Richmond Mutual Bancorporation, Inc. 10-K

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Note Regarding Forward-Looking Statements Certain matters in this Form 10-K 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 41 • 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: • potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, generally resulting from the ongoing novel coronavirus 2019 ("COVID-19") and any governmental or societal responses thereto; • 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 residential, commercial and multifamily real estate market conditions; • demand for loans and deposits in our market area; • our ability to implement and change our business strategies; • competition among depository and other financial institutions and equipment financing companies; • inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans and leases we have made and make; • adverse changes in the securities or secondary mortgage markets; • changes in the quality or composition of our loan, lease or investment portfolios; • our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on our information technology systems or on the third-party vendors who perform several of our critical processing functions; • 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; • the future of the LIBOR, and the transition away from LIBOR toward new interest rate benchmarks; • our ability to enter new markets successfully and capitalize on growth opportunities; • 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; 42 • 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, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; including as a result of the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") and the Consolidated Appropriations Act, 2021 (“CAA 2021”); • legislative or regulatory changes such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and its implementing regulations that adversely affect our business, and the availability of resources to address such changes; • our ability to pay dividends on our common stock; • other economic, competitive, governmental, regulatory, and technical factors affecting our operations, pricing, products and services including as a result of the CAA 2021 and recent COVID vaccination effort; and • the other risks described elsewhere in this Form 10 K and our other reports filed with the U.S. Securities and Exchange Commission (“SEC”). 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. Additional factors that may affect our results are discussed under Part I, Item 1A in this document under the heading “Risk Factors.” General Our principal business consists of attracting deposits from the general public, as well as brokered deposits, and investing those funds primarily in loans secured by first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, direct financing leases, commercial and industrial loans, and loans secured by commercial and multi-family real estate. We also obtain funds by utilizing FHLB advances. Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and agency and municipal bonds. Our results of operations are primarily dependent on net interest income. Net interest income is the difference between interest income, which is the income that is earned on loans and investments, and interest expense, which is the interest that is paid on deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), and fees from the sale of residential mortgage loans originated for sale in the secondary market. We may also recognize income from the sale of investment securities. At December 31, 2021, on a consolidated basis, we had $1.3 billion in assets, $832.8 million in loans, $900.2 million in deposits and $180.5 million in stockholders’ equity. First Bank Richmond’s risk-based capital ratio at December 31, 2021 was 17.3%, exceeding the 10.0% requirement for a well-capitalized institution. For the year ended December 31, 2021, we reported net income of $11.1 million, compared with net income of $10.0 million for 2020. Critical Accounting Policies and Estimates 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. 43 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 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 44 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. Management Strategy We are a community-oriented financial institution dedicated to serving the needs of customers in our primary market area. Our commitment is to offer a full array of consumer and commercial banking products and services to meet the needs of our customers. We offer mortgage lending products to qualified borrowers to give them the broadest access to home ownership in our markets. We offer commercial lending products and services tailored to complement their businesses. Our goal is to maintain asset quality while continuing to build our strong capital position while looking for growth opportunities in the markets we serve. To achieve these goals, we will focus on the following strategies: Lending. We believe that commercial lending offers an opportunity to enhance our profitability while managing credit, interest rate and operational risk. We seek quality commercial loan opportunities in our existing markets and purchase loan participations that complement our existing portfolios. We will continue to focus our efforts on our existing markets as well as to further develop the Columbus, Ohio market through our loan production office. We anticipate that the majority of our commercial and multi-family real estate and commercial construction loan originations will range in size from $1.0 million to $8.0 million, while the majority of our commercial and industrial loan originations will range in size from $250,000 to $1.5 million. At December 31, 2021, our commercial loan portfolio, which includes commercial and multi-family real estate loans, commercial and industrial loans and construction loans, totaled $562.0 million, or 66.4% of total loans and leases, with approximately $202.0 million of these loans, or 23.9% of our total loans and leases, located in the Columbus, Ohio market. Deposit Services. Deposits are our primary source of funds for lending and investment. We intend to continue to focus on increasing core deposits (which we define as all deposits except for certificates of deposit of $250,000 or more and brokered certificates of deposit) in our primary market area, with a particular emphasis on noninterest-bearing deposits. We will continue to enhance our offering of retail deposit products to maintain and increase our market share, while continuing to build our product offering of commercial deposit products to strengthen our relationships with our business customers. Core deposits represented 79.6% of our total deposits as of December 31, 2021. Balance Sheet Growth . As a result of our efforts to build our management and infrastructure, we believe we are well-positioned to increase the size of our balance sheet without a proportional increase in overhead expense or operating risk. Accordingly, we intend to increase, on a managed basis, our assets and liabilities, particularly loans and deposits. Asset Quality. We believe that strong asset quality is a key to long-term financial success. Our strategy for credit risk management focuses on an experienced team of credit professionals, well-defined credit policies and procedures, appropriate loan underwriting criteria and active credit monitoring. Our non-performing loans to total loans ratio was 0.95% at December 31, 2021. Capital Position. Our policy has always been to protect the safety and soundness of First Bank Richmond through credit and operational risk management, balance sheet strength, and sound operations. The end result of these activities has been a capital ratio in excess of the well-capitalized standards set by our regulators. We believe that maintaining a strong capital position safeguards the long-term interests of First Bank Richmond. 45 Interest Rate Risk Management. Changes in interest rates are our primary market risk as our balance sheet is almost entirely comprised of interest-earning assets and interest-bearing liabilities. As such, fluctuations in interest rates have a significant impact not only upon our net income but also upon the cash flows related to those assets and liabilities and the market value of our assets and liabilities. In order to maintain what we believe to be acceptable levels of net interest income in varying interest rate environments, we actively manage our interest rate risk and assume a moderate amount of interest rate risk consistent with board policies. Selected Consolidated Financial and Other Data The Financial Condition Data and Operating Data as of and for the years ended December 31, 2021 and 2020 are derived from the audited financial statements and related notes included elsewhere in this Form 10-K. The following information is only a summary and is qualified in its entirety by the detailed information included elsewhere herein and should be read along with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” of this Form 10-K. At December 31, 2021 2020 (In thousands) Selected Financial Condition Data: Total assets $ 1,267,640 $ 1,084,193 Loans and leases, net (1) 832,846 734,413 Securities available for sale, at fair value 357,538 244,505 Investment securities, at amortized cost 9,041 12,225 Federal Reserve Bank and FHLB stock 9,992 9,050 Deposits 900,175 693,045 FHLB advances 180,000 170,000 Stockholders’ equity 180,481 192,713 (1) Net of allowances for loan and lease losses, loans in process and deferred loan fees. Years Ended December 31, 2021 2020 (In thousands) Selected Operations Data: Total interest income $ 45,926 $ 42,861 Total interest expense 7,682 9,393 Net interest income 38,244 33,468 Provision for loan and lease losses 1,430 3,770 Net interest income after provision for loan and lease losses 36,814 29,698 Service charges on deposit accounts 882 731 Card fee income 1,087 843 Loan and lease servicing fees (84) 382 Gain on loan and lease sales 2,450 3,633 Gain on sales of securities 56 196 Other income 1,025 1,021 Total non-interest income 5,416 6,806 Total non-interest expenses 28,649 24,009 Income before provision for income taxes 13,581 12,495 Provision for income taxes 2,436 2,477 Net income $ 11,145 $ 10,018 46 At or For the Years Ended December 31, 2021 2020 Selected Financial Ratios and Other Data: Performance ratios: Return on average assets (ratio of net income (loss) to average total assets) 0.94 % 0.95 % Return on average equity (ratio of net income (loss) to average equity) 6.03 % 5.21 % Yield on interest-earning assets 4.01 % 4.20 % Rate paid on interest-bearing liabilities 0.89 % 1.24 % Interest rate spread information: Average during period 3.12 % 2.96 % End of period 2.91 % 2.87 % Net interest margin (1) 3.34 % 3.28 % Operating expense to average total assets 2.42 % 2.28 % Average interest-earning assets to average interest-bearing liabilities 131.81 % 134.41 % Efficiency ratio (2) 65.70 % 59.91 % Asset quality ratios: Non-performing assets to total assets (3) 0.64 % 0.45 % Non-performing loans and leases to total gross loans and leases (4) 0.95 % 0.64 % Allowance for loan and lease losses to non-performing loans and leases (4) 150.76 % 220.57 % Allowance for loan and lease losses to loans and leases 1.43 % 1.42 % Net (recoveries)/charge-offs to average outstanding loans and leases during the period (0.01 %) 0.04 % Capital ratios: Common equity tier 1 capital (to risk weighted assets) (5) 16.02 % 20.64 % Tier 1 leverage (core) capital (to adjusted tangible assets) (5) 12.53 % 14.28 % Tier 1 risk-based capital (to risk weighted assets) (5) 16.02 % 20.64 % Total risk-based capital (to risk weighted assets) (5) 17.25 % 21.90 % Equity to total assets at end of period 14.27 % 17.85 % Average equity to average assets 15.64 % 18.25 % Per share data: Basic earnings per share $ 0.98 $ 0.82 Diluted earnings per share 0.96 0.82 Cash dividends paid 0.78 0.15 Book value at year end 14.55 14.61 Tangible book value (6) 14.55 14.61 Other data: Number of full-service offices 12 12 Full-time equivalent employees 173 170 _____________________ (1) Net interest income divided by average interest earning assets. (2) Total other (non-interest) expenses as a percentage of net interest income (on a tax equivalent basis) and total other (non-interest) income, excluding net securities transactions. (3) Non-performing assets consist of non-accruing loans and leases, accruing loans and leases more than 90 days past due and foreclosed assets. (4) Non-performing loans and leases consist of non-accruing loans and leases and accruing loans and leases more than 90 days past due. (5) Capital ratios are for First Bank Richmond. (6) Tangible book value per share is a non-GAAP measure used by management and others within the financial services industry. Tangible book value per share is calculated by dividing tangible common equity by the number of shares outstanding. 47 Financial Condition at December 31, 2021 Compared to December 31, 2020 General. Total assets increased $183.4 million, or 16.9%, to $1.3 billion at December 31, 2021 from $1.1 billion at December 31, 2020. This increase was driven by a $98.4 million, or 13.4%, increase in the loan and lease portfolio, net of allowance for loan and lease losses, a $109.8 million, or 42.8%, increase in investment securities partially offset by a $25.7 million, or 52.8%, decrease in cash and cash equivalents. The increase in loans and investment securities was funded by a $207.1 million, or 29.9%, increase in deposits and a $10.0 million, or 5.9% increase in advances from the FHLB. Loans and Leases. Our loan and lease portfolio, net of allowance for loan and lease losses, increased $98.4 million, or 13.4%, to $832.8 million at December 31, 2021 from $734.4 million at December 31, 2020. The majority of the growth occurred in the multi-family loan portfolio which increased $51.4 million or 91.8% and construction and development loan portfolio which increased $35.3 million, or 60.3%. We also experienced a $13.6 million, or 5.5%, increase in the commercial real estate portfolio, a $9.6 million, or 8.2%, increase in direct financing leases, and a $9.0 million, or 7.2%, increase in the residential mortgage portfolio. These increases were partially offset by a $23.1 million, or 18.8%, decrease in our commercial and industrial loan portfolio as a result of a decline in outstanding PPP loans of $34.0 million, or 78.4%, from $43.3 million at December 31, 2020 to $9.4 million on December 31, 2021. The following table presents information concerning the composition of our loan and lease portfolio in dollar amounts and in percentages (before deductions for loans in process, deferred fees and discounts and allowances for loan and lease losses) as of the dates indicated. At December 31, 2021 2020 Amount Percent Amount Percent (Dollars in thousands) Real estate loans: Residential (1) $ 134,155 15.86 % $ 125,121 16.76 % Home equity lines of credit 7,146 0.84 5,982 0.80 Multi-family 107,421 12.70 55,998 7.50 Commercial 261,202 30.88 247,564 33.17 Construction and development 93,678 11.07 58,424 7.83 Total real estate loans 603,602 71.35 493,089 66.07 Consumer loans 15,905 1.88 13,257 1.78 Commercial business loans and leases: Commercial and industrial 99,682 11.78 122,831 16.46 Leases 126,762 14.98 117,171 15.70 Total commercial business loans and leases 226,444 26.77 240,002 32.16 Total loans and leases 845,951 100.00 % 746,348 100.00 % Less: Deferred fees and discounts 997 1,349 Allowance for loan and lease losses 12,108 10,586 Total loans and leases, net $ 832,846 $ 734,413 (1) Includes $3.2 million and $3.6 million of loans secured by second mortgages on residential properties at December 31, 2021 and 2020, respectively. Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loan and leases more than 90 days past due, totaled $8.0 million, or 0.95%, of total loans and leases at December 31, 2021, compared to $4.8 million, or 0.64% of total loans and leases at December 31, 2020. The increase in nonperforming loans and leases was primarily the result 48 of a $4.9 million non-accruing commercial real estate loan more than 90 days past due that is currently subject to litigation between the developer and other parties. At the time of origination, this loan had a loan to value ratio of 73%. At December 31, 2021, TDRs totaled $456,000 compared to $541,000 at December 31, 2020. 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 December 31, 2021, the Company had no outstanding loan and lease modifications qualifying under the CARES Act related to the COVID-19 pandemic. This was a decrease from 48 loans and leases with modifications totaling $54.7 million at December 31, 2020. Allowance for Loan and Lease Losses. Our allowance for loan and lease losses increased $1.5 million, or 14.4%, to $12.1 million at December 31, 2021 from $10.6 million at December 31, 2020. At December 31, 2021, the allowance for loan and lease losses totaled 1.43% of total loans and leases outstanding compared to 1.42% at December 31, 2020. Net recoveries during the year ended 2021 were $92,000, or 0.01% of average loans and leases outstanding compared to net charge-offs of $273,000, or 0.04% of average loans and leases outstanding during 2020. The allowance for loan and lease losses to non-performing loans and leases was 150.8% at December 31, 2021, compared to 220.6% at December 31, 2020. 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 December 31, 2021, which evaluation included consideration of potential credit losses due to the economic conditions driven by the impact of the COVID-19 pandemic. The full impact of the pandemic on the Company's deposit and loan customers is still not fully known at this time due to the different variants of the COVID-19 infection arise. 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 , continue to be closely monitored. Investment Securities. Investment securities increased $109.8 million, or 42.8%, to $366.6 million at December 31, 2021, from $256.7 million at December 31, 2020. The increase was primarily due to the purchase of $190.8 million of available for sale investment securities during 2021, partially offset by the routine amortization and repayment of investment principal balances and securities called and matured. Deposits. Total deposits increased $207.1 million, or 29.9%, to $900.2 million at December 31, 2021 from $693.0 million at December 31, 2020. This increase in deposits was primarily due to an increase in brokered deposits of $98.5 million, or 423.1%, as well as an increase in savings and money market accounts of $44.1 million, or 21.0%, an increase in demand deposits of $37.9 million, or 15.8%, and increases in non-brokered time deposits of $26.6 million, or 12.1%, which management primarily attributes to overall changes in spending and savings habits by businesses and consumers due to the COVID-19 pandemic. Management increased longer-term brokered time deposits as a result of continued low rates being offered in the market for these deposits. At December 31, 2021, brokered deposits equaled 13.5% of total deposits compared to $23.3 million, or 3.4% of total deposits at December 31, 2020. At December 31, 2021, noninterest bearing deposits totaled $114.3 million, or 12.7% of total deposits, compared to $98.7 million, or 14.2%, of total deposits at December 31, 2020. Borrowings. Total borrowings, consisting solely of FHLB advances, increased $10.0 million, or 5.9%, to $180.0 million at December 31, 2021 from $170.0 million at December 31, 2020. The increase in borrowings was used to fund both loan and lease growth as well as investment securities growth during the period. Stockholders’ Equity. Stockholders’ equity totaled $180.5 million as of December 31, 2021, a decrease of $12.2 million, or 6.3%, from December 31, 2020. The decrease in stockholders’ equity primarily was the result of the repurchase of $11.9 million of Company common stock, the payment of $9.3 million in dividends to Company stockholders and a reduction in accumulated comprehensive income of $4.9 million, partially offset by net income of $11.1 million. First Bank Richmond’s tangible common equity ratio and its risk-based capital ratios exceeded “well-capitalized” levels as defined by all regulatory standards as of December 31, 2021. Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020 General . Net income totaled $11.1 million for 2021 compared to $10.0 million in 2020, an increase of $1.1 million or 11.3%. The increase in net income was due to a $3.1 million, or 7.2%, increase in interest income, a $1.7 million, or 18.2%, decrease in interest expense and a $2.3 million, or 62.1%, reduction in the provision for loan losses, partially offset by a $1.4 million, or 20.4%, decrease in non-interest income and a $4.6 million, or 19.3%, increase in non-interest expense, which included a $665,000 non-recurring expense to terminate the Company's defined benefit plan ("DB Plan").. 49 Interest Income . Total interest income for 2021 increased $3.1 million or 7.2% over 2020. The increase primarily was a result of a $50.7 million increase in the average balance of loans and leases outstanding year-over-year, partially offset by a four basis point decrease in average yield on loans and leases, resulting in a $2.3 million increase in loan interest income. Interest on investment securities, including FHLB stock, increased $883,000, or 20.0%, due to a $83.2 million increase in the average balance of the portfolio, partially offset by a 19 basis point decrease in the average yield. Interest on cash and cash equivalents decreased $100,000 as average balances decreased $11.5 million and the yield declined 21 basis points. Interest Expense . Total interest expense decreased $1.7 million, or 18.2%, to $7.7 million during 2021 compared to $9.4 million during 2020. The decrease was the result of a 35 basis point decline in the average rate paid on interest-bearing liabilities, primarily certificate accounts and borrowings, partially offset by an increase in the average balance in all categories of interest-bearing liabilities. The decline in the rate paid on certificate of deposit accounts was the primary driver for the decrease in interest expense in 2021. The average rate paid on certificate of deposit accounts decreased 65 basis points to 1.16% in 2021 from 1.81% in 2020, including an 85 basis point decrease in brokered certificate of deposit accounts, which was partially offset by a $9.0 million increase in the average balance of these accounts, resulting in a $1.7 million decrease in interest expense. The average balance of savings and money market accounts increased $59.1 million, or 31.4%, to $247.4 million in 2021 compared to $188.4 million in 2020, while the rate paid on these accounts declined five basis points to 0.51% in 2021 from 0.56% in 2020, resulting in a $194,000 increase in interest expense. The average balance of interest-bearing checking accounts increased $36.3 million, or 30.6%, to $154.9 million in 2021 from $118.7 million in 2020, while the average rate paid on interest-bearing checking accounts decreased two basis points to 0.23% in 2021 from 0.25% in 2020, resulting in a $69,000 increase in interest expense. Interest expense on borrowings, consisting solely of FHLB advances, decreased $264,000, or 8.8%, due to an 18 basis point decrease on the average rate paid to 1.54% in 2021 from 1.72% in 2020, partially offset by a $3.5 million, or 2.0%, increase in the average balance of borrowings to $178.5 million in 2021 from $175.1 million in 2020. Net Interest Income . Net interest income before provision for loan and lease losses increased $4.8 million, or 14.3%, to $38.2 million in 2021 compared to $33.5 million in 2020, primarily due to the increase in average earning assets exceeding the growth in average interest-bearing liabilities and a 16 basis point increase in the average interest rate spread. Our net interest margin in 2021 was 3.34%, an increase of six basis points compared to 2020. During the year, the recognition of deferred fees related to PPP loan forgiveness had a positive impact on the net interest margin. The average yield on PPP loans was 8.62%, including the recognition of deferred fees, resulting in a positive impact to loan yield of 15 basis points during 2021, compared to an average yield of 4.06% with a negative impact to loan yield of seven basis points during 2020. Provision for Loan and Lease Losses . The provision for loan and lease losses in 2021 was $1.4 million, a $2.3 million or 62.1% decrease, compared to $3.8 million in 2020. The decrease in the provision was due to the quality of the Bank's loan and lease portfolio. Net recoveries in 2021 were $92,000 compared to net charge-offs of $273,000 in 2020. The allowance as a percentage of the total loan and lease portfolio was 1.43% at year-end 2021, compared to 1.42% at year-end 2020. Net recoveries in 2021 equaled 0.01% of total average loans and leases outstanding compared to net charge-offs of 0.04% of total average loans and leases outstanding in 2020. Non-Interest Income . Total non-interest income decreased $1.4 million, or 20.4%, to $5.4 million for 2021 compared to $6.8 million for 2020. The decrease was primarily driven by a decrease in the net gain on loan and lease sales of $1.2 million, or 32.6%, to $2.5 million in 2021 from $3.6 million in 2020, primarily due to a decrease in the volume of loans sold in 2021. Loan and lease servicing fees decreased $466,000, or 122.1%, from 2020 to 2021, primarily due to recording a mortgage servicing rights impairment charge of $360,000 in 2021 compared to a write-up of mortgage servicing rights of $286,000 in 2020. Net gain on the sale of securities decreased $141,000, or 71.6%, due to a substantial decline in the volume of available for sale securities sold during 2021 compared to 2020. These decreases were partially offset by a $244,000, or 28.9% increase in card fee income and a $151,000, or 20.6%, increase in service charges on deposit accounts in 2021 compared to 2020. The increase in card fee income was the result of an overall increase in debit card usage, while the increase in service charges on deposit accounts was the result of higher overdraft fees and ATM fees compared to the waiving of overdraft fees and certain ATM fees during a portion of 2020. Non-Interest Expenses . Total non-interest expense increased $4.6 million, or 19.3%, to $28.6 million during 2021 compared to 2020. The increase primarily was the result of a $3.4 million increase in salaries and benefits. Salaries and employee benefits increased $3.4 million, or 22.7%, in 2021 compared to 2020, primarily due to a $1.2 million, or 11.9%, increase in salaries resulting from the addition of three full-time-equivalent hires in 2021 as well as annual merit increases, a $1.0 million, or 123.3%, increase in expenses related to the grant of new awards and the vesting of existing awards made pursuant to our equity incentive plan, and a $665,000 expense related to the final termination of the DB Plan. Data processing expenses increased $330,000, or 17.8%, to $2.2 million in 2021 from $1.9 million in 2020 due to higher software expenses associated with the Company's continued investment in digital banking services. Equipment expenses increased 50 $131,000, or 11.1%, to $1.3 million in 2021 from $1.2 million in 2020. Other expenses increased $507,000, or 16.7%, in 2021 to $3.5 million from $3.0 million in 2020, primarily due to an increase in Ohio franchise taxes paid due to the Company's increasing presence in Ohio, additional loan related expenses due to the significant increase in loan activity during the year, additional expenses associated with the Company's investment in low income housing projects, $79,000 in losses due to electronic fraud on customers' accounts, and additional expense of $66,000 associated with converting our digital banking services to a new provider. Income Tax Expense . Income tax expense decreased $42,000 in 2021 compared to 2020, despite higher net income, due to a lower effective tax rate in 2021. This decrease in income tax expense was primarily due to increased holdings of tax-free municipal securities. The effective tax rate for the year ended 2021 was 17.9% compared to 19.8% in 2020. Average Balances, Interest and Average Yields/Cost The following tables set forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using daily balances. Average balances of loans and leases receivable include loans held for sale. Non-accruing loans have been included in the table as loans carrying a zero yield. Loan fees are included in interest income on loans and are not material. Years Ended December 31, 2021 2020 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 $ 786,686 $ 40,579 5.16 % $ 735,959 $ 38,297 5.20 % Securities 324,372 5,022 1.55 % 241,659 4,127 1.71 % FHLB stock 9,281 273 2.94 % 8,803 285 3.24 % Cash and cash equivalents and other 23,750 52 0.22 % 35,247 152 0.43 % Total interest-earning assets 1,144,089 45,926 4.01 % 1,021,668 42,861 4.20 % Interest-bearing liabilities: Savings and money market accounts 247,431 1,256 0.51 % 188,379 1,062 0.56 % Interest-bearing checking accounts 154,938 362 0.23 % 118,668 293 0.25 % Certificate accounts 287,051 3,318 1.16 % 278,018 5,028 1.81 % Borrowings 178,540 2,746 1.54 % 175,060 3,010 1.72 % Total interest-bearing liabilities 867,960 7,682 0.89 % 760,125 9,393 1.24 % Net interest income $ 38,244 $ 33,468 Net earning assets $ 276,129 $ 261,543 Net interest rate spread (1) 3.12 % 2.96 % Net interest margin (2) 3.34 % 3.28 % Average interest-earning assets to average interest-bearing liabilities 131.81 % 134.41 % (1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities. (2) Net interest margin represents net interest income divided by average total interest-earning assets. Rate/Volume Analysis The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) 51 changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate. Years Ended December 31, 2021 vs. 2020 Increase/ (decrease) due to Total increase/ (decrease) Volume Rate (In thousands) Interest-earning assets: Loans and leases receivable $ 2,591 $ (309) $ 2,282 Securities 1,413 (518) 895 FHLB stock 15 (27) (12) Cash and cash equivalents and other (50) (50) (100) Total interest-earning assets $ 3,969 $ (904) $ 3,065 Interest-bearing liabilities: Savings and money market accounts $ 310 $ (116) $ 194 Interest-bearing checking accounts 105 (36) 69 Certificate accounts 164 (1,874) (1,710) Borrowings 61 (325) (264) Total interest-bearing liabilities $ 640 $ (2,351) $ (1,711) Change in net interest income $ 4,776 Capital and Liquidity Capital. Shareholders' equity totaled $180.5 million at December 31, 2021 and $192.7 million at December 31, 2020. In addition to net income of $11.1 million, other sources of capital during 2021 included $128,000 in proceeds from stock option exercises, $796,000 related to the allocation of ESOP shares during the year and $1.8 million related to stock-based compensation. Uses of capital during 2021 included $9.3 million of dividends paid on common stock, other comprehensive loss, net of tax, of $4.9 million and $11.9 million of stock repurchases. The decrease in the accumulated other comprehensive income/loss component of shareholders' equity was caused by changes to the unrealized gains and losses on available-for-sale securities. We paid regular quarterly dividends of $0.07 per common share and a special dividend of $0.50 per common share during 2021, and regular quarterly dividends per share commencing in the second quarter of 2020 of $0.05 per share during 2020. This equates to a dividend payout ratio of 83.8% in 2021 and 18.4% in 2020. We currently expect to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Assuming continued payment during 2022 at the current dividend rate of $0.10 per share, our average total dividend paid each quarter would be approximately $1.2 million based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards). The amount of dividends, if any, we may pay may be limited as more fully discussed in "Note 16: Regulatory Capital" in the accompanying notes to consolidated financial statements contained in Item 8 of this Form 10-K. 52 Stock Repurchase Plans. From time to time, our board of directors has authorized stock repurchase plans. In general, stock-repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. On May 19, 2021, the Board of Directors authorized a third stock repurchase program for up to 1,263,841 shares, or approximately 10% of its outstanding shares. This repurchase program commenced on July 3, 2021, and will expire on July 3, 2022 unless completed sooner. See Part II, Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet. Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets. Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities held to maturity, sales of fixed rate residential mortgage loans in the secondary market, and federal funds sold and resell agreements. Liability liquidity generally is provided by access to funding sources which include core deposits and advances from the FHLB and other borrowing relationships with third party financial institutions. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As of December 31, 2021, we had approximately $13.8 million held in an interest-bearing account at the Federal Reserve. We also have the ability to borrow funds as a member of the FHLB. As of December 31, 2021, based upon available, pledgeable collateral, our total remaining borrowing capacity with the FHLB was approximately $93.4 million. Furthermore, at December 31, 2021, we had approximately $219.9 million in securities that were unencumbered by a pledge and could be used to support additional borrowings through repurchase agreements or the Federal Reserve discount window, as needed. As of December 31, 2021, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us. In the ordinary course of business we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such payments as of December 31, 2021. These include payments related to (i) long-term borrowings (Note 9 - Federal Home Loan Bank Advances), (ii) time deposits with stated maturity dates (Note 8 - Deposits) and (iii) commitments to extend credit and standby letters of credit (Note 12 - Commitments and Contingent Liabilities). Richmond Mutual Bancorporation is a separate legal entity from First Bank Richmond and must provide for its own liquidity. In addition to its own operating expenses, Richmond Mutual Bancorporation is responsible for paying for any stock repurchases, dividends declared to its stockholders and other general corporate expenses. Since Richmond Mutual Bancorporation is a holding company and does not conduct operations, its primary sources of liquidity are interest on investment securities purchased with proceeds from our initial public offering, dividends upstreamed from First Bank Richmond and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be to us paid by First Bank Richmond. "Note 16: Regulatory Capital" in the accompanying notes to consolidated financial statements contained in Part II, Item 8 and "How We Are Regulated - Dividends" contained in Part I, Item I of this Form 10-K. At December 31, 2021, Richmond Mutual Bancorporation, on an unconsolidated basis, had $21.5 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs. 53 See also the "Consolidated Statements of Cash Flows" included in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K for further information. Regulatory Capital Requirements. 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 December 31, 2021, 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. Actual Required for Adequate Capital To Be Well Capitalized Amount Ratio Amount Ratio Amount Ratio As of December 31, 2021 (Dollars in thousands) Total risk-based capital (to risk weighted assets) $ 169,589 17.3 % $ 78,590 8.0 % $ 98,238 10.0 % Tier 1 risk-based capital (to risk weighted assets) 157,481 16.0 58,943 6.0 78,590 8.0 Common equity tier 1 capital (to risk weighted assets) 157,481 16.0 44,207 4.5 63,855 6.5 Tier 1 leverage (core) capital (to adjusted tangible assets) 157,481 12.5 50,284 4.0 62,855 5.0 As of December 31, 2020 Total risk-based capital (to risk weighted assets) $ 162,624 21.9 % $ 59,416 8.0 % $ 74,270 10.0 % Tier 1 risk-based capital (to risk weighted assets) 153,325 20.6 44,562 6.0 59,416 8.0 Common equity tier 1 capital (to risk weighted assets) 153,325 20.6 33,422 4.5 48,276 6.5 Tier 1 leverage (core) capital (to adjusted tangible assets) 153,325 14.3 42,939 4.0 53,673 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 December 31, 2021, 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 Federal Reserve Board 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 December 31, 2021, it would have exceeded all regulatory capital requirements.