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Item 7. Management’s Discussion and Analysis

2021-03-31 compared with 2020-03-30 · 189 added, 82 removed, 227 unchanged (54% of the section changed)

11 unchanged sentences

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

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

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

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

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• our ability to access cost-effective funding;

fluctuations in real estate values and both residential and commercial real estate market conditions;

risks associated with the relatively unseasoned nature of a significant portion of our loan portfolio;

• fluctuations in real estate values, and residential, commercial and multifamily real estate market conditions;

• demand for loans and deposits in our market area;

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• competition among depository and other financial institutions and equipment financing companies;

• the impact and intended termination of our frozen defined benefit plan;

• 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;

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• changes in the quality or composition of our loan, lease or investment portfolios;

technological changes that may be more difficult or expensive than expected;

• 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;

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• 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;

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;

the impact of the Dodd–Frank Wall Street Reform and Consumer Protection Act and the implementing regulations;

other economic, competitive, governmental, regulatory, and technical factors affecting our operations, pricing, products and services including the potential effects of coronavirus on local and international trade (including supply chains and export levels), and other risks described elsewhere in this Form 10 K and our other reports filed with the U.S.

• 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;

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

Securities and Exchange Commission (“SEC”).

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Net interest income is the difference between interest income, which is the income that is earned on loans and investments, and interest expense, which is the interest that is paid on deposits and borrowings.

Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), and fees from sale of residential mortgage loans originated for sale in the secondary market.

We also recognize income from the sale of investment securities.

At December 31, 2019, on a consolidated basis, we had $986.0 million in assets, $687.3 million in loans, $617.2 million in deposits and $187.8 million in stockholders’ equity.

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, 2020, on a consolidated basis, we had $1.1 billion in assets, $736.4 million in loans, $693.0 million in deposits and $192.7 million in stockholders’ equity.

First Bank Richmond’s risk-based capital ratio at December 31, 2020 was 21.9%, exceeding the 10.0% requirement for a well-capitalized institution.

For the year ended December 31, 2019, we reported a net loss of $14.1 million, compared with net income of $5.7 million for 2018.

For the year ended December 31, 2020, we reported net income of $10.0 million, compared with a net loss of $14.1 million for 2019.

Critical Accounting Policies

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

Foreclosed Assets .

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

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

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

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

Mortgage Servicing Rights .

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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.

As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatility.

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.

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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.

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, 2020, our commercial loan portfolio, which includes commercial and multi-family real estate loans, commercial and industrial loans and construction loans, totaled $484.8 million, or 65.2% of total loans and leases, with approximately $144.8 million of these loans, or 19.5% of our total loans and leases, located in the Columbus, Ohio market.

A large portion of our commercial loan portfolio is unseasoned, meaning they were originated recently.

Our limited experience with these borrowers does not provide us with a significant payment history pattern with which to judge future collectability.

Further, these loans have not been subjected to unfavorable economic conditions.

As a result, it is difficult to predict the future performance of this part of our loan portfolio.

These loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our future performance.

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 greater than $250,000 and brokered certificates of deposit) in our primary market area, with a particular emphasis on non-interest 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.

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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.

COVID 19 Response

In response to the COVID-19 pandemic, the Company is offering a number of options designed to support our customers and the communities that we serve.

Paycheck Protection Program ("PPP").

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

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

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

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

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

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

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

(i) 5% for loans of not more than $350,000;

(ii) 3% for loans of more than $350,000 and less than $2,000,000;

and (iii) 1% for loans of at least $2,000,000.

The SBA processing fees for the approved loans totaled $2.3 million for the year ended December 31, 2020.

As of December 31, 2020, SBA had approved 200 loan forgiveness applications totaling $21.6 million with an additional 63 applications totaling $18.4 million pending approval.

Recent legislation reopened the PPP through March 31, 2021, by authorizing $284.5 billion in funding for eligible small businesses and non-profits.

In January 2021, we began accepting and processing loan applications under this second PPP program and will continue working with clients to assist them with accessing other borrowing options, including SBA and other government sponsored lending programs, as appropriate.

We may utilize the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”), pursuant to which the Company would pledge its PPP loans as collateral to obtain FRB non-recourse loans.

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

As of December 31, 2020, we had not utilized the PPPLF.

Loan Modifications.

We offer payment and financial relief programs for borrowers impacted by COVID-19, primarily through loan and lease payment deferments of principal and interest up to 90 days, although requests for payment relief during the fourth quarter of 2020 declined significantly from the second and third prior quarters of 2020.

We continue to monitor our loan portfolio and strive to work with our customers and communities.

Deferred loans are re-evaluated at the end of the initial deferral period and will either return to the original loan terms or be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

At December 31, 2020, the number of loans and leases granted payment deferrals was 48, representing $54.7 million in loans and leases outstanding, compared to 70 loans and leases at September 30, 2020 totaling $35.3 million, and 752 loans and leases at June 30, 2020 totaling $175.1 million.

The increase in the outstanding deferred loan amount was primarily attributable to four first time deferrals of large loans totaling $11.7 million in the fourth quarter.

Of the loans currently deferred at December 31, 2020, ten loans, representing $11.9 million in loans and leases outstanding, were new deferrals and 38 loans, representing $42.8 million in loans and leases outstanding, were repeat deferrals.

The following table summarizes information relating to loan deferments at December 31, 2020 and September 30, 2020:

December 31, 2020 September 30, 2020

($ in thousands)

Number of Loans

Balance Number of Loans

Commercial mortgage

18 $ 44,352 24 $ 27,767

Commercial and industrial

Construction and development

4 8,868 2 2,105

Residential mortgage

3 163 16 3,347

Direct financing leases

20 494 23 1,063

48 $ 54,665 70 $ 35,310

The following table summarizes information relating to hospitality loan deferments (which are included in the table above) at December 31, 2020 and September 30, 2020:

December 31, 2020 September 30, 2020

($ in thousands) Number of Loans Balance Percent of total loans in category Number of loans Balance Percent of total loans in category

Restaurants 1 $ 375 6.78 % 0 $ — — %

Hotels 12 37,056 56.17 % 13 24,384 38.05 %

Total Loans 13 $ 37,431 52.35 % 13 $ 24,384 34.83 %

Branch Operations and Additional Client Support.

Many of our employees continue to work remotely or have flexible work schedules, and we have established protective measures within our offices to help ensure the safety of those employees who must work on-site.

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

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

We continue to work closely with our borrowers to evaluate pandemic related challenges.

Financial Condition at December 31, 2020 Compared to December 31, 2019

Total assets increased $136.4 million, or 16.1%, to $986.0 million at December 31, 2019 from $849.6 million at December 31, 2018.

This increase was driven by a $32.5 million, or 5.0%, increase in the loan and lease portfolio, net of allowance for loan and lease losses, a $74.1 million, or 51.6%, increase in investment securities and a $25.6 million, or 171.1%, increase in cash and cash equivalents.

The increase in assets was funded with the proceeds received by the Company in connection with the initial public offering.

Most of the growth in the loan portfolio occurred in the commercial and multi-family real estate and commercial and industrial loan portfolios.

Total assets increased $98.2 million, or 10.0%, to $1.1 billion at December 31, 2020 from $986.0 million at December 31, 2019.

This increase was driven by a $49.2 million, or 7.2%, increase in the loan and lease portfolio, net of

allowance for loan and lease losses, a $39.0 million, or 17.9%, increase in investment securities and an $8.2 million, or 20.1%, increase in cash and cash equivalents.

The growth in the loan portfolio occurred primarily in the PPP loan portfolio, which totaled $43.3 million at December 31, 2020.

The increase in assets was funded by a $75.8 million, or 12.3%, increase in deposits and a $16.0 million, or 10.4% increase in advances from the FHLB.

Loans and Leases.

Our loan and lease portfolio, net of allowance for loan and lease losses, increased $49.2 million, or 7.2%, to $736.4 million at December 31, 2020 from $687.3 million at December 31, 2019.

The majority of the growth occurred in the commercial and multi-family real estate portfolios, which in the aggregate increased $40.4 million, or 15.8%.

We also experienced a $12.7 million, or 17.7%, increase in our commercial and industrial loan portfolio.

These increases were partially offset by a $19.5 million, or 26.8%, decrease in our construction and development loan portfolio.

Most of the growth in the loan portfolio took place in the Richmond, Indiana market area.

The majority of the growth occurred in the commercial and industrial loan portfolio which increased $38.3 million or 45.3%.

The growth in the commercial and industrial loan portfolio consisted of PPP loans which equaled $43.3 million at year-end 2020.

We also experienced an $18.2 million, or 7.9%, increase in the commercial real estate portfolio, a $7.6 million, or 6.9%, increase in direct financing leases, and a $5.0 million, or 9.4%, increase in the construction and development portfolio.

These increases were partially offset by a $4.2 million, or 3.2%, decrease in our residential mortgage portfolio as a result of selling a substantial majority of the residential loans originated during 2020 and normal paydowns and maturities.

The majority of the PPP loans were generated within the western Ohio and Richmond, Indiana market area.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loan and leases more than 90 days past due, total $4.8 million, or 0.64%, of total loans and leases at December 31, 2020, compared to $3.8 million, or 0.55% of total loans and leases at December 31, 2019.

The increase in nonperforming loans and leases was primarily the result of a $1.1 million commercial real estate participation loan more than 90 days past due and still accruing that is working towards resolution by the lead bank.

At December 31, 2020, TDRs totaled $541,000, compared to $597,000 at December 31, 2019.

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, 2020, the Company had outstanding 48 loan modifications qualifying under the CARES Act related to the COVID-19 pandemic with an outstanding loan balance totaling $54.7 million.

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

Allowance for Loan and Lease Losses.

Our allowance for loan and lease losses increased $1.5 million, or 26.8%, to $7.1 million at December 31, 2019 from $5.6 million at December 31, 2018, primarily as a result of the growth in commercial and multi-family real estate loans.

Our allowance for loan and lease losses increased $3.5 million, or 49.3%, to $10.6 million at December 31, 2020 from $7.1 million at December 31, 2019.

At December 31, 2020, the allowance for loan and lease losses totaled 1.42% of total loans and leases outstanding compared to 1.02% at December 31, 2019.

Net charge-offs during the year ended 2019 were $1.1 million or 0.16% of average loans and leases outstanding compared to $880,000 or 0.14% of average loans and leases outstanding during 2018..

Total deposits decreased $3.4 million, or 0.6%, to $617.2 million at December 31, 2019 from $620.6 million at December 31, 2018.

This decrease in deposits was due to brokered deposits decreasing $67.8 million, or 54.5%, during 2019.

At December 31, 2019, our brokered deposits totaled $56.7 million, or 9.2% of total deposits.

This decrease was partially offset by an increase in retail certificates of deposit of $40.8 million from December 31, 2018 to December 31, 2019.

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

Net charge-offs during the year ended 2020 were $273,000, or 0.04% of average loans and leases outstanding compared to $1.1 million, or 0.16% of average loans and leases outstanding during 2019.

The allowance for loan and lease losses to non-performing loans and leases was 220.6% at December 31, 2020, compared to 186.0% at December 31, 2019.

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

The Company evaluated its exposure to potential loan and lease losses as of December 31, 2020, which evaluation included consideration of potential credit losses due to the deteriorating economic conditions driven by the impact of the COVID-19 pandemic.

The full impact of the pandemic on the Company's deposit and loan customers is still not fully known at this time.

The Company has increased its qualitative factors when determining the adequacy of its allowance for loan and lease losses.

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

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

Total deposits increased $75.8 million, or 12.3%, to $693.0 million at December 31, 2020 from $617.2 million at December 31, 2019.

This increase in deposits was due to increases in demand deposits of $93.2 million, or 35.5%, and savings accounts of $21.6 million, or 29.4%, primarily linked to overall changes in spending and savings habits by businesses and consumers due to the COVID-19 pandemic.

The increase in retail deposits allowed for a decrease in brokered deposits of $33.4 million, or 58.9%, during 2020.

At December 31, 2020, brokered deposits equaled 3.4% of total deposits compared to $56.7 million, or 9.2% of total deposits at December 31, 2019.

At December 31, 2020, noninterest bearing deposits totaled $98.7 million, or 14.2% of total deposits, compared to $60.3 million, or 9.8%, of total deposits at December 31, 2019.

Total borrowings, consisting solely of FHLB advances, increased $16.0 million, or 10.4%, to $170.0 million at December 31, 2020 from $154.0 million at December 31, 2019.

The increase in borrowings was used to primarily fund loan growth during the period.

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 $192.7 million as of December 31, 2020, an increase of $4.9 million, or 2.6%, from December 31, 2019.

The increase in stockholders’ equity was the result of the completion of the Company’s initial public offering and a $3.7 million reduction in the accumulated other comprehensive loss, partially offset by a net loss of $14.1 million.

The increase in stockholders’ equity was the result of 2020 net income of $10.0 million, an increase of $4.4 million in other comprehensive income, an increase of $648,000 due to ESOP shares earned, and an increase of $811,000 due to awards made pursuant to the Company's stock-based compensation plan.

These increases were partially offset by cash dividends paid in 2020 of $1.8 million, and the repurchase of common stock totaling $9.1 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, 2020.

Comparison of Results of Operations for the Years Ended December 31, 2020 and 2019

We reported a net loss for 2019 of $14.1 million compared to net income of $5.7 million in 2018.

The net loss for the 2019 was affected by the estimated $14.3 million after-tax charge associated with the planned termination of the DB Plan, an after-tax charge of $4.9 million associated with the Company’s contribution to the Foundation which was formed in connection with our reorganization and stock offering completed on July 1, 2019, and an after-tax charge of $1.3 million related to the adoption of a nonqualified deferred compensation plan in the second quarter of 2019

We reported net income of $10.0 million for 2020 compared to a net loss of $14.1 million in 2019.

The net loss for 2019 was affected by the estimated $14.3 million after-tax charge associated with the planned termination of the DB Plan, an after-tax charge of $4.9 million associated with the Company’s contribution to the Foundation which was formed in connection with our reorganization and stock offering completed on July 1, 2019, and an after-tax charge of $1.3 million related to the adoption of a nonqualified deferred compensation plan in the second quarter of 2019.

Interest Income .

Total interest income for 2019 increased $6.4 million or 18.2% over 2018.

The increase primarily was a result of the $73.4 million increase in the average balance of loans and leases outstanding year-over-year and a 18 basis point increase in average yield on loans and leases resulting in a $5.0 million increase in interest income.

Interest on investment securities increased $294,000 during 2019 primarily due to a $18.7 million increase in the average balance of the portfolio, partially offset by an eight basis point decrease in the average yield on investment securities.

Total interest income for 2020 increased $784,000 or 1.9% over 2019.

The increase primarily was a result of a $49.0 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 $1.2 million increase in loan interest income.

Interest on investment securities, including FHLB stock, increased $566,000, or 14.7%, due to a $82.4 million increase in the portfolio, partially offset by a 53 basis point decrease in the average yield.

Interest on cash and cash equivalents decreased $1.0 million as average balances decreased $20.1 million and the yield declined 165 basis points.

Interest Expense .

Total interest expense increased $3.4 million, or 43.6% to $11.2 million during 2019 compared to $7.8 million during 2018.

The primary reason for this increase was an increase in the average rate paid and the average balance of certificates of deposit and borrowings.

The average rate paid on certificates of deposit increased 48 basis points in 2019 compared to 2018, partially due to a 34 basis point increase in the average rate paid on brokered certificates of deposit.

The rate paid on borrowings was 2.18% in 2019, an increase of 36 basis points over the average rate of 1.82% in 2018.

The primary reason for these increases was a higher average market rate of interest during 2019, despite three 25 basis point decreases in the Federal Funds Rate during the months of August, September and October.

The average balance of certificates of deposit and borrowings in 2019 increased by

$23.9 million and $28.6 million, respectively, compared to those in 2018.

The primary reason for these increases was to fund loan growth during 2019.

Total interest expense decreased $1.8 million, or 15.8% to $9.4 million during 2020 compared to $11.2 million during 2019.

The primary reason for this decrease was a decrease in the average rate paid on all deposit accounts and borrowings as well as a decrease in the average balance of certificates of deposit.

The average balance of savings and money market accounts increased $18.4 million, or 10.9%, to $188.4 million in 2020 compared to $169.9 million in 2019.

The average rate paid on savings and money market accounts declined 16 basis points in 2020 to 0.56% from 0.72% in 2019.

The average balance of interest-bearing checking accounts increased $16.1 million, or 15.8%, to $118.7 million in 2020 from $102.5 million in 2019.

The average rate paid on interest-bearing checking accounts decreased 11 basis points to 0.25% in 2020 from 0.36% in 2019.

The average balance of certificate of deposits declined $24.7 million, or 8.2%, to $278.0 million in 2020 from $302.7 million in 2019.

The average rate paid on certificates of deposit decreased 31 basis points to 1.81% in 2020 from 2.12% in 2019.

The decline in the average balance of certificate of deposit was attributable to a decrease in brokered certificates of deposit of $39.5 million, or 42.1%, to $54.4 million in 2020 from $94.0 million in 2019.

The average rate paid on brokered certificates of deposit dropped 53 basis points to 1.70% in 2020 from 2.23% in 2019.

The average balance of FHLB borrowings increased $30.9 million, or 21.4%, to $175.1 million in 2020 from $144.2 million in 2019.

The average rate on FHLB borrowings decreased 46 basis points to 1.72% in 2020 from 2.18% in 2019.

The Company increased its FHLB borrowings in 2020 to procure longer term borrowings at lower rates as a result of the drop in rates experienced in the first quarter of 2020.

Net Interest Income .

Net interest income before provision for loan and lease losses increased $3.0 million, or 10.8%, to $30.4 million in 2019 compared to $27.4 million in 2018, primarily due to the increase in average earning assets.

Net interest income before provision for loan and lease losses increased $2.5 million, or 8.4%, to $32.9 million in 2020 compared to $30.4 million in 2019, primarily due to the increase in average earning assets exceeding the growth in interest-bearing liabilities.

Our net interest margin in 2020 was 3.22%, a decrease of 12 basis points compared to 2019.

The decrease in net interest margin mostly reflects slightly lower overall yield on average interest-earning assets largely as a result of three 25 basis point decreases in the targeted Fed Funds Rate in the third and fourth quarters of 2019.

The decrease in net interest margin reflects a lower overall yield on average interest-earning assets of 43 basis points in 2020 compared to 2019, while the overall rate on interest-bearing liabilities declined only 31 basis points from 2019 to 2020.

Provision for Loan and Lease Losses .

The provision for loan and lease losses in 2019 was $2.6 million, a $920,000 increase over the $1.7 million provision in 2018.

The increase in the provision was due to the growth of the loan and lease portfolio during 2019, and slightly higher net charge-offs than were experienced in 2018.

Net charge-offs in 2019 were $231,000 more than 2018.

The provision for loan and lease losses in 2020 was $3.8 million, a $1.2 million increase over the $2.6 million provision in 2019.

The increase in the provision was due to the continued uncertainty of the economic impact of the COVID-19 pandemic on the Bank's loan and lease portfolio.

Net charge-offs in 2020 were $273,000 compared to $1.1 million in 2019.

Due to the increased provision expense, the allowance increased as a percentage of the total loan and lease portfolio to 1.42% at year-end 2020.

Net charge-offs in 2020 equaled 0.04% of total average loans and leases outstanding compared to 0.16% of total average loans and leases outstanding in 2019.

The increase in net charge-offs was primarily due to three moderately-sized loan charge-offs in 2019 with no similar charge-offs during 2018.

Non-Interest Income .

Total non-interest income decreased $434,000, or 10.1%, to 39.0 million for 2019 compared to $4.3 million for 2018.

The decrease in total noninterest income was primarily driven by the recognition of impairment of mortgage servicing rights of $202,000 and a $510,000 decrease in other income primarily due to gains recorded on prepayment of below market rate FHLB advances recorded in 2018.

These decreases were partially offset by an $83,000 increase in the gain on sale of securities in 2019 compared to 2018.

Total non-interest income increased $3.5 million, or 89.8%, to $7.3 million for 2020 compared to $3.9 million for 2019.

The increase in total noninterest income was primarily driven by an increase in the net gain on loan and lease sales of $3.0 million, or 461.7%, to $3.6 million in 2020 from $647,000 in 2010, and by smaller increases in other loan fees and loan and lease servicing fees.

These increases were partially offset by a $347,000, or 32.2%, decrease in service charges on deposit accounts in 2020 compared to 2019.

The decrease in service charges on deposit accounts was the result of

higher customer balances maintained in deposit accounts along with the waiving of overdraft fees and the waiving of certain ATM fees during a portion of 2020.

Non-Interest Expenses .

Total noninterest expense increased $27.9 million, or 120.8%, to $51.0 million during 2019 compared to 2018.

The increase primarily was the result of the $19.3 million estimated DB Plan expense, the $6.25 million expense attributable to the contribution to the Foundation and the $1.7 million expense related to the adoption of a nonqualified deferred compensation plan during the year.

Total noninterest expense decreased $27.0 million, or 53.0%, to $24.0 million during 2020 compared to 2019.

The decrease primarily was the result of the $19.3 million estimated DB Plan expense, the $6.25 million expense attributable to the contribution to the Foundation, and the $1.7 million expense related to the adoption of a nonqualified deferred compensation plan incurred in 2019.

Excluding these three 2019 non-recurring expenses, noninterest expenses increased $219,000 in 2020 compared to 2019.

Salaries and employee benefits increased $21.2 million, or 153.6%, in 2019 compared to 2018, primarily due to the estimated DB Plan expense and expense related to the adoption of the nonqualified deferred compensation plan.

Excluding the cost of those two non-recurring expenses, salaries and employee benefits increased $300,000, or 2.25, due to merit increases.

Data processing fees increased $267,000, primarily attributable to higher transaction volume and additional services utilized from the Company’s IT provider.

FDIC assessments decreased $329,000, or 54.8%, during 2019 compared to 2018.

This was the result of the Deposit Insurance Fund achieving a specified ratio of eligible deposits and banks with less than $10 billion assets receiving credit for previous assessments paid.

Legal and professional fees increased $133,000, or 15.2%, in 2019 compared to 2018, primarily as a result of our reorganization and stock offering and operating as a public company.

Advertising expense increased $280,000, or 51.5%, year-over-year due to sponsorships of various community organizations and events.

Loan tax and insurance expense decreased by $274,000, or 46.7%, during 2019 compared to 2018 due to a recovery of $84,000 in property taxes during 2019 that were advanced in 2018 and lower expenses in 2019 on loans sold but still serviced by the Bank.

Other expenses increased $4,259,000, or 9.0%, in 2019 compared to 2018, primarily driven by a $62,000 increase in loan closing expenses and a $46,000 increase in charitable contributions.

Salaries and employee benefits decreased $156,000, or 1.1%, in 2020 compared to 2019.

Pension plan expense decreased $20.1 million, or 98.1%, in 2020 compared to 2019.

This was due to the recognition of the estimated $19.3 million DB Plan pre-tax expense incurred in 2019 associated with the expected termination of the DB Plan.

Equipment expense increased $175,000, or 17.5%, to $1.2 million in 2020 from $1.0 million in 2019 due to additional depreciation and maintenance expense.

Data processing fees increased $105,000, or 6.0%, to $1.9 million in 2020 from $1.7 million in 2019 primarily due to higher transaction volumes and additional services utilized from the Company's IT provider.

Legal and professional fees increased $124,000, or 12.3%, to $1.1 million in 2020 from $1.0 million in 2019.

This is primarily attributable to ongoing expenses associated with operating as a public company.

Advertising expenses declined $452,000, or 54.9%, to $372,000 in 2020 from $824,000 in 2019.

Much of this was attributable to sponsorships involving 501(c)(3) non-profits now being funded by the Foundation.

In 2019, the Company expensed $6.25 million to fund the Foundation while in 2020 there was no comparable expense.

Other expenses decreased $341,000, or 10.1%, to $3.0 million in 2020 from $3.4 million in 2019.

This was primarily due to state taxes associated with the leasing portfolio decreasing by $100,000, employee expenses associated with education and travel decreasing by $140,000, and charitable contributions decreasing $185,000.

Contributions in 2020 to registered 501(c)(3) organizations were primarily funded through the Foundation that was established in 2019.

Income Tax Expense .

Income tax expense decreased in 2019 by $6.6 million compared to 2018, reflecting a tax benefit of $5.3 million for 2019.

This decrease in income tax expense was due to pre-tax income decreasing during 2019 compared to 2018 for the reasons discussed above.

Income tax expense increased in 2020 by $7.8 million compared to 2019, reflecting a tax rate of 19.8% for 2020.

This increase in income tax expense was due to pre-tax income increasing during 2020 compared to 2019 for the reasons discussed above.

Average Balances, Interest and Average Yields/Cost

The following tables set forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities.

Average balances have been calculated using quarterly balances.

Average balances have

been calculated using quarterly balances.

Non-accruing loans have been included in the table as loans carrying a zero yield.

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Years Ended December 31,

2020 2019 2018

Outstanding Interest

(Dollars in thousands)

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Loans and leases receivable $ 735,959 $ 37,777 5.13 % $ 686,949 $ 36,560 5.32 % $ 613,569 $ 31,559 5.14 %

Federal Reserve Bank and FHLB stock

Securities 241,659 4,128 1.71 % 160,812 3,461 2.15 % 142,140 3,167 2.23 %

FHLB stock 8,803 285 3.24 % 7,256 386 5.32 % 6,686 341 5.10 %

Cash and cash equivalents and other 35,247 152 0.43 % 55,316 1,151 2.08 % 5,771 132 2.29 %

Total interest-earning assets 1,021,668 42,342 4.14 % 910,333 41,558 4.57 % 768,166 35,199 4.58 %

3 unchanged sentences

Certificate accounts 278,018 5,028 1.81 % 302,735 6,419 2.12 % 278,810 4,559 1.64 %

Borrowings 175,060 3,010 1.72 % 144,201 3,138 2.18 % 115,620 2,104 1.82 %

Total interest-bearing liabilities 760,125 9,393 1.24 % 719,398 11,156 1.55 % 656,499 7,752 1.18 %

2 unchanged sentences

Net interest rate spread (1)

2.90 % 3.02 % 3.40 %

Net interest margin (2)

3.22 % 3.34 % 3.57 %

Average interest-earning assets to average interest-bearing liabilities 134.41 % 126.54 % 117.01 %

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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.

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

December 31, Years Ended

2019 2019 vs.

increase/ (decrease) Increase/

increase/ (decrease)

Volume Rate Volume Rate

(In thousands)

1 unchanged sentence

Loans and leases receivable $ 2,624 $ (1,407) $ 1,217 $ 3,766 $ 1,235 $ 5,001

Securities 1,717 (1,050) 667 426 (132) 294

FHLB stock 83 (184) (101) 29 16 45

Cash and cash equivalents and other (417) (582) (999) 1,135 (116) 1,019

Total interest-earning assets $ 4,007 $ (3,223) $ 784 $ 5,356 $ 1,003 $ 6,359

3 unchanged sentences

Certificate accounts (526) (865) (1,391) 395 1,465 1,860

Borrowings 651 (779) (128) 518 516 1,034

Total interest-bearing liabilities $ 318 $ (2,081) $ (1,763) $ 965 $ 2,439 $ 3,404

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It is overseen by the Asset and Liability Management Committee.

Excess liquidity is generally invested in short-term investments, such as overnight deposits and holding excess funds at the Federal Reserve Board.

Excess liquidity is generally invested in short-term investments, such as overnight

deposits and holding excess funds at the Federal Reserve Board.

On a long-term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed and municipal securities.

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Based on this management strategy, we believe that a majority of maturing deposits will remain with us.

As disclosed in our Consolidated Statements of Cash Flows in Item 8 of this Form 10-K, cash and cash equivalents increased $8.2 million to $48.8 million as of December 31, 2020, from $40.6 million at December 31, 2019.

Net cash provided by operating activities was $16.6 million for the year ended December 31, 2020.

Net cash of $89.3 million was used in investing activities for the year ended December 31, 2020, primarily due to the purchase of investment securities and the funding of loans.

There was $80.9 million of cash provided by financing activities for the year ended December 31, 2020, which primarily consisted of an increase in deposits and additional FHLB advances, partially offset by the repurchase of common stock and payment of dividends.

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 (many of which are paid to First Bank Richmond), Richmond Mutual Bancorporation is responsible for paying for any stock repurchases, dividends declared to its stockholders and other general corporate expenses.

Richmond Mutual Bancorporation’s primary source of funds are the proceeds it received and retained in connection with its recent stock offering and dividends from First Bank Richmond, which are subject to regulatory limits.

At December 31, 2020, Richmond Mutual Bancorporation, on an unconsolidated basis, had $32.7 million in cash, noninterest-bearing deposits and liquid investments generally available for general corporate purposes.

Except as set forth above, management is not aware of any trends, events, or uncertainties that will have, or that are reasonably likely to have a material impact on liquidity, capital resources or operations.

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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.

Adequate Capital

At December 31, 2019

(Dollars in thousands)

Actual Required for

Adequate Capital To Be Well

Amount Ratio Amount Ratio Amount Ratio

At December 31, 2020 (Dollars in thousands)

Total risk-based capital (to risk weighted assets) $ 162,624 21.9 % $ 59,416 8.0 % $ 74,270 10.0 %

17 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