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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-03-30 · 114 added, 110 removed, 348 unchanged (39% of the section changed)

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

• 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;

• 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, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses to the COVID-19 pandemic, including new COVID-19 variants;

• general economic conditions, either nationally or in our market areas, that are worse than expected;

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• 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;

• the transition away from LIBOR toward new interest rate benchmarks;

• our ability to enter new markets successfully and capitalize on growth opportunities;

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• 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;

• other economic, competitive, governmental, regulatory, and technical factors affecting our operations, pricing, products and services;

• the other risks described elsewhere in this Form 10 K and our other reports filed with the U.S.

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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.

At December 31, 2022, on a consolidated basis, we had $1.3 billion in assets, $961.7 million in loans, $1.0 billion in deposits and $133.0 million in stockholders’ equity.

First Bank Richmond’s risk-based capital ratio at December 31, 2022 was 14.3%, exceeding the 10.0% requirement for a well-capitalized institution.

For the year ended December 31, 2022, we reported net income of $ 13.0 million, compared with net income of $11.1 million for 2021.

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.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with GAAP.

In doing so, we have to make estimates and assumptions.

Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

Accordingly, actual results could differ materially from our estimates.

We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

We have reviewed our critical accounting estimates with the audit committee of our Board of Directors.

See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.

Allowance for Loan and Lease Losses .

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

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.

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.

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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.

amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment.

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.

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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

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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.

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

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Investment securities, at amortized cost 6,672 9,041

Federal Reserve Bank and FHLB stock 9,992 9,050

FHLB stock 9,947 9,992

Deposits 1,005,261 900,175

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Stockholders’ equity 132,978 180,481

_____________________

(1) Net of allowances for loan and lease losses, loans in process and deferred loan fees.

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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 %

Return on average assets (ratio of net income to average total assets) 1.01 % 0.94 %

Return on average equity (ratio of net income to average equity) 8.79 % 6.03 %

Yield on interest-earning assets 4.18 % 4.01 %

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Allowance for loan and lease losses to loans and leases 1.27 % 1.43 %

Net (recoveries)/charge-offs to average outstanding loans and leases during the period (0.01 %) 0.04 %

Net charge-offs/(recoveries) to average outstanding loans and leases during the period 0.03 % (0.01 %)

Capital ratios:

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Book value at year end 11.28 14.55

Tangible book value (6)

Tangible book value at year end (6)

Number of full-service offices 12 12

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(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.

(2) Total non-interest expenses as a percentage of net interest income and total non-interest income.

(3) Non-performing assets consist of nonaccrual loans and leases, accruing loans and leases more than 90 days past due, and foreclosed assets.

(4) Non-performing loans and leases consist of nonaccrual loans and leases and accruing loans and leases more than 90 days past due.

(5) Capital ratios are for First Bank Richmond.

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Financial Condition at December 31, 2022 Compared to December 31, 2021

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.

Total assets increased $61.0 million, or 4.8%, to $1.3 billion at December 31, 2022 from December 31, 2021.

This increase was driven by a $128.8 million, or 15.5%, increase in the loan and lease portfolio, net of allowance for loan and lease losses, partially offset by a $75.0 million, or 20.5% decrease in investment securities, and a $7.1 million, or 30.9% decrease in cash and cash equivalents.

The increase in loans was primarily funded by a $105.1 million, or 11.7%, increase in deposits.

Loans and Leases.

Our loan and lease portfolio, net of allowance for loan and lease losses, increased $128.8 million, or 15.5%, to $961.7 million at December 31, 2022 from $832.8 million at December 31, 2021.

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 majority of the growth occurred in construction and development loans which increased $46.2 million, or 49.4%, to $139.9 million, and in commercial real estate loans which increased $36.9 million, or 14.1%, to $298.1 million at December 31, 2022 compared to the prior year.

We also experienced a $17.5 million, or 16.3%, increase in multi-family loans, a $15.8 million, or 11.2%, increase in residential real estate loans (including home equity lines of credit), a $6.7 million, or 5.3%, increase in direct financing leases, and a $5.1 million, or 32.3%, increase in consumer loans.

Commercial and industrial loans increased by $700,000, or 0.7% at December 31, 2022 compared to a year ago, in spite of an $8.4 million, or 89.4%, decrease in outstanding PPP loans to $994,000 at December 31, 2022 from $9.4 million at 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.

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Real estate loans:

Residential (1)

Residential mortgage (1)

$ 146,129 14.99 % $ 134,155 15.86 %

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Multi-family 124,914 12.81 107,421 12.70

Commercial 261,202 30.88 247,564 33.17

Commercial mortgage 298,087 30.57 261,202 30.88

Construction and development 139,923 14.35 93,678 11.07

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Total loans and leases, net $ 961,691 $ 832,846

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(1) Includes $4.7 million and $3.2 million of loans secured by second mortgages on residential properties at December 31, 2022 and 2021, 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

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.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loan and leases more than 90 days past due, totaled $9.2 million, or 0.94%, of total loans and leases at December 31, 2022, compared to $8.0 million, or

0.95% of total loans and leases at December 31, 2021.

The increase in nonperforming loans was primarily attributable to a $1.3 million increase in commercial and industrial loans, primarily due to one loan of $1.3 million secured by business assets and a second mortgage past due more than 90 days and still accruing.

At December 31, 2022, our largest nonperforming loan was a $4.9 million nonaccrual commercial construction and development loan 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.

At December 31, 2022, TDRs totaled $428,000 compared to $456,000 at December 31, 2021, all of which were nonaccrual loans at those dates.

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.

Our allowance for loan and lease losses increased $305,000, or 2.5%, to $12.4 million at December 31, 2022 from $12.1 million at December 31, 2021.

At December 31, 2022, the allowance for loan and lease losses totaled 1.27% of total loans and leases outstanding compared to 1.43% at December 31, 2021.

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.

Net charge-offs during the year ended 2022 were $295,000, or 0.03% of average loans and leases outstanding, compared to net recoveries of $92,000, or 0.01% of average loans and leases outstanding, during 2021.

The allowance for loan and lease losses to non-performing loans and leases was 135.3% at December 31, 2022, compared to 150.8% at December 31, 2021.

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.

The Company evaluated its exposure to potential loan and lease losses as of December 31, 2022, which evaluation included consideration of a potential recession due to inflation, rising interest rates, stock market volatility, and the Russia-Ukraine conflict.

Credit metrics are being reviewed and stress testing is being performed on the loan portfolio on an ongoing basis.

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.

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.

Investment securities decreased $75.0 million, or 20.5%, to $291.6 million at December 31, 2022, from $366.6 million at December 31, 2021.

The decrease was primarily due to a $61.4 million downward mark-to-market adjustment in the fair value of securities available for sale and proceeds from maturities and paydowns of securities of $32.2 million, partially offset by the purchase of $22.5 million in securities.

Total deposits increased $105.1 million, or 11.7%, to $1.0 billion at December 31, 2022 from $900.2 million at December 31, 2021.

This increase in deposits was primarily due to an increase in brokered deposits of $136.1 million, or 111.8%, as well as an increase in savings and money market accounts of $26.7 million, or 10.5%.

These increases were partially offset by a decrease of $7.9 million, or 6.9%, in noninterest-bearing demand deposits, a $6.9 million, or 4.2%, decrease in interest-bearing demand deposits, and a $42.9 million, or 17.5%, decrease in non-brokered time deposits.

At December 31, 2022, brokered deposits equaled 25.7% of total deposits compared to $121.8 million, or 13.5% of total deposits at December 31, 2021.

At December 31, 2022, noninterest-bearing deposits totaled $106.4 million, or 10.6% of total deposits, compared to $114.3 million, or 12.7%, of total deposits at December 31, 2021.

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.

Total borrowings, consisting solely of FHLB advances, totaled $180.0 million at both December 31, 2022 and 2021.

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.

Stockholders’ equity totaled $133.0 million at December 31, 2022, a decrease of $47.5 million, or 26.3%, from December 31, 2021.

The decrease in stockholders’ equity from December 31, 2021 primarily was the result of a reduction in accumulated comprehensive income of $48.5 million due to a greater mark-to-market adjustment to the investment portfolio as a result of higher interest rates, the payment of $4.4 million in dividends to Company stockholders, and the repurchase of $9.9 million of Company common stock, partially offset by net income of $13.0 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, 2022.

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Net income totaled $13.0 million for 2022 compared to $11.1 million in 2021, an increase of $1.8 million or 16.3%.

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")..

The increase in net income was due to a $5.9 million, or 12.9%, increase in interest income, an $830,000, or 58.0%, reduction in the provision for loan losses, partially offset by a $2.5 million, or 33.0%, increase in interest expense, a $549,000, or 10.1%, decrease in non-interest income, and a $1.5 million, or 5.3%, increase in non-interest expense.

Interest Income .

Total interest income for 2022 increased $5.9 million or 12.9% over 2021.

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.

The increase primarily was a result of a $111.2 million increase in the average balance of loans and leases outstanding year-over-year, partially offset by a 19 basis point decrease in average yield on loans and leases, resulting in a $4.0 million increase in interest income on loans and leases.

Interest earned on investment securities, including FHLB stock, increased $1.8 million, or 34.3%, due to a 58 basis point increase in the average yield, partially offset by a $5.5 million decrease in the average balance of the portfolio.

cash and cash equivalents increased $101,000 due to an 89 basis point increase in the average yield, partially offset by a $10.0 million decrease in average balances.

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.

Total interest expense increased $2.5 million, or 33.0%, to $10.2 million during 2022 compared to $7.7 million during 2021.

The increase was the result of an increase in the average balance in all categories of interest-bearing liabilities, and a 12 basis point increase in the average rate paid on interest-bearing liabilities.

The average balance of savings and money market accounts increased $37.3 million, or 15.1%, to $284.7 million in 2022 compared to $247.4 million in 2021, while the rate paid on these accounts increased 25 basis points to 0.76% in 2022 from 0.51% in 2021, resulting in a $897,000 increase in interest expense.

The average balance of interest-bearing checking accounts increased $10.3 million, or 6.6%, to $165.2 million in 2022 from $154.9 million in 2021, while the average rate paid on interest-bearing checking accounts increased nine basis points to 0.32% in 2022 from 0.23% in 2021, resulting in a $172,000 increase in interest expense.

Average balances of certificates of deposit increased $97.0 million, or 33.8% in 2022 from $287.1 million in 2021, while the rate paid on certificates of deposit remained the same in 2022 as 2021, resulting in a $1.1 million increase in interest expense.

The growth in certificates of deposit balances was due to a $112.7 million, or 231.6% increase in brokered certificates of deposit.

The average rate paid on brokered certificates of deposit increased to 1.17% in 2022 from 0.72% in 2021.

Interest expense on borrowings, consisting solely of FHLB advances, increased $345,000, or 12.6%, due to an 18 basis point increase on the average rate paid to 1.72% in 2022 from 1.54% in 2021, and a $1.4 million, or 0.8%, increase in the average balance of borrowings to $180.0 million in 2022 from $178.5 million in 2021.

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.

Net interest income before provision for loan and lease losses increased $3.4 million, or 8.9%, to $41.6 million in 2022 compared to $38.2 million in 2021, primarily due to a five basis point increase in the average interest rate spread, partially offset by the growth in average interest-bearing liabilities exceeding the growth in average interest-bearing assets.

Our net interest margin in 2022 was 3.36%, an increase of two basis points compared to 2021.

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.

The average yield on PPP loans was 9.41%, including the recognition of deferred fees, resulting in a positive impact to loan yield of three basis points during 2022, compared to an average yield of 8.62% with a positive impact to loan yield of 15 basis points during 2021.

Since March 2022, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Federal Reserve System has increased the target range for the federal funds rate by 425 basis points, including 125 basis points during the fourth quarter of 2022, to a range of 4.25% to 4.50%.

While net interest income benefited from the repricing impact of the higher interest rate environment on earning asset yields, the benefits were offset by the higher cost of interest-bearing deposit accounts and borrowings which tend to be shorter in duration than our assets and re-price or reset faster than assets.

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 provision for loan and lease losses in 2022 was $600,000, an $830,000, or 58.0%, decrease compared to $1.4 million in 2021.

The provision for loan and lease losses reflects the amount required to maintain the allowance for loan and leases losses at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves.

The provision for loan and leases losses for the current year primarily reflects loan growth and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to estimate loan and leases losses, partially offset by an improvement in the level of adversely classified loans.

Beginning in 2023, we will be required to adopt CECL, the FASB’s standard on accounting for expected credit losses.

The CECL impairment model is based on expected losses rather than incurred losses, which is what we currently use.

Under the new guidance, we must recognize our estimate of expected credit losses as an allowance.

The CECL model incorporates forward-looking information and results in earlier loss recognition than incurred loss models do.

Future assessments of the expected credit losses on loans and leases will not only be impacted by changes to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast and the period following the reasonable and supportable forecast period through the end of the asset’s contractual life.

As of the CECL adoption and day one measurement date of January 1, 2023, the Company expects to record a one-time cumulative-effect adjustment to retained earnings, net of income taxes, on the consolidated balance sheet.

The allowance will increase between $2.3 million and $3.0 million from December 31, 2022.

CECL also requires the establishment of a reserve for potential losses from unfunded commitments that is recorded in other liabilities, separate from the allowance for credit losses, which will be approximately $1.8 million to $2.5 million.

Also, as required by CECL, the Company reviewed the held-to-maturity debt securities portfolio and determined the expected losses were immaterial.

Net charge-offs in 2022 were $295,000 compared to net recoveries of $92,000 in 2021.

The allowance as a percentage of the total loan and lease portfolio was 1.27% at year-end 2022, compared to 1.43% at year-end 2021.

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.

Net charge-offs in 2022 equaled 0.03% of total average loans and leases outstanding compared to net recoveries of 0.01% of total average loans and leases outstanding in 2021.

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.

Total non-interest income decreased $549,000, or 10.1%, to $4.9 million for 2022 compared to $5.4 million for 2021.

The decrease was primarily driven by a decrease in net gains on loan and lease sales of $1.8 million, or 73.9%, to $639,000 in 2022 from $2.5 million in 2021, as mortgage banking activity declined due to lower refinancing activity, a lower supply of houses for sale in the Bank’s market area, and increases in residential mortgage rates.

Net gains on securities decreased $56,000, or 100.0%, as no securities were sold during 2022 compared to $5.3 million of securities sold in 2021.

Partially offsetting these decreases were loan and lease servicing fees, including mortgage servicing right impairment, of $862,000 during 2022, an increase of $946,000 compared to a loss of $84,000 during 2021, primarily due to a recovery of mortgage servicing rights of $380,000 in 2022 as a result of continued rising interest rates increasing the expected duration of our loans compared to recording a mortgage servicing rights impairment charge of $360,000 in 2021.

Service charges on deposit accounts increased $168,000, or 19.1%, to $1.0 million during 2022 compared to $882,000 during 2021 as a result of higher overdraft fees and ATM fees.

In addition, card fee income increased $123,000, or 11.3%, due to an overall increase in debit card usage and other income increased $81,000, or 7.9%, primarily due to increased wealth management income during 2022 compared to 2021.

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.

Total non-interest expense increased $1.5 million, or 5.3%, to $30.2 million during 2022 compared to 2021, with increases occurring in all non-interest expense categories other than equipment expenses and other expenses.

Salaries and employee benefits increased $335,000, or 1.8%, to $18.5 million in 2022 from $18.1 million in 2021, primarily due to increases in salaries resulting from the net addition of eight full-time-equivalent hires in 2022 and annual merit increases, partially offset by a $665,000 expense recorded in 2021 to complete the termination of the Company’s defined benefit pension plan which was not required in 2022.

Data processing expenses increased $532,000, or 24.4%, to $2.7 million in 2022 from $2.2 million in 2021 due to higher software expenses associated with the Company's continued investment in digital banking services.

Equipment expenses increased

$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.

Legal and professional fees increased $193,000, or 15.8%, to $1.4 million during 2022, compared to $1.2 million during 2021 due to expenses associated with the formation of First Insurance Management, Inc.

Deposit insurance expenses increased $193,000, or 64.1%, to $494,000 during 2022, compared to $301,000 during 2021 due to lower capital levels, a change in our loan composition and a greater use of wholesale certificates of deposit during 2022.

Net occupancy expenses increased $188,000, or 15.2%, to $1.4 million during 2022, compared to $1.2 million during 2021, due to increased building maintenance expenses.

These increases in non-interest expense were partially offset by a $38,000, or 2.9%, decrease in equipment expenses to $1.3 million in 2022 compared to 2021 due to depreciation charges, and a $12,000 decrease in other expenses.

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.

Income tax expense increased $348,000 in 2022 compared to 2021.

This increase in income tax expense was primarily due to pretax income increasing $2.2 million, or 16.0%, partially offset by a lower effective tax rate in 2022.

The effective tax rate for the year ended 2022 was 17.7% compared to 17.9% in 2021.

3 unchanged sentences

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.

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.

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Total interest-earning assets 1,240,430 51,858 4.18 % 1,144,089 45,926 4.01 %

Non-earning assets 40,659 38,840

Total assets 1,281,089 1,182,929

Interest-bearing liabilities:

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Total interest-bearing liabilities 1,013,942 10,219 1.01 % 867,960 7,682 0.89 %

Noninterest-bearing demand deposits 111,990 108,374

Other liabilities 7,686 22,458

Stockholders' equity 147,471 184,137

Total liabilities and stockholders' equity 1,281,089 1,182,929

Net interest income $ 41,639 $ 38,244

5 unchanged sentences

Average interest-earning assets to average interest-bearing liabilities 122.34 % 131.81 %

_____________________

(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.

3 unchanged sentences

It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates.

For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)

changes in rate (i.e., changes in rate multiplied by old volume).

For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

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Shareholders' equity totaled $133.0 million at December 31, 2022 and $180.5 million at December 31, 2021.

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.

In addition to net income of $13.0 million, other sources of capital during 2022 included $799,000 related to the allocation of ESOP shares during the year and $1.5 million related to stock-based compensation.

Uses of capital during 2022 included $4.4 million of dividends paid on common stock, other comprehensive loss, net of tax, of $48.5 million and $9.9 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.

The accumulated other comprehensive loss component of shareholders' equity was caused by changes to the unrealized gains and losses on available-for-sale securities as a result of the increase in market interest rates during 2022.

We paid regular quarterly cash dividends of $0.10 per common share during 2022, and regular quarterly cash dividends of $0.07 per share and a special dividend of $0.50 per share during 2021.

This equates to a dividend payout ratio of 34.0% in 2022 and 83.8% in 2021.

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).

Assuming continued payment during 2023 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 at December 31, 2022.

The amount of dividends, if any, we may pay may be limited as more fully discussed in "Note 17:

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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.

This repurchase program expired on July 3, 2022 with a total of 817,984 shares being repurchased.

On July 21, 2022, the Company announced that the Board of Directors authorized a fourth stock repurchase program for up to 1,184,649 shares, or approximately 10% of its then outstanding shares.

The fourth stock repurchase program will expire in July 2023, unless completed sooner.

See Part II, Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

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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.

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 up streamed 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.

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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

Actual Minimum for Capital Adequacy Purposes Minimum to be Categorized as "Well-Capitalized" Under Prompt Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio

14 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis