Richmond Mutual Bancorporation, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Management’s discussion and analysis of financial condition of the Richmond Mutual Bancorporation, Inc. (the “Company”) at 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. The terms “we,” “our,” “us,” or the “Company” refer to Richmond Mutual Bancorporation, Inc. and its consolidated subsidiary, First Bank Richmond, which we sometimes refer to as the “Bank,” unless the context otherwise requires. Cautionary Note Regarding Forward-Looking Statements Certain matters in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of words such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” These forward-looking statements include, but are not limited to: · statements of our goals, intentions and expectations; · statements regarding our business plans, prospects, growth and operating strategies; · statements regarding the quality of our loan and investment portfolios; and · estimates of our risks and future costs and benefits. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These forward-looking statements are based on our current beliefs and expectations and, by their nature, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Important factors that could cause our actual results to differ materially from the results anticipated or projected, include, but are not limited to, the following: · the effect of the novel coronavirus disease of 2019 (“COVID-19”), including on the Company’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; · 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; 27 · our ability to implement and change our business strategies; · competition among depository and other financial institutions and equipment financing companies; · the impact of the proposed termination of our defined benefit plan; · the deductibility of our contribution to the charitable foundation for tax purposes; · inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans and leases we have made and make; · adverse changes in the securities or secondary mortgage markets; · changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III; · changes in the quality or composition of our loan, lease or investment portfolios; · technological changes that may be more difficult or expensive than expected; · the inability of third-party providers to perform as expected; · our ability to manage market risk, credit risk and operational risk in the current economic environment; · our ability to enter new markets successfully and capitalize on growth opportunities; · our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto; · changes in consumer spending, borrowing and savings habits; · changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board; · our ability to retain key employees; · our compensation expense associated with equity allocated or awarded to our employees; · changes in the financial condition, results of operations or future prospects of issuers of securities that we own; · other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") ; and · the other risks detailed in this report and from time to time in our other filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”). We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements. 28 Overview On February 6, 2019, the Board of Directors of First Mutual of Richmond, Inc. (the “MHC”), the parent mutual holding company of Richmond Mutual Bancorporation-Delaware, adopted a Plan of Reorganization and Stock Offering (the “Plan”). The Plan was approved by the Board of Governors of the Federal Reserve System (the “FRB”) and by the Indiana Department of Financial Institutions (the “IDFI”), as well as the voting members of the MHC at a special meeting of members held on June 19, 2019. Pursuant to the Plan, upon completion of the transaction, the MHC would convert from a mutual holding company to the stock holding company corporate structure, the MHC and Richmond Mutual Bancorporation-Delaware would cease to exist, and First Bank Richmond would become a wholly owned subsidiary of the Company, a newly formed Maryland corporation. The transaction was completed on July 1, 2019. In connection with the related stock offering, which was also completed on July 1, 2019, the Company sold 13,026,625 shares of common stock at $10.00 per share, for gross offering proceeds of approximately $130.3 million in its subscription offering and contributed 500,000 shares and $1.25 million to a newly formed charitable foundation, First Bank Richmond, Inc. Community Foundation (the “Foundation”). In certain circumstances, where appropriate, the terms “we”, “us”, “our” and the “Company” refer collectively to (i) RMB-Delaware and First Bank Richmond with respect to discussions in this document involving matters occurring prior to completion of the corporate reorganization and (ii) the Company and First Bank Richmond with respect to discussions in this document involving matters occurring post-corporate reorganization, in each case unless the context indicates another meaning. The Company is regulated by the FRB and the IDFI. Our corporate office is located at 31 North 9th Street, Richmond, Indiana, and our telephone number is (765) 962-2581. First Bank Richmond is an Indiana state-chartered commercial bank headquartered in Richmond, Indiana. The Bank was originally established in 1887 as an Indiana state-chartered mutual savings and loan association and in 1935 converted to a federal mutual savings and loan association, operating under the name First Federal Savings and Loan Association of Richmond. In 1993, the Bank converted to a state-chartered mutual savings bank and changed its name to First Bank Richmond, S.B. In 1998, the Bank, in connection with its non-stock mutual holding company reorganization, converted to a national bank charter operating as First Bank Richmond, National Association. In July 2007, Richmond Mutual Bancorporation-Delaware, the Bank’s then current holding company, acquired Mutual Federal Savings Bank headquartered in Sidney, Ohio. Mutual Federal Savings Bank was operated independently as a separately chartered, wholly owned subsidiary of Richmond Mutual Bancorporation-Delaware until 2016 when it was combined with the bank through an internal merger transaction that consolidated both banks into a single, more efficient commercial bank charter. In 2017, the Bank converted to an Indiana state-chartered commercial bank and changed its name to First Bank Richmond. Mutual Federal Savings Bank continues to operate in Ohio under the name Mutual Federal, a division of First Bank Richmond. First Bank Richmond provides full banking services through its seven full- and one limited-service offices located in Cambridge City (1), Centerville (1), Richmond (5) and Shelbyville (1), Indiana, its five full-service offices located in Piqua (2), Sidney (2) and Troy (1), Ohio, and its loan production office in Columbus, Ohio. Administrative, trust and wealth management services are conducted through First Bank Richmond’s Corporate Office/Financial Center located in Richmond, Indiana. As an Indiana-chartered commercial bank, First Bank Richmond is subject to regulation by the IDFI and the Federal Deposit Insurance Corporation (“FDIC”). Our principal business consists of attracting deposits from the general public, as well as brokered deposits, and investing those funds primarily in loans secured by commercial and multi-family real estate, first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, direct financing leases and commercial and industrial loans. We also obtain funds by utilizing Federal Home Loan Bank (“FHLB”) advances. Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and 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. 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 29 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 $147.8 million at September 30, 2020. Our results of operations are primarily dependent on net interest income. Net interest income is the difference between interest income, which is the income that is earned on loans and investments, and interest expense, which is the interest that is paid on deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), and fees from sale of residential mortgage loans originated for sale in the secondary market. We also recognize income from the sale of investment securities. Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reduction in the targeted federal funds rate, until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in 2020 and possibly longer. At 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 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. Mortgage Servicing Rights (“MSRs”). MSRs associated with loans originated and sold, where servicing is retained, are capitalized and included in the consolidated balance sheet. The value of the capitalized servicing rights represents the fair value of the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds 30 and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as a reduction in loan servicing fee income. Securities. Under Financial Accounting Standards Board (“FASB”) Codification Topic 320 (ASC 320), Investments-Debt, investment securities must be classified as held to maturity, available for sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and we have the ability to hold the securities to maturity. Securities not classified as held to maturity are classified as available for sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and which do not affect earnings until realized. The fair values of our securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of our fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities. We evaluate all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if any other-than-temporary-impairments (“OTTI”) exist pursuant to guidelines established in ASC 320. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our ability and intent to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. If management determines that an investment experienced an OTTI, we must then determine the amount of the OTTI to be recognized in earnings. If we do not intend to sell the security and it is more likely than not that we will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the value of these securities are recorded as an unrealized gain (as accumulated other comprehensive income (loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold. From time to time we may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time. Deferred Tax Asset. We have evaluated our deferred tax asset to determine if it is more likely than not that the asset will be utilized in the future. Our most recent evaluation has determined that we will more likely than not be able to utilize our remaining deferred tax asset. Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. 31 COVID 19 Response In response to the COVID-19 pandemic, the Company is offering a number of options designed to support our customers and the communities that we serve. Paycheck Protection Program ("PPP"). The 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 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 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: (i) five (5) percent for loans of not more than $350,000; (ii) three (3) percent for loans of more than $350,000 and less than $2,000,000; and one (1) percent for loans of at least $2,000,000. We may not collect any fees from the loan applicants. We may utilize the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”), pursuant to which the Company would pledge its PPP loans as collateral to obtain FRB non-recourse loans. The PPPLF will take the PPP loans as collateral at face value. As of 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 September 30, 2020, 70 loans and leases aggregating $35.3 million, or 4.7% of total loans and leases, were modified. Modifications include payment deferrals, interest only or principal and interest, of up to primarily 90 days, fee waivers, extensions of repayment terms of up to six months, or other delays in payment that are considered insignificant. These modifications were not classified as TDRs at September 30, 2020 in accordance with the guidance of the CARES Act and related regulatory banking guidance. The CARES Act provides that the short-term modification of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory banking guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in rating is appropriate. We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic. The following table summarizes information relating to forbearances granted at September 30, 2020 and June 30, 2020: September 30, 2020 June 30, 2020 ($ in thousands) Number of Loans Balance Number of Loans Balance Commercial mortgage 24 $ 27,767 70 $ 98,010 Commercial and industrial 2 788 27 12,692 Construction and development 2 226 3 10,098 Multi-Family 2 2,105 13 21,197 Residential mortgage 16 3,347 88 11,198 Home equity 1 14 7 215 Direct financing leases 23 1,063 507 21,080 Consumer – – 37 597 Total Loans 70 $ 35,310 752 $ 175,087 32 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) Number of Loans Balance Percent of total loans in category Number of Loans Balance Percent of total loans in category Restaurants – $ – 0.00 % 7 $ 1,356 24.64 % Hotels 13 24,384 38.05 % 19 44,455 72.58 % Total Loans 13 $ 24,384 34.83 % 26 $ 45,811 68.62 % 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 Amount Commercial mortgage 14 $ 20,459 Commercial and industrial 2 788 Construction and development – – Multi-Family 2 2,105 Residential mortgage 7 1,303 Home equity – – Direct financing leases 18 857 Consumer – – Total Loans 43 $ 25,512 Branch Operations and Additional Client Support Many of our employees continue to work remotely or have flexible work schedules, and we have established protective measures within our offices to help ensure the safety of those employees who must work on-site. We have also taken steps to resume more normal branch activities with specific guidelines in place to ensure the safety of our clients and our personnel. 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. Comparison of Financial Condition at September 30, 2020 and December 31, 2019 General. 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 $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 $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 33 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. The CARES Act amended generally accepted accounting principles with respect to the modification of loans to borrowers affected by the COVID-19 pandemic. Among other criteria, this guidance provided that short-term loan modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. As of 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 $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 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 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. The Company has increased its qualitative factors when determining the adequacy of its allowance for loan and lease losses. Credit metrics are being reviewed and stress testing is being performed on the loan portfolio. Potentially higher risk segments of the portfolio, such as hotels and restaurants, are being closely monitored as are loan payment deferrals. Deposits. Total deposits increased $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. Borrowings. 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 $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. 34 Comparison of Results of Operations for the Three Months Ended September 30, 2020 and 2019. General. 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 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 $256.2 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 $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 1.04% 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 $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 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. 35 Average Balances, Interest and Average Yields/Cost. The following tables set forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using quarterly balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Loan fees are included in interest income on loans and are not material. Three Months Ended September 30, 2020 2019 Average Balance Outstanding Interest Earned/ Paid Yield/ Rate Average Balance Outstanding Interest Earned/ Paid Yield/ Rate (Dollars in thousands) Interest-earning assets: Loans and leases receivable $ 756,307 $ 9,557 5.05 % $ 698,924 $ 9,318 5.33 % Securities 247,113 891 1.44 % 158,701 750 1.89 % FHLB stock 9,083 126 5.55 % 7,580 112 5.91 % Cash and cash equivalents and other 28,096 9 0.13 % 89,550 627 2.80 % Total interest-earning assets 1,040,599 10,583 4.07 % 954,755 10,807 4.53 % Interest-bearing liabilities: Savings and money market accounts 189,848 243 0.51 % 163,660 286 0.70 % Interest-bearing checking accounts 123,271 68 0.22 % 104,951 115 0.44 % Certificate accounts 282,306 1,234 1.75 % 297,848 1,632 2.19 % Borrowings 180,913 763 1.69 % 147,302 865 2.35 % Total interest-bearing liabilities 776,338 2,308 1.19 % 713,761 2,898 1.62 % Net interest income $ 8,275 $ 7,909 Net earning assets $ 264,261 $ 240,994 Net interest rate spread (1) 2.88 % 2.91 % Net interest margin (2) 3.18 % 3.31 % Average interest-earning assets to average interest-bearing liabilities 134.04 % 133.76 % _____________ (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 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 and lease portfolio, additional provisions may be required. Non-Interest Income. 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. 36 Non-Interest Expense. 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 $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. General. 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 $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 $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 $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. 37 Net Interest Income. 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. 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. Nine Months Ended September 30, 2020 2019 Average Balance Outstanding Interest Earned/ Paid Yield/ Rate Average Balance Outstanding Interest Earned/ Paid Yield/ Rate (Dollars in thousands) Interest-earning assets: Loans and leases receivable $ 691,890 $ 27,928 5.38 % $ 684,844 $ 27,247 5.30 % Securities 239,696 3,252 1.81 % 149,064 2,465 2.20 % FHLB stock 8,681 207 3.18 % 7,140 296 5.53 % Cash and cash equivalents and other 38,355 146 0.51 % 56,949 954 2.23 % Total interest-earning assets 978,622 31,533 4.30 % 897,997 30,962 4.60 % Interest-bearing liabilities: Savings and money market accounts 178,699 787 0.59 % 168,800 914 0.72 % Interest-bearing checking accounts 114,205 216 0.25 % 102,221 278 0.36 % Certificate accounts 288,571 4,071 1.88 % 308,976 4,835 2.09 % Borrowings 175,620 2,273 1.73 % 143,597 2,424 2.25 % Total interest-bearing liabilities 757,095 7,347 1.29 % 723,594 8,451 1.56 % Net interest income $ 24,186 $ 22,511 Net earning assets $ 221,527 $ 174,403 Net interest rate spread (1) 3.01 % 3.04 % Net interest margin (2) 3.30 % 3.34 % Average interest-earning assets to average interest-bearing liabilities 129.26 % 124.10 % ___________________ (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 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 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. As management continues to monitor the loan portfolio, additional provisions may be required. Non-Interest Income. 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 38 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 $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 $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. 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. 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 $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. 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. 39 Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and our ability to manage those requirements. We strive to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance in short-term investments at any given time will cover adequately any reasonably anticipated immediate need for funds. Additionally, First Bank Richmond maintains a relationship with the FHLB of Indianapolis which could provide funds on short-term notice if needed. Liquidity management is both a daily and long-term function of the management of our business. It is overseen by the Asset and Liability Management Committee. Excess liquidity is generally invested in short-term investments, such as overnight deposits and holding excess funds at the Federal Reserve Bank. On a long-term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed and municipal securities. First Bank Richmond can also generate funds from borrowings, primarily FHLB advances. In addition, we have historically sold eligible long-term, fixed-rate residential mortgage loans in the secondary market in order to reduce interest rate risk and to create another source of liquidity. At 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 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 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. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Bank. Liquidity, represented by cash, cash equivalents, and investment securities, is a product of our operating, investing and financing activities. Primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, excess funds are invested in short-term interest-earning assets, which provide liquidity to meet lending requirements. Cash is also generated through borrowings. FHLB advances are utilized to leverage our capital base and provide funds for lending and investment activities, as well as to enhance interest rate risk management. Cash and cash equivalents 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 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. Management believes that its primary liquidity sources of loan repayments, maturing investment securities, available FHLB borrowing, possible utilization of the PPPLF facility, and access to the brokered CD market are sufficient in the economic environment created by the COVID-19 pandemic. Except as set forth above, management is not aware of any trends, events, or uncertainties that will have, or that are reasonably likely to have a material impact on liquidity, capital resources or operations. Further, management is not aware of any current recommendations by regulatory agencies, which, if they were to be implemented, would have this effect. 40 Off-Balance Sheet Activities In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements, including commitments to extend credit and unused lines of credit. These transactions involve varying degrees of off-balance sheet risks. While these commitments are contractual obligations and represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2020, we had $154.0 million in loan and lease commitments and unused lines of credit. Capital Resources First Bank Richmond is subject to minimum capital requirements imposed by the FDIC. The FDIC may require us to have additional capital above the specific regulatory levels if it believes we are subject to increased risk due to asset problems, high interest rate risk and other risks. At 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. Required for To Be Well Actual Adequate Capital Capitalized Amount Ratio Amount Ratio Amount Ratio As of September 30, 2020 (Dollars in thousands) Total risk-based capital (to risk weighted assets) $ 159,748 20.1 % $ 63,492 8.0 % $ 79,365 10.0 % Tier 1 risk-based capital (to risk weighted assets) 149,939 19.0 47,619 6.0 63,492 8.0 Common equity tier 1 capital (to risk weighted assets) 149,939 19.0 35,714 4.5 51,587 6.5 Tier 1 leverage (core) capital (to adjusted tangible assets) 149,939 13.9 43,246 4.0 54,058 5.0 As of December 31, 2019 Total risk-based capital (to risk weighted assets) $ 149,137 19.5 % $ 61,304 8.0 % $ 76,629 10.0 % Tier 1 risk-based capital (to risk weighted assets) 142,048 18.5 45,978 6.0 61,304 8.0 Common equity tier 1 capital (to risk weighted assets) 142,048 18.5 34,483 4.5 49,809 6.5 Tier 1 leverage (core) capital (to adjusted tangible assets) 142,048 14.6 39,027 4.0 48,784 5.0 Pursuant to the capital regulations of the FDIC and the other federal banking agencies, First Bank Richmond must maintain a capital conservation buffer consisting of additional common equity tier 1 (“CET1”) capital greater than 2.5% of risk-weighted assets above the required minimum levels of risk-based CET1 capital, tier 1 capital and total capital in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At 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 September 30, 2020, it would have exceeded all regulatory capital requirements. Impact of Inflation The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the economic value of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of inflationary 41 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There has not been any material change in the market risk disclosures contained in our 2019 Form 10-K.