What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-13 compared with 2020-08-13 · 198 added, 172 removed, 308 unchanged (55% of the section changed)

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Management’s discussion and analysis of financial condition of the Richmond Mutual Bancorporation, Inc.

(the “Company”) at June 30, 2020, and the consolidated results of operations for the three and six month periods ended June 30, 2020, compared to the same periods in 2019 is intended to assist in understanding the financial condition and results of operations of the Company.

(the “Company”) at September 30, 2020, and the consolidated results of operations for the three and nine month periods ended September 30, 2020, compared to the same periods in 2019 is intended to assist in understanding the financial condition and results of operations of the Company.

The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this Form 10-Q.

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Important factors that could cause our actual results to differ materially from the results anticipated or projected, include, but are not limited to, the following:

· the effect of the novel coronavirus disease of 2019 (“COVID-19”), including on the Company’ credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S.

the effect of the novel coronavirus disease of 2019 (“COVID-19”), including on the Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S.

and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity;

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We also obtain funds by utilizing Federal Home Loan Bank (“FHLB”) advances.

Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and agency and municipal bonds.

Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and government sponsored agency and municipal bonds.

First Bank Richmond generates commercial, mortgage and consumer loans and leases and receives deposits from customers located primarily in Wayne and Shelby Counties, in Indiana and Shelby, Miami and Franklin (no deposits) Counties, in Ohio.

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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 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.

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We also provide trust and wealth management services, including serving as executor and trustee under wills and deeds and as guardian and custodian of employee benefits, and manage private investment accounts for individuals and institutions.

Total wealth management assets under management and administration were $167.0 million at June 30, 2020.

Total wealth management assets under management and administration were $147.8 million at September 30, 2020.

Our results of operations are primarily dependent on net interest income.

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Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reduction in the targeted federal funds rate, until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in 2020 and possibly longer.

At June 30, 2020, on a consolidated basis, we had $1.1 billion in assets, $752.9 million in loans and leases, net of allowance, $739.1 million in deposits and $196.1 million in stockholders’ equity.

At June 30, 2020, First Bank Richmond’s total risk-based capital ratio was 13.4%, exceeding the 10.0% requirement for a well-capitalized institution.

For the six months ended June 30, 2020, net income was $5.0 million, compared with net income of $1.7 million for the six months ended June 30, 2019.

At September 30, 2020, on a consolidated basis, we had $1.1 billion in assets, $750.6 million in loans and leases, net of allowance, $663.1 million in deposits and $191.7 million in stockholders’ equity.

At September 30, 2020, First Bank Richmond’s total risk-based capital ratio was 20.1%, exceeding the 10.0% requirement for a well-capitalized institution.

For the nine months ended September 30, 2020, net income was $7.5 million, compared with a net loss of $1.5 million for the nine months ended September 30, 2019.

Critical Accounting Policies

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The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors, all of which may be susceptible to significant change.

Foreclosed Assets.

Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs.

Management estimates the fair value of the properties based on current appraisal information.

Fair value estimates are particularly susceptible to significant changes in the economic environment, market conditions and real estate market.

A worsening or protracted economic decline would increase the likelihood of a decline in property values and could create the need to write down the properties through current operations.

Mortgage Servicing Rights (“MSRs”).

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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.

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.

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Paycheck Protection Program ("PPP").

The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program called the Paycheck Protection Program, or PPP.

The goal of the PPP is to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls.

The CARES Act was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a loan program called the Paycheck Protection Program, or PPP.

The goal of the PPP was to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls.

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020.

PPP loans have:

(a) an interest rate of 1.0%, (b) a two-year loan term to maturity;

and (c) principal and interest payments deferred for six months from the date of disbursement.

(a) an interest rate of 1.0%, (b) a five-year loan term to maturity;

and (c) principal and interest payments deferred for ten months from the end of the forgiveness period.

The SBA guarantees 100% of the PPP loans made to eligible borrowers.

The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA.

The deadline for PPP loan applications to the SBA has been extended to August 8, 2020.

The Bank continued to accept new PPP applications based on this extended

deadline and is assisting small businesses with other borrowing options as they become available, including SBA and other government sponsored lending programs, as appropriate.

As of June 30, 2020, we have processed 465 PPP loans totaling $64.3 million.

There were $72,000 PPP loans approved awaiting funding as of June 30, 2020.

Many of the PPP applications have been from our existing clients but we are also serving those who have not had a banking relationship with us in the past.

The deadline for PPP loan applications to the SBA was extended to August 8, 2020.

The Bank continued to accept new PPP applications based on this extended deadline and is assisting small businesses with other borrowing options as they become available, including SBA and other government sponsored lending programs, as appropriate.

As of the conclusion of the PPP on August 8, 2020, we had funded 482 PPP loans totaling $64.9 million .

Many of the PPP applications were from our existing clients but we also served those who had not had a banking relationship with us in the past.

In addition to the 1% interest earned on these loans, the SBA pays us fees for processing PPP loans in the following amounts:

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The PPPLF will take the PPP loans as collateral at face value.

As of June 30,2020, we had not utilized the PPPLF.

As of September 30, 2020, we had not utilized the PPPLF.

Loan Modifications.

Beginning in March 2020 we started receiving requests from our borrowers for loan and lease deferrals related to the effects of the COVID-19 pandemic.

At June 30, 2020, 752 loans aggregating $175.1 million, or 22.9% of total loans and leases, were modified.

At September 30, 2020, 70 loans and leases aggregating $35.3 million, or 4.7% of total loans and leases, were modified.

Modifications include payment deferrals, interest only or principal and interest, of up to primarily 90 days, fee waivers, extensions of repayment terms of up to six months, or other delays in payment that are considered insignificant.

These modifications were not classified as TDRs at June 30, 2020 in accordance with the guidance of the CARES Act and related regulatory banking guidance.

These modifications were not classified as TDRs at September 30, 2020 in accordance with the guidance of the CARES Act and related regulatory banking guidance.

The CARES Act provides that the short-term modification of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs.

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Borrowers are considered current under the CARES Act and related regulatory banking guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.

All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.

The following table summarizes information relating to forbearance requests granted at June 30, 2020 and March 31, 2020:

The following table summarizes information relating to forbearances granted at September 30, 2020 and June 30, 2020:

September 30, 2020

June 30, 2020

March 31, 2020

($ in thousands)

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Direct financing leases

The following table summarizes information relating to hospitality loan deferments (which are included in the table above) at quarter ended September 30, 2020 and June 30, 2020:

September 30, 2020

June 30, 2020

($ in thousands)

Percent of total

loans in category

Percent of total

loans in category

Certain customers have requested an additional 90-day deferment.

Shown in the following table is a summary of currently deferred loans with more than one round of deferments granted as of September 30, 2020.

($ in thousands)

Number of Loans

Commercial mortgage

Commercial and industrial

Construction and development

Residential mortgage

Direct financing leases

Branch Operations and Additional Client Support

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We have also taken steps to resume more normal branch activities with specific guidelines in place to ensure the safety of our clients and our personnel.

This includes the installation of counter shields and hand sanitizing stations, limiting the number of clients in a branch at any one time, requiring social distancing and the wearing of masks within the branch, diligent disinfecting of common area high touchpoints and encouraging the use of our digital and electronic banking channels.

We continuously monitor and conform our practices based on updates from the Center for Disease Control, World Health Organization, Financial Regulatory Agencies, and local and state health departments.

In addition, certain late fees are being waived for those customers experiencing a hardship as a result of the COVID 19 pandemic.

Comparison of Financial Condition at June 30, 2020 and December 31, 2019

Total assets increased $154.2 million, or 15.6%, to $1.1 billion at June 30, 2020 from $986.0 million at December 31, 2019.

The increase was primarily a result of a $65.7 million, or 9.6%, increase in loans and leases, net of allowance, to $752.9 million at June 30, 2020 from $687.3 million at December 31, 2019, and a $70.0 million, or 172.5%, increase in cash and cash equivalents to $110.6 million at June 30, 2020, compared to $40.6 million at December 31, 2019.

The increase in cash and cash equivalents primarily was the result of an increase in brokered deposits and FHLB borrowings as part of the Company’s strategy to increase liquidity.

Comparison of Financial Condition at September 30, 2020 and December 31, 2019

Total assets increased $68.8 million, or 7.0%, to $1.1 billion at September 30, 2020 from $986.0 million at December 31, 2019.

The increase was primarily a result of a $63.4 million, or 9.2%, increase in loans and leases, net of allowance to $750.6 million at September 30, 2020 from $687.3 million at December 31, 2019;

and a $26.5 million, or 12.2%, increase in investment securities to $244.2 million at September 30, 2020, compared to $217.7 million at December 31, 2019.

Cash and cash equivalents decreased $23.9 million, or 58.9%, to $16.7 million at September 30, 2020, from $40.6 million at December 31, 2019.

Loans and Leases.

Our loan and lease portfolio, net of allowance for loan and lease losses, increased $65.7 million, to $752.9 million at June 30, 2020 from $687.3 million at December 31, 2019.

The increase in loans and leases was attributable to PPP loans, which accounted for $64.3 million of the $65.7 million increase.

From December 31, 2019 to June 30, 2020, commercial and industrial loans increased $56.6 million or 67.0%, commercial real estate loans increased $12.6 million or 5.5%, and construction and development loans increased $8.9 million or 16.7%.

Our loan and lease portfolio, net of allowance for loan and lease losses, increased $63.4 million, to $750.6 million at September 30, 2020 from $687.3 million at December 31, 2019.

The increase in loans and leases primarily was attributable to the $64.9 million of PPP loans originated.

From December 31, 2019 to September 30, 2020, commercial and industrial loans increased $56.6 million or 66.9%, commercial real estate loans increased $16.2 million or 7.1%, construction and development loans increased $2.3 million or 4.3%, and leases increased $5.5 million, or 5.0%.

PPP loans accounted for all of the increases in commercial and industrial loans, offsetting a decline of $8.3 million of non-PPP loans.

Partially offsetting these increases were decreases in multi-family real estate loans of $7.3 million or 11.0%, non-PPP commercial and industrial loans of $7.7 million, residential real estate loans, including home equity loans, of $5.6 million or 4.1%, and consumer loans of $984,000 or 7.3%.

Leases grew $4.8 million, or 4.3%, from December 31, 2019 to June 30, 2020.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loans and leases more than 90 days past due, totaled $4.3 million or 0.57% of total loans and leases at June 30, 2020, compared to $4.3 million or 0.61% of total loans at March 31, 2020, and $3.8 million or 0.55% of total loans and leases at December 31, 2019.

Accruing loans past due more than 90 days at June 30, 2020, totaled $3.3 million, compared to $3.1 million at March 31, 2020, and $2.6 million at December 31, 2019.

At June 30, 2020, TDRs totaled $569,000, compared to $598,000 at December 31, 2019.

At June 30, 2020 and December 31, 2019, the Company had TDRs that were accruing and performing in accordance with their modified terms of $569,000 and $598,000, respectively.

Partially offsetting these increases were decreases in multi-family real estate loans of $2.8 million or 4.2%, residential real estate loans, including home equity loans, of $9.6 million or 7.0%, and consumer loans of $433,000 or 3.2%.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loans and leases more than 90 days past due, totaled $3.4 million or 0.45% of total loans and leases at September 30, 2020, compared to $3.8 million or 0.55% of total loans and leases at December 31, 2019.

The decrease in nonperforming loans and leases was primarily the

result of the resolution of a $1.0 million multi-family loan.

Accruing loans past due more than 90 days at September 30, 2020, totaled $2.4 million, compared to $2.6 million at December 31, 2019.

At September 30, 2020, TDRs totaled $556,000, compared to $598,000 at December 31, 2019.

At September 30, 2020 and December 31, 2019, the Company had TDRs that were accruing and performing in accordance with their modified terms of $556,000 and $598,000, respectively.

Performing TDRs are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status.

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Among other criteria, this guidance provided that short-term loan modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs.

As of June 30, 2020, the Company had approved 752 loan modifications qualifying under the CARES Act related to the COVID-19 pandemic with an outstanding loan balance totaling $175.1 million.

As of September 30, 2020, the Company had outstanding 70 loan modifications qualifying under the CARES Act related to the COVID-19 pandemic with an outstanding loan balance totaling $35.3 million.

This was a decrease from 752 loans with modifications totaling $175.1 million at June 30, 2020.

Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regards to determining whether or not a loan is deemed to be impaired.

Allowance for Loan and Lease Losses.

The allowance for loan and lease losses increased $1.4 million, or 20.2%, to $8.5 million at June 30, 2020 from $7.1 million at December 31, 2019.

At June 30, 2020, the allowance for loan and lease losses totaled 1.12% of total loans and leases outstanding compared to 1.02% at December 31, 2019.

Excluding the $64.3 million of PPP loans from the $763.9 million of total loans and leases at June 30, 2020, the allowance for loan and lease losses to total loans and leases was 1.22% at June 30, 2020.

The allowance for loan and lease losses increased $2.7 million, or 38.4%, to $9.8 million at September 30, 2020 from $7.1 million at December 31, 2019.

At September 30, 2020, the allowance for loan and lease losses totaled 1.29% of total loans and leases outstanding compared to 1.02% at December 31, 2019.

Excluding the $64.9 million of PPP loans from the $750.6 million of total loans and leases at September 30, 2020, the allowance for loan and lease losses to total loans and leases was 1.41% at September 30, 2020.

PPP loans are fully guaranteed by the SBA and management expects that the vast majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven.

Net charge-offs during the first six months of 2020 were $98,000 or 0.03% of average loans and leases outstanding, compared to net charge-offs of $329,000, or 0.10% of average loans and leases outstanding during the first six months of 2019.

The allowance for loan and lease losses to non-performing loans and leases was 197.5% at June 30, 2020, compared to 186.0% at December 31, 2019.

Net charge-offs during the first nine months of 2020 were $110,000 or 0.02% of average loans and leases outstanding, compared to net charge-offs of $419,000, or 0.08% of average loans and leases outstanding during the first nine months of 2019.

The allowance for loan and lease losses to non-performing loans and leases was 290.9% at September 30, 2020, compared to 186.0% at December 31, 2019.

Management regularly analyzes conditions within its geographic markets and evaluates its loan and lease portfolio.

The Company evaluated its exposure to potential loan and lease losses as of June 30, 2020, which evaluation included consideration of potential credit losses due to the deteriorating economic conditions driven by the impact of the COVID-19 pandemic.

The Company evaluated its exposure to potential loan and lease losses as of September 30, 2020, which evaluation included consideration of potential credit losses due to the deteriorating economic conditions driven by the impact of the COVID-19 pandemic.

The full impact of the pandemic on the Company’s deposit and loan and lease customers is still unknown.

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Potentially higher risk segments of the portfolio, such as hotels and restaurants, are being closely monitored as are loan payment deferrals.

Total deposits increased $121.9 million, or 19.8%, to $739.1 million at June 30, 2020, from $617.2 million at December 31, 2019.

This increase in deposits was primarily due to an increase in brokered deposits (as the Company sought to increase its liquidity position) and an increase in demand deposit and savings accounts primarily related to disbursements of PPP loan funds to borrowers’ deposit accounts as well as reduced withdrawals reflecting changes in customer spending habits due to the COVID-19 pandemic.

Brokered deposits increased $64.0 million to $120.7 million, or 16.3% of total deposits, at June 30, 2020, compared to $56.7 million, or 9.2% of total deposits, at December 31, 2019.

Demand deposit and savings accounts increased $60.1 million to $395.9 million at June 30, 2020, compared to $335.8 million at December 31, 2019.

At June 30, 2020, noninterest bearing deposits totaled $89.9 million, or 12.2% of total deposits, compared to $60.3 million or 9.8% of total deposits at December 31, 2019.

Total borrowings, consisting solely of FHLB advances, increased $26.0 million, or 16.9%, to $180.0 million at June 30, 2020 from $154.0 million at December 31, 2019 consistent with the Company’s strategy to increase liquidity.

Total deposits increased $45.8 million, or 7.4%, to $663.1 million at September 30, 2020, from $617.2 million at December 31, 2019.

This increase in deposits was primarily due to an increase in demand deposit and savings accounts primarily related to disbursements of PPP loan funds to borrowers’ deposit accounts as well as reduced withdrawals reflecting changes in customer spending habits due to the COVID-19 pandemic.

Brokered deposits decreased $24.2 million to $32.4 million, or 4.9% of total deposits, at September 30, 2020, compared to $56.7 million, or 9.2% of total deposits, at December 31, 2019.

The decrease in brokered deposits was due to increases in retail deposits and deposits related to PPP loans which reduced the need for brokered deposits.

Demand deposit and savings accounts increased $71.9 million to $407.7 million at September 30, 2020, compared to $335.8 million at December 31, 2019.

At September 30, 2020, noninterest bearing deposits totaled $88.7 million, or 13.4% of total deposits, compared to $60.3 million or 9.8% of total deposits at December 31, 2019.

Total borrowings, consisting solely of FHLB advances, increased $22.0 million, or 14.3%, to $176.0 million at September 30, 2020 from $154.0 million at December 31, 2019 consistent with the Company’s strategy to increase liquidity.

Stockholders’ Equity.

Stockholders’ equity totaled $196.1 million at June 30, 2020, an increase of $8.3 million, or 4.4%, from December 31, 2019.

The increase in stockholders’ equity primarily was the result of net income of $5.0 million in the first half of 2020 and a $3.7 million improvement in accumulated other comprehensive income, partially offset by $623,000 in dividends paid to shareholders.

The Company’s equity to asset ratio was 17.2% at June 30, 2020.

At June 30, 2020, the Bank’s Tier 1 capital to total assets ratio was 13.4% and the Bank’s capital was well in excess of all regulatory requirements.

Comparison of Results of Operations for the Three Months Ended June 30, 2020 and 2019.

Net income for the three months ended June 30, 2020 was $2.5 million, a $2.2 million, or 647.8% increase from net income of $335,000 for the three months ended June 30, 2019.

The $2.5 million in earnings equaled $0.20 diluted earnings per share for the second quarter of 2020.

There is no comparison of earnings per share to the second quarter of 2019, as the Company’s reorganization from the mutual to stock form of ownership and related stock offering was not completed until July 1, 2019.

Stockholders’ equity totaled $191.7 million at September 30, 2020, an increase of $3.9 million, or 2.1%, from December 31, 2019.

The increase in stockholders’ equity primarily was the result of net income of $7.5 million in the first nine months of 2020 and a $3.8 million improvement in accumulated other comprehensive income, partially offset by $1.2 million in cash dividends paid to shareholders and $6.6 million in stock repurchases.

The Company repurchased 582,079 shares of Company common stock at an average price of $11.37 per share for a total of $6.6 million during the third quarter of 2020.

The Company’s equity to asset ratio was 18.2% at September 30, 2020.

At September 30, 2020, the Bank’s Tier 1 capital to total assets ratio was 13.9% and the Bank’s capital was well in excess of all regulatory requirements.

Comparison of Results of Operations for the Three Months Ended September 30, 2020 and 2019.

Net income for the three months ended September 30, 2020 was $2.5 million, a $5.8 million increase from a net loss of $3.3 million recorded for the three months ended September 30, 2019.

The $2.5 million in earnings equaled $0.21 diluted earnings per share for the third quarter of 2020, compared to $(0.26) diluted loss per share for the third quarter of 2019.

Interest Income.

Interest income increased $100,000, or 1.0%, to $10.5 million during the quarter ended June 30, 2020, compared to $10.4 million during the quarter ended June 30, 2019.

Interest income on loans and leases increased $145,000, or 1.6%, to $9.3 million for the quarter ended June 30, 2020, from $9.2 million for the comparable quarter in 2019, due to higher average loan and lease balances.

The average outstanding loan and lease balance was $747.9 million for the quarter ended June 30, 2020, compared to $687.0 million for the quarter ended June 30, 2019.

The average yield on loans and leases was 4.98% for the quarter ended June 30, 2020, compared to 5.33% for the comparable quarter in 2019.

The yield on the loan and lease portfolio was impacted by the PPP loan activity during the second quarter of 2020 as PPP loans are originated at an interest rate of 1%, although the effective yield is slightly higher as a result of the origination fees paid to us by the SBA.

The average yield on PPP loans was 3.22%, including the recognition of the net deferred fees, reducing average yield on loans and leases by 12 basis points for the three months ended June 30, 2020.

Interest income on investment securities, including FHLB stock, increased $222,000, or 23.2%, to $1.2 million during the quarter ended June 30, 2020, from $957,000 during the comparable quarter in 2019.

Interest income decreased $224,000, or 2.1%, to $10.6 million during the quarter ended September 30, 2020, compared to $10.8 million during the quarter ended September 30, 2019.

Interest income on loans and leases increased $238,000, or 2.6%, to $9.6 million for the quarter ended September 30, 2020, from $9.3 million for the comparable quarter in 2019, due to higher average balances in the loan and lease and investment securities portfolios.

The average outstanding loan and lease balances were $756.3 million for the quarter ended September 30, 2020, compared to $698.9 million for the quarter ended September 30, 2019.

The average yield on loans and leases was 5.05% for the quarter ended September 30, 2020, compared to 5.33% for the comparable quarter in 2019.

The yield on the loan and lease portfolio was impacted by the PPP loan activity during the third quarter of 2020 as PPP loans are originated at an interest rate of 1%, although the effective yield is slightly higher as a result of the origination fees paid to us by the SBA.

The average yield on PPP loans was 2.70%, including the recognition of the net deferred fees, reducing average yield on loans and leases by 22 basis points for the three months ended September 30, 2020.

Interest income on investment securities, including FHLB stock, increased $155,000, or 18.0%, to $1.0 million during the quarter ended September 30, 2020, from $862,000 during the comparable quarter in 2019.

The increase in interest income on investment securities from the comparable period in 2019 was due to higher average balances, partially offset by a lower weighted average yield.

The average balance of investment securities, including FHLB stock, was $256.6 million for the quarter ended June 30, 2020, compared to $157.8 million for the quarter ended June 30, 2019.

The average yield on investment securities, including FHLB stock, was 1.84% for the second quarter of 2020, compared to 2.45% for the second quarter of 2019.

Interest income earned on cash and cash equivalents decreased to $11,000 in the second quarter of 2020 compared to $278,000 in the comparable quarter of 2019.

This was due to the significantly lower yield earned on funds at the Federal Reserve after the rate reductions experienced in the second half of 2019 and in March 2020.

The average balance of investment securities, including FHLB stock, was $256.2 million for the quarter ended September 30, 2020, compared to $166.3 million for the quarter ended September 30, 2019.

The average yield on investment securities, including FHLB stock, was 1.59% for the third quarter of 2020, compared to 2.07% for the third quarter of 2019.

Interest income earned on cash and cash equivalents decreased to $9,000 in the third quarter of 2020 compared to $627,000 in the comparable quarter of 2019.

The decrease in interest income earned on cash and cash equivalents in the third quarter of 2020 compared to the comparable quarter of 2019 was due to the significantly lower yield earned on funds at the Federal Reserve after the rate reductions experienced in the second half of 2019 and in March 2020, as well as a $61.5 million decline in the average balance of cash and cash equivalents outstanding during the comparable periods.

Interest Expense.

Interest expense decreased $441,000, or 15.1%, to $2.5 million for the quarter ended June 30, 2020, from $2.9 million for the quarter ended June 30, 2019.

Interest expense on deposits decreased $403,000, or 19.1%, to $1.7 million for the quarter ended June 30, 2020, from $2.1 million for the comparable quarter in 2019.

Interest expense decreased $590,000, or 20.3%, to $2.3 million for the quarter ended September 30, 2020, from $2.9 million for the quarter ended September 30, 2019.

Interest expense on deposits decreased $488,000, or 24.0%, to $1.5 million for the quarter ended September 30, 2020, from $2.0 million for the comparable quarter in 2019.

This decrease in interest expense was attributable to the lower weighted average rate paid on interest-bearing deposits, partially offset by higher average deposit balances.

The weighted average rate paid on interest-bearing deposits was 1.13% for the quarter ended June 30, 2020, compared to 1.40% for the quarter ended June 30, 2019.

Average balances of interest-bearing deposits increased slightly to $602.3 million in the quarter ended June 30, 2020, compared to $600.1 million in the comparable quarter in 2019.

Interest expense on FHLB borrowings decreased $38,000, or 4.7%, to $770,000 in the second quarter of 2020 compared to the same quarter in 2019.

The average balance of FHLB borrowings totaled $181.8 million during the quarter ended June 30, 2020, compared to $147.4 million for the quarter ended June 30, 2019.

The weighted average rate paid on FHLB borrowings was 1.69% for the quarter ended June 30, 2020, a 51 basis point decline from 2.20% for the comparable quarter in 2019.

The weighted average rate paid on interest-bearing deposits was 1.04% for the quarter ended September 30, 2020, compared to 1.44% for the quarter ended September 30, 2019.

Average balances of interest-bearing deposits increased to $595.4 million, or 5.1%, in the quarter ended September 30, 2020, compared to $566.5 million in the comparable quarter in 2019.

Interest expense on FHLB borrowings decreased $102,000, or 11.8%, to $763,000 in the third quarter of 2020 compared to $865,0000 for the same quarter in 2019.

The average balance of FHLB borrowings totaled $180.9 million during the quarter ended September 30, 2020, compared to $147.3 million for the quarter ended September 30, 2019.

The weighted average rate paid on FHLB borrowings was 1.69% for the quarter ended September 30, 2020, a 66 basis point decline from 2.35% for the comparable quarter in 2019.

Net Interest Income.

Net interest income before the provision for loan and lease losses increased $541,000, or 7.2%, to $8.0 million in the second quarter of 2020, compared to $7.5 million for the second quarter of 2019.

This increase was primarily due to an increase in average interest-earning assets during the second quarter of 2020 compared to the comparable period in 2019.

Our net interest margin was 3.03% for three months ended June 30, 2020, compared to 3.27% for the three months ended June 30, 2019.

Net interest income before the provision for loan and lease losses increased $366,000, or 4.6%, to $8.3 million in the third quarter of 2020, compared to $7.9 million for the third quarter of 2019.

This increase was primarily due to an increase in average interest-earning assets during the third quarter of 2020 compared to the comparable period in 2019, partially offset by a decrease in the net interest margin.

Our net interest margin (annualized) was 3.18% for the three months ended September 30, 2020, compared to 3.31% for the three months ended September 30, 2019.

The decrease in net interest margin was primarily due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities.

The market’s response to lowering deposit pricing to reflect the targeted federal funds rate decrease over the past year typically lags declines in the yield on interest earning assets.

The average yield on PPP loans was 3.22% during the three months ended June 30, 2020, including the recognition of the net deferred fees, resulting in a negative impact on net interest margin of 12 basis points for the three months ended June 30, 2020.

The average yield on PPP loans was 2.70% during the three months ended September 30, 2020, including the recognition of the net deferred fees, resulting in a negative impact on net interest margin.

Average Balances, Interest and Average Yields/Cost.

3 unchanged sentences

Loan fees are included in interest income on loans and are not material.

Three Months Ended June 30,

Three Months Ended September 30,

(Dollars in thousands)

15 unchanged sentences

_____________

(1) Annualized.

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) Annualized.

Net interest margin represents net interest income divided by average total interest-earning assets.

Provision for Loan and Lease Losses.

The provision for loan and lease losses for the three months ended June 30, 2020 totaled $1.3 million compared to $485,000 for the three months ended June 30, 2019, a $835,000 or 172.2% increase.

The increased provision was primarily due to the continued uncertainty of the economic impact of the COVID-19 pandemic on the Bank’s loan portfolio.

Net charge-offs during the second quarter of 2020 were $106,000, compared to net charge-offs of $40,000 in the second quarter of 2019.

The provision for loan and lease losses for the three months ended September 30, 2020 totaled $1.3 million compared to $705,000 for the three months ended September 30, 2019, a $595,000 or 84.4% increase.

The increased provision was primarily due to the continued uncertainty of the economic impact of the COVID-19 pandemic on the Bank’s loan and lease portfolio.

Net charge-offs during the third quarter of 2020 were $12,000, compared to net charge-offs of $90,000 in the third quarter of 2019.

As the COVID-19 pandemic continues, we expect to see continued pressure on asset quality.

As management continues to monitor the loan portfolio, additional provisions may be required.

As management continues to monitor the loan and lease portfolio, additional provisions may be required.

Non-Interest Income.

Non-interest income increased $1.2 million or 131.4%, to $2.1 million for the quarter ended June 30, 2020, compared to $900,000 for the comparable quarter in 2019 The increase in noninterest income resulted primarily from the increase in the gain on sale of loans and leases, which increased $907,000, or 734.1%, to $1.0 million during the second quarter of 2020, compared to $124,000 during the first quarter of 2020 as a result of increased mortgage banking activity during the current quarter due to lower rates.

Loan and lease servicing income increased $202,000, or 20.5%, to $301,000 for the second quarter of 2020 compared to $99,000 for the comparable quarter in 2019.

In the second quarter of 2020, the Company recorded a recovery to the value of its mortgage servicing rights of $296,000, while no impairment recovery or charge was recorded in the second quarter of 2019.

Other loan fees increased $156,000, or 176.8%, to $245,000 due to increased letter of credit fees of $58,000 and loan interest rate modification fees of $76,000.

Service fees on deposit accounts decreased $146,000, or 58.1%, to $106,000 for the quarter ended June 20, 2020, compared to $252,000 for the quarter ended June 30, 2019 as a result of the waiving of overdraft fees.

Non-interest income increased $1.0 million or 87.9%, to $2.2 million for the quarter ended September 30, 2020, compared to $1.1 million for the comparable quarter in 2019 The increase in noninterest income resulted primarily from the increase in the gain on sale of loans and leases, which increased $1.1 million, or 473.4%, to $1.3 million during the third quarter of 2020, compared to $232,000 during the third quarter of 2019 as a result of increased mortgage banking activity during the current quarter due to lower rates.

Loan and lease servicing income decreased $110,000, to a loss of $42,000 for the third quarter of 2020 compared to income of $68,000 for the comparable quarter in 2019.

Other loan fees decreased $37,000, or 17.7%, to $174,000, and were attributable to increased loan processing fees of $80,000, or 96.3%, offset by decreased miscellaneous loan fees of $118,000, or 91.8%.

Service fees on deposit accounts decreased $145,000, or 49.1%, to $151,000 for the quarter ended September 20, 2020, compared to $296,000 for the quarter ended September 30, 2019 as a result of the waiving of overdraft fees for the first two months of the third quarter of 2020, and only re-instituting overdraft fees in September 2020.

Non-Interest Expense.

Non-interest expense decreased $2.0 million, or 25.7%, to $5.6 million for the three months ended June 30, 2020, from $7.6 million for the same period in 2019.

Salaries and employee benefits decreased $2.0 million, or 38.5%, to $3.3 million for the quarter ended June 30, 2020 from $5.3 million for the quarter ended June 30, 2019.

The $2.0 million decrease from the second quarter of 2019 was primarily attributable to the $1.7 million pre-tax expense related to the adoption of a nonqualified deferred compensation plan during the second quarter of 2019.

Excluding this expense, salaries and employee benefits decreased $369,000, or 10.3%, for the three months ended June 30, 2020, compared to the three months ended June 30, 2019.

Data processing expenses increased $48,000, or 11.3%, in the second quarter of 2020 compared to the second quarter of 2019, due to normal price increases associated with information technology services and additional digital services and products offered by the Company.

Deposit insurance expense decreased $98,000, or 62.0%, to $60,000, in the second quarter of 2020 compared to the second quarter of 2019.

The decrease from the second quarter of 2019 was due to the Bank’s higher capital ratios resulting from the Company’s injection of capital into the Bank in connection with our reorganization to a stock holding company and related stock offering.

Legal and professional fees increased $118,000, or 56.4%, to $327,000 for the quarter ended June 30, 2020 from $209,000 for the comparable quarter in 2019.

The increase in legal and professional fees was due to the establishment of an out-of-state subsidiary of First Bank for investment management purposes in the second quarter of 2020.

Non-interest expense decreased $6.5 million, or 52.1%, to $6.0 million for the three months ended September 30, 2020, from $12.5 million for the same period in 2019.

Salaries and employee benefits decreased $193,000, or 5.0%, to $3.6 million for the quarter ended September 30, 2020 from $3.8 million for the quarter ended September 30, 2019.

The decrease from the third quarter of 2019 was primarily due to the lower retirement costs in the third quarter of 2020 compared to the comparable quarter of 2019 as a result of the freezing of the Company’s defined benefit plan (“DB Plan”).

Deposit insurance expense increased $56,000, or 233.6% compared to the third quarter of 2019 as a result of the Bank having previously utilized all of its remaining small bank credit awarded by the FDIC.

Advertising expense declined $127,000 or 64.1%, from the third quarter of 2019, as a result of a reduction in advertising occurring in 2020.

In the third quarter of 2019, the Company incurred a $6.3 million non-recurring expense associated with the establishment and funding of the Foundation established in connection with the Company’s reorganization to a public company and stock offering.

Income Tax Expense.

Income tax expense increased $674,000 during the three months ended June 30, 2020, compared to the same period in 2019, primarily due to a $2.8 million increase in pre-tax income.

The effective tax rate for the second quarter of 2020 was 20.2% compared to a 14.3% benefit for the same quarter a year ago.

Comparison of Results of Operations for the Six Months Ended June 30, 2020 and 2019.

Net income for the six months ended June 30, 2020 totaled $5.0 million, a $3.3 million or 190.4% increase from net income of $1.7 million for the comparable period in 2019.

The $5.0 million in earnings equaled $0.40 diluted earnings per share for the first half of 2020.

There is no comparison of earnings per share to the first half of 2019, as the Company’s reorganization from the mutual to stock form of ownership and related stock offering was not completed until July 1, 2019.

Income tax expense increased $1.5 million during the three months ended September 30, 2020, compared to the same period in 2019, primarily due to a $7.3 million increase in pre-tax income.

The effective tax rate for the third quarter of 2020 was 19.5% compared to a 21.7% benefit for the same quarter a year ago.

Comparison of Results of Operations for the Nine Months Ended September 30, 2020 and 2019.

Net income for the nine months ended September 30, 2020 totaled $7.5 million, a $9.0 million increase from a net loss of $1.5 million for the comparable period in 2019.

The $7.5 million in earnings equaled $0.60 diluted earnings per share for the first nine months of 2020.

There is no comparison of earnings per share to the first nine months of 2019, as the Company’s reorganization from the mutual to stock form of ownership and related stock offering was not completed until July 1, 2019.

Interest Income.

Interest income increased $795,000, or 3.9%, to $20.9 million during the six months ended June 30, 2020, compared to $20.2 million for the comparable period in 2019.

Interest income on loans and leases increased $443,000, or 2.5%, to $18.4 million for the first six months of 2020, compared to $17.9 million for the comparable period in 2019, due to higher average loan and lease balances and a slightly higher average yield.

The average outstanding loan and lease balance was $692.1 million for the first half of the year of 2020, compared to $677.7 million for the first half of 2019.

The average yield on loans and leases was 5.31% for the first six months of 2020, compared to 5.29% for the first six months of 2019.

The yield on the loan and lease portfolio was impacted by the PPP loan activity which occurred during the second quarter of 2020 as PPP loans are originated at an interest rate of 1%, although the effective yield is slightly higher as a result of the origination fees paid to us by the SBA.

The average yield on PPP loans was 3.22% in the first half of 2020, including the recognition of the net deferred fees, reducing average yield on loans and leases by eight basis points during the six months ended June 30, 2020.

Interest income on investment securities, including FHLB stock, increased $543,000, or 28.6%, to $2.4 million during the six months ended June 30, 2020, compared to $1.9 million during the comparable period in 2019.

Interest income increased $570,000, or 1.8%, to $31.5 million during the nine months ended September 30, 2020, compared to $31.0 million for the comparable period in 2019.

Interest income on loans and leases increased $681,000, or 2.5%, to $27.9 million for the first nine months of 2020, compared to $27.2 million for the comparable period in 2019, due to slightly higher average loan and lease balances, and a slightly higher average yield.

The average outstanding loan and lease balance was $691.9 million for the first nine months of 2020, compared to $684.8 million for the first nine months of 2019.

The average yield on loans and leases was 5.38% for the first nine months of 2020, compared to 5.30% for the first nine months of 2019.

The yield on the loan and lease portfolio was impacted by PPP loan activity as PPP loans are originated at an interest rate of 1%, although the effective yield is slightly higher as a result of the origination fees paid to us by the SBA.

The average yield on PPP loans was 2.90% in the first nine months of 2020, including the recognition of the net deferred fees, reducing average yield on loans and leases by 15 basis points during the first nine months of 2020.

Interest income on investment securities, including FHLB stock, increased $698,000, or 25.3%, to $3.5 million during the nine months ended September 30, 2020, compared to $2.8 million during the comparable period in 2019.

The increase in the interest income on investment securities was due to higher average balances, partially offset by a lower weighted average yield.

The average balance of investment securities, including FHLB stock, was $244.4 million for the first six months of 2020, compared to $153.6 million for the first six months of 2019.

The average yield on investment securities, including FHLB stock, was 2.00% for the first half of 2020, compared to 2.47% for the first half of 2019.

Interest income earned on cash and cash equivalents decreased to $136,000 in the first half of 2020 compared to $328,000 in the first half of 2019.

This was due to the significantly lower yield earned on funds at the Federal Reserve after the rate reductions experienced in the second half of 2019 and in March 2020.

The average balance of investment securities, including FHLB stock, was $248.4 million for the first nine months of 2020, compared to $156.2 million for the first nine months of 2019.

The average yield on investment securities, including FHLB stock, was 1.86% for the first nine months of 2020, compared to 2.36% for the first nine months of 2019.

Interest income earned on cash and cash equivalents decreased to $146,000 in the first nine months of 2020 compared to $954,000 in the first nine months of 2019.

This primarily was due to the significantly lower yield earned on funds at the Federal Reserve after the rate reductions experienced in the second half of 2019 and in March 2020.

Interest Expense.

Interest expense decreased $514,000, or 9.3%, to $5.0 million for the six months ended June 30, 2020, compared to $5.6 million for the six months ended June 30, 2019.

Interest expense on deposits decreased $465,000, or 11.6%, to $3.5 million for the first half of 2020, compared to $4.0 million in the first half of 2019.

This decrease in interest expense on deposits was primarily attributable to the lower weighted average rate paid on interest-bearing deposits, as well as a decline in average balances of interest-bearing deposits.

The weighted average rate paid on interest-bearing deposits was 1.23% for the six months ended June 30, 2020, compared to 1.37% for the six months ended June 30, 2019.

Average balances of interest-bearing deposits declined $12.5 million, or 2.1%, to $574.4 million in the first six months of 2020 compared to the first six months of 2019.

Interest expense on FHLB borrowings decreased $49,000, or 3.2%, to $1.5 million in the first half of 2020 compared to the first half of 2019.

The average balance of FHLB borrowings totaled $172.9 million during the first six months of 2020, compared to $141.7 million for the first six months of 2019.

The weighted average rate paid on FHLB borrowings was 1.75% for the first half of 2020, a 45 basis point decline from 2.20% for the first half of 2019.

Interest expense decreased $1.1 million, or 13.1%, to $7.3 million for the nine months ended September 30, 2020, compared to $8.5 million for the nine months ended September 30, 2019.

Interest expense on deposits decreased $953,000, or 15.8%, to $5.1 million for the first nine months of 2020, compared to $6.0 million in the first nine months of 2019.

This decrease in interest expense on deposits was primarily attributable to the lower weighted average rate paid on interest-bearing deposits, offset by a slight increase in average balances of interest-bearing deposits.

The weighted average rate paid on interest-bearing deposits was 1.16% for the nine months ended September 30, 2020, compared to 1.39% for the nine months ended September 30, 2019.

Average balances of interest-bearing deposits increased $1.5 million, or 0.3%, to $581.5 million in the first nine months of 2020 compared to the first nine months of 2019.

Interest expense on FHLB borrowings decreased $151,000, or 6.2%, to $2.3 million in the first nine months of 2020 compared to the first nine months of 2019.

The average balance of FHLB borrowings totaled $175.6 million during the first nine months of 2020, compared to $143.6 million for the first nine months of 2019.

The weighted average rate paid on FHLB borrowings was 1.73% for the first nine months of 2020, a 52 basis point decline from 2.25% for the first nine months of 2019.

Net Interest Income.

Net interest income before the provision for loan and lease losses increased $1.3 million, or 9.0%, to $15.9 million in the first half of 2020, compared to $14.6 million for the first half of 2019.

This increase was primarily due to an increase in average interest-earning assets during the first half of 2020 compared to the same period in 2019.

Our net interest margin was 3.25% for six months ended June 30, 2020, compared to 3.35% for the six months ended June 30, 2019.

Net interest income before the provision for loan and lease losses increased $1.7 million, or 7.4%, to $24.2 million in the first nine months of 2020, compared to $22.5 million for the first nine months of 2019.

This increase was primarily due to an increase in average interest-earning assets during the first nine months of 2020 compared to the same period in 2019.

Our net interest margin was 3.30% for the nine months ended September 30, 2020, compared to 3.34% for the nine months ended September 30, 2019.

The decrease in net interest margin was primarily due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities.

The market’s response to lowering deposit pricing to reflect the targeted federal funds rate decrease over the past year typically lags declines in the yield on interest earning assets.

The average yield on PPP loans was 3.22% during the six months ended June 30, 2020, including the recognition of the net deferred fees, resulting in a negative impact on net interest margin of eight basis points for the six months ended June 30, 2020.

Average Balances, Interest and Average Yields/Cost.

3 unchanged sentences

Loan fees are included in interest income on loans and are not material.

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in thousands)

15 unchanged sentences

___________________

(1) Annualized.

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) Annualized.

Net interest margin represents net interest income divided by average total interest-earning assets.

Provision for Loan and Lease Losses.

The provision for loan and lease losses for the six months ended June 30, 2020 totaled $1.5 million compared to $1.0 million for the six months ended June 30, 2019, a $520,000 or 51.5% increase.

The provision for loan and lease losses for the nine months ended September 30, 2020 totaled $2.8 million compared to $1.7 million for the nine months ended September 30, 2019, a $1.1 million or 65.0% increase.

The increased provision was primarily due to the continued uncertainty of the economic impact of the COVID-19 pandemic on the Bank’s loan portfolio.

Net charge-offs during the first half of 2020 were $98,000, compared to net charge-offs of $329,000 in the first half of 2019.

Net charge-offs during the first nine months of 2020 were $110,000, compared to net charge-offs of $419,000 in the first nine months of 2019.

As the COVID-19 pandemic continues, we expect to see continued pressure on asset quality.

1 unchanged sentence

Non-Interest Income.

Non-interest income increased $1.2 million, or 68.2%, to $3.0 million for the first six months of 2020, compared to $1.8 million for the same period in 2019.

Gain on sale of loans and leases increased $1.0 million in the first half of 2020 to $1.3 million compared to $211,000 in the comparable period of 2019 as a result of increased mortgage banking activity due to lower rates.

Service charges on deposit accounts declined $123,000, or 25.5%, in the first six months of 2020 compared to the first six months of 2019.

This decrease was the result of waiving overdraft charges in the second quarter of 2020.

Other loan fees increased $85,000, or 34.8%, in the first half of 2020, primarily due to a $58,000 increase in letter of credit fees and a $27,000 increase in loan processing fees.

Trust income increased $46,000, or 21.5%, in the first six months of 2020 compared to the first six months of 2019 due to an increase in assets under management.

Non-interest income increased $2.2 million, or 75.9%, to $5.2 million for the first nine months of 2020, compared to $3.0 million for the same period in 2019, primarily as a result of an increase in the net gain on

sale of loans and leases.

Net gain on sale of loans and leases increased $2.1 million in the first nine months of 2020 to $2.6 million compared to $442,000 in the comparable period of 2019 as a result of increased mortgage banking activity due to lower rates.

Service charges on deposit accounts declined $268,000, or 34.4%, in the first nine months of 2020 compared to the first nine months of 2019.

This decrease was the result of waiving overdraft charges in the second quarter of 2020 through August 2020.

Other loan fees increased $47,000, or 10.4%, in the first nine months of 2020, primarily due to a $58,000 increase in letter of credit fees.

Trust income increased $68,000, or 21.1%, in the first nine months of 2020 compared to the first nine months of 2019 due to an increase in average assets under management during the nine months ended September 30, 2020, compared to the same period in 2019.

Non-Interest Expense.

Non-interest expense decreased $2.2 million, or 16.7%, to $11.2 million during the first six months of 2020 compared to $13.4 million during the same period in 2019.

Salaries and employee benefits declined $2.2 million, or 24.5%, in the first half of 2020 compared to the first half of 2019.

Non-interest expense decreased $8.8 million, or 33.8%, to $17.2 million during the first nine months of 2020 compared to $25.9 million during the same period in 2019.

Salaries and employee benefits declined $2.4 million, or 18.6%, in the first nine months of 2020 compared to the first nine months of 2019.

This decrease was primarily due to the $1.7 million pre-tax expense related to the adoption of a nonqualified deferred compensation plan during the second quarter of 2019.

Excluding this expense, salaries and employee benefits decreased $456,000, or 6.4%, for the first half of 2020 compared to the first half of 2019.

Salary expense increased $49,000, or 1.1%, in the first half of 2020, while benefit expense declined $505,000 in the first half of 2020 compared to the first half of 2019 primarily due to the lower cost of the ESOP compared to the Company’s defined benefit plan which was frozen with the intent to terminate it in December 2019.

The freezing of the plan is expected to reduce, but not eliminate, the ongoing expenses associated with the defined benefit plan until the plan is terminated.

Data processing expenses increased $111,000, or 13.2%, in the first half of 2020 compared to the first half of 2019, due to normal price increases associated with information technology services and additional digital services offered by the Company.

Deposit insurance expense decreased $177,000, or 60.4%, in the first six months of 2020 compared to the first six months of 2019 due to the Bank’s higher capital ratios resulting from the Company’s injection of capital into the Bank in connection with our reorganization to a stock holding company and related stock offering.

We also experienced an increase of $62,000, or 12.3%, in legal and professional fees due to the establishment of an out-of-state subsidiary of First Bank for investment management purposes;

and a $107,000, or 36.0%, decline in advertising expenses.

Excluding this expense, salaries and employee benefits decreased $651,000, or 6.0%, for the first nine months of 2020 compared to the first nine months of 2019.

Salary expense increased $12,000, or 0.2%, in the first nine months of 2020, while benefit expense declined $663,000 in the first nine months of 2020 compared to the first nine months of 2019 primarily due to the lower cost of the ESOP compared to the Company’s DB Plan which was frozen in October 2019 with the intent to terminate it.

The freezing of the DB Plan has reduced, but not eliminated, the ongoing expenses associated with the DB Plan until it is terminated.

Data processing expenses increased $115,000, or 9.0%, in the first nine months of 2020 compared to the first nine months of 2019, due to normal price increases associated with information technology services and additional digital services and products offered by the Company.

Deposit insurance expense decreased $121,000, or 38.2%, in the first nine months of 2020 compared to the first nine months of 2019 due to the Bank’s higher capital ratios resulting from the Company’s injection of capital into the Bank in connection with our reorganization to a stock holding company and related stock offering.

We also experienced a $234,000, or 47.2%, decline in advertising expenses.

As mentioned above and disclosed in previous public filings, the Company has frozen and intends to terminate the Bank’s participation in the DB Plan, a multi-employer, tax-qualified defined benefit pension plan.

Freezing the DB plan resulted in some immediate cost savings because future benefit accruals were stopped.

However, the freeze did not impact unfunded liabilities or eliminate cost volatility.

The frozen DB Plan remains subject to the interest rate, investment and demographic risks that apply to ongoing defined benefit plans.

In addition, the frozen DB Plan is still subject to the same minimum funding, compliance, administrative and fiduciary requirements as an ongoing defined benefit plan.

The Company still intends to terminate the Bank’s participation in the DB Plan, which will require it to pay an amount based on the underfunded status of the plan.

As of September 30, 2020, the Company has accrued $17.5 million for this expense.

The actual termination expense of the DB Plan may be higher or lower than the amount currently accrued for by the Company depending on a number of factors, including but not limited to the interest rate environment and the valuation of plan assets.

Due to the current low interest rate environment, terminating the DB Plan at this time would require the Company to incur a substantial additional expense over and above the amount presently accrued.

As a result, the Company’s Board of Directors will continue to monitor and evaluate the timing of, and costs associated with, termination of the DB Plan.

Any additional expenses associated with the termination of the DB Plan will negatively impact our results of operations in the future.

Income Tax Expense.

Income tax expense increased $1.0 million during the first half of 2020, compared to the first half of 2019, primarily due to a $4.3 million increase in pre-tax income.

The effective tax rate for the first half of 2020 was 20.6% compared to 14.1% in the first half of 2019.

Income tax expense increased $2.5 million during the first nine months of 2020, compared to the first nine months of 2019, primarily due to a $11.6 million increase in pre-tax income.

The effective tax rate for the first nine months of 2020 was 20.2% compared to a benefit of 28.6% in the same period of 2019.

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.

11 unchanged sentences

In addition, we have historically sold eligible long-term, fixed-rate residential mortgage loans in the secondary market in order to reduce interest rate risk and to create another source of liquidity.

At June 30, 2020, the Bank had $204.1 million in cash and unpledged available-for-sale investment securities for its cash needs.

At September 30, 2020, the Bank had $141.7 million in cash and unpledged available-for-sale investment securities for its cash needs.

The Bank had the ability to borrow an additional $56.3 million in FHLB advances based on existing collateral pledged.

First Bank Richmond’s liquidity may be supplemented in the second half of 2020 if it participates in the FRB’s PPPLF pursuant to which First Bank Richmond would pledge PPP loans as collateral to obtain FRB non-recourse loans.

At June 30, 2020, we had no borrowings from the PPPLF, with the ability to borrow up to $64.3 million based on PPP loans unpledged at that date.

First Bank Richmond’s liquidity may be supplemented if it participates in the FRB’s PPPLF pursuant to which First Bank Richmond would pledge PPP loans as collateral to obtain FRB non-recourse loans.

At September 30, 2020, we had no borrowings from the PPPLF, with the ability to borrow up to $64.9 million based on PPP loans unpledged at that date.

First Bank Richmond uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits, fund deposit withdrawals and fund loan and lease commitments.

At June 30, 2020, outstanding loan and lease commitments, including unused lines and letters of credit, totaled $133.9 million, including $55.6 million of undisbursed construction and land loans.

Certificates of deposit scheduled to mature in one year or less at June 30, 2020, totaled $265.2 million.

At September 30, 2020, outstanding loan and lease commitments, including unused lines and letters of credit, totaled $154.0 million, including $69.9 million of undisbursed construction and land loans.

Certificates of deposit scheduled to mature in one year or less at September 30, 2020, totaled $154.1 million.

It is management’s policy to offer deposit rates that are competitive with other local financial institutions.

6 unchanged sentences

FHLB advances are utilized to leverage our capital base and provide funds for lending and investment activities, as well as to enhance interest rate risk management.

Cash and cash equivalents increased $70.0 million to $110.6 million as of June 30, 2020, from $40.6 million as of December 31, 2019.

Net cash provided by operating activities was $7.2 million for the six months ended June 30, 2020.

Net cash used in investing activities totaled $84.5 million during the six months ended June 30, 2020 and consisted primarily of increases in net loans and available-for-sale securities.

The $147.2 million of net cash provided by financing activities during the six months ended June 30, 2020 was primarily the result of a $121.9 million net increase in deposits and $26.0 million net increase in FHLB advances.

Cash and cash equivalents decreased $23.9 million to $16.7 million as of September 30, 2020, from $40.6 million as of December 31, 2019.

Net cash provided by operating activities was $7.6 million for the nine months ended September 30, 2020.

Net cash used in investing activities totaled $91.5 million during the nine months ended September 30, 2020 and consisted primarily of increases in net loans and available-for-sale securities.

The $60.0 million of net cash provided by financing activities during the nine months ended September 30, 2020 was primarily the result of a $45.9 million net increase in deposits and $22.0 million net increase in FHLB advances.

As a separate legal entity from the Bank, the Company must provide for its own liquidity.

At June 30, 2020, the Company, on an unconsolidated basis, had $42.5 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

At September 30, 2020, the Company, on an unconsolidated basis, had $34.8 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

The Company’s principal source of liquidity is dividends and ESOP loan repayments from the Bank.

7 unchanged sentences

Such commitments are subject to the same credit policies and approval process accorded to loans we make.

At June 30, 2020, we had $133.9 million in loan and lease commitments and unused lines of credit.

At September 30, 2020, we had $154.0 million in loan and lease commitments and unused lines of credit.

Capital Resources

1 unchanged sentence

The FDIC may require us to have additional capital above the specific regulatory levels if it believes we are subject to increased risk due to asset problems, high interest rate risk and other risks.

At June 30, 2020 First Bank Richmond’s regulatory capital exceeded the FDIC regulatory requirements, and First Bank Richmond was well-capitalized under regulatory prompt corrective action standards.

At September 30, 2020 First Bank Richmond’s regulatory capital exceeded the FDIC regulatory requirements, and First Bank Richmond was well-capitalized under regulatory prompt corrective action standards.

Consistent with our goals to operate a sound and profitable organization, our policy is for First Bank Richmond to maintain well-capitalized status.

Adequate Capital

As of June 30, 2020

As of September 30, 2020

(Dollars in thousands)

9 unchanged sentences

Pursuant to the capital regulations of the FDIC and the other federal banking agencies, First Bank Richmond must maintain a capital conservation buffer consisting of additional common equity tier 1 (“CET1”) capital greater than 2.5% of risk-weighted assets above the required minimum levels of risk-based CET1 capital, tier 1 capital and total capital in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.

At June 30, 2020 the Bank’s CET1 capital exceeded the required capital conservation buffer.

At September 30, 2020 the Bank’s CET1 capital exceeded the required capital conservation buffer.

For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the FRB expects the holding company’s subsidiary banks to be well capitalized under the prompt corrective action regulations.

If Richmond Mutual Bancorporation was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at June 30, 2020, it would have exceeded all regulatory capital requirements.

If Richmond Mutual Bancorporation was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at September 30, 2020, it would have exceeded all regulatory capital requirements.

Impact of Inflation

1 unchanged sentence

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.

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.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis