitations in the offering at any time. A detailed discussion of the limitations on purchases of common stock by an individual and persons acting in concert is set forth under the caption “The Reorganization and Offering – Additional Limitations on Common Stock Purchases.”

 

We expect that the employee stock ownership plan will purchase 8.0% of our outstanding shares (including shares contributed to the charitable foundation). Subject to the approval of the Federal Reserve Board, the employee stock ownership plan may purchase some or all of these shares in the open market following the completion of the offering. Our employee stock ownership plan purchases will range from 709,800 shares to 1,082,130 shares of common stock, respectively, at the minimum and adjusted maximum of the offering range.

 

How You May Purchase Shares of Common Stock in the Subscription and Community Offering

 

In the subscription offering and the community offering, you may pay for your shares only by:

 

(i)personal check, bank check or money order payable to Richmond Mutual Bancorporation, Inc. (cash and third-party checks will not be accepted); or

 

(ii)authorizing us to withdraw available funds (without any early withdrawal penalty) from the types of deposit account(s) maintained with First Bank Richmond designated on the stock order form.

 

First Bank Richmond is not permitted to knowingly lend funds for the purpose of purchasing shares of common stock in the offering. You may not pay by wire transfer, use a check drawn on a First Bank Richmond line of credit, or use a third-party check to pay for shares of common stock. Please do not submit cash.

 

You can subscribe for shares of common stock in the offering by delivering a signed and completed original stock order form, together with full payment, before the expiration date of the subscription offering. You may submit your stock order form in one of three ways: by mail, using the reply envelope provided; by overnight courier to the address indicated on the stock order form; or by bringing your stock order form and payment to First Bank Richmond’s office located at 20 North 9th Street, Richmond, Indiana. Please do not mail stock order forms to First Bank Richmond. Once submitted, your order is irrevocable. We do not intend to accept incomplete stock order forms, unsigned stock order forms, or copies or facsimiles of stock order forms. For orders paid for by check or money order, the funds must be available in the account. Funds received prior to the completion of the offering will be held in a segregated account at First Bank Richmond. Subscription funds will earn interest at [•]%. If the offering is terminated, we will promptly return your subscription funds with interest.

 

 9 

 

 

Withdrawals from certificate of deposit accounts at First Bank Richmond for the purpose of purchasing common stock in the offering may be made without incurring an early withdrawal penalty. All funds authorized for withdrawal from deposit accounts with First Bank Richmond must be in the deposit accounts at the time the stock order form is received; no credit to purchase shares will be given for future interest to be earned on the funds in your deposit account or submitted for payment for the shares. However, funds will not be withdrawn from the accounts until the offering is completed and will continue to earn interest at the applicable deposit account rate until the completion of the offering. A hold will be placed on those funds when your stock order is received, making the designated funds unavailable to you. If a withdrawal results in a certificate of deposit account with a balance less than the applicable minimum balance requirement, the certificate of deposit will be canceled at the time of withdrawal without penalty, and the remaining balance will earn interest at [•]% thereafter, until such funds are withdrawn. After we receive an order, the order cannot be revoked or changed.

 

By signing the stock order form, you are acknowledging receipt of this prospectus and that the shares of our common stock are not deposits or savings accounts that are federally insured or otherwise guaranteed by First Bank Richmond, the Federal Deposit Insurance Corporation (“FDIC”) or any other government agency.

 

Using Retirement Account Funds to Purchase Shares of Common Stock in the Subscription and Community Offerings

 

You may be able to subscribe for shares of common stock using funds in your IRA or other retirement account. If you wish to use some or all of the funds in your IRA or other retirement account held at First Bank Richmond, the applicable funds must be transferred to an IRA, or other retirement account that can hold common stock, maintained by an independent custodian or trustee, such as a brokerage firm, before you place your stock order. If you do not have such an account, you will need to establish one. A one-time and/or annual administrative fee may be payable to the independent custodian or trustee. Because individual circumstances differ, and the processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the [Date 1], 2019 offering deadline, for assistance with purchases using funds in your IRA or other retirement account held at First Bank Richmond or elsewhere. Whether you may use such funds for the purchase of shares in the offering may depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held. For a complete description of how to use IRA funds to purchase shares in the offering, see “The Reorganization and Offering − Procedure for Purchasing Shares − Using Retirement Account Funds to Purchase Shares.”

 

You May Not Sell or Transfer Your Subscription Rights

 

Applicable regulations prohibit you from selling, giving, or otherwise transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to state that you are purchasing the shares of common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action, including reporting persons to federal or state regulatory agencies, against anyone who we believe has sold or given away his or her subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred your subscription rights. On the stock order form, you cannot add the name(s) of person who do not have subscription rights or who qualify only in a lower purchase priority than you do. Doing so may jeopardize your subscription rights. In addition, the stock order form requires that you list all accounts, giving all names on each account and the account number at the applicable eligibility record date. Your failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation, if there is an oversubscription. Eligible subscribers who enter into agreements to allow ineligible investors to participate in the subscription offering may be violating federal and state law and may be subject to civil enforcement actions or criminal prosecution.

 

Deadline for Orders of Common Stock

 

The deadline for submitting orders to purchase shares of the common stock in the subscription and community offerings is 2:00 p.m., Eastern Time, on [Date 1], 2019, unless we extend this deadline. If you wish to purchase shares of common stock, your properly completed and signed original stock order form, together with full payment for the shares, must be received (not postmarked) by this time. Orders received after 2:00 p.m., Eastern Time, on [Date 1], 2019 will be rejected unless the offering is extended.

 

 10 

 

 

Although we will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 2:00 p.m., Eastern Time, on [Date 1], 2019, whether or not we have been able to locate each person entitled to subscription rights.

 

See “The Reorganization and Offering - Offering Deadline” for a complete description of the deadline for purchasing shares in the offering.

 

Once Submitted, Your Stock Purchase Order May Not Be Revoked Except Under Certain Circumstances

 

Funds that you use to purchase shares of our common stock in the offering will be held in a segregated account until the termination or completion of the offering, including any extension of the expiration date. Because completion of the reorganization and offering is subject to the receipt of all required regulatory approvals, including an update of the independent appraisal, among other factors, there may be one or more delays in the completion of the reorganization. Any orders that you submit to purchase shares of our common stock in the offering are irrevocable, and you will not have access to subscription funds unless the offering is terminated, or extended beyond [Date 2], 2019, or the number of shares to be sold in the offering is increased to more than 13,026,625 shares or decreased to fewer than 8,372,500 shares.

 

Termination of the Offering

 

The subscription offering will expire at 2:00 p.m., Eastern Time, on [Date 1], 2019. We expect that the community offering, if one is conducted, would expire at the same time. We may extend this expiration date without notice to you until [Date 2], 2019, or such later date as the applicable regulators may approve. If the offerings are extended beyond [Date 2], 2019 we will be required to resolicit subscriptions before proceeding with the offering. In such event, all subscribers will be afforded the opportunity to confirm, cancel or change their orders. If you choose to cancel your order or you do not respond to the resolicitation notice, your funds will be promptly returned to you with interest and deposit account withdrawal authorizations will be canceled. All further extensions, in the aggregate, may not last beyond [Date 4], 2021, which is two years after the special meeting of members of First Mutual of Richmond-MHC to be held on [Date 3], 2019 to vote on the plan of reorganization.

 

Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares

 

If we do not receive orders for at least 8,372,500 shares of common stock, we may take several steps in order to sell the minimum number of shares of common stock in the offering range. Specifically, we may (a) increase the purchase limitations, (b) seek regulatory approval to extend the offering beyond the [Date 2], 2019 expiration date, and/or (c) reduce the valuation and offering range, provided that any such extension or reduction will require us to resolicit subscriptions received in the offering and provide subscribers with the opportunity to increase, decrease or cancel their subscriptions. If the offering is extended beyond [Date 2], 2019, subscribers will have the right to confirm, cancel or change their orders. If the number of shares to be sold in the offering is increased to more than 13,026,625 shares or decreased to less than 8,372,500 shares, we will resolicit subscribers, and all funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest.

 

Market for the Common Stock

 

We have never issued capital stock and there is no established market for our common stock. We expect that our common stock will be traded on the on the Nasdaq Capital Market under the symbol “RMBI” upon conclusion of the offering. See “Market for the Common Stock.”

 

Our Dividend Policy

 

Following completion of the reorganization and offering, our board of directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. We currently intend to pay quarterly cash dividends but have not determined the amount or when payment would start. The payment and amount of any dividends will depend upon a number of factors, including the following: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of stockholders; tax considerations; statutory and regulatory limitations; and general economic conditions. See “Our Policy Regarding Dividends” in this prospectus for additional information regarding our dividend policy.

 11 

 

 

Possible Change in the Offering Range

RP Financial will update its appraisal before we complete the offering. If, as a result of demand for the shares or changes in market conditions, RP Financial determines that our pro forma market value has increased, we may sell up to 13,026,625 shares in the offering without further notice to you. If our pro forma market value at that time is either below $88.7 million or above $135.3 million, then, after consulting with the Federal Reserve Board, we may:

 

·terminate the offering, cancel deposit account withdrawal authorizations and promptly return all funds received in the offering with interest at [•]%;

 

·set a new offering range; or

 

·take such other actions as may be permitted by the Federal Reserve Board, the Indiana Department of Financial Institutions, the Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission.

 

If we set a new offering range, we will promptly return funds, with interest at [•]% for funds received in the offering, cancel deposit account withdrawal authorizations and commence a resolicitation. In connection with the resolicitation, we will notify subscribers of their right to place a new stock order for a specified period of time.

 

Possible Termination of the Offering

 

We may terminate the offering at any time prior to the special meeting of members of First Mutual of Richmond-MHC that is being called to vote on the reorganization and offering, and at any time after member approval with applicable regulatory approval. If we terminate the offering, we will promptly return your funds, with interest at [•]%, and we will cancel deposit account withdrawal authorizations.

 

Our Officers, Directors and Employees Will Receive Additional Benefits and Compensation After the Reorganization and Offering

 

In connection with the reorganization, we are establishing an employee stock ownership plan, and, subject to stockholder approval, we intend to implement a stock-based benefit plan that will provide for grants of stock options and restricted stock.

 

Employee Stock Ownership Plan. The boards of directors of Richmond Mutual Bancorporation-Maryland and First Bank Richmond have adopted an employee stock ownership plan, which will award shares of our common stock to all eligible employees primarily based on their compensation. We expect the employee stock ownership plan to purchase up to 8.0% of the shares of common stock sold in the offering (including shares contributed to the charitable foundation) from the proceeds of a loan to be made by Richmond Mutual Bancorporation-Maryland to the plan. If market conditions warrant, in the judgment of the plan’s trustees, and the employee stock ownership plan’s subscription order is not filled, the employee stock ownership plan may elect to purchase shares in the open market following the completion of the offering, subject to the approval of the Indiana Department of Financial Institutions and the Federal Reserve Board.

 

Stock-Based Benefit Plan. In addition to shares purchased by the employee stock ownership plan, we intend to adopt a stock-based benefit plan. The plan will be designed to attract and retain qualified personnel in key positions and provide directors, officers and key employees with an ownership interest in Richmond Mutual Bancorporation-Maryland, which will be an incentive to contribute to our success and will reward key employees for their performance. The number of options and shares of restricted common stock awarded under a stock-based benefit plan may not exceed 10.0% and 4.0%, respectively, of the shares of common stock sold in the offering (including shares contributed to the charitable foundation), provided that if First Bank Richmond’s tangible capital at the time of adoption of the stock-based benefit plan is less than 10% of its assets, then the amount of shares of restricted common stock may not exceed 3.0% of our outstanding shares. If a stock-based benefit plan is adopted more than 12 months after the completion of the offering, it would not be subject to the percentage limitations set forth above. 

 

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Under applicable regulations, a stock-based benefit plan cannot be established sooner than six months after the offering, and if adopted within one year after the offering, the plan must be approved by a majority of the votes eligible to be cast by our stockholders. If a stock-based benefit plan is established more than one year after the offering, it must be approved by a majority of votes cast by our stockholders.

 

The following additional restrictions would apply to our stock-based benefit plan only if such plan is adopted within one year after completion of the offering:

 

·non-employee directors in the aggregate may not receive more than 30% of the options and shares of restricted common stock authorized under the plan;

 

·no non-employee director may receive more than 5% of the options and shares of restricted common stock authorized under the plan;

 

·no individual may receive more than 25% of the options and shares of restricted common stock authorized under the plan;

 

·options and shares of restricted common stock may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plan; and

 

·accelerated vesting is not permitted except for death, disability or upon a change in control of First Bank Richmond or Richmond Mutual Bancorporation-Maryland.

 

We have not determined whether we will present a stock-based benefit plan for stockholder approval prior to or more than 12 months after the completion of the offering. In the event federal regulators change their regulations or policies regarding stock-based benefit plans, including any regulations or policies restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable.

 

The shares needed for our stock-based benefit plan may be obtained either by issuing additional shares of common stock from authorized but unissued shares or through stock repurchases.

 

Equity Plan Expenses. The implementation of an employee stock ownership plan and a stock-based benefit plan will increase our future compensation costs, thereby reducing our earnings. For example, we will be required to recognize an expense each year under our employee stock ownership plan equal to the fair market value of the shares committed to be released for that year to the participating employees. Similarly, if we issue restricted stock awards under a stock-based benefit plan, we would be required to recognize an expense as the shares vest equal to their fair market value on the grant date. Finally, if we issue stock options, we would be required to recognize an expense as the options vest, equal to their estimated value on the grant date. See “Risk Factors − Risks Related to the Offering − Our stock-based benefit plans will increase our costs, which will reduce our net income” and “Management – Existing and Future Benefit Plans and Agreements.”

 

Benefits to Management. The following table summarizes the stock benefits that our officers, directors and employees may receive following the reorganization and offering, at the adjusted maximum of the offering range and assuming that our employee stock ownership plan purchases 8.0% of the total shares of common stock sold in the offering (including shares contributed to the charitable foundation) and that we implement a stock-based benefit plan granting options to purchase 10.0% of the total shares of common stock sold in the offering (including shares contributed to the charitable foundation) and awarding shares of restricted common stock equal to 4.0% of the total shares of common stock sold in the offering (including shares contributed to the charitable foundation).

 

 13 

 

  

Plan  Individuals Eligible to Receive
Awards
  Percent of
Outstanding
Shares
   Value of Benefits Based
on Adjusted Maximum
of Offering Range
(In Thousands)
 
            
Employee stock ownership plan  All employees   8.0%  $10,821 
Stock awards  Directors, officers and employees   4.0    5,411 
Stock options  Directors, officers and employees   10.0    3,990(1)
Total      22.0%  $20,222 

 

 

(1)The fair value of stock options has been estimated at $2.95 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; no dividend yield; expected option life of 10 years; risk free interest rate of 2.69%; and a volatility rate of 13.53% based on an index of publicly traded financial institutions.

 

The actual value of the shares of restricted common stock awarded under the stock-based benefit plan would be based on the price of Richmond Mutual Bancorporation-Maryland’s common stock at the time the shares are awarded. The following table presents the total value of all shares of restricted common stock to be available for award and issuance under the stock-based benefit plan, assuming receipt of stockholder approval and that the shares are awarded in a range of market prices from $8.00 per share to $14.00 per share.

 

Share Price   354,900 Shares
Awarded at
Minimum of Offering
Range
   414,000 Shares
Awarded at Midpoint
of Offering Range
   473,100 Shares
Awarded at
Maximum of
Offering Range
  

541,065 Shares
Awarded at Adjusted

Maximum of
Offering Range

 
(In thousands, except share price information) 
      
$8.00   $2,839   $3,312   $3,785   $4,329 
$10.00   $3,549   $4,140   $4,731   $5,411 
$12.00   $4,259   $4,968   $5,677   $6,493 
$14.00   $4,969   $5,796   $6,623   $7,575 

 

The grant-date fair value of the options granted under the stock-based benefit plan will be based in part on the price of shares of Richmond Mutual Bancorporation-Maryland’s common stock at the time the options are granted. The value will also depend on the various assumptions utilized in the option pricing model ultimately adopted. The following table presents the total estimated value of the options to be available for grant under the stock-based benefit plan, assuming receipt of stockholder approval, using a Black-Scholes option pricing model, and assuming the market price and exercise price for the stock options are equal and the range of market prices for the shares is $8.00 per share to $14.00 per share. The Black-Scholes option pricing model provides an estimate only of the fair value of the options, and the actual value of the options may differ significantly from the value set forth in this table.

 

Market/Exercise
Price
   Grant-Date Fair
Value Per Option
   887,250 Options at
Minimum of
Offering Range
   1,035,000
Options at
Midpoint of
Offering Range
   1,182,750
Options at
Maximum of
Offering Range
   1,352,662
Options at
Adjusted
Maximum of
Offering Range
 
(In thousands, except market/exercise price and fair value information) 
      
$8.00   $2.36   $2,094   $2,443   $2,791   $3,192 
$10.00   $2.95   $2,617   $3,053   $3,489   $3,990 
$12.00   $3.54   $3,141   $3,664   $4,187   $4,788 
$14.00   $4.13   $3,664   $4,275   $4,885   $5,586 

 

Restrictions on the Acquisition of Richmond Mutual Bancorporation-Maryland and First Bank Richmond

 

Federal and state regulations, as well as provisions contained in the articles of incorporation of Richmond Mutual Bancorporation-Maryland, restrict the ability of any person, firm or entity to acquire Richmond Mutual Bancorporation-Maryland or a controlling interest in its capital stock. These restrictions include the requirement that a potential acquirer of common stock obtain the prior approval of the Federal Reserve Board before acquiring in excess of 10% of the voting stock of Richmond Mutual Bancorporation-Maryland, as well as a provision in Richmond Mutual Bancorporation-Maryland’s articles of incorporation that generally provides that in no event will any person who beneficially owns more than 10% of the then-outstanding shares of common stock of Richmond Mutual Bancorporation-Maryland, be entitled or permitted to vote any of the shares of common stock held in excess of the 10% limit. See “Risk Factors - Risks Related to the Offering — Various factors may make takeover attempts more difficult to achieve.”

 

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Proposed Stock Purchases by Management

 

Richmond Mutual Bancorporation-Maryland’s directors and executive officers and their associates are expected to purchase, for investment purposes, approximately 225,100 shares ($2,251,000) of common stock in the offering, which represents 2.5% of the shares of common stock to be issued in the offering (including shares contributed to the charitable foundation) at the minimum of the offering range. If more shares are sold in the offering, then officers and directors will own a lesser percentage of Richmond Mutual Bancorporation-Maryland. Like all of our eligible subscribers, our directors and executive officers and their associates have subscription rights based on their deposits and, in the event of an oversubscription, their orders will be subject to the allocation provisions set forth in our plan of reorganization. Directors and executive officers will pay the same $10.00 per share price paid by all other persons who purchase shares in the offering. These shares will be counted in determining whether the minimum of the offering range is reached.

 

The plan of reorganization provides that the aggregate number of shares acquired in the offering by our directors and executive officers (and their associates) may not exceed 25% of the shares of common stock sold in the offering, except with the approval of federal regulators. We may seek approval from the federal regulators to allow purchases by our directors and executive officers (and their associates) to exceed the 25% limit to the extent needed to enable us to sell the minimum number of shares of common stock in the offering range.

 

These proposed purchases of common stock by our directors and executive officers (2.5% of the aggregate shares sold in the offering and contributed to the charitable foundation at the minimum of the offering range, together with the purchase by the employee stock ownership plan (8.0% of the aggregate shares sold in the offering and contributed to the charitable foundation), as well as the potential acquisition of common stock through the proposed equity incentive plan (an amount equal to 14% of the aggregate shares sold in the offering and contributed to the charitable foundation) will result in ownership by insiders of Richmond Mutual Bancorporation-Maryland in excess 24.5% of the total shares sold in the offering (including shares contributed to the charitable foundation) at the minimum of the offering range. As a result, it could be more difficult to obtain majority support for stockholder proposals opposed by the board and management. See “Risk Factors - Risks Related to This Offering – Various factors make takeover attempts more difficult to achieve.

 

Conditions to Completing the Reorganization and Offering

 

We cannot complete the reorganization and offering unless:

 

·we sell at least 8,372,500 shares, the minimum of the offering range;

 

·the members of First Mutual of Richmond-MHC vote to approve the reorganization and offering; and

 

·we receive final approval from the Federal Reserve Board to complete the reorganization and offering, as well as any additional required approvals from the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation.

 

Federal Reserve Board, Indiana Department of Financial Institutions or the Federal Deposit Insurance Corporation approval does not constitute a recommendation or endorsement of an investment in our stock.

 

Delivery of Prospectus

 

To ensure that each person receives a prospectus at least 48 hours before the deadline for orders for common stock, we may not mail prospectuses any later than five days prior to such date or hand-deliver prospectuses later than two days prior to that date. Stock order forms may only be delivered if accompanied or preceded by a prospectus. We are not obligated to deliver a prospectus or stock order form by means other than U.S. mail.

 

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We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The subscription offering and all subscription rights will expire at 2:00 p.m., Eastern Time, on [Date 1], 2019, whether or not we have been able to locate each person entitled to subscription rights.

 

Our Contribution of Cash and Shares of Common Stock to the Charitable Foundation

 

To further our commitment to our local community, we intend to establish and fund a charitable foundation as part of the reorganization and offering. Assuming we receive regulatory approval, we intend to contribute a total of $6.25 million to the charitable foundation, consisting of $1.25 million of cash and $5.0 million (500,000 shares) of common stock (with the contribution of common stock representing 6.0% and 3.8% of the shares of our common stock at the minimum and adjusted maximum of the offering range, respectively).

 

The charitable foundation will be dedicated exclusively to supporting charitable causes and community development activities in the communities in which we operate. The contribution of common stock and cash to the charitable foundation will:

 

·with respect to the contribution of shares of common stock, dilute the voting interests of purchasers of shares of our common stock in the offering; and

 

·result in an expense, and a reduction in capital, during the quarter in which the contribution is made, equal to the full amount of the contribution to the charitable foundation, which we expect to be offset in part by a corresponding tax benefit.

 

The amount of common stock that we would offer for sale would be greater if the offering were to be completed without the establishment and funding of the charitable foundation. For a further discussion of the financial impact of the charitable foundation, including its effect on those who purchase shares in the offering, see “Risk Factors – Risks Related to the Charitable Foundation — The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in 2019”, “Risk Factors − Risks Related to the Charitable Foundation — Our contribution to the charitable foundation may not be tax deductible, which could reduce our profits.” “Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation” and “First Bank Richmond, Inc. Community Foundation.”

 

Delivery of Shares of Common Stock

 

All shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registration address noted by them on their stock order forms as soon as practicable following consummation of the offering. Shares of common stock sold in the syndicated community offering may be delivered electronically through the services of The Depository Trust Company, subject to any necessary regulatory approval. We expect trading in the stock to begin on the day of completion of the offering or the next business day. Until a statement reflecting ownership of shares of common stock is available and delivered to purchasers, purchasers might not be able to sell the shares of common stock that they purchased, even though the common stock will have begun trading. Your ability to sell your shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

 

Tax Consequences

 

First Bank Richmond and Richmond Mutual Bancorporation-Maryland have received an opinion of counsel, Silver, Freedman, Taff & Tiernan LLP, regarding the material federal income tax consequences of the reorganization, including an opinion that it is more likely than not that the fair market value of the nontransferable subscription rights to purchase the common stock will be zero and, accordingly, no gain or loss will be recognized by members upon the distribution to them of the nontransferable subscription rights to purchase the common stock and no taxable income will be realized by members as a result of the exercise of the nontransferable subscription rights. First Bank Richmond and Richmond Mutual Bancorporation-Maryland have also received an opinion of BKD LLP regarding the material Indiana state tax consequences of the reorganization. As a general matter, the reorganization will not be a taxable transaction for purposes of federal or state income taxes to First Bank Richmond, Richmond Mutual Bancorporation-Maryland or persons eligible to subscribe in the subscription offering. See the section of this prospectus entitled “Taxation” for additional information regarding taxes.

 

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Emerging Growth Company Status

 

We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as we are an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies. See “Risk Factors − Risks Related to the Offering − We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors” and “Regulation and Supervision − Emerging Growth Company Status.”

 

An emerging growth company may elect to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. We have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

 

How You May Obtain Additional Information Regarding the Reorganization and Offering

 

Our banking personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the reorganization and offering, please call the Stock Information Center at (___) ___-____. The Stock Information Center will be open Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern Time. The Stock Information Center will be closed on bank holidays.

 

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RISK FACTORS

 

You should consider carefully the following risk factors, in addition to all other information in this prospectus, in evaluating an investment in our common stock.

 

Risks Related to Our Business

 

We have a substantial amount of commercial and multi-family real estate and commercial and industrial loans, and intend to continue to increase originations of these types of loans. These loans involve credit risks that could adversely affect our financial condition and results of operations.

 

We intend to continue to originate and purchase commercial and multi-family real estate loans and commercial and industrial loans. At December 31, 2018, our commercial real estate, multi-family real estate and commercial and industrial loans totaled $326.9 million, or 49.5% of our total loans and leases, with approximately $77.2 million of these loans, or 11.7% of our total loans and leases, located in the Columbus, Ohio market. While these types of loans are potentially more profitable than residential mortgage loans, they are generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. These loans also generally have relatively large balances to single borrowers or related groups of borrowers. Given their larger balances and the complexity of the underlying collateral, commercial and multi-family real estate and commercial and industrial loans generally have more risk than the one- to four-family residential real estate loans we originate. Because the repayment of these types of loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment can be affected by adverse conditions in the local, regional and national real estate market or economy. A downturn in the real estate market or the local, regional and national economy could adversely impact the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of non-performing loans. Further, unlike residential mortgage loans, commercial and industrial loans may be secured by collateral other than real estate, such as inventory and accounts receivable, the value of which may depreciate over time, may be more difficult to appraise or liquidate and may be more susceptible to fluctuation in value at default. As our commercial and multi-family real estate and commercial and industrial loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase.

 

Our portfolio of loans with a higher risk of loss is increasing and the unseasoned nature of our commercial loan portfolio may result in errors in judging its collectability, which may lead to additional provisions for loan losses or charge-offs, which would hurt our profits.

 

Our commercial loan portfolio, which includes commercial and multi-family real estate loans, commercial and industrial loans and construction loans, has increased to $399.9 million, or 60.5% of total loans and leases, at December 31, 2018 from $226.9 million, or 48.5% of total loans and leases, at December 31, 2016. A large portion of our commercial loan portfolio is unseasoned, meaning they were originated recently. Our limited experience with these borrowers does not provide us with a significant payment history pattern with which to judge future collectability. Further, these loans have not been subjected to unfavorable economic conditions. As a result, it is difficult to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our future performance.

 

If our allowance for loan and lease losses is not sufficient to cover actual losses, our earnings could decrease.

 

We periodically review our allowance for loan and lease losses for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. We cannot be certain that our allowance for loan and lease losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets, and changes in borrower behaviors. Differences between our actual experience and assumptions and the effectiveness of our models may adversely affect our business, financial condition, including liquidity and capital, and results of operations.

 

The Financial Accounting Standards Board, or FASB, adopted Accounting Standards Update, or ASU, No. 2016-13 “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” or CECL, on June 16, 2016, which changed the loss model to take into account current expected credit losses. This accounting pronouncement is expected to be applicable to us, as an emerging growth company, effective for our fiscal year beginning January 1, 2022. The federal banking regulators, including the Federal Reserve and the FDIC, have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital.

 

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CECL substantially changes how we calculate our allowance for loan and lease losses. We are evaluating CECL and when we will be required to adopt it. We cannot predict when and how it will affect our results of operations and financial condition, including our regulatory capital. See “- We are subject to an extensive body of accounting rules and best practices. Periodic changes to such rules may change the treatment and recognition of critical financial line items and affect our profitability.”

 

A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could adversely affect our operations, financial condition and earnings.

 

Local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing loans. A deterioration in economic conditions could have the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

 

·demand for our products and services may decline;

 

·loan delinquencies, problem assets and foreclosures may increase;

 

·collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans; and

 

·the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

 

Moreover, a significant decline in general local, regional or national economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

 

Changes in the valuation of our securities portfolio could hurt our profits and reduce our capital levels.

 

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issues. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively insignificant levels of depreciation in our debt portfolio, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. In analyzing an equity issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. Declines in market value could result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels. As of December 31, 2018, we have no securities that are deemed impaired.

 

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A tightening of credit markets and liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

 

Liquidity is essential to our business. A tightening of the credit markets and the inability to obtain adequate funding to replace deposits and fund continued loan growth may affect asset growth, our earnings capability and capital levels negatively. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of liquidity are increases in deposit accounts, including brokered deposits, as well as cash flows from loan payments and our securities portfolio. Borrowings, especially from the Federal Home Loan Bank and repurchase agreements, also provide us with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us or a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated. Our ability to borrow also could be impaired by factors that are not specific to us, such as a disruption in the financial markets, negative views and expectations about the prospects for the financial services industry or deterioration in credit markets.

 

Our utilization of time deposits, including brokered certificates of deposit, as a source of funds for loans and our other liquidity needs could have an adverse effect on our operating results.

 

We rely primarily on deposits for funds to make loans and provide for our other liquidity needs, including time deposits and brokered certificates of deposit. As of December 31, 2018, brokered certificates of deposit represented 20.1% of our total deposits. Such deposits may not be as stable as other types of deposits and, in the future, depositors may not renew those time deposits when they mature, or we may have to pay a higher rate of interest to attract or keep them or to replace them with other deposits or with funds from other sources. Not being able to attract those deposits or to keep or replace them as they mature would adversely affect our liquidity. Additionally, we are regulated by the FDIC, which requires us to maintain certain capital levels to be considered "well capitalized." If we fail to maintain these capital levels, we could lose our ability to obtain funding through brokered deposits. In addition, we may also be restricted from paying higher deposit rates to attract, keep or replace those deposits, which could have a negative effect on our operating results and the value of our common stock.

 

We may be adversely affected by recent changes in U.S. tax laws.

 

Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. Changes include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility of property taxes and state and local income taxes. The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan and lease losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

 

We use estimates in determining the fair value of certain assets, such as mortgage servicing rights (“MSRs”). If our estimates prove to be incorrect, we may be required to write down the value of these assets which could adversely affect our earnings.

 

We sell a portion of our one- to four-family loans in the secondary market. We generally retain the right to service these loans through First Bank Richmond. At December 31, 2018, the book value of our MSRs was $1.2 million. We use a financial model that uses, wherever possible, quoted market prices to value our MSRs. This model is complex and also uses assumptions related to interest and discount rates, prepayment speeds, delinquency and foreclosure rates and ancillary fee income. Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the model. The primary risk associated with MSRs is that they will lose a substantial portion of their value as a result of higher than anticipated prepayments occasioned by declining interest rates. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than anticipated. If prepayment speeds increase more than estimated, or delinquency and default levels are higher than anticipated, we may be required to write down the value of our MSRs which could have a material adverse effect on our net income and capital levels. We obtain independent valuations annually to determine if impairment in the asset exists.

 

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If our investment in the Federal Home Loan Bank of Indianapolis becomes impaired, our earnings and stockholders’ equity could decrease.

 

At December 31, 2018, we owned $6.4 million in Federal Home Loan Bank (“FHLB”) of Indianapolis stock. We are required to own this stock to be a member of and to obtain advances from the FHLB of Indianapolis. This stock is not marketable and can only be redeemed by the FHLB of Indianapolis. The most recent stock buyback initiated by the FHLB of Indianapolis was in 2015. The FHLB of Indianapolis’ financial condition is linked, in part, to the eleven other members of the FHLB System and to accounting rules and asset quality risks that could materially lower their capital, which would cause our FHLB of Indianapolis stock to be deemed impaired, resulting in a decrease in our earnings and assets.

 

Our size makes it more difficult for us to compete.

 

Our asset size makes it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our lower earnings may also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base may make it difficult to generate meaningful non-interest income from such activities as securities brokerage or the sale of insurance products. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.

 

As a community bank, maintaining our reputation in our market area is critical to the success of our business, and the failure to do so may materially adversely affect our performance.

 

We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. We operate in many different financial service businesses and rely on the ability of our employees and systems to process a significant number of transactions. Operational risk is the risk of loss from operations, including fraud by employees or outside persons, employees’ execution of incorrect or unauthorized transactions, data processing and technology errors or hacking and breaches of internal control systems. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.

 

We face significant operational risks because the financial services business involves a high volume of transactions and because of our reliance on technology.

 

Our business requires us to collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and our own business, operations, plans and business strategies. Our operational and security systems infrastructure, including our computer systems, data management and internal processes, as well as those of third parties, are integral to our performance. Our operational risks include the risk of malfeasance by employees or persons outside our company, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a result of non-compliance with applicable regulatory standards or customer attrition due to potential negative publicity.

 

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In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, or a breach of our security systems, including if confidential or proprietary information were to be mishandled, misused or lost, we could suffer financial loss, face regulatory action, civil litigation and/or suffer damage to our reputation. Although to date we have not experienced any technology failures, cyber-attacks or other information or security breaches, there can be no assurance that we will not suffer such losses or other consequences in the future. Our risk and exposure to these matters remain heightened because of, among other things, the evolving nature of these threats and our role as a provider of financial services, our continuous transmission of sensitive information to, and storage of such information by, third parties, including our vendors and regulators, the outsourcing of some of our business operations, threats of cyber-terrorism, and system and customer account updates and conversions. As a result, cyber-security and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority.

 

Our information technology systems may be subject to failure, interruption or security breaches.

 

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions and security breaches, including privacy breaches and cyber-attacks, and, although we have not experienced any such events to date, such failures, interruptions or breaches may still occur or may not be adequately addressed if they do occur.

 

There have been increasing efforts by third parties to breach data security at financial institutions. Such attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information, damages to systems, or other material disruptions to network access or business operations. There have been several recent instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data. Although we take protective measures, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have an impact on information security. Because the techniques used to cause security breaches change frequently, we may be unable to proactively address these techniques or to implement adequate preventative measures.

 

In addition, we outsource a majority of our data processing requirements to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with those service providers, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel. To our knowledge, the services and programs provided to us by third parties have not suffered any security breaches. However, the existence of cyber-attacks or security breaches at third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner.

 

The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business, subject us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

 

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Future changes in interest rates could reduce our profits and affect the value of our assets and liabilities.

 

Net income is the amount by which net interest income and non-interest income exceed non-interest expense, the provision for loan and lease losses and taxes. Net interest income makes up a majority of our net income and is based on the difference between:

 

·the interest income we earn on interest-earning assets, such as loans and securities; and

 

·the interest expense we pay on interest-bearing liabilities, such as deposits and borrowings.

 

The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many financial institutions, our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility because market interest rates change over time. In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest we pay on our liabilities. A decline in interest rates results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial institution’s net interest margin and create financial risk for financial institutions that originate longer-term, fixed-rate mortgage loans. At December 31, 2018, 44.6% of our loan and lease portfolio consisted of fixed-rate loans and leases.

 

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Changes in the level of interest rates also may negatively affect the value of our assets and liabilities and ultimately affect our earnings.

 

We monitor interest rate risk through the use of simulation models, including estimates of the amounts by which the fair value of our assets, liabilities and equity (our economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. As of December 31, 2018, in the event of an instantaneous 200 basis point increase in interest rates, we estimate that we would experience a 10.1% decrease in EVE. For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Economic Value of Equity.”

 

Strong competition within our market areas may limit our growth and profitability.

 

Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and securities brokerage firms and unregulated or less regulated non-banking entities, operating locally and elsewhere. Many of these competitors have substantially greater resources and higher lending limits than we have and offer certain services that we do not or cannot provide. In addition, some of our competitors offer loans with lower interest rates and fees on more attractive terms than loans we offer. Competition also makes it increasingly difficult and costly to attract and retain qualified employees. Our profitability depends upon our continued ability to successfully compete in our market area. If we must raise interest rates paid on deposits or lower interest rates charged on our loans due to competition, our net interest margin and profitability could be adversely affected.

 

The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve greater economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. For additional information see “Business of First Bank Richmond − Market Area” and “− Competition.”

 

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Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

 

First Bank Richmond is subject to extensive regulation, supervision and examination by the FDIC and the Indiana Department of Financial Institutions, and Richmond Mutual Bancorporation-Maryland will be subject to extensive regulation, supervision and examination by the Federal Reserve Board. Such regulation and supervision govern the activities in which an institution and its holding company may engage and are intended primarily for the protection of the federal deposit insurance fund and the depositors of First Bank Richmond, rather than for our stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan and lease losses. These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations, control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations. See “ - We are subject to an extensive body of accounting rules and best practices. Periodic changes to such rules may change the treatment and recognition of critical financial line items and affect our profitability.”

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has significantly changed the regulation of banks and savings institutions and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies have exercised significant discretion in drafting the implementing rules and regulations. It will be some time before the full effect of the Dodd-Frank Act and the regulations thereunder can be assessed. Compliance with the Dodd-Frank Act and its implementing regulations and policies has already resulted in changes to our business and operations, as well as additional costs, and has diverted management’s time from other business activities, all of which have adversely affected our financial condition and results of operations.

 

We are subject to an extensive body of accounting rules and best practices. Periodic changes to such rules may change the treatment and recognition of critical financial line items and affect our profitability.

 

The nature of our business makes us sensitive to the large body of accounting rules in the United States. From time to time, the governing bodies that oversee changes to accounting rules and reporting requirements may release new guidance for the preparation of our financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some instances, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. Changes which have been approved for future implementation, or which are currently proposed or expected to be proposed or adopted include requirements that we calculate the allowance for loan and lease losses on the basis of the current expected credit losses over the lifetime of our loans, referred to as the CECL model, which is expected to be applicable to us, as an emerging growth company, beginning in 2022. CECL adoption will have broad impact on our financial statements, which will affect key profitability and solvency measures, including, but not limited to higher loan loss reserve levels and related deferred tax assets.  Increased reserve levels also may lead to a reduction in capital levels. Any such changes could have a material adverse effect on our business, financial condition and results of operations.

 

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Under the CECL model, banks will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The forward-looking modeling required by CECL relies on a number of macroeconomic variables. Unexpected changes to such indicators between periods could potentially result in greater earnings volatility from period to period. Our reserves may need to be adjusted in response to not only to our actual experience, but also to external factors. If we are required to materially increase the level of the allowance for loan and lease losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

 

An additional impact of CECL will be the asymmetry in accounting between loan related income, which will continue to be recognized on a periodic basis based on the effective interest method, and the related credit losses, which will be recognized up front at origination. This will make periods of loan expansion seem less profitable due to the immediate recognition of expected credit losses. Periods of stable or declining loan levels will look comparatively more profitable as the income trickles in for loans, where losses had been previously recognized.

 

We are evaluating the impact the CECL accounting model will have on our accounting, but expect to recognize a one-time cumulative-effect adjustment to the allowance for loan and lease losses as of the beginning of the first reporting period in which the new standard is effective. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations. The federal banking regulators, including the Federal Reserve and the FDIC, have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital.

 

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

 

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are suspected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on pursuing acquisitions or establishing new branches. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations. Furthermore, these rules and regulations continue to evolve and expand.

 

We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends or repurchase shares.

 

Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and defines “capital” for calculating these ratios. The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The regulations also establish a “capital conservation buffer” of 2.5% which results in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amounts.

 

The application of more stringent capital requirements could, among other things, result in lower returns on equity, and result in regulatory actions if we are unable to comply with such requirements. Specifically, following the completion of the offering, First Bank Richmond’s ability to pay dividends to Richmond Mutual Bancorporation-Maryland will be limited if it does not have the capital conservation buffer required by the capital rules, which may further limit Richmond Mutual Bancorporation-Maryland’s ability to pay dividends to stockholders. See “Regulation and Supervision − Federal Banking Regulation − Capital Requirements.”

 

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The cost of additional finance and accounting systems, procedures, compliance and controls in order to satisfy our new public company reporting requirements will increase our expenses.

 

As a result of the completion of this offering, we will become a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes Oxley Act”) requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the Securities and Exchange Commission. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our operations.

 

Changes in accounting standards could affect reported earnings.

 

The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our financial statements. In some cases, we could be required to apply new or revised guidance retroactively. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations.

 

Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

 

In preparing this prospectus as well as periodic reports we will be required to file under the Securities Exchange Act of 1934, including our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our evaluation of the adequacy of our allowance for loan and lease losses and our determinations with respect to amounts owed for income taxes.

 

Legal and regulatory proceedings and related matters could adversely affect us.

 

We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.

 

We are subject to environmental liability risk associated with lending activities or properties we own.

 

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties, or with respect to properties that we own in operating our business. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Our policies, which require us to perform an environmental review before initiating any foreclosure action on non-residential real property, may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

 

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We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed or on terms acceptable to us.

 

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We believe the net proceeds of this offering will be sufficient to permit Richmond Mutual Bancorporation-Maryland to maintain regulatory compliance for the foreseeable future. Nevertheless, we may elect to raise more capital to support our business or to finance acquisitions, if any, or we may otherwise elect or be required to raise additional capital in the future. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. We cannot assure you of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, or if the terms of such a capital raise are not advantageous, it may have a material adverse effect on our financial condition, results of operations and prospects.

 

There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock.

 

We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.

 

Our board of directors is authorized to allow us to issue additional common stock, as well as classes or series of preferred stock, generally without any action on the part of the stockholders. In addition, the board has the power, generally without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over the common stock with respect to dividends or upon the liquidation, dissolution or winding-up of our business and other terms. If we issue additional preferred stock in the future that has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue additional preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market value of the common stock could be adversely affected.

 

Risks Related to the Offering

 

The future price of our common stock may be less than the purchase price in the offering.

 

If you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $10.00 purchase price in the offering. In some cases, shares of common stock issued by newly converted financial institutions or mutual holding companies have traded below the initial offering price. The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The independent appraisal is based on certain estimates, assumptions and projections, all of which are subject to change from time to time. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, changes in federal tax laws, new regulations, investor perceptions of Richmond Mutual Bancorporation-Maryland and the outlook for the financial services industry in general. Price fluctuations in our common stock may be unrelated to our operating performance.

 

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The capital we raise in the offering may negatively impact our return on equity until we can fully implement our business plan. This could negatively affect the trading price of our shares of common stock.

 

Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers. Although we anticipate increasing net interest income using proceeds of the offering, our return on equity will be reduced by the capital raised in the offering, higher expenses from the costs of being a public company, and added expenses associated with our employee stock ownership plan and the stock-based benefit plans we intend to adopt. Until we can implement our business plan and increase our net interest income through investment of the proceeds of the offering, we expect our return on equity to remain relatively low compared to our peer group, which may reduce the value of our shares.

 

We have broad discretion in using the proceeds of the offering. Our failure to effectively deploy the net proceeds of the offering may have an adverse effect on our financial performance and the value of our common stock.

 

We intend to invest between $40.7 million and $55.3 million, or $63.7 million if the offering is increased by 15%, of the net proceeds of the offering in First Bank Richmond. We also expect to use a portion of the net proceeds we retain to fund a loan to the employee stock ownership plan for the purchase of shares of common stock in the offering by the employee stock ownership plan, will contribute $1.25 million in cash to the charitable foundation that we are establishing in connection with the reorganization and will use approximately $5.0 million to redeem outstanding subordinated debentures and related trust preferred securities issued by First Mutual of Richmond-MHC which will be assumed by Richmond Mutual Bancorporation-Maryland in connection with the reorganization. We may use the remaining net proceeds to invest in short-term investments and for general corporate purposes, including, subject to regulatory limitations, the repurchase of shares of common stock and the payment of dividends. First Bank Richmond intends to use approximately $13.3 million ($9.8 million after tax) of the funds it receives from Richmond Mutual Bancorporation-Maryland in the offering to terminate its participation in the Pentegra DB Plan and generally intends to use the remaining net proceeds it receives to fund new loans, expand its retail banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies, or for other general corporate purposes. Funds used to pay the termination expense related to the Pentegra DB Plan may be higher or lower depending on a number of factors, including but not limited to the interest rate environment and the valuation of plan assets. With the exception of the loan to the employee stock ownership plan, the contribution to the charitable foundation, the redemption of the subordinated debentures and related trust preferred securities, and the termination expense of the Pentegra DB Plan, we have not allocated specific amounts of the net proceeds for any purposes, and we will have significant flexibility in determining the amount of the net proceeds we apply to different uses and the timing of such applications. Also, certain of these uses, such as any potential acquisition, paying dividends and repurchasing common stock, may require prior regulatory approval. We have not established a timetable for reinvesting the net proceeds, and we cannot predict how long it will take to reinvest the net proceeds. Our failure to utilize these funds effectively and timely would reduce our profitability and may adversely affect the value of our common stock. For additional information see “How We Intend To Use The Proceeds From The Offering.”

 

There may be a limited trading market in our common stock, which would hinder your ability to sell our common stock and may lower the market price of the stock.

 

We have never issued capital stock and there is no established market for our common stock. We expect that our common stock will be quoted on the Nasdaq Capital Market under the symbol “RMBI” upon conclusion of the offering, subject to completion of the offering and compliance with certain conditions, including having 300 “round lot” stockholders (stockholders owning more than 100 shares) and at least three companies making a market for our common stock. KBW has advised us that it intends to make a market in shares of our common stock following the offering, but it is not obligated to do so or to continue to do so once it begins. While we will attempt before completion of the offering to obtain commitments from at least two other broker-dealers to make a market in shares of our common stock, we may not be able to obtain such commitments. This would result in our common stock not being listed for trading on the Nasdaq Capital Market, which could reduce the liquidity of our common stock.

 

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The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment.

 

We will incur a substantial expense in connection with the termination of First Bank Richmond’s participation in the Pentegra DB Plan, which will most likely eliminate all of our earnings for 2019 and result in us reporting a net loss for the year ending 2019.

 

First Bank Richmond participates in the Pentegra DB Plan, an industry-wide, tax-qualified defined-benefit pension plan, which covers substantially all of its employees. First Bank Richmond intends to use funds it receives from Richmond Mutual Bancorporation-Maryland in the offering to terminate its participation in the Pentegra DB Plan, which will require us to pay an amount based on the underfunded status of the plan, referred to as a withdrawal liability, which we currently estimate to be approximately $13.3 million ($9.8 million after tax). Our actual termination expense may be higher or lower depending on a number of factors, including but not limited to the interest rate environment and the valuation of plan assets. For the year ended December 31, 2018, we reported net income before income taxes of $7.0 million. As a result of the one-time termination fee and based on our historical earnings, we expect to report a net loss for the fiscal year ending December 31, 2019.

 

Our stock-based and other benefit plans will increase our costs, which will reduce our net income.

 

We intend to adopt a new stock-based benefit plan after the reorganization and offering, subject to shareholder approval, which will increase our annual compensation and benefit expenses related to the stock options and stock awards granted to participants under the new stock-based benefit plan. The actual amount of these new stock-related compensation and benefit expenses will depend on the number of options and stock awards actually granted under the plan, the fair market value of our stock or options on the date of grant, the vesting period, and other factors that we cannot predict at this time. If we adopt stock-based benefit plans within 12 months following the offering, the total shares of common stock reserved for issuance pursuant to awards of restricted stock and grants of options under such plans would be limited to 4% and 10%, respectively, of the total shares of our common stock sold in the offering and contributed to the charitable foundation. If we award restricted shares of common stock or grant options in excess of these amounts under stock-based benefit plans adopted more than 12 months after the completion of the offering, our costs would increase further.

 

We also will recognize expense for our employee stock ownership plan when shares are committed to be released to participants’ accounts, and we will recognize expense for restricted stock awards and stock options over the vesting period of awards made to recipients. The expense in the first year following the offering for shares purchased by the employee stock ownership plan in the offering and for our new stock-based benefit plans has been estimated to be approximately $2.4 million ($1.9 million after tax) at the adjusted maximum of the offering range as set forth in the pro forma financial information under “Pro Forma Data,” assuming the $10.00 per share offering price as fair market value. Actual expense may be higher if the price of our common stock at the time the shares are allocated or awarded is greater than $10.00 per share.

 

For further discussion of our proposed stock-based plans, see “Management - Existing and Future Benefit Plans and Agreements — Proposed Employee Stock Ownership Plan” and “— Proposed Stock-Based Incentive Plan.”

 

In addition, First Bank Richmond entered into a nonqualified deferred compensation plan with Garry Kleer, its Chairman, President and Chief Executive Officer, which will result in a $1.9 million ($1.4 million after tax) expense to First Bank Richmond in 2019. For a discussion of the non-qualified deferred compensation plan, see “Management - Existing and Future Benefit Plans and Agreements — Nonqualified Deferred Compensation Plan.”

 

The implementation of a stock-based benefit plan may dilute your ownership interest.

 

We intend to adopt a stock-based benefit plan following the reorganization and offering. The stock-based benefit plan will be funded through either open market purchases, if permitted, or from the issuance of authorized but unissued shares. Our ability to repurchase shares of common stock to fund these plans will be subject to many factors, including applicable regulatory restrictions on common stock repurchases, the availability of stock in the market, the trading price of the stock, our capital levels, alternative uses for our capital and our financial performance. While our intention is to fund the new stock-based benefit plan through open market purchases, stockholders would experience a reduction in ownership interest totaling 12.3% in the event newly issued shares are used to fund stock options and restricted stock awards in an amount equal to 10.0% and 4.0%, respectively, of the total shares issued in the reorganization and offering (including shares contributed to the charitable foundation).

 

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We have not determined when we will adopt our new stock-based benefit plan. Stock-based benefit plans adopted more than 12 months following the completion of the reorganization and offering may exceed regulatory restrictions on the size of stock-based benefit plans adopted within 12 months, which would further increase our costs.

 

If we adopt a stock-based benefit plan more than 12 months following the completion of the offering, then grants of shares of common stock or stock options under our existing and proposed stock-based benefit plan may exceed 4% and 10%, respectively, of shares of common stock sold in the offering and contributed to the charitable foundation. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “- Our stock-based and other benefit plans will increase our costs, which will reduce our net income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to shareholders in excess of that described in “- The implementation of a stock-based benefit plan may dilute your ownership interest.” Although the implementation of stock-based benefit plans would be subject to shareholder approval, the timing of the implementation of such plans will be at the discretion of our board of directors. Historically, shareholders have approved these stock-based benefit plans.

 

Various factors may make takeover attempts more difficult to achieve.

 

Certain provisions of our articles of incorporation and bylaws and state and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of Richmond Mutual Bancorporation -Maryland without our board of directors’ prior approval.

 

Under Federal Reserve Board regulations, for a period of three years following completion of the reorganization and offering, no person may directly or indirectly acquire or offer to acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board before acquiring control of a bank holding company. Acquisition of 10% or more of any class of voting stock of a bank holding company creates a rebuttable presumption that the acquirer “controls” the bank holding company. Also, a bank holding company must obtain the prior approval of the Federal Reserve Board before, among other things, acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any bank, including First Bank Richmond.

 

There also are provisions in our articles of organization that may be used to delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of the shares of common stock outstanding and a provision governing certain business combinations. Furthermore, shares of restricted stock and stock options that we may grant to employees and directors, stock ownership by our management and directors and other factors may make it more difficult for companies or persons to acquire control of Richmond Mutual Bancorporation-Maryland without the consent of our board of directors. Taken as a whole, these statutory provisions and provisions in our articles of incorporation could result in our being less attractive to a potential acquirer and thus could adversely affect the market price of our common stock.

 

For additional information, see “Restrictions on Acquisition of Richmond Mutual Bancorporation-Maryland” for a discussion of applicable Federal Reserve Board regulations regarding acquisitions and provisions in our articles of incorporation and bylaws that could impact acquisitions of control of Richmond Mutual Bancorporation-Maryland.

 

Our management team has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business.

 

Our management team has limited experience managing a publicly traded company or complying with the complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to a public company, which will be subject to significant regulatory oversight and reporting obligations under the federal securities laws. In particular, these new obligations will require substantial attention from our management team and may divert their attention away from the day-to-day management of our business, which could materially and adversely impact our business operations.

 

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You may not receive dividends on our common stock.

 

Holders of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. The declaration and payment of future cash dividends will be subject to, among other things, regulatory restrictions, our then current and projected consolidated operating results, financial condition, tax considerations, future growth plans, general economic conditions, and other factors our board of directors deems relevant. Richmond Mutual Bancorporation-Maryland will depend primarily upon the proceeds it retains from the offering as well as earnings of First Bank Richmond to provide funds to pay dividends on our common stock. The payment of dividends by First Bank Richmond also is subject to certain regulatory restrictions. Federal law generally prohibits a depository institution from making any capital distributions (including payment of a dividend) to its parent holding company if the depository institution would thereafter be or continue to be undercapitalized, and dividends by a depository institution are subject to additional limitations. As a result, any payment of dividends in the future by Richmond Mutual Bancorporation-Maryland will depend, in large part, on First Bank Richmond’s ability to satisfy these regulatory restrictions and its earnings, capital requirements, financial condition and other factors.

 

You may not be able to sell your shares of common stock until you have received a statement reflecting ownership of shares, which will affect your ability to take advantage of changes in the stock price immediately following the offering.

 

A statement reflecting ownership of shares of common stock purchased in the offering may not be delivered for several days after the completion of the offering and the commencement of trading in the common stock. Your ability to sell the shares of common stock before receiving your ownership statement will depend on arrangements you may make with a brokerage firm, and you may not be able to sell your shares of common stock until you have received your ownership statement. As a result, you may not be able to take advantage of fluctuations in the price of the common stock immediately following the offering.

 

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation or on any golden parachute payments not previously approved. As an emerging growth company, we also will not be subject to Section 404(b) of the Sarbanes-Oxley Act of 2002, which would require that our independent auditors review and attest as to the effectiveness of our internal control over financial reporting. We have also elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

 

We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.

 

As a result, our stockholders may not have access to certain information they may deem important, and investors may find our common stock less attractive if we choose to rely on these exemptions. This could result in a less active trading market for our common stock and the price of our common stock may be more volatile.

 

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Risks Related to the Charitable Foundation

 

The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in 2019.

 

We intend to establish and fund a new charitable foundation in connection with the reorganization and offering, subject to approval of the members of First Mutual of Richmond-MHC. We intend to contribute a total of $6.25 million to the charitable foundation, which contribution will consist of $5.0 million (500,000 shares) of common stock and $1.25 million of cash. The 500,000 shares of common stock contributed to the charitable foundation will represent approximately 6.0%, 5.1%, 4.4% and 3.8% of the common stock sold in the offering at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. The contribution will have an adverse effect on our net income for the quarter and year in which we make the issuance and contribution to the charitable foundation. The after-tax expense of the contribution is expected to reduce net income in fiscal 2019 by approximately $4.6 million. Our fiscal 2018 net income was $5.7 million. In addition, persons purchasing shares in the offering will have their ownership and voting interests in Richmond Mutual Bancorporation-Maryland diluted by up to 5.6% and 3.7% at the minimum and adjusted maximum of the offering range, respectively due to the contribution of shares of common stock to the charitable foundation.

 

Our contribution to the charitable foundation may not be tax deductible, which could reduce our profits.

 

We may not have sufficient profits to be able to fully use the tax deduction from our contribution to the charitable foundation. Under the Internal Revenue Code, an entity is permitted to deduct up to 10% of its taxable income (generally income before federal income taxes and charitable contributions expense) in any one year for charitable contributions. Any contribution in excess of the 10% limit may be deducted for federal income tax purposes over each of the five years following the year in which the charitable contribution is made. Accordingly, a charitable contribution could, if necessary, be deducted over a six-year period and expires thereafter.

 

As previously stated, we will incur a substantial expense in connection with the termination of First Bank Richmond’s participation in the Pentegra DB Plan, which will most likely eliminate all of our earnings for 2019 and result in us reporting a net loss for the year. As a result, we do not expect to be able to use the tax deduction in 2019 from our contribution to the charitable foundation. There are no assurances that we will have sufficient profits in the future to be able to fully use the tax deduction from our contribution to the charitable foundation.

 

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SELECTED FINANCIAL AND OTHER DATA

 

The Financial Condition Data as of December 31, 2018 and 2017 and the Operating Data for the years ended December 31, 2018, 2017 and 2016 are derived from the audited financial statements and related notes included elsewhere in the prospectus. The Financial Condition Data as of December 31, 2016, 2015 and 2014 and the Operating Data for the years ended December 31, 2015 and 2014 are derived from audited financial statements not included in this prospectus. The following information is only a summary and you should read it in conjunction with our financial statements and related notes beginning on page F-1 and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

   At December 31, 
   2018   2017   2016   2015   2014 
   (In thousands) 
Selected Financial Condition Data:                         
Total assets  $849,618   $753,621   $693,956   $674,637   $614,197 
Loans and leases, net(1)   654,755    557,929    461,990    400,427    366,332 
Securities available for sale, at fair value   122,482    118,357    144,214    189,571    180,350 
Investment securities, at amortized cost   21,080    24,892    27,360    28,837    13,567 
Federal Reserve and FHLB stock   6,561    6,717    6,224    5,384    7,129 
Deposits   620,637    560,395    516,302    520,487    475,161 
FHLB advances   136,100    104,000    92,300    71,600    57,600 
Stockholders’ equity   85,853    81,798    78,105    77,576    75,920 

 

   Years Ended December 31, 
   2018   2017   2016   2015   2014 
   (In thousands) 
Selected Operations Data:                         
Total interest income  $35,199   $29,104   $26,686   $25,561   $25,586 
Total interest expense   7,752    5,250    4,068    3,630    4,090 
Net interest income   27,447    23,854    22,618    21,931    21,496 
Provision for loan and lease losses   1,680    1,370    1,155    830    1,800 
Net interest income after provision for loan and lease losses   25,767    22,484    21,463    21,100    19,696 
Service charges on deposit accounts   1,115    1,111    1,157    1,282    1,409 
Card fee income   698    644    673    661    670 
Loan and lease servicing fees (losses)   335    208    84    (198)   125 
Gain on loan and lease sales   459    794    712    375    298 
Gain on sales of securities   15    96    473    1,567    527 
Other income   1,671    1,662    1,491    1,202    2,370 
Total non-interest income   4,294    4,515    4,590    4,889    5,399 
Total non-interest expenses   23,105    21,312    21,574    20,284    20,710 
Income before provision for income taxes   6,956    5,687    4,479    5,705    4,385 
Provision for income taxes(2)   1,278    2,972    1,075    1,651    1,437 
Net income(2)  $5,678   $2,715   $3,404   $4,054   $2,948 

 

 

(1)Net of allowances for loan and lease losses, loans in process and deferred loan fees.
(2)The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 reducing our federal corporate tax rate from 34% to 21%, effective January 1, 2018. As a result of the Tax Act, our provision for income taxes and net income in 2018 were positively impacted by a $676,000 tax benefit related to tax rate changes, while our provision for income taxes and net income in 2017 were negatively impacted by an additional $1.5 million in tax expense related to an adjustment to our deferred tax asset.

 

 33 

 

 

   At or For the 
   Years Ended December 31, 
   2018   2017   2016   2015   2014 
Selected Financial Ratios and Other Data:                         
Performance ratios:                         
Return on average assets (ratio of net income (loss) to average total assets)   0.71%   0.38%   0.50%   0.63%   0.47%
Return on average equity (ratio of net income (loss) to average equity)   6.89%   3.36%   4.28%   5.28%   4.03%
Yield on interest-earning assets   4.58%   4.24%   4.14%   4.18%   4.27%
Rate paid on interest-bearing liabilities   1.18%   0.92%   0.78%   0.76%   0.90%
Interest rate spread information:                         
Average during period   3.40%   3.32%   3.36%   3.43%   3.37%
End of period   3.11%   3.21%   3.27%   3.36%   3.45%
Net interest margin(1)   3.57%   3.48%   3.51%   3.59%   3.61%
Operating expense to average total assets   2.89%   2.96%   3.18%   3.16%   3.30%
Average interest-earning assets to average interest-bearing liabilities   117.01%   120.20%   124.13%   127.18%   131.52%
Efficiency ratio(2)   71.84%   73.22%   78.20%   78.79%   77.37%
                          
Asset quality ratios:                         
Non-performing assets to total assets(3)   0.56%   0.60%   1.63%   2.11%   3.14%
Non-performing loans and leases to total gross loans and leases(4)   0.69%   0.80%   1.62%   3.24%   4.91%
Allowance for loan and lease losses to non-performing loans and leases(4)   122.40%   106.36%   71.31%   39.96%   34.27%
Allowance for loan and lease losses to loans and leases receivable, net   0.85%   0.85%   1.15%   1.29%   1.68%
Net charge-offs to average outstanding loans and leases during the period   0.14%   0.38%   0.23%   0.49%   0.64%
                          
Capital ratios: (5)                         
Common equity tier 1 capital (to risk weighted assets)   11.49%   11.80%   13.10%   15.30%   16.80%
Tier 1 leverage (core) capital (to adjusted tangible assets)   10.06%   10.30%   9.80%   10.30%   10.50%
Tier 1 risk-based capital (to risk weighted assets)   11.49%   11.80%   13.10%   15.30%   16.80%
Total risk-based capital (to risk weighted assets)   12.26%   12.60%   14.10%   16.50%   18.00%
Equity to total assets at end of period   10.11%   10.85%   11.26%   11.50%   12.36%
Average equity to average assets   10.30%   11.22%   11.71%   11.97%   11.69%
                          
Other data:                         
Number of full service offices   12    12    11    11    12 
Full-time equivalent employees   172    174    173    170    180 

 

 

(1)Net interest income (on a tax equivalent basis) divided by average interest earning assets.
(2)Total other (non-interest) expenses as a percentage of net interest income (on a tax equivalent basis) and total other (non-interest) income, excluding net securities transactions.
(3)Non-performing assets consist of non-accruing loans and leases, accruing loans and leases more than 90 days past due and foreclosed assets.
(4)Non-performing loans and leases consist of non-accruing loans and leases and accruing loans and leases more than 90 days past due.
(5)Capital ratios are for First Bank Richmond.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” and words of similar meaning. 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.

 

These forward-looking statements are based on our current beliefs and expectations and 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. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this prospectus.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

·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;

 

·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;

 

·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;

 

·the impact of the Dodd-Frank Act and the implementing regulations;

 

·changes in the quality or composition of our loan or investment portfolios;

 

·technological changes that may be more difficult or expensive than expected;

 

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·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;

 

·the deductibility of our contribution to the charitable foundation for tax purposes; and

 

·changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Please see “Risk Factors” beginning on page 18.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

 

Although we will not be able to determine the amount of actual net proceeds we will receive from the sale of shares of common stock until the offering is completed, we anticipate that the net proceeds will be between $81.4 million and $110.6 million, or $127.5 million if the offering is increased by 15%.

 

Richmond Mutual Bancorporation-Maryland intends to distribute the net proceeds from the offering as follows:

 

   Based Upon the Sale at $10.00 Per Share of 
   8,372,500 Shares at
Minimum of Offering
Range
   9,850,000 Shares at
Midpoint of Offering
Range
   11,327,500 Shares at
Maximum of Offering
Range
  

13,026,625 Shares at
Adjusted Maximum of
Offering Range (1)

 
   Amount   Percent of
Net
Proceeds
   Amount   Percent of
Net
Proceeds
   Amount   Percent of
Net
Proceeds
   Amount   Percent of
Net
Proceeds
 
   (Dollars in thousands) 
                                 
Gross offering proceeds  $83,725        $98,500        $113,275        $130,266      
Less: estimated offering expenses   (2,366)        (2,502)        (2,638)        (2,794)     
Net offering proceeds  $81,359    100.0%  $95,998    100.0%  $110,637    100.0%  $127,472    100.0%
Less:                                        
Proceeds contributed to First Bank Richmond  $(40,680)   (50.0)%  $(47,999)   (50.0)%  $(55,318)   (50.0)%  $(63,736)   (50.0)%
Proceeds used for loan to employee stock ownership plan (2)   (7,098)   (8.7)%   (8,280)   (8.6)%   (9,462)   (8.6)%   (10,821)   (8.5)%
Proceeds used to redeem subordinated debentures   (5,000)   (6.1)%   (5,000)   (5.2)%   (5,000)   (4.5)%   (5,000)   (3.9)%
Cash Contribution to the charitable foundation   (1,250)   (1.5)%   (1,250)   (1.3)%   (1,250)   (1.1)%   (1,250)   (1.0)%
Proceeds retained by Richmond Mutual Bancorporation-Maryland  $27,331    33.7%  $33,469    34.9%  $39,607    35.8%  $46,665    36.6%

 

 

(1)As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)The employee stock ownership plan (“ESOP”) will purchase 8.0% of the shares of common stock sold in the offering (including shares contributed to the charitable foundation) with the ESOP obtaining the funds to purchase the shares from a loan made available by Richmond Mutual Bancorporation-Maryland to the ESOP. The loan will be repaid principally through First Bank Richmond’s contribution to the ESOP and dividends payable on common stock held by the ESOP over the anticipated 20-year term of the loan. The interest rate for the ESOP loan is expected to be equal to the prime rate, as published in The Wall Street Journal, on the closing date of the offering.

 

The net proceeds may vary because total expenses relating to the reorganization and offering may be more or less than our estimates. For example, our expenses would increase if a syndicated community offering were used to sell shares of common stock not purchased in the subscription offering and the community offering. See “The Reorganization and Offering—Plan of Distribution and Marketing Arrangements” for a discussion of fees to be paid in the event that shares are sold in a syndicated community offering. Payments for shares made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of First Bank Richmond’s deposits. First Bank Richmond will receive at least 50% of the net proceeds of the offering.

 

Use of Proceeds Retained by Richmond Mutual Bancorporation-Maryland

 

Richmond Mutual Bancorporation-Maryland:

 

·intends to initially invest the proceeds that it retains in interest-earning deposits and in securities, including securities issued by the U.S. government and its agencies or government sponsored enterprises, mortgage-backed securities, and other securities as permitted by our investment policy. See “Business of First Bank Richmond − Investment Activities;”

 

·may, in the future, use a portion of the proceeds that it retains to pay cash dividends or to repurchase shares of our common stock, although under current federal regulations we may not repurchase shares of our common stock during the first year following the reorganization and offering, except to fund stock-based benefit plans or when extraordinary circumstances exist with prior regulatory approval;

 

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·may, in the future, use a portion of the proceeds that it retains to finance acquisitions of financial institutions, or branches thereof, or other financial services businesses, or to expand through de novo branching, although no specific transactions are being considered at this time and no specific expansion is being considered at this time;

 

·expects to use the proceeds that it retains from time to time for other general corporate purposes.

 

See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the offering.

 

Use of Proceeds Received by First Bank Richmond

 

First Bank Richmond:

 

·intends to use approximately $13.3 million ($9.8 million after tax) to terminate its participation in the Pentegra DB Plan; however, this amount may be higher or lower depending on a number of factors, including but not limited to the interest rate environment and the valuation of plan assets;

 

·intends to use a portion of the proceeds received to fund new loans;

 

·may use a portion of the proceeds received to support new loan, deposit and other financial products and services if our board of directors determines that such products will help us compete more effectively in our market area or increase our financial performance;

 

·may invest a portion of the proceeds received in securities issued by the U.S. government and its agencies or government sponsored enterprises, mortgage-backed securities, and other securities as permitted by our investment policy;

 

·may, in the future, use a portion of the proceeds received to expand our retail banking franchise, by acquiring other financial institutions, branch offices or other financial services businesses, or establishing new branches or loan production offices, although no specific transactions are being considered at this time; and

 

·expects to use the proceeds received from time to time for other general corporate purposes.

 

The use of the proceeds by Richmond Mutual Bancorporation-Maryland and First Bank Richmond may change based on changes in interest rates, equity markets, laws and regulations affecting the financial services industry, our relative position in the financial services industry, the attractiveness of potential acquisitions to expand our operations, and overall market conditions. 

 

 38 

 

 

OUR POLICY REGARDING DIVIDENDS

 

Following completion of the reorganization, our board of directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. We currently intend to pay quarterly cash dividends but have not determined the amount or when payment would start. The payment and amount of dividends would depend upon a number of factors, including: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of stockholders; tax considerations; statutory and regulatory limitations; and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, they will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by applicable law, regulations and policy, may be paid in addition to, or in lieu of, regular cash dividends.

 

The Federal Reserve Board has issued a policy statement providing that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Regulatory guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate of earnings retention is inconsistent with its capital needs and overall financial condition. In addition, First Bank Richmond’s ability to pay dividends will be limited if it does not have the capital conservation buffer required by the applicable capital rules, which may limit our ability to pay dividends to stockholders. See “Regulation and Supervision − Federal Banking Regulation − Capital Requirements.” No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future.

 

Richmond Mutual Bancorporation-Maryland will file a consolidated federal tax return with First Bank Richmond. Accordingly, it is anticipated that any cash distributions that Richmond Mutual Bancorporation-Maryland makes to its stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal and state tax purposes. Additionally, pursuant to regulations of the Federal Reserve Board, during the three-year period following the offering, Richmond Mutual Bancorporation-Maryland will not take any action to declare an extraordinary dividend to its stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

 

Pursuant to Richmond Mutual Bancorporation-Maryland’s articles of incorporation, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof may have a priority over the holders of our shares of common stock with respect to the payment of dividends. For a further discussion concerning the payment of dividends on our shares of common stock, see “Description of Capital Stock of Richmond Mutual Bancorporation-Maryland − Common Stock.” Dividends we can declare and pay will depend, in part, upon receipt of dividends from First Bank Richmond, because initially we will have no source of income other than dividends from First Bank Richmond and earnings from the investment of the net proceeds from the sale of shares of common stock retained by Richmond Mutual Bancorporation-Maryland and interest payments received in connection with the loan to the employee stock ownership plan. Indiana banking law imposes limitations on “capital distributions” by First Bank Richmond. See “Regulation and Supervision – Indiana Banking Regulation — Dividends.”

 

Any payment of dividends by First Bank Richmond to Richmond Mutual Bancorporation-Maryland that would be deemed to be drawn out of First Bank Richmond’s bad debt reserves, if any, would require a payment of taxes at the then-current tax rate by First Bank Richmond on the amount of earnings deemed to be removed from the reserves for such distribution. First Bank Richmond does not intend to make any distribution to Richmond Mutual Bancorporation-Maryland that would create such a federal tax liability. See “Taxation.”

 

 39 

 

 

MARKET FOR THE COMMON STOCK

 

Richmond Mutual Bancorporation-Maryland has never issued capital stock. Accordingly, there is no established market for our common stock. Richmond Mutual Bancorporation-Maryland expects that its common stock will be listed for trading on the Nasdaq Capital Market under the symbol “RMBI”, subject to completion of the reorganization and offering, and compliance with certain listing conditions, including the presence of at least three registered and active market makers. KBW has advised us that it intends to make a market in shares of our common stock following the offering, but it is not obligated to do so or to continue to do so once it begins. While we will attempt before completion of the offering to obtain commitments from at least two other broker-dealers to make a market in shares of our common stock, there can be no assurance that we will be successful in obtaining such commitments.

 

The development and maintenance of an active trading market, having the desirable characteristics of depth, liquidity and orderliness, depends on the existence of willing buyers and sellers, which is not within our control or that of any market maker. The number of active buyers and sellers of shares of our common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. Furthermore, we cannot assure you that, if you purchase shares of common stock, you will be able to sell them at or above $10.00 per share. Purchasers of common stock in this offering should have long-term investment intent and should recognize that there may be a limited trading market in the common stock. This may make it difficult to sell the common stock after the offering and may have an adverse impact on the price at which the common stock can be sold.

 

 40 

 

 

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

 

At December 31, 2018, First Bank Richmond exceeded all of the applicable regulatory capital requirements and was considered “well capitalized.” The table below sets forth the historical equity capital and regulatory capital of First Bank Richmond at December 31, 2018, and the pro forma equity capital and regulatory capital of First Bank Richmond after giving effect to the sale of shares of common stock at $10.00 per share. The table assumes the receipt by First Bank Richmond of 50% of the net offering proceeds. See “How We Intend to Use the Proceeds from the Offering.”

 

   First Bank Richmond
Historical at
  

Pro Forma at December 31, 2018, Based Upon the Sale in the Offering of (1)

 
   December 31, 2018   8,372,500 Shares   9,850,000 Shares   11,327,500 Shares  

13,026,625 Shares (2)

 
   Amount  

Percent of
Assets (3(4))

   Amount  

Percent of
Assets (3)

   Amount  

Percent of

Assets (3)

   Amount  

Percent of
Assets (3)

   Amount  

Percent of
Assets (3)

 
   (Dollars in thousands) 
     
Equity  $80,857    9.57%  $101,059    11.59%  $106,605    12.13%  $112,152    12.67%  $118,531    13.27%
                                                   
Tier 1 leverage capital  $84,250    10.06%  $104,452    12.07%  $109,998    12.62%  $115,545    13.15%  $121,924    13.76%
Tier 1 leverage capital requirement   41,888    5.00    43,253    5.00    43,590    5.00    43,926    5.00    44,313    5.00 
Excess  $42,362    5.06%  $61,199    7.07%  $66,408    7.62%  $71,619    8.15%  $77,611    8.76%
                                                   
Tier 1 risk-based capital (5)  $84,250    11.49%  $104,452    14.14%  $109,998    14.87%  $115,545    15.59%  $121,924    16.42%
Tier 1 risk-based requirement   58,640    8.00    59,077    8.00    59,184    8.00    59,292    8.00    59,416    8.00 
Excess  $25,610    3.49%  $45,375    6.14%  $50,814    6.87%  $56,253    7.59%  $62,508    8.42%
                                                   
Total risk-based capital (5)  $89,850    12.26%  $110,052    14.90%  $115,598    15.63%  $121,145    16.35%  $127,524    17.17%
Total risk-based requirement   73,300    10.00    73,846    10.00    73,981    10.00    74,115    10.00    74,270    10.00 
Excess  $16,550    2.26%  $36,206    4.90%  $41,617    5.63%  $47,030    6.35%  $53,254    7.17%
                                                   
Common equity tier 1 risk-based capital (5)  $84,250    11.49%  $104,452    14.14%  $109,998    14.87%  $115,545    15.59%  $121,924    16.42%
Common equity tier 1 risk-based requirement   47,645    6.50    48,000    6.50    48,087    6.50    48,175    6.50    48,275    6.50 
Excess  $36,605    4.99%  $56,452    7.64%  $61,911    8.37%  $67,370    9.09%  $73,649    9.92%
                                                   
Reconciliation of capital infused into First Bank Richmond:                                         
Net offering proceeds   $81,359        $95,998        $110,637        $127,472      
Proceeds to First Bank Richmond   $40,680        $47,999        $55,318        $63,736      
Less:                                                  
Expense of Pentegra DB Plan termination, net of taxes    (9,831)        (9,831)        (9,831)        (9,831)     
Common stock acquired by employee stock ownership plan    (7,098)        (8,280)        (9,462)        (10,821)     
Common stock acquired by stock-based benefit plans    (3,549)        (4,140)        (4,731)        (5,411)     
Pro forma increase   $20,202        $25,748        $31,296        $37,674      

 

 

(1)Pro forma capital levels assume that the employee stock ownership plan purchases 8.0% of our total outstanding shares (including shares contributed to the charitable foundation) with funds we lend and that one or more stock-based benefit plans purchases 4.0% of our total outstanding shares (including shares contributed to the charitable foundation) for restricted stock awards. Pro forma capital calculated under U.S. generally accepted accounting principles (“U.S. GAAP”) and regulatory capital have been reduced by the amount required to fund these plans. See “Management – Existing and Future Benefit Plans and Agreements” for a discussion of the employee stock ownership plan.
(2)As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(3)Tier 1 leverage capital levels are shown as a percentage of total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.
(4)Based on total assets of $845.0 million for the purposes of the GAAP capital ratio, total assets of $837.8 million, for the purposes of the Tier 1 leverage capital requirement and risk-weighted assets of $733.0 million, for the purposes of the Tier 1 risk-based and total risk-based capital requirements.
(5)Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.

 

 41 

 

 

CAPITALIZATION

 

The following table presents, on a consolidated basis, our historical deposits, borrowings and capitalization at December 31, 2018, and the pro forma consolidated capitalization of Richmond Mutual Bancorporation-Maryland after giving effect to the offering, based upon the sale of the number of shares of common stock indicated in the table and the other assumptions set forth under “Pro Forma Data.”

 

   Consolidated
Historical
Capitalization
   Pro Forma Consolidated Capitalization at December 31, 2018
of Richmond Mutual Bancorporation-Maryland
Based Upon the Sale for $10.00 Per Share of
 
   at December 31,
2018
   8,372,500
Shares
   9,850,000
Shares
   11,327,500
Shares
  

13,026,625
Shares(1)

 
   (Dollars in thousands) 
                     
Deposits(2)  $620,637   $620,637   $620,637   $620,637   $620,637 
Borrowings   136,100    136,100    136,100    136,100    136,100 
Subordinated debentures   5,000                 
Total deposits and borrowed funds  $761,737   $756,737   $756,737   $756,737   $756,737 
                          
Stockholders’ equity:                         
Preferred Stock, $0.01 par value per share: 10,000,000 shares authorized (post offering); none to be issued  $   $   $   $   $ 
Common Stock, $0.01 par value per share:                         
90,000,000 shares authorized (post offering); shares to be issued as reflected(3)       89    104    118    135 
Additional paid-in capital(3)   12,751    94,020    108,645    123,269    140,087 
Retained earnings(4)   77,480    77,480    77,480    77,480    77,480 

First Mutual of Richmond-MHC consolidation Adjustment(5)

   (6,035)   (6,035)   (6,035)   (6,035)   (6,035)
Accumulated other comprehensive loss, net   (4,378)   (4,378)   (4,378)   (4,378)   (4,378)
Stock contribution to charitable foundation       5,000    5,000    5,000    5,000 
Less:                         
Expense of contribution to charitable foundation, net of taxes(6)       (4,629)   (4,629)   (4,629)   (4,629)
Expense of Pentegra DP termination, net of taxes       (9,831)   (9,831)   (9,831)   (9,831)
Common stock acquired by employee stock ownership plan(7)       (7,098)   (8,280)   (9,462)   (10,821)
Common stock acquired by stock-based benefit plans(8)       (3,549)   (4,140)   (4,731)   (5,411)
Total stockholders’ equity  $79,818   $141,070   $153,936   $166,802   $181,598 
Total tangible stockholders’ equity(9)  $79,818   $141,070   $153,936   $166,802   $181,598 
                          
Pro forma shares of common stock outstanding:                         
Shares offered for sale       8,372,500    9,850,000    11,327,500    13,026,625 
Shares issued to charitable foundation       500,000    500,000    500,000    500,000 
Total shares outstanding       8,872,500    10,350,000    11,827,500    13,526,625 
                          
Total stockholders’ equity as a percentage of pro forma total assets   9.39%   15.49%   16.66%   17.81%   19.09%
Total stockholders’ tangible equity as a percentage of pro forma total assets(9)   9.39%   15.49%   16.66%   17.81%   19.09%

 

 

(1)As adjusted to give effect to a 15% increase in the number of shares of common stock outstanding after the offering, which could occur due to an increase in the maximum of the independent valuation to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the offering. Such withdrawals would reduce pro forma deposits by the amount of such withdrawals.
(3)The sum of the par value and the additional paid-in capital equals the net offering proceeds plus Richmond Mutual Bancorporation-Delaware’s historical retained earnings. No effect has been given to the issuance of additional shares of common stock pursuant to the exercise of options under one or more stock-based benefit plans that we expect to adopt following completion of the reorganization and offering. See “Management - Existing and Future Benefit Plans and Agreements.”
(4)The retained earnings of First Bank Richmond will be substantially restricted after the offering. See “Regulation and Supervision - Indiana Banking Regulation — Dividends.”
(5)To reflect adjustments required to consolidate the financial statements of First Mutual of Richmond-MHC with those of Richmond Mutual Bancorporation-Delaware’s consolidated financial statements presented in this prospectus.

 

(footnotes continued on following page)

 

 42 

 

 

(6)Represents the expense of the contribution to the charitable foundation based on a 25.9% tax rate. The realization of the deferred tax benefit is limited annually to a maximum deduction for charitable donations equal to 10% of our annual taxable income, subject to our ability to carry forward any unused portion of the deduction for five years following the year in which the contribution is made.
(7)Assumes that 8.0% of the shares of common stock outstanding following the reorganization and offering (including shares contributed to the charitable foundation) will be purchased by the employee stock ownership plan at a price of $10.00 per share and that the funds used to acquire the employee stock ownership plan shares will be borrowed from Richmond Mutual Bancorporation-Maryland and will represent unearned compensation, reflected as a reduction of stockholders’ equity. First Bank Richmond will provide the funds to repay the employee stock ownership plan loan. See “Management – Existing and Future Benefit Plans and Agreements.”
(8)Assumes a number of shares of common stock equal to 4.0% of the shares of common stock outstanding following the reorganization and offering (including shares contributed to the charitable foundation) will be purchased for grant by one or more stock-based benefit plans. The funds to be used by such plans to purchase the shares will be provided by Richmond Mutual Bancorporation-Maryland. The dollar amount of common stock to be purchased is based on the $10.00 per share offering price and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the offering price. Richmond Mutual Bancorporation-Maryland will accrue compensation expense to reflect the vesting of shares pursuant to such stock-based benefit plans and will credit capital in an amount equal to the charge to operations. Implementation of such plans will require stockholder approval. See “Management – Existing and Future Benefit Plans and Agreements.”
(9)At December 31, 2018, we had no intangible assets, other than our Mortgage Servicing Rights which are included for purposes of calculating tangible stockholder equity.

 

 43 

 

 

PRO FORMA DATA

 

The following tables summarize our historical data and the pro forma data of Richmond Mutual Bancorporation-Maryland at and for the year ended December 31, 2018. This information is based on assumptions set forth below, and in the table and related footnotes, and should not be used as a basis for projections of market value of the shares of common stock following the reorganization.

 

The net proceeds disclosed in the tables are based upon the following assumptions:

 

(i)all shares of common stock will be sold in the subscription and community offerings;

 

(ii)our directors, executive officers, and their associates will purchase 225,100 shares of common stock;

 

(iii)our employee stock ownership plan will purchase an amount of shares equal to 8.0% of our outstanding shares, including shares contributed to the charitable foundation, with a loan from Richmond Mutual Bancorporation-Maryland. The loan will be repaid in substantially equal principal payments over a period of 20 years. Interest income that we earn on the loan will offset the interest paid by First Bank Richmond;

 

(iv)Richmond Mutual Bancorporation-Maryland will contribute $1.25 million in cash to the charitable foundation;

 

(v)we will pay KBW a fee equal to 1.0% of the aggregate amount of common stock sold in the subscription and community offerings, excluding any shares of common stock purchased by our tax-qualified and non-qualified employee stock benefit plans or contributed to the charitable foundation; and

 

(vi)total expenses of the offering, other than fees and commissions to be paid to KBW, will be $1.6 million.

 

We calculated the pro forma consolidated net income of Richmond Mutual Bancorporation-Maryland for the year as if the shares of common stock had been sold at the beginning of the year and the net proceeds had been invested at 2.51% (1.86% on an after-tax basis), which is equal to the yield on the five-year U.S. Treasury Note as of December 31, 2018. In light of current interest rates, we consider this rate to more accurately reflect the pro forma reinvestment rate than the arithmetic average method, which assumes reinvestment of the net proceeds at a rate equal to the average of the yield on interest-earning assets and the cost of deposits for those periods.

 

We further believe that the reinvestment rate is factually supportable because:

 

·the yield on the U.S. Treasury Note can be determined and/or estimated from third-party sources; and

 

·we believe that U.S. Treasury securities are not subject to credit losses due to a U.S. Government guarantee of payment of principal and interest.

 

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of net income and stockholders’ equity by the indicated number of shares of common stock. For pro forma income calculations, we adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts for each period as if the common stock was outstanding at the beginning of the periods, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

 

The pro forma tables give effect to the implementation of one or more stock-based benefit plans. We have assumed that the stock-based benefit plans will acquire an amount of common stock equal to 4.0% of our outstanding shares of common stock (including shares contributed to the charitable foundation) at the same price for which they were sold in the offering. We assume that shares of common stock are granted under the plan in awards that vest over a five-year period.

 

 44 

 

 

We have also assumed that the stock-based benefit plans will grant options to acquire common stock equal to 10.0% of our outstanding shares of common stock (including shares of common stock contributed to the charitable foundation). In preparing the following tables, we also assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $2.95 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model incorporated an estimated volatility rate of 13.53% for the common stock based on an index of publicly traded thrifts, no dividend yield, an expected option life of 10 years and a risk-free interest rate of 2.69%.

 

As disclosed under “How We Intend to Use the Proceeds from the Offering,” Richmond Mutual Bancorporation-Maryland intends to contribute 50% of the net proceeds from the offering to First Bank Richmond and will retain the remainder of the net proceeds from the offering. Richmond Mutual Bancorporation-Maryland will use a portion of the proceeds it retains for the purpose of making a loan to the employee stock ownership plan, will utilize its funds to make the cash contribution to the foundation and retain the rest of the proceeds for future use.

 

The pro forma table does not give effect to:

 

·withdrawals from deposit accounts for the purpose of purchasing shares of common stock in the offering;

 

·our results of operations after the offering;

 

·increased fees and expenses that we would pay KBW and other broker-dealers if we conducted a syndicated offering; or

 

·changes in the market price of the shares of common stock after the offering.

 

The following pro forma information may not represent the financial effects of the offering at the date on which the offering actually occurs and you should not use the tables to indicate future results of operations. Pro forma stockholders’ equity represents the difference between the stated amounts of assets and liabilities of Richmond Mutual Bancorporation-Maryland, computed in accordance with U.S. GAAP. We did not increase or decrease stockholders’ equity to reflect the difference between the carrying value of loans and other assets and their market value. Pro forma stockholders’ equity is not intended to represent the fair market value of the common stock, and may be different than the amounts that would be available for distribution to stockholders if we were liquidated. Pro forma stockholders’ equity does not give effect to the impact of tax bad debt reserves in the event we were to be liquidated.

 

 45 

 

 

   At or For the Year Ended December 31, 2018
Based Upon the Sale at $10.00 Per Share of
 
   8,372,500
Shares at
Minimum of
Offering
Range
   9,850,000
Shares at
Midpoint of
Offering
Range
  

11,327,500
Shares at

Maximum of
Offering
Range

  

13,026,625
Shares at
Adjusted
Maximum of
Offering
Range (1)

 
   (Dollars in thousands, except per share amounts) 
Gross proceeds of the offering  $83,725   $98,500   $113,275   $130,266 
Market value of shares issued to foundation   5,000    5,000    5,000    5,000 
Market value of Richmond Mutual Bancorporation-Maryland  $88,725   $103,500   $118,275   $135,266 
                     
Gross proceeds of the offering  $83,725   $98,500   $113,275   $130,266 
Estimated expenses   (2,366)   (2,502)   (2,638)   (2,794)
Estimated net proceeds   81,359    95,998    110,637    127,472 
Cash contribution to foundation   (1,250)   (1,250)   (1,250)   (1,250)
Redemption of subordinated debentures   (5,000)   (5,000)   (5,000)   (5,000)
Termination of Pentegra DB Plan   (9,831)   (9,831)   (9,831)   (9,831)
Common stock acquired by employee stock ownership plan (2)   (7,098)   (8,280)   (9,462)   (10,821)
Common stock acquired by stock-based benefit plans (3)   (3,549)   (4,140)   (4,731)   (5,411)
Estimated net proceeds, as adjusted  $54,631   $67,497   $80,363   $95,160 
                     
For the year ended December 31, 2018                    
Consolidated net income:                    
Historical (4)  $5,678   $5,678   $5,678   $5,678 
First Mutual of Richmond-MHC consolidation adjustment (5)   (283)   (283)   (283)   (283)
Historical, as adjusted   5,395    5,395    5,395    5,395 
Reduction in expense from termination of Pentegra DB Plan   1,278    1,278    1,278    1,278 
Reduction in expense from redemption of subordinated debenture   148    148    148    148 
Income on adjusted net proceeds   1,016    1,255    1,494    1,769 
Employee stock ownership plan (2)   (263)   (307)   (350)   (401)
Shares granted under stock-based benefit plans (3)   (526)   (613)   (701)   (801)
Options granted under stock-based benefit plans (6)   (490)   (571)   (653)   (746)
Pro forma net income  $6,558   $6,585   $6,611   $6,642 
                     
Earnings per share:                    
Historical  $0.69   $0.59   $0.52   $0.45 
First Mutual of Richmond-MHC consolidation adjustment   (0.03)   (0.03)   (0.03)   (0.02)
Historical, as adjusted   0.66    0.56    0.49    0.43 
Reduction in expense from termination of Pentegra DB Plan   0.16    0.13    0.12    0.10 
Reduction in expense from redemption of subordinated debenture   0.02    0.02    0.01    0.01 
Income on net proceeds   0.12    0.13    0.14    0.14 
Employee stock ownership plan (2)   (0.03)   (0.03)   (0.03)   (0.03)
Shares granted under stock-based benefit plans (3)   (0.06)   (0.06)   (0.06)   (0.06)
Options granted under stock-based benefit plans (6)   (0.06)   (0.06)   (0.06)   (0.06)
Pro forma earnings per share  $0.81   $0.69   $0.61   $0.53 
                     
Offering price to pro forma earnings per share   12.35x   14.49x   16.39x   18.87x
Number of shares used in earnings per share calculations (2)   8,198,190    9,563,400    10,928,610    12,498,602 
                     
At December 31, 2018                    
Stockholders’ equity:                    
Historical (4)  $85,853   $85,853   $85,853   $85,853 
First Mutual of Richmond-MHC consolidation adjustment (5)   (6,035)   (6,035)   (6,035)   (6,035)
Historical, as adjusted   79,818    79,818    79,818    79,818 
Estimated net proceeds   81,359    95,998    110,637    127,472 
Termination of Pentegra DB Plan   (9,831)   (9,831)   (9,831)   (9,831)
Stock contribution to foundation   5,000    5,000    5,000    5,000 
After tax cost of foundation   (4,629)   (4,629)   (4,629)   (4,629)
Common stock acquired by employee stock ownership plan (2)   (7,098)   (8,280)   (9,462)   (10,821)
Common stock acquired by stock-based benefit plans (3)   (3,549)   (4,140)   (4,731)   (5,411)
Pro forma stockholders’ equity(7)  $141,070   $153,936   $166,802   $181,598 
Pro forma tangible stockholders’ equity  $141,070   $153,936   $166,802   $181,598 
                     
Stockholders’ equity per share:                    
Historical  $9.68   $8.30   $7.26   $6.35 
First Mutual of Richmond-MHC consolidation adjustment   (0.68)   (0.58)   (0.51)   (0.45)
Historical, as adjusted   9.00    7.72    6.75    5.90 
Estimated net proceeds   9.17    9.27    9.35    9.42 
Termination of Pentegra DB Plan   (1.11)   (0.95)   (0.83)   (0.73)
Shares issued to foundation   0.56    0.48    0.42    0.37 
After tax cost of foundation   (0.52)   (0.44)   (0.39)   (0.34)
Common stock acquired by employee stock ownership plan (2)   (0.80)   (0.80)   (0.80)   (0.80)
Common stock acquired by stock-based benefit plans (3)   (0.40)   (0.40)   (0.40)   (0.40)
Pro forma stockholders’ equity per share (3)(7)  $15.90   $14.88   $14.10   $13.42 
Pro forma tangible stockholders’ equity per share  $15.90   $14.88   $14.10   $13.42 
                     
Offering price as a percentage of pro forma stockholders’ equity per share   62.89%   67.20%   70.92%   74.52%
Offering price as a percentage of pro forma tangible stockholders’ equity per share   62.89%   67.20%   70.92%   74.52%
Number of shares outstanding for pro forma equity per share calculations   8,872,500    10,350,000    11,827,500    13,526,625 

 

 

(1)As adjusted to give effect to a 15% increase in the number of shares outstanding after the offering, which could occur due to an increase in the maximum of the independent valuation as a result of demand for the shares or changes in market conditions following the commencement of the offering.

 

 46 

 

 

(2)It is assumed that 8.0% of the shares outstanding following the offering (including shares of common stock contributed to the charitable foundation) will be purchased in the offering by the employee stock ownership plan at a price of $10.00 per share. For purposes of this table, the funds used to acquire such shares are assumed to have been borrowed by the employee stock ownership plan from Richmond Mutual Bancorporation-Maryland. The amount to be borrowed is reflected as a reduction of stockholders’ equity. First Bank Richmond intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the principal and interest requirement of the debt. First Bank Richmond’s total annual payment of the employee stock ownership plan debt is based upon 20 equal annual installments of principal and interest. The pro forma net earnings information makes the following assumptions: (i) First Bank Richmond’s contribution to the employee stock ownership plan is equivalent to the debt service requirement for the period presented and was made at the end of the period; (ii) the employee stock ownership plan acquires 709,800, 828,000, 946,200 and 1,082,130 shares, respectively, at the minimum, midpoint, maximum and adjusted maximum of the offering range; (iii) 35,490, 41,400, 47,310 and 54,107 shares, respectively, at the minimum, midpoint, maximum and adjusted maximum of the offering range (based on a 20-year loan term), were committed to be released during the year ended December 31, 2018 at an average fair value equal to the price for which the shares are sold in the offering; and (iv) only the employee stock ownership plan shares committed to be released were considered outstanding for purposes of the net earnings per share calculations, resulting in a reduction from total outstanding shares (which is also the number of shares outstanding for pro forma equity per share calculations) of 674,310, 786,600, 898,890 and 1,028,023 shares, respectively, at the minimum, midpoint, maximum and adjusted maximum of the offering range, to determine the number of shares outstanding for earnings per share calculations.
(3)Gives effect to one or more stock-based benefit plans expected to be adopted following the offering. We have assumed that these plans acquire a number of shares of common stock equal to 4.0% of the shares issued in the reorganization and offering (including shares of common stock contributed to the charitable foundation) either through open market purchases or from authorized but unissued shares of common stock of Richmond Mutual Bancorporation-Maryland, if any. Funds used by the stock-based benefit plans to purchase the shares will be contributed to the plan by Richmond Mutual Bancorporation-Maryland. In calculating the pro forma effect of the stock-based benefit plans, it is assumed that the shares were acquired by the plan in open market purchases at the beginning of the year presented for a purchase price equal to the price for which the shares are sold in the offering, and that 20% of the amount contributed was an amortized expense (based upon a five-year vesting period) during the year ended December 31, 2018. The actual purchase price of the shares granted under the stock-based benefit plans may not be equal to the subscription price of $10.00 per share. If shares are acquired from the issuance of authorized but unissued shares of common stock of Richmond Mutual Bancorporation-Maryland, there would be a dilutive effect of up to 3.8% on the ownership interest of persons who purchase common stock in the offering. The above table shows pro forma net income per share and pro forma stockholders’ equity per share, assuming all the shares to fund the stock-based benefit plans are obtained from authorized but unissued shares.
(4)Derived from our audited December 31, 2018 consolidated financial statements included elsewhere in this prospectus.
(5)To reflect adjustments required to consolidate the financial statements of First Mutual of Richmond-MHC with those of Richmond Mutual Bancorporation-Delaware’s consolidated financial statements presented in this prospectus.
(6)Gives effect to one or more stock-based benefit plans expected to be adopted following the offering. We have assumed that options will be granted to acquire common stock equal to 10.0% of the shares of common stock issued in the reorganization and offering (including shares of common stock contributed to the charitable foundation). In calculating the pro forma effect of the stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the stock at the date of grant were $10.00 per share, the estimated grant-date fair value pursuant to the application of the Black-Scholes option pricing model was $2.95 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options, and that 25% of the amortization expense (the assumed portion relating to options granted to directors) resulted in a tax benefit using an assumed tax rate of 25.9%. Under the above assumptions, the adoption of stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. The actual exercise price of the stock options may not be equal to the $10.00 price per share. If a portion of the shares issued to satisfy the exercise of options under stock-based benefit plans are obtained from the issuance of authorized but unissued shares, our net income per share and stockholders’ equity per share will decrease. This will also have a dilutive effect of up to 9.1% on the ownership interest of persons who purchase common stock in the offering.
(7)The retained earnings of First Bank Richmond will continue to be substantially restricted after the offering. See “Regulation and Supervision – Indiana Banking Regulation.”

 

 47 

 

 

COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT THE CHARITABLE FOUNDATION

 

As reflected in the table below, if the charitable foundation is not established and funded in connection with the reorganization and offering, RP Financial estimates that our pro forma valuation would be greater and, as a result, a greater number of shares of common stock would be issued in the offering. At the minimum, midpoint, maximum, and adjusted maximum of the valuation range, the amount of the stock sold in the offering is $83.7 million, $98.5 million, $113.3 million and $130.3 million, respectively, with the charitable foundation, as compared to $94.4 million, $111.0 million, $127.7 million and $146.8 million, respectively, without the charitable foundation. There is no assurance that if the charitable foundation were not formed, the appraisal prepared at that time would conclude that our pro forma market value would be the same as that estimated in the table below. Any appraisal prepared at that time would be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions.

 

For comparative purposes only, set forth below are certain pricing ratios, financial data and ratios at and for the year ended December 31, 2018, at the minimum, midpoint, maximum, and adjusted maximum of the offering range, assuming the offering was completed at the beginning of the period, with and without the charitable foundation.

 

  

Minimum of Offering Range

  

Midpoint of Offering Range

  

Maximum of Offering Range

  

Adjusted Maximum of
Offering Range

 
  

With
Foundation

  

Without
Foundation

  

With
Foundation

  

Without
Foundation

  

With
Foundation

  

Without
Foundation

  

With
Foundation

  

Without
Foundation

 
   (Dollars in thousands, except per share amounts) 
     
Estimated offering amount  $83,725   $94,350   $98,500   $111,000   $113,275   $127,650   $130,266   $146,798 
Pro forma market capitalization   88,725    94,350    103,500    111,000    118,275    127,650    135,266    146,798 
Total assets   910,870    920,346    923,736    934,845    936,602    949,344    951,398    966,017 
Total liabilities   769,800    769,800    769,800    769,800    769,800    769,800    769,800    769,800 
Pro forma stockholders’ equity   141,070    150,546    153,936    165,045    166,802    179,544    181,598    196,217 
Pro forma net income (1)   6,558    6,683    6,585    6,713    6,611    6,744    6,642    6,777 
Pro forma stockholders’ equity per share   15.90    15.96    14.88    14.86    14.10    14.06    13.42    13.37 
Pro forma net income per share   0.81    0.78    0.69    0.65    0.61    0.58    0.53    0.50 
                                         
Pro forma pricing ratios:                                        
Offering price as a percentage of pro forma stockholders’ equity per share   62.89%   62.66%   67.20%   67.29%   70.92%   71.12%   74.52%   74.79%
Offering price as a multiple of pro forma price to earnings   12.35x   12.82x   14.49x   15.38x   16.39x   17.24x   18.87x   20.00x
                                         
Pro forma financial ratios:                                        
Return on assets   0.72%   0.73%   0.71%   0.72%   0.71%   0.71%   0.70%   0.70%
Return on equity   4.65%   4.44%   4.28%   4.07%   3.96%   3.76%   3.66%   3.45%
Equity to assets   15.49%   16.36%   16.66%   17.65%   17.81%   18.91%   19.09%   20.31%
Total shares issued   8,872,500    9,435,000    10,350,000    11,100,000    11,827,500    12,765,000    13,526,625    14,679,750 

 

(footnote on following page) 

 

 48 

 

(1)The following table shows the estimated after-tax expense associated with the contribution to the charitable foundation, as well as pro forma net income (loss), pro forma net income (loss) per share, pro forma return on assets and pro forma return on stockholders’ equity assuming the contribution to the charitable foundation was expensed during the year ended December 31, 2018.

 

   Minimum of
Offering Range
   Midpoint of
Offering Range
   Maximum of
Offering Range
   Adjusted
Maximum of
Offering Range
 
                 
After-tax expense of stock and cash contribution to foundation  $4,629   $4,629   $4,629   $4,629 
Pro forma net income (loss)  $1,929   $1,956   $1,982   $2,013 
Pro forma net income (loss) per share  $0.24   $0.20   $0.18   $0.16 
Offering price to pro forma net income (loss) per share   41.67x   50.00x   55.56x   62.50x
Pro forma return on assets (annualized)   0.21%   0.21%   0.21%   0.21%
Pro forma return on equity (annualized)   1.37%   1.27%   1.19%   1.11%

 

 

 49 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

Overview

 

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 first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, direct financing leases, commercial and industrial loans, and loans secured by commercial and multi-family real estate. We also obtain funds by utilizing 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.

 

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.

 

At December 31, 2018, on a consolidated basis, we had $849.6 million in assets, $654.8 million in loans, $620.6 million in deposits and $85.9 million in stockholders’ equity. Our total risk-based capital ratio at December 31, 2018 was 12.3%, exceeding the 10.0% requirement for a well-capitalized institution. The ratio of tangible common equity decreased to 11.3% as of December 31, 2018 compared to 11.8% at December 31, 2017 primarily due to growth in our loan and lease portfolio. For the year ended December 31, 2018, net income was $5.7 million, compared with net income of $2.7 million for 2017.

 

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.

 

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.

 

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Mortgage Servicing Rights. 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 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 the Company has 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 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.

 

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.

 

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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.

 

The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 reducing our federal corporate tax rate from 34% to 21%, effective January 1, 2018. At December 31, 2017, we completed our accounting for the tax effects of enactment of the Tax Act. For deferred tax assets and liabilities, amounts were re-assessed based on the rates expected to reverse in the future, which is now 21%. Based on this new law, we recorded an additional tax expense of $1.5 million due to the revaluation of our deferred tax asset.

 

Management Strategy

 

We are a community-oriented financial institution dedicated to serving the needs of customers in our primary market area. Our commitment is to offer a full array of consumer and commercial banking products and services to meet the needs of our customers. We offer mortgage lending products to qualified borrowers to give them the broadest access to home ownership in our markets. We offer commercial lending products and services tailored to complement their businesses. Our goal is to maintain asset quality while continuing to build our strong capital position while looking for growth opportunities in the markets we serve. To achieve these goals, we will focus on the following strategies:

 

Lending. We believe that commercial lending offers an opportunity to enhance our profitability while managing credit, interest rate and operational risk. We seek quality commercial loan opportunities in our existing markets and purchase loan participations that complement our existing portfolios. We will continue to focus our efforts on our existing markets as well as to further develop the Columbus, Ohio market through our loan production office. We anticipate that the majority of our commercial and multi-family real estate and commercial construction loan originations will range in size from $1.0 million to $8.0 million, while the majority of our commercial and industrial loan originations will range in size from $250,000 to $1.5 million.

 

Deposit Services. Deposits are our primary source of funds for lending and investment. We intend to continue to focus on increasing core deposits (which we define as all deposits except for certificates of deposit greater than $250,000 and brokered certificates of deposit) in our primary market area, with a particular emphasis on non-interest bearing deposits. We will continue to enhance our offering of retail deposit products to maintain and increase our market share, while continuing to build our product offering of commercial deposit products to strengthen our relationships with our business customers. Core deposits represented 75.0% of our total deposits as of December 31, 2018.

 

Balance Sheet Growth. As a result of our efforts to build our management and infrastructure, we believe we are well-positioned to increase the size of our balance sheet without a proportional increase in overhead expense or operating risk. Accordingly, we intend to increase, on a managed basis, our assets and liabilities, particularly loans and deposits.

 

Asset Quality. We believe that strong asset quality is a key to long-term financial success. Our strategy for credit risk management focuses on an experienced team of credit professionals, well-defined credit policies and procedures, appropriate loan underwriting criteria and active credit monitoring. Our non-performing loans to total loans ratio was 0.69% at December 31, 2018.

 

Capital Position. Our policy has always been to protect the safety and soundness of First Bank Richmond through credit and operational risk management, balance sheet strength, and sound operations. The end result of these activities has been a capital ratio in excess of the well-capitalized standards set by our regulators. We believe that maintaining a strong capital position safeguards the long-term interests of First Bank Richmond.

 

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Interest Rate Risk Management. Changes in interest rates are our primary market risk as our balance sheet is almost entirely comprised of interest-earning assets and interest-bearing liabilities. As such, fluctuations in interest rates have a significant impact not only upon our net income but also upon the cash flows related to those assets and liabilities and the market value of our assets and liabilities. In order to maintain what we believe to be acceptable levels of net interest income in varying interest rate environments, we actively manage our interest rate risk and assume a moderate amount of interest rate risk consistent with board policies.

 

Financial Condition at December 31, 2018 Compared to December 31, 2017

 

General. Total assets at December 31, 2018 were $849.6 million, reflecting a $96.0 million increase during the year, due to a $96.8 million, or 17.4% increase in the total loan and lease portfolio.

 

Cash and Investments. Cash and investments decreased $1.1 million from $159.6 million at year-end 2017 to $158.5 million at year-end 2018. At December 31, 2018, our investment portfolio consisted of $92.7 million in government-sponsored agency and government-sponsored entity mortgage-backed securities and collateralized mortgage obligations, $48.4 million in municipal securities and $2.5 million in corporate obligations and equity securities.

 

Loans and Leases. Our loan and lease portfolio increased $96.8 million, or 17.4%, during 2018, ending the year at $654.8 million. The majority of the growth occurred in the commercial real estate and the construction and development categories. Those two categories grew a combined $94.0 million during the year and at December 31, 2018 represented 43.4% of the total loan and lease portfolio. Much of this growth occurred in the Columbus, Ohio market as Columbus is currently experiencing strong economic growth. Our residential mortgage loan portfolio experienced a modest 2.9% growth during 2018 as we continued to sell longer term fixed-rate mortgage loans whenever possible, to reduce related interest rate risk. We generally retain the servicing rights on the fixed-rate mortgages sold in order to foster and to continue to develop customer relationships.

 

Our allowance for loan and lease losses increased 16.7% during 2018, from $4.8 million at December 31, 2017 to $5.6 million at December 31, 2018. At both December 31, 2018 and 2017, the allowance for loan and lease losses equaled 0.85% of total loans and leases outstanding. Loans individually evaluated for impairment decreased $935,000, or 28.8% from December 31, 2017 while the allowance allocated to such loans decreased to $694,000. Net charge-offs during 2018 were $880,000, $1.1 million less than in 2017.

 

Premises and Equipment, Net. Premises and equipment, net increased $433,000, reflecting normal capital expenditures plus the purchase and refurbishing of a bank branch office in Piqua, OH that had been closed by another bank.

 

Deposits. Total deposits increased $60.2 million during 2018 to $620.6 million at December 31, 2018. This growth was primarily due to increases in certificates of deposit. Brokered certificates of deposit increased $38.8 million to $124.5 million as of December 31, 2018, while other certificates increased $19.3 million during 2018. This deposit growth was used to fund a portion of the loan growth experienced during 2018.

 

Borrowings. Total borrowings increased $32.1 million, or 30.9%, to $136.1 million at December 31, 2018. This increase was used to fund a portion of our loan growth in 2018 and to lengthen the duration of our liabilities.

 

Stockholders’ Equity. Stockholders’ equity was $85.9 million as of December 31, 2018, an increase of $4.1 million from December 31, 2017. The increase was primarily due to net income of $5.7 million, partially offset by an accumulated other comprehensive loss of $1.7 million resulting from an increase in market rates of interest during 2018. First Bank Richmond’s tangible common equity ratio and its risk-based capital ratios were well in excess of “well-capitalized” levels as defined by all regulatory standards as of December 31, 2018.

 

Comparison of Results of Operations for the Years Ended December 31, 2018 and 2017.

 

General. Net income for 2018 was $5.7 million, compared to $2.7 million in 2017. The increase was primarily a result of a $3.6 million increase in net interest income and a $1.7 million decrease in income tax expense, partially offset by a $1.8 million increase in non-interest expense, a $310,000 increase in provision for loan and lease losses and a $221,000 decrease in non-interest income.

 

Interest Income. Total interest income for 2018 increased $6.1 million or 20.9% over 2017. The increase was primarily a result of the $100.4 million increase in the average balance of loans and leases outstanding year-over-year and a 17 basis point increase in average yield on loans and leases resulting in a $6.0 million increase in interest income. Interest on investment securities decreased $10,000 during 2018 primarily due to a $13.1 million decrease in the average balance of the portfolio, partially offset by an 18 basis point increase in the average yield on investment securities.

 

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Interest Expense. Total interest expense increased $2.5 million, or 47.7% to $7.8 million during 2018 compared to $5.2 million during 2017. The reason for this increase was an increase in the average rate paid and the average balance of certificates of deposit and FHLB advances. The average rate paid on certificates of deposit increased 37 basis points in 2018 compared to 2017, partially due to a 52 basis point increase in the average rate paid on brokered certificates of deposit. The rate paid on FHLB advances was 1.82% in 2018, an increase of 32 basis points over the average rate of 1.50% in 2017. The primary reason for these increases was an increase in market rates of interest. The average balance of certificates of deposit and FHLB advances in 2018 increased by $55.8 and $18.4 million, respectively, compared to those in 2017. The primary reason for these increases was to fund loan growth during 2018.

 

Net Interest Income. Net interest income before the provision for loan and lease losses increased $3.6 million, or 15.1% in 2018 compared to 2017. This was due to the increase in average earning assets. Our net interest margin in 2018 was 3.57%, an increase of nine basis points over 2017.

 

Provision for Loan and Lease Losses. The provision for loan and lease losses in 2018 was $1.7 million, a $310,000 increase over the $1.4 million provision in 2017. The increase in the provision was due to the growth of the loan and lease portfolio during 2018, despite lower net charge-offs than were experienced in 2017. Net charge-offs in 2018 were $1.1 million less than 2017, which allowed the allowance to remain at a level of 0.85% of the total loan and lease portfolio. Net charge-offs in 2018 equaled 0.14% of total average loans and leases outstanding compared to 0.38% of total average loans and leases outstanding in 2017. The decrease in net charge-offs was due to one large loan charge-off in 2017 with no similar charge-off during 2018.

 

Non-Interest Income. Total non-interest income decreased $221,000 from 2017 to 2018. Service charges on deposit accounts remained flat while card fee income increased $55,000, or 8.5%, from 2017 levels. Loan and lease servicing fees increased $127,000 due to a $2.1 million increase in our loan servicing portfolio during 2018. Net gains on securities declined $81,000 in 2018. Net gains on loan and lease sales declined $336,000, or 42.2%, from 2017 to 2018. In addition, in 2017, the Bank sold two lease portfolios for a total gain of $221,000 while there were no sales in 2018.

 

Non-Interest Expenses. Total non-interest expenses increased $1.8 million to $23.1 million in 2018 from 2017. $1.0 million of this increase was attributable to salaries and employee benefits. This increase reflected the hiring of additional personnel to support First Bank Richmond’s loan growth, as well as higher health insurance costs. Higher occupancy expenses of $72,000 reflected increased maintenance costs while equipment expense increased $150,000 due to equipment purchases and increased depreciation. Deposit insurance expense increased $280,000 primarily as a result of the increase in our asset size. Legal and professional fees increased $310,000 in 2018 compared to 2017 primarily as a result of expenses related to this offering.

 

Income Tax Expense. Income tax expense decreased in 2018 by $1.7 million compared to 2017. In 2017, we incurred a one-time income tax expense of $1.5 million during the fourth quarter, related to the remeasurement of our deferred tax assets and liabilities as a result of the Tax Act. We also recorded a $72,000 tax credit in 2018 associated with a low-income housing tax credit.

 

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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.

 

    Years Ended December 31,  
    2018     2017     2016  
   

Average

Balance

Outstanding

   

Interest

Earned/

Paid

   

Yield/

Rate

   

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   $ 613,569     $ 31,559       5.14 %   $ 513,129     $ 25,523       4.97 %   $ 431,238     $ 22,554       5.23 %
Securities     142,140       3,167       2.23 %     155,250       3,177       2.05 %     189,515       3,798       2.00 %
Federal Reserve and FHLB stock     6,686       341       5.10 %     6,631       267       4.03 %     6,234       281       4.51 %
Other     5,771       132       2.29 %     11,250       137       1.22 %     17,732       53       0.30 %
Total interest-earning assets     768,166       35,199       4.58 %     686,261       29,104       4.24 %     644,720       26,686       4.14 %
                                                                         
Interest-bearing liabilities:                                                                        
Savings and money market accounts     161,111       884       0.55 %     157,926       784       0.50 %     147,826       706       0.48 %
Interest-bearing checking accounts     100,958       205       0.20 %     92,698       169       0.18 %     95,533       156       0.16 %
Certificate accounts     278,810       4,559       1.64 %     223,060       2,843       1.27 %     195,256       2,195       1.12 %
Borrowings     115,620       2,104       1.82 %     97,240       1,454       1.50 %     80,760       1,011       1.25 %
Total interest-bearing liabilities     656,499       7,752       1.18 %     570,924       5,250       0.92 %     519,375       4,068       0.78 %
                                                                         
Net interest income           $ 27,447                     $ 23,854                     $ 22,618          
Net earning assets   $ 111,667                     $ 115,337                     $ 125,345                  
Net interest rate spread(1)                     3.40 %                     3.32 %                     3.36 %
Net interest margin(2)                     3.57 %                     3.48 %                     3.51 %
Average interest-earning assets to average interest-bearing liabilities     117.01 %                     120.20 %                     124.13 %                

 

 

(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.

  

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Rate/Volume Analysis

 

The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

 

   Years Ended
December 31,
   Years Ended
December 31,
 
   2018 vs. 2017   2017 vs. 2016 
   Increase/
(decrease)
due to
   Total
increase/
   Increase/
(decrease)
due to
   Total
increase/
 
   Volume   Rate   (decrease)   Volume   Rate   (decrease) 
   (In thousands) 
Interest-earning assets:                              
                               
Loans and leases receivable  $5,142   $894   $6,036   $4,117   $(1,148)  $2,969 
Securities   (280)   270    (10)   (700)   79    (621)
Federal Reserve and FHLB stock   2    72    74    17    (31)   (14)
Other   (88)   83    (5)   (26)   110    84 
                               
Total interest-earning assets  $4,776   $1,318   $6,095   $3,408   $(990)  $2,418 
                               
Interest-bearing liabilities:                              
Savings and money market accounts  $(152)  $252   $100   $55   $23   $78 
Interest-bearing checking accounts   16    20    36    (5)   18    13 
Certificate accounts   804    912    1,716    334    314    648 
Borrowings   303    347    650    227    216    443 
                               
Total interest-bearing liabilities  $971   $1,531   $2,502   $611   $571   $1,182 
                               
Change in net interest income            $3,593             $1,236 

 

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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 the ability of the Company 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 Board. 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 uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits, fund deposit withdrawals and fund loan commitments.

 

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.

 

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.

 

Funds are used primarily to meet ongoing commitments, pay maturing deposits, fund withdrawals, and to fund loan commitments. 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 us.

 

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 contractual obligations 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 December 31, 2018, we had $132.9 million in loan commitments and unused lines of credit.

 

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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. Richmond Mutual Bancorporation-Delaware is subject to minimum capital requirements imposed by the Federal Reserve Board, which are substantially similar to those imposed on First Bank Richmond, including guidelines for bank holding companies to be considered well-capitalized.

 

At December 31, 2018, First Bank Richmond’s regulatory capital exceeded the FDIC regulatory requirements, and First Bank Richmond was well-capitalized under regulatory prompt corrective action standards. In addition, at December 31, 2018, Richmond Mutual Bancorporation-Delaware‘s capital levels exceeded the FRB’s requirements, and Richmond Mutual Bancorporation-Delaware was considered well-capitalized under FRB guidelines. Consistent with our goals to operate a sound and profitable organization, our policy is for First Bank Richmond to maintain well-capitalized status.

 

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.

 

Management of Market Risk

 

Our most significant form of market risk is interest rate risk as the majority of our assets and liabilities are sensitive to changes in interest rates. A principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Committee is responsible for evaluating the interest rate risk inherent in our balance sheet, for determining the appropriate level of risk given our business strategy, operating environment, capital and liquidity, and for managing this risk consistent with our policies and guidelines.

 

Our strategy attempts to manage the impact of changes in interest rates on net interest income, which is our primary source of earnings. Among the actions taken are:

 

·Originate commercial and commercial real estate loans, which generally have shorter terms and higher yields than owner-occupied one-to four-family residential real estate loans.

 

·Sell substantially all longer-term fixed-rate residential real estate loans in the secondary market.

 

·Cultivate stable deposit relationships with business and consumer customers.

 

·Acquire longer-term, fixed-rate borrowings when appropriate to reduce our sensitivity to changing interest rates.

 

Interest Rate Risk. The Asset/Liability Committee monitors First Bank Richmond’s interest rate risk (“IRR”) position and meets quarterly to review pricing, liquidity needs, and to assess our interest rate risk. We currently utilize a third-party modeling program prepared quarterly to evaluate our sensitivity to changing interest rates.

 

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The table below sets forth, as of December 31, 2018, the calculation of the estimated changes in our net interest income that results from the designated immediate changes in the United States Treasury yield curve.

 

Change in Interest Rates

(basis points) (1)

 

Net Interest Income

Year 1 Forecast

  

Year 1 Change

from Level

 
   (Dollars in thousands)     
+400  $27,789    2.48%
+300   27,557    1.63 
+200   27,412    1.09 
+100   27,197    0.30 
Level   27,116    - 
-100   26,349    (2.83)

 

 

(1) Assumes an immediate uniform change in interest rates at all maturities.

 

Economic Value of Equity. Interest rate risk is monitored through the use of a simulation model that also estimates the amounts by which the fair value of our assets and liabilities (Economic Value of Equity, or “EVE”) would change in the event of a range of assumed changes in market interest rates. The reports that are prepared quarterly in the simulation assist the Asset/Liability Committee in measuring and monitoring interest rate risk over a longer-term than the interest rate risk model does when looking at earnings simulations.

 

The table below sets forth, as of December 31, 2018, the estimated changes in our EVE that would result from instantaneous changes in market interest rates. This table assumes an instantaneous uniform change in interest rates at all maturities.

 

Basis Point (“bp”) Change in      Estimated Increase (Decrease) in EVE 

Interest Rates(1)

 

Estimated EVE(2)

   Amount   Percent 
   (Dollars in thousands) 
+400  $83,746   $(26,531)   (24.06)%
+300   91,279    (18,998)   (17.23)
+200   99,156    (11,121)   (10.08)
+100   105,197    (5,080)   (4.61)
Level   110,277    -    - 
-100   113,350    3,073    2.79 

 

 

(1)Assumes an instantaneous uniform change in interest rates at all maturities.
(2)EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

 

In evaluating our exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing tables must be considered. For example, although certain assets and liabilities may have similar maturities or re-pricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring our exposure to interest rate risk.

 

The Asset/Liability committee annually reviews reinvestment rate assumptions, along with the betas used in the IRR and EVE modeling. We generally manage our balance sheet based on potential changes to net interest income under various rate scenarios. The EVE ratio is useful in long-term planning; but management gives more weight to changes in net interest income under various rate scenarios. IRR projections are tested annually, and the model is subject to a third party review every three years.

 

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BUSINESS OF RICHMOND MUTUAL BANCORPORATION, INC. (MARYLAND)

 

Richmond Mutual Bancorporation-Maryland was incorporated in February 2019. The offering of common stock by means of this prospectus is being made by Richmond Mutual Bancorporation-Maryland in connection with the reorganization of First Bank Richmond from the mutual holding company form of organization. Upon completion of the reorganization and offering, Richmond Mutual Bancorporation-Maryland will become the bank holding company for First Bank Richmond by owning all of the outstanding shares of capital stock of First Bank Richmond, and will be regulated by the Federal Reserve and the Indiana Department of Financial Institutions. Our corporate office is located at 31 North 9th Street, Richmond, Indiana, and our telephone number is (765) 962-2581.

 

To date, Richmond Mutual Bancorporation-Maryland has engaged in organizational activities only. Following the reorganization and offering, our primary business activity will relate to owning all of the outstanding shares of capital stock of First Bank Richmond. In the future, Richmond Mutual Bancorporation-Maryland, as the holding company of First Bank Richmond, will be authorized to pursue other business activities permitted by applicable laws and regulations for bank holding companies, which may include the acquisition of banking and financial services companies. We have no plans for any mergers or acquisitions, or other diversification of the activities of Richmond Mutual Bancorporation-Maryland at the present time.

 

Our cash flow will depend on earnings from the investment of the net proceeds received in the offering that we retain, and any dividends received from First Bank Richmond. Initially, Richmond Mutual Bancorporation-Maryland will neither own nor lease any property, but will instead use the premises, equipment and furniture of First Bank Richmond. At the present time, we intend to employ only persons who are officers of First Bank Richmond to serve as officers of Richmond Mutual Bancorporation-Maryland. We will also use the support staff of First Bank Richmond from time to time. These persons will not be separately compensated by Richmond Mutual Bancorporation-Maryland. Richmond Mutual Bancorporation-Maryland may hire additional employees, as appropriate, to the extent it expands its business in the future. The initial directors of Richmond Mutual Bancorporation-Maryland consist of the current directors of First Bank Richmond. See “Management.” 

 

BUSINESS OF FIRST BANK RICHMOND

 

General

 

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 holding company, acquired Mutual Federal Savings Bank headquartered in Sidney, Ohio, which it operated independently as a separately chartered, wholly owned subsidiary of Richmond Mutual Bancorporation-Delaware until 2016 when Mutual Federal Savings Bank 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 Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation. At December 31, 2018, on a consolidated basis, we had total assets of $849.6 million, total deposits of $620.6 million and stockholders’ equity of $85.9 million.

 

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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. 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 $126.0 million at December 31, 2018.

 

Our corporate offices are located at 31 North 9th Street, Richmond, Indiana, and our telephone number is (765) 962-2581. Our website addresses are www.firstbankrichmond.com and http://www.mutualbancorp.com. Information on these websites should not be considered a part of this prospectus.

 

Market Area

 

Our primary market area includes Wayne and Shelby counties in Indiana and Shelby, Miami, and Franklin counties in Ohio. We conduct our business through 12 full service and one limited service banking offices, with seven full service and one limited service offices located in Indiana and five offices situated in Ohio. Our main full service banking office and four other branch offices are located in Richmond (Wayne County), Indiana. We operate two other offices in Wayne County in the towns of Cambridge City and Centerville, and one office in Shelbyville (Shelby County), Indiana, which is situated approximately 25 miles southeast of Indianapolis. Through Mutual Federal, a division of First Bank Richmond, we operate two offices in Sidney (Shelby County), Ohio, and two offices in Piqua and one office in Troy, Ohio (Miami County). We also operate a loan production office in Columbus (Franklin County), Ohio that focuses on commercial and multi-family real estate lending. Administrative, trust and wealth management services are provided at our Corporate Office/Financial Center located in Richmond, Indiana.

 

Indiana. Wayne County had an estimated population in 2019 of 65,600 with a median household income of approximately $56,500. The unemployment rate in December 2018 was 3.6% in Wayne County, as compared to the national and state unemployment rates of 3.7% and 3.4%, respectively. The top employers in Wayne County include Reid Health, Richmond Community Schools, Belden Wire & Cable, Sugar Creek Brandworthy Food Solutions, Richmond State Hospital, and Primex Plastics Corporation. First Bank Richmond operates seven banking offices in Wayne County including five in Richmond, which is the largest city in Wayne County.

 

Richmond is a city in east central Indiana and the county seat of Wayne County. Richmond represents our largest deposit concentration and branch office presence. Richmond had an estimated population of 35,000 in 2019 with a median household income of approximately $41,500. It is favorably located with excellent highway access and has over 6.0 million people within a 100-mile radius. Manufacturing is the primary source of employment, followed by health care and food service. The city is home to a regional hospital, Reid Health, as well as four higher educational institutions: Earlham College, Indiana University East, Purdue Polytechnic University-Richmond, and Ivy Tech Community College.

 

Within Wayne County, we also operate branches in Cambridge City and Centerville, which were initially opened in 1958 and 1959, respectively. Cambridge City is located in the western part of Wayne County approximately 15 miles west of Richmond, and had an estimated population of 1,760 with a median household income of approximately $43,500. The workforce in this community is primarily composed of factory workers and employees in the agricultural sector. Centerville had an estimated population of 2,650 with a median household income of approximately $53,300. It is a residential suburb to Richmond and home to many antique stores. While Wayne County experienced a 4.8% decline in population from 2010 to 2019, the population in Centerville increased by 3.5% during this period. The population growth in Centerville resulted in part from the influx of professionals and the appeal of its school system.

 

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Shelbyville, where we operate one branch, is the county seat of Shelby County, Indiana. Shelby County had an estimated population in 2019 of 44,500 with a median household income of approximately $58,600. Shelbyville, which had an estimated population of 19,800 with a median household income of $47,900, is located in central Indiana and within the Indianapolis metropolitan area. Manufacturing and retail trade are the largest employment sectors in Shelby County. The unemployment rate in Shelby County was 2.9% in December 2018.

 

Ohio. We operate two offices in Sidney (Shelby County), Ohio, and two offices in Piqua and one office in Troy (Miami County), Ohio. We also operate a loan production office in Columbus, Ohio (Franklin County) that focuses on commercial real estate lending.

 

Sidney is the largest city and the county seat of Shelby County. Sidney is located approximately 35 miles north of Dayton, Ohio and 75 miles west of Columbus, Ohio. Sidney had an estimated population in 2019 of 21,000 with a median household income of approximately $54,900. Manufacturing is the dominant industry among the employee workforce in Shelby County. Leading manufacturing employers in Shelby County include Honda of America Manufacturing, Emerson Climate Technologies, Airstream, NK Parts, and Plastipak Packaging. The unemployment rate in Shelby County was 4.1% in December 2018.

 

Miami County is located in west central Ohio and is part of the Dayton metropolitan area. Miami County had an estimated population in 2019 of 105,900 with a median household income of approximately $63,900. Within Miami County, we have offices in Troy, which is the county seat and most populous city, and Piqua. Troy is located 19 miles north of Dayton, while Piqua is located 27 miles north of Dayton. Troy had an estimated population in 2019 of 26,500 with a median household income of approximately $60,500, while Piqua had a population of 20,900 with a median household income of approximately $53,000. Manufacturing is the leading industry employment sector in Miami County, followed by retail trade and health care and social services. The largest employers in Miami County include Upper Valley Medical Center, Clopay Building Products, F&P America, UTC Aerospace Systems, Meijer Distribution Center, ConAgra Foods, American Honda, and Hobart Brothers. The unemployment rate in Miami County increased moderately from 3.9% in December 2017 to 4.2% in December 2018.

 

Columbus, Ohio, where we operate our loan production office, is the state capital of and most populous city in Ohio. Columbus ranked as the 14th most populous city in the United States with an estimated population in 2019 of 897,000 and a median household income of approximately $54,400. Columbus is the county seat of Franklin County, which along with nine other counties comprises the Columbus metropolitan area. The city has a diverse economy based on education, government, insurance, banking, defense, aviation, food, clothing, logistics, steel, energy, medical research, health care, hospitality, retail, and technology. Columbus is home to The Ohio State University, one of the largest universities in the nation.

 

The Columbus metropolitan area had an estimated population of 2.1 million and ranked as the 31st most populous metropolitan area in the United States and the second most populous metropolitan area in Ohio, just behind the Cincinnati metropolitan area and slightly ahead of the Cleveland metropolitan area. The unemployment rate in December 2018 was 4.0% for the entire Columbus metropolitan area and 3.9% for Franklin County.

 

Competition

 

We face significant competition within our market both in making loans and leases and attracting deposits. Our market area has a high concentration of financial institutions, including large money center and regional banks, community banks and credit unions. Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms, equipment financing companies, consumer finance companies and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies.

 

As of June 30, 2018 (the most recent branch deposit data provided by the FDIC), First Bank Richmond’s share of deposits in Wayne and Shelby Counties, in Indiana, was approximately 33.9% and 5.7%, respectively, and in Shelby and Miami Counties, in Ohio, was approximately 7.2% and 2.8%, respectively. We do not accept deposits at our loan production office located in Columbus, Ohio.

 

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Lending Activities

 

We offer a full range of lending products, including multi-family and commercial real estate loans (including owner and non-owner occupied real estate loans), commercial and industrial loans (including equipment loans and working capital lines of credit), construction and development loans, residential real estate loans, including home equity loans and lines of credit, and consumer loans. We also engage in lease financing which consists of direct financing leases and is used by our commercial customers to finance purchases of equipment. We offer consumer loans, predominantly as an accommodation to our customers, secured by personal assets such as automobiles or recreational vehicles. Some consumer loans are unsecured, such as small installment loans and certain lines of credit. Lending activities originate from the relationships and efforts of our bankers.

 

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Loan and Lease Portfolio Composition. The following table presents information concerning the composition of our loan and lease portfolio in dollar amounts and in percentages (before deductions for loans in process, deferred fees and discounts and allowances for loan and lease losses) as of the dates indicated.

 

  

At December 31,

 
  

2018

  

2017

  

2016

  

2015

  

2014

 
  

Amount

  

Percent

  

Amount

  

Percent

  

Amount

  

Percent

  

Amount

  

Percent

  

Amount

  

Percent

 
   (Dollars in thousands) 
Real estate loans:                                                  
Residential(1)  $132,492    20.05%  $128,773    22.86%  $129,336    27.64%  $130,482    32.14%  $127,162    34.09%
Home equity lines of credit   7,214    1.09    7,245    1.29    7,370    1.58    7,687    1.89    6,344    1.70 
Multi-family   43,816    6.63    63,701    11.31    32,624    6.97    20,028    4.93    13,533    3.63 
Commercial   211,237    31.97    162,218    28.80    120,098    25.67    89,750    22.10    74,286    19.92 
Construction and development   72,955    11.04    27,944    4.96    18,788    4.02    9,805    2.41    12,964    3.48 
Total real estate loans   467,714    70.78    389,881    69.22    308,216    65.88    257,752    63.47    234,289    62.82 
                                                   
Consumer loans   13,520    2.05    11,628    2.06    10,858    2.32    10,508    2.59    10,831    2.90 
                                                   
Commercial business loans and leases:                                                  
                                                   
Commercial and industrial   71,854    10.87    61,753    10.97    55,352    11.83    50,269    12.38    52,034    13.95 
Direct financing leases   107,735    16.30    99,940    17.75    93,433    19.97    87,580    21.56    75,814    20.33 
Total commercial business loans and leases   179,589    27.17    161,693    28.72    147,785    31.80    137,849    33.94    127,848    34.28 
                                                   
Total loans and leases   660,823    100.00%   563,202    100.00%   467,859    100.00%   406,109    100.00%   372,968    100.00%
                                                   
Less:                                                  
Deferred fees and discounts   468         473         475         436         370      
Allowance for loan and lease losses   5,600         4,800         5,394         5,246         6,266      
Total loans and leases receivable, net  $654,755        $557,929        $461,990        $400,427        $366,332      

 

 

(1)Includes $5.1 million of loans secured by second mortgages on residential properties at December 31, 2018.

 

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Loan Maturity and Repricing. The following table sets forth certain information at December 31, 2018 regarding the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Loans with scheduled maturities are reported in the maturity category in which the loan is due. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan and lease losses.

 

   Consumer  

Commercial and

Industrial

   Total 

Due During Years Ending

December 31,

  Amount  

Weighted

Average

Rate

   Amount  

Weighted

Average

Rate

   Amount  

Weighted

Average

Rate

 
2019(1)  $889    4.81%  $31,928    5.59%  $32,817    5.57%
2020   1,688    5.61    2,628    5.15    4,316    5.33 
2021   1,838    5.50    3,512    4.83    5,350    5.06 
2022 and 2023   5,938    4.57    6,650    5.05    12,588    4.82 
2024 to 2028   3,080    4.01    22,090    4.89    25,170    4.78 
2029 to 2033   87    6.23    1,106    5.70    1,193    5.74 
2034 and following           3,940    5.09    3,940    5.09 
Total  $13,520    4.73%  $71,854    5.25%  $85,374    5.16%

 

 

(1)Includes demand loans, loans having no stated maturity and overdraft loans.

 

The total amount of loans set forth in the table above due after December 31, 2019 which have pre-determined or fixed interest rates is $31.2 million, while the total amount of loans due after this date which have floating or adjustable interest rates is $21.3 million.

 

Residential Mortgage Lending. We make one- to four-family residential real estate loans and home equity loans and lines of credit secured by the borrower’s primary residence. In addition, we may periodically purchase residential loans, which we refer to as brokered mortgages, primarily during periods of reduced loan demand in our primary market areas and at times to support our Community Reinvestment Act lending activities, although we have not purchased any brokered mortgage loans in the last six years. Any such purchases are made generally consistent with our underwriting standards for residential mortgage loans. At December 31, 2018, $139.7 million, or 21.1%, of our total loan and lease portfolio was secured by residential real estate, consisting of $127.4 million of one- to four-family residential real estate loans, including $5.1 million of home equity loans and $7.2 million of home equity lines of credit. Brokered mortgage loans totaled $1.2 million of our total residential mortgage loan portfolio at December 31, 2018.

 

We originate both fixed-rate and adjustable-rate one- to four-family residential real estate loans. At December 31, 2018, 70.3% of our one- to four-family residential real estate loans were fixed-rate loans, and 29.7% of such loans were adjustable-rate loans. Most of our loans are underwritten using generally-accepted secondary market underwriting guidelines. We typically sell most of the conforming, fixed-rate one- to four-family loans we originate into the secondary market to Fannie Mae and, to a lesser extent, the FHLB of Indianapolis. Loans that are sold into the secondary market to Fannie Mae or the FHLB of Indianapolis are sold with the servicing retained to maintain the client relationship and to generate noninterest income. The sale of mortgage loans provides a source of non-interest income through the gain on sale, reduces our interest rate risk, provides a stream of servicing income, enhances liquidity and enables us to originate more loans at our current capital level than if we held the loans in our loan portfolio. Our pricing strategy for mortgage loans includes establishing interest rates that are competitive with other financial institutions and consistent with our internal asset and liability management objectives. During the year ended December 31, 2018, we originated $37.3 million one- to four-family fixed-rate mortgage loans and $6.7 million one- to four-family adjustable rate mortgage (“ARM”) loans, and sold $20.2 million of these loans without recourse to Fannie Mae and the FHLB of Indianapolis. See “- Loan Originations, Purchases, Sales, Repayments and Servicing.”

 

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We also make a limited amount of Federal Housing Administration (“FHA”) loans, U.S. Department of Veterans Affairs (“VA”) loans and U.S. Department of Agriculture (“USDA”) loans, all of which we originate for sale on a servicing-released, non-recourse basis in accordance with FHA, VA and USDA guidelines. During the year ended December 31, 2018, we originated and sold $465,000 in the aggregate of FHA, VA and USDA loans.

 

Substantially all of the one- to four-family residential mortgage loans we retain in our portfolio consist of fixed-rate loans that do not satisfy acreage limits, income, credit, conforming loan limits (i.e., jumbo mortgages) or various other requirements imposed by Fannie Mae or are adjustable-rate loans. Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy Fannie Mae credit requirements because of personal and financial reasons (i.e., bankruptcy, length of time employed, etc.), and other aspects, which do not conform to Fannie Mae’s guidelines. Such borrowers may have higher debt-to-income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the value according to secondary market requirements. We may require additional collateral or lower loan-to-value ratios to reduce the risk of these loans. We believe that these loans satisfy the needs of borrowers in our market area. As a result, subject to market conditions, we intend to continue to originate these types of loans. We also retain jumbo loans which exceed the conforming loan limits and therefore are not eligible to be purchased by Fannie Mae. At December 31, 2018, $24.7 million or 18.6% of our one- to four-family loan portfolio consisted of jumbo loans.

 

We generally underwrite our one- to four-family loans based on the applicant’s employment and credit history and the appraised value of the subject property. We generally lend up to 89% of the lesser of the appraised value or purchase price for one- to four-family first mortgage loans and non-owner occupied first mortgage loans. For first mortgage loans with a loan-to-value ratio in excess of 89%, we may require private mortgage insurance or other credit enhancement to help mitigate the risk. Fixed-rate loans secured by one- to four-family residences may have contractual maturities of up to 30 years. All of these loans are fully amortizing, with payments due monthly. Properties securing our one- to four-family loans are typically appraised by independent fee appraisers who are selected in accordance with criteria approved by the Loan Committee. For loans that are less than $250,000, we may use an automated valuation model, in lieu of an appraisal. We require title insurance policies on all first mortgage real estate loans originated over $100,000. Homeowners, liability, fire and, if required, flood insurance policies are also required for one-to four-family loans. Our real estate loans generally contain a “due on sale” clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property.

 

ARM loans are offered with annual adjustments and life-time rate caps that vary based on the product, generally with a maximum annual rate change of 2.0% and a maximum overall rate change of 6.0%. We generally use the rate on one-year Treasury Bills to re-price our ARM loans. As a consequence of using caps, the interest rates on ARM loans may not be as rate sensitive as our cost of funds. Furthermore, because loan indexes may not respond perfectly to changes in market interest rates, upward adjustments on loans may occur more slowly than increases in our cost of interest-bearing liabilities, especially during periods of rapidly increasing interest rates. Because of these characteristics, future yields on ARM loans may not be sufficient to offset increases in our cost of funds.

 

ARM loans generally pose different credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower’s payment increases, which increases the potential for default. We continue to offer our fully amortizing ARM loans with a fixed interest rate for the first one, three, five or seven years, followed by a periodic adjustable interest rate for the remaining term.

 

The average balance of our one- to four-family residential loans secured by first mortgages was approximately $76,000 at December 31, 2018.

 

We originate fixed-rate home equity loans and fixed- and variable-rate lines of credit secured either by a first or second lien on the borrower’s primary residence. Our home equity loans are fixed rate fully amortizing loans with terms of up to 15 years and are generally originated in amounts, together with the amount of the existing first mortgage, of up to 89% of the appraised value of the subject property. Home equity loans originated with a loan to value ratio in excess of 80.0% are subject to a higher origination fee and higher interest rate than home equity loans with loan to value ratios of 80% or less. If the home equity loan is for home improvements, the improvements to be made to the property may be considered when calculating the loan to value ratio. If the loan to value ratio on the property is sufficient, regardless of the improvements to be made, the proceeds may be disbursed directly to the borrower. When the appraised value is dependent on the improvements to meet the loan to value requirement, the proceeds are held by us until we receive reasonable assurance that the improvements have been completed. The loan officers, at their discretion, may use a limited appraisal or a recertification of value on these types of loans. At December 31, 2018, home equity loans totaled $5.1 million, or 0.7% of our total loan and lease portfolio.

 

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Home equity lines of credit may be either fixed- or adjustable -rate and are typically originated in amounts, together with the amount of the existing first mortgage, of up to 89% of the appraised value of the subject property. Home equity lines of credit originated with a loan to value ratio in excess of 80% are subject to a higher interest rate than home equity lines of credit with loan to value ratios of 80% or less. Home equity lines of credit with an adjustable rate of interest adjust quarterly and are based on the Wall Street Journal Prime rate, plus a margin. Our fixed rate lines have a five year draw period and our adjustable rate lines have a 10 year draw period, during which time the funds may be paid down and redrawn up to the committed amount. Once the draw period has lapsed, the borrower either pays off the loan balance, or a new loan is negotiated. We charge an annual fee on each home equity line of credit and require a monthly payment of 0.9% of the outstanding balance drawn during the period, plus interest. At December 31, 2018, home equity lines of credit totaled $7.2 million, or 1.1% of our total loan and lease portfolio, with adjustable-rate home equity lines of credit totaling $5.5 million and fixed rate home equity lines making up the remaining balance. At December 31, 2018, unfunded commitments on home equity lines of credit totaled $10.8 million.

 

We do not engage in originating interest only, negative amortization, option adjustable rate or subprime loans and have no established program to originate or purchase these loans. Subprime loans are defined as loans that at the time of loan origination had a FICO credit score of less than 660. Of the $47.4 million in one- to four- family loans, including home equity loans and lines of credit, originated in 2018, only $2.6 million, or 5.5%, were to borrowers with a credit score under 660.

 

Multi-family and Commercial Real Estate Lending. We originate commercial real estate loans, including loans secured by multi-family residential properties, office buildings, hotels, industrial properties, retail buildings, medical and professional buildings, restaurants and various other commercial properties located principally in our primary market area. As of December 31, 2018, $255.1 million or 38.6% of our total loan and lease portfolio was secured by commercial and multi-family real estate, of which $74.5 million, or 11.3% of our total loan and lease portfolio, was secured by property located in the Columbus, Ohio market. Multi-family loans totaled $43.8 million of the $255.1 million commercial and multi-family real estate loan portfolio, or 6.6% of our total loan and lease portfolio, at December 31, 2018. Of the remaining $211.3 million of this portfolio, approximately $149.5 million was secured by income producing, or non-owner-occupied commercial real estate. We also purchase and participate, from time to time, in multi-family and commercial real estate loans from other financial institutions, which amounts are included in our multi-family and commercial real estate loan portfolios. Such loans are independently underwritten according to our policies. At December 31, 2018, our purchased multi-family and commercial real estate loan participations totaled $30.3 million, or 11.9% of our total multi-family and commercial real estate loan portfolios.

 

Multi-family and commercial real estate loans generally are priced at a higher rate of interest than one- to four-family residential loans. Typically, these loans have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than one- to four-family residential loans. Often payments on loans secured by commercial or multi-family properties are dependent on the successful operation and management of the property; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. We generally require and obtain loan guarantees from financially capable parties based upon the review of personal financial statements. If the borrower is a corporation, we generally require and obtain personal guarantees from the corporate principals based upon a review of their personal financial statements and individual credit reports. In addition, the borrower’s and guarantor’s financial information on such loans is monitored on an ongoing basis by requiring periodic financial statement updates.

 

Our commercial and multi-family real estate loans generally have initial terms of 10 to 20 years and amortization terms of up to 25 years, with a balloon payment at the end of the initial term, and may be fixed-rate or adjustable-rate loans. Our adjustable-rate multi-family and commercial real estate loans are generally tied to a margin above the prime rate or the applicable treasury rate. The maximum loan-to-value ratio of our multi-family and commercial real estate loans is generally 80% of the lower of cost or appraised value of the property securing the loan. At December 31, 2018, 16.1% of our multi-family and commercial real estate loans were fixed-rate loans and 83.9% were adjustable-rate loans.

 

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We consider a number of factors in originating multi-family and commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including project-level and global cash flows, credit history and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally require a debt service ratio of at least 1.10x. All multi-family and commercial real estate loans in excess of $500,000 are appraised by outside independent appraisers. We require property and casualty insurance and also require flood insurance if the property is determined to be in a flood zone area.

 

In addition, we generally require a Phase I Environmental Audit as a condition of making all multi-family and commercial real estate loans in excess of $1.0 million, which audit is performed by a qualified environmental consulting firm. The Phase I Environmental Audit includes appropriate inquiry into previous ownership and uses of the real estate to satisfactorily comply with the “Innocent Landowner Defense Amendment” to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA). The results and recommendations of the audit must be acceptable to us prior to loan closing. For loans less than $1.0 million but greater than $150,000, a full Phase I Environmental Audit is not be required, although an environmental investigation is typically performed by qualified bank personnel or a third party to determine if a full Phase I Environmental Audit should be done.

 

At December 31, 2018, the average loan size of our outstanding multi-family and commercial real estate loans was $720,000, and the largest of such loans was a $6.6 million loan secured by a first mortgage on a warehouse distribution facility located in the Columbus, Ohio metropolitan area. This loan was performing in accordance with its repayment terms at December 31, 2018. We had 22 other commercial and multi-family real estate loans with an outstanding balance in excess of $3.0 million at December 31, 2018, all of which were performing in accordance with their repayment terms at December 31, 2018. Our largest lending relationship at December 31, 2018 with one borrower was for $10.1 million consisting of four commercial real estate loans secured by four separate hotels, two in the Dayton, Ohio area and two in the Cincinnati, Ohio area, all with a common guarantor. All of these loans were performing in accordance with their repayment terms at December 31, 2018.

 

Multi-family and commercial real estate loans entail greater credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the repayment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for multi-family and commercial real estate than residential properties. If we foreclose on a commercial or multi-family real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be a lengthy process with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers