Description

Richmond Mutual Bancorporation is a $1.265 billion in assets, Midwest bank that trades at 115% of tangible book value (TBV). I believe that the bank will be sold in the coming year and could fetch $21-$22/share for a 30%+ return.

History: The bank was founded in 1887 in Richmond, Indiana, which sits on Indiana’s eastern border, straddling I-70 between Dayton, OH and Indianapolis, IN. Over the years, the bank went through various name and charter changes. The bank is currently an Indiana state-chartered commercial bank.

In 1998, the bank converted to a non-stock mutual holding company. This allowed the bank to acquire Mutual First Savings Bank in Sidney, OH in 2007, which operated as a wholly-owned subsidiary until 2016 when the subsidiary banks were combined.

The bank did run into some capital issues following the GFC as detailed in this Federal Reserve letter:

https://www.federalreserve.gov/newsevents/pressreleases/files/enf20120705a1.pdf

On 7/1/2019, the bank became a stock, Maryland corporation and sold shares to the public in a thrift conversion. 13.0 million shares were sold, and 500K were given to a foundation.

 The bank operates 7 branches and one loan office in Indiana and 5 branches in Ohio.

Loans: The bank is very much a commercial lender, as over 80% of the loans are commercial. The bank does focus on the hospitality sector, particularly motels and hotels. During the initial pandemic in 2020, over 20% of the loans were in forbearance. Currently, non-performing loans are very respectable at 0.95% of loans while allowance for loan and lease losses sits at 1.43% of loans.

Deposits: The bank has a very good deposit base, with 62% of deposits in demand accounts and savings accounts.

 There is an old joke that bank CEOs follow the 3-6-3 plan. Take deposits at 3%, make loans at 6%, and be on the golf course by 3 pm. Today, the spread is about the same, but it is more like the 1-4-3 plan. The average loan rate is 4.08% and the average interest paid is 0.87%. The bank makes a nice net interest margin. Now let’s talk golf.

Management: The CEO is Garry Kleer, who has been with the bank since 1994 and CEO for the past 21 years. He is 66 years old. He is also president of the Indiana Bankers Association for 2022, which means that he has a lot of contact with other banks.

 https://indiana.bank/news/kleer-elected-2022-chairman-indiana-bankers-association

 He is very involved in the community, serving on various charities and boards, and the bank has sponsored numerous fundraisers over the years, with an emphasis on golf tournaments.

You see, Garry likes golf. A lot. In 2021, Garry competed in 12 tournaments in Indiana:

 https://www.bluegolf.com/a/#/players/player/gkleer

 It helps that he lives 2.5 miles from his country club in Richmond. But wait, there’s more! Garry and his wife Cheryl bought a $480K home at the Bonita National Golf & Country Club in Florida about 6 years ago.

 https://parcellookup.com/p/28535-longford-ct-bonita-springs-fl-34135_7818453

Board of Directors: Besides Kleer, there are 6 other directors on the board and they are all 65 years or older. Directors Jackson and Wetzel also have served on the board of directors of the local golf club, Forest Hills. Another director, Harold Hanley, worked with Keefe, Bruyette & Woods (KBW), the firm that brought the bank public.

Stock Options: The initial stock option package totaled 1,352,622 shares or 10% of the shares outstanding.

 Each of the 6 non-employee directors was awarded 17,585 shares, as well as 40,580 in stock options. The top 3 executives received a combined 392,274 of stock options. Altogether, 1,095,657 stock options have been granted, most in October 2020 at $10.53/share. That number is based on the last year’s 10-K and DEF 14A, so I would expect that additional stock options have been given out. We will know more in the coming months from the annual report and proxy.

Capital Allocation: The bank has been very active with deploying capital. The share repurchase program bought back 777,692 shares in 2020, 310,854 in 2021, and 52,515 in January 2022, leaving 947,038 available under the existing repurchase program. RMBI began paying a $0.05 quarterly dividend in 2020, which was raised to $0.07 in 2021. A special dividend of $0.50 was paid on 4/17/2021. The quarterly dividend recently was raised to $0.10/share. Over the past three years, assets have increased 50%, loans and leases 27%, and net income 96%. Even with all this, the bank is still very well capitalized.

Everything that I am seeing points to a sale in the coming year. I get a takeout price of between $21 - $22 share or about 150% of TBV. The bank’s efficiency ratio tends to be in the upper 60s so I am assuming a buyer would realize 30% in synergies. For some good background, please check the VIC post by dman976 on WAYN:

 https://valueinvestorsclub.com/idea/Wayn_Savings/0477554039

 In particular, see the table of Midwest banks sold in recent years, and note the assets and TBV acquisition multiples.

Risks:

 -        No buyers.

-        Economy turns.

Catalyst

Buyout