What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-14 compared with 2020-11-13 · 178 added, 273 removed, 233 unchanged (66% of the section changed)

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

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

(the “Company”) at March 31, 2021, and the consolidated results of operations for the three months ended March 31, 2021, compared to the same period in 2020 is intended to assist in understanding the financial condition and results of operations of the Company.

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

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• 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 of the proposed termination of our defined benefit plan;

the deductibility of our contribution to the charitable foundation for tax purposes;

• 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;

• adverse changes in the securities or secondary mortgage markets;

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

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

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

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

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

changes in consumer spending, borrowing and savings habits;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

• our ability to retain key employees;

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• changes in the financial condition, results of operations or future prospects of issuers of securities that we own;

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") ;

the other risks detailed in this report and from time to time in our other filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”).

• our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

• changes in consumer spending, borrowing and savings habits;

• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

including as a result of the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") and the Consolidated Appropriations Act, 2021 ("CAA 2021");

• legislative or regulatory changes such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and its implementing regulations that adversely affect our business, and the availability of resources to address such changes;

• our ability to pay dividends on our common stock;

• other economic, competitive, governmental, regulatory, and technical factors affecting our operations, pricing, products and services including as a result of the CAA 2021 and recent COVID vaccination effort;

• the other risks detailed in this report and from time to time in our other filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”).

We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.

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In 2017, the Bank converted to an Indiana state-chartered commercial bank and changed its name to First Bank Richmond.

Mutual Federal Savings Bank continues to operate in Ohio under the name Mutual Federal, a division of First Bank Richmond.

The former Mutual Federal Savings Bank continues to operate in Ohio under the name Mutual Federal, a division of First Bank Richmond.

First Bank Richmond provides full banking services through its seven full- and one limited-service offices located in Cambridge City (1), Centerville (1), Richmond (5) and Shelbyville (1), Indiana, its five full-service offices located in Piqua (2), Sidney (2) and Troy (1), Ohio, and its loan production office in Columbus, Ohio.

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First Bank Richmond’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets.

Our leasing operation consists of direct investments in equipment that we lease (referred to as direct finance leases) to small businesses located throughout

the United States.

Our leasing operation consists of direct investments in equipment that we lease (referred to as direct finance leases) to small businesses located throughout the United States.

Our lease portfolio consists of various kinds of equipment, generally technology-related, such as computer systems, medical equipment and general manufacturing, industrial, construction and transportation equipment.

We seek leasing transactions where we believe the equipment leased is integral to the lessee's business.

We seek leasing

transactions where we believe the equipment leased is integral to the lessee's business.

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

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

Total wealth management assets under management and administration were $151.3 million at March 31, 2021.

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

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Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period.

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

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

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

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

Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are still unknown, including the 150 basis point reduction in the targeted federal funds rate in March 2020, until the pandemic further subsides, the Company expects its net interest income and net interest margin will be adversely affected in 2021 and possibly longer.

At March 31, 2021, on a consolidated basis, we had $1.1 billion in assets, $763.7 million in loans and leases, net of allowance, $757.1 million in deposits and $189.5 million in stockholders’ equity.

At March 31, 2021, First Bank Richmond’s total risk-based capital ratio was 20.8%, exceeding the 10.0% requirement for a well-capitalized institution.

For the three months ended March 31, 2021, net income was $2.6 million, compared with net income of $2.5 million for the three months ended March 31, 2020.

Critical Accounting Policies

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The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value.

For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds

and discount rates.

For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates.

Impairment, if any, is recognized through a valuation allowance and is recorded as a reduction in loan servicing fee income.

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COVID 19 Response

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

Paycheck Protection Program ("PPP").

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

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

The Company continues to offer a number of options designed to support our customers and the communities that we serve during the ongoing COVID-19 pandemic.

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.

PPP loans have:

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

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

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

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

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

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

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

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

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

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

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

and one (1) percent for loans of at least $2,000,000.

We may not collect any fees from the loan applicants.

The initial PPP concluded on August 8, 2020 and was then reopened through May 31, 2021.

During the first quarter of 2021, the Company continued its participation in the initial SBA PPP by processing applications for PPP loan forgiveness.

As of March 31, 2021, the Company has received SBA forgiveness for 413 PPP loans totaling $47.0 million out of the $64.9 million in PPP loans funded during the first PPP program.

During the first quarter of 2021, the Company began accepting and processing loan applications under the second PPP program enacted in December 2020.

As of March 31, 2021, the Bank has funded 329 PPP loans totaling $35.2 million under the second PPP program.

As of March 31, 2021, there was a total of 408 PPP loans outstanding totaling $54.7 million.

We expect to continue accepting and processing applications for the second round of PPP loans through its expiration date of May 31, 2021.

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

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

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

As of March 31, 2021, we had not utilized the PPPLF.

Loan Modifications.

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

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

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

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

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

This includes short-term (e.g.

six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

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

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

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

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

September 30, 2020

June 30, 2020

($ in thousands)

Number of Loans

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 first quarter of 2021 declined significantly from 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 March 31, 2021, the number of loans and leases granted payment deferrals was 33, representing $24.6 million in loans and leases outstanding, compared to 48 loans and leases at December 31, 2020 totaling $54.7 million.

The decrease in the outstanding deferred loan and lease amounts was primarily attributable to $21.0 million in commercial mortgage loans and $8.9 million in multi-family loans returning to their normal payment terms.

Of the loans and leases currently deferred at March 31, 2021, six loans, representing $2.3 million in loans and leases outstanding, were new deferrals and 27 loans, representing $22.3 million in loans and leases outstanding, were repeat deferrals.

The following table summarizes information relating to loan deferments at March 31, 2021 and December 31, 2020:

March 31, 2021 December 31, 2020

($ in thousands) Number of Loans Balance Number of Loans Balance

Commercial mortgage 8 23,372 18 44,352

Commercial and industrial — — 1 770

Construction and development

Multi-Family — — 4 8,868

Residential mortgage 5 450 3 163

Direct financing leases 19 756 20 494

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

September 30, 2020

June 30, 2020

($ in thousands)

Percent of total

loans in category

Percent of total

Consumer 1 4 2 18

Total Loans 33 24,582 48 54,665

The following table summarizes information relating to hospitality loan deferments (which are included in the commercial mortgage balance in the table above) at March 31, 2021 and December 31, 2020:

March 31, 2021 December 31, 2020

($ in thousands) Number

of Loans Balance Percent of total

loans in category Number

of Loans Balance Percent of total

loans in category

Certain customers have requested an additional 90-day deferment.

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

($ in thousands)

Number of Loans

Commercial mortgage

Commercial and industrial

Construction and development

Residential mortgage

Direct financing leases

Restaurants — $ — — % 1 $ 375 6.78 %

Hotels 5 16,350 23.15 % 12 37,056 56.17 %

Total Loans 5 $ 16,350 21.74 % 13 $ 37,431 52.35 %

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.

The Company remains focused on keeping its employees safe and the Bank running effectively to serve its clients.

The Bank is managing branch access and occupancy levels in relation to cases and close contact scenarios, following governmental restrictions and public health authority guidelines, and encouraging remote work and supporting employees with paid time off.

As of March 31, 2021, all of the Bank's branch lobbies were open.

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

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

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

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

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

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

Comparison of Financial Condition at March 31, 2021 and December 31, 2020

Total assets increased $56.7 million, or 5.2%, to $1.1 billion at March 31, 2021 from $1.1 billion at December 31, 2020.

The increase was primarily a result of a $27.3 million, or 3.7%, increase in loans and leases, net of allowance to $763.7 million at March 31, 2021 from $736.4 million at December 31, 2020;

and a $11.6 million, or 4.5%, increase in investment securities to $268.4 million at March 31, 2021, compared to $256.7 million at December 31, 2020.

The balance of the increase in assets was attributable to a $16.8 million, or 34.4%, increase in cash and cash equivalents to $65.5 million at March 31, 2021, from $48.8 million at December 31, 2020.

Loans and Leases.

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

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

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

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

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

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

The decrease in nonperforming loans and leases was primarily the

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

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

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

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

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

Our loan and lease portfolio, net of allowance for loan and lease losses, increased $27.3 million, to $763.7 million at March 31, 2021 from $736.4 million at December 31, 2020.

The increase in loans and leases was attributable to an increase in commercial and industrial loans of $5.3 million (consisting of an increase of $11.4 million in PPP loans and a decrease of $6.1 million of non-PPP commercial and industrial loans), an increase in commercial mortgage loans of $7.0 million, and an increase in construction and development loans of $9.3 million.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loans and leases more than 90 days past due, totaled $8.1 million or 1.05% of total loans and leases at March 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 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.

At the time of origination, this loan had a loan to value ratio of 73%.

Accruing loans and leases past due more than 90 days at March 31, 2021, totaled $2.5 million, compared to $4.0 million at December 31, 2020.

At March 31, 2021, TDRs totaled $528,000, 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 September 30, 2020, the Company had outstanding 70 loan modifications qualifying under the CARES Act related to the COVID-19 pandemic with an outstanding loan balance totaling $35.3 million.

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

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

As of March 31, 2021, the Company had outstanding 33 loan and lease modifications qualifying under the CARES Act related to the COVID-19 pandemic with an outstanding loan and lease balance totaling $24.6 million.

This was a decrease from 48 loans and leases with modifications totaling $54.7 million at December 31, 2020.

Loan and lease 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 or lease is deemed to be impaired.

Allowance for Loan and Lease Losses.

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

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

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

The allowance for loan and lease losses increased $372,000, or 3.5%, to $11.0 million at March 31, 2021 from $10.6 million at December 31, 2020.

At March 31, 2021, the allowance for loan and lease losses totaled 1.41% of total loans and leases outstanding compared to 1.42% at December 31, 2020.

The allowance for loan and lease losses to total loans at March 31, 2021 and December 31, 2020 would increase eleven and eight basis points, respectively, if PPP loans, which totaled $54.7 million and $43.3 million at March 31, 2021 and December 31, 2020, respectively, are excluded from the calculation.

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

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

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

Net charge-offs during the first three months of 2021 were $27,000 or 0.01% of average loans and leases outstanding, compared to net recoveries of $7,000 during the first three months of 2020.

The allowance for loan and lease losses to non-performing loans and leases was 135.1% at March 31, 2021, compared to 220.6% at December 31, 2020.

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

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

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

The Company evaluated its exposure to potential loan and lease losses as of March 31, 2021, which evaluation included consideration of potential credit losses due to the deteriorating economic conditions driven by the impact of the COVID-19 pandemic.

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

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.

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

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

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

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

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

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

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

Total deposits increased $64.0 million, or 9.2%, to $757.1 million at March 31, 2021, from $693.0 million at December 31, 2020.

The increase in deposits from December 31, 2020 primarily was due to overall changes in spending and savings habits by business and consumers due to the COVID-19 pandemic as well as additional PPP funds and government stimulus payments made to customers in December 2020 and first quarter 2021.

Brokered deposits increased $3.4 million to $26.7 million, or 3.5% of total deposits, at March 31, 2021, compared to $23.3 million, or 3.4% of total deposits, at December 31, 2020.

Demand deposit and savings accounts increased $50.1 million to $500.6 million at March 31, 2021, compared to $450.6 million at December 31, 2020.

At March 31, 2021, noninterest bearing deposits totaled $118.1 million, or 15.6% of total deposits, compared to $98.7 million or 14.2% of total deposits at December 31, 2020.

Total borrowings, consisting solely of FHLB advances, were steady at $170.0 million at March 31, 2021 and December 31, 2020, consistent with the Company’s strategy to maintain excess liquidity in light of the ongoing COVID-19 pandemic and continuing economic uncertainty.

Stockholders’ Equity.

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

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

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

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

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

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

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

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

Stockholders’ equity totaled $189.5 million at March 31, 2021, a decrease of $3.2 million, or 1.7%, from December 31, 2020.

The decrease in stockholders' equity from year-end 2020 was the result of a reduction in accumulated comprehensive income of $3.7 million, the repurchase of $1.9 million of Company common stock and the payment of $847,000 in dividends to Company stockholders during the current quarter, partially offset by net income of $2.6 million in the first quarter, an increase of $508,000 due to the Company's equity incentive plan, and a $183,000 increase due to ESOP shares earned.

The Company repurchased 142,764 shares of Company common stock at an average price of $13.58 per share for a total of $1.9 million during the first quarter of 2021.

The Company’s equity to asset ratio was 16.6% at March 31, 2021.

At March 31, 2021, the Bank’s Tier 1 capital to total assets ratio was 14.2% and the Bank’s capital was well in excess of all regulatory requirements.

Comparison of Results of Operations for the Three Months Ended March 31, 2021 and 2020.

Net income for the three months ended March 31, 2021 was $2.6 million, a $110,000 increase from net income of $2.5 million for the three months ended March 31, 2020.

The $2.6 million in earnings equaled $0.22 diluted earnings per share for the first quarter of 2021, compared to $0.20 diluted earnings per share for the first quarter of 2020.

Interest Income.

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

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

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

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

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

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

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

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

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

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

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

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

Interest income increased $193,000, or 1.8%, to $10.6 million during the quarter ended March 31, 2021, compared to $10.5 million during the quarter ended March 31, 2020.

Interest income on loans and leases increased $565,000, or 6.2%, to $9.6 million for the quarter ended March 31, 2021, from $9.1 million for the comparable quarter in 2020, due to higher average balances in the loan and lease portfolio as well as higher yield.

The average outstanding loan and lease balances were $718.0 million for the quarter ended March 31, 2021, compared to $686.2 million for the quarter ended March 31, 2020.

The average yield on loans and leases was 5.36% for the quarter ended March 31, 2021, compared to 5.28% for the comparable quarter in 2020.

Interest income also included $772,000 in fees earned related to PPP loans in the quarter ended March 31, 2021 compared to none during the same quarter in 2020.

As of March 31, 2021, total unrecognized fees on PPP loans were $1.9 million.

Interest income on investment securities, including FHLB stock, decreased $254,000, or 20.1%, to $1.0 million during the quarter ended March 31, 2021, from $1.3 million during the comparable quarter in 2020.

The decrease in interest income on investment securities from the comparable period in 2020 was due to a decrease in the weighted average yield of 68 basis points, partially offset by an increase in the average balances of investment securities including FHLB stock.

The average balance of investment securities, including FHLB stock, was $269.8 million for the quarter ended March 31, 2021, compared to $232.2 million for the quarter ended March 31, 2020.

The average yield on investment securities, including FHLB stock, was 1.50% for the first quarter of 2021, compared to 2.18% for the first quarter of 2020.

Interest income earned on cash and cash equivalents decreased to $7,000 in the first quarter of 2021 compared to $125,000 in the comparable quarter of 2020.

The decrease in interest income earned on cash and cash equivalents in the first quarter of 2021 compared to the comparable quarter of 2020 was due to the significantly lower yield earned on funds at the Federal Reserve after the rate reductions experienced in March 2020.

Interest Expense.

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

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

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

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

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

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

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

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

Interest expense decreased $683,000, or 26.6%, to $1.9 million for the quarter ended March 31, 2021, from $2.6 million for the quarter ended March 31, 2020.

Interest expense on deposits decreased $637,000, or 34.9%, to $1.2 million for the quarter ended March 31, 2021, from $1.8 million for the comparable quarter in 2020.

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

average deposit balances.

The weighted average rate paid on interest-bearing deposits was 0.77% for the quarter ended March 31, 2021, compared to 1.34% for the quarter ended March 31, 2020.

Average balance of interest-bearing deposits increased to $614.4 million, or 12.4%, in the quarter ended March 31, 2021, compared to $546.5 million in the comparable quarter in 2020.

Interest expense on FHLB borrowings decreased $45,000, or 6.1%, to $694,000 in the first quarter of 2021 compared to $739,000 for the same quarter in 2020.

The average balance of FHLB borrowings totaled $170.0 million during the quarter ended March 31, 2021, compared to $164.1 million for the quarter ended March 31, 2020.

The weighted average rate paid on FHLB borrowings was 1.63% for the quarter ended March 31, 2021, a 17 basis point decline from 1.80% for the comparable quarter in 2020.

Net Interest Income.

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

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

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

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

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

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

Net interest income before the provision for loan and lease losses increased $876,000, or 11.1%, to $8.8 million in the first quarter of 2021, compared to $7.9 million for the first quarter of 2020.

This increase was primarily due to an increase in average interest-earning assets during the first quarter of 2021 compared to the comparable period in 2020.

Net interest margin (annualized) was 3.44% for the three months ended March 31, 2021, compared to 3.32% for the three months ended March 31, 2020.

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

The yield on the loans and lease portfolio was impacted by the PPP loan activity during the first quarter of 2021 as PPP loans are originated at an interest rate of 1%, although the effective yield is higher as a result of the origination fees paid to us by the SBA.

The average yield on PPP loans was 7.85%, including the recognition of deferred fees, resulting in a positive impact to net interest margin of 17 basis points during the quarter ended March 31, 2021, compared to no impact in the comparable quarter in 2020 as no PPP loans were originated at that time.

Average Balances, Interest and Average Yields/Cost.

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

Three Months Ended September 30,

Three Months Ended March 31,

Outstanding Interest

(Dollars in thousands)

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Loans and leases receivable $ 717,980 $ 9,628 5.36 % $ 686,180 $ 9,064 5.28 %

Securities 260,763 940 1.44 % 224,300 1,182 2.11 %

FHLB stock 9,050 69 3.05 % 7,922 81 4.09 %

Cash and cash equivalents and other 31,595 7 0.09 % 32,277 125 1.55 %

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Certificate accounts 248,360 828 1.33 % 278,434 1,451 2.08 %

Borrowings 170,000 694 1.63 % 164,066 739 1.80 %

Total interest-bearing liabilities 784,377 1,881 0.96 % 710,602 2,564 1.44 %

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Net interest rate spread (1)

Net interest margin (2)

Average interest-earning assets to

average interest-bearing liabilities

3.22 % 2.96 %

(1) Annualized.

Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(2) Annualized.

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

Provision for Loan and Lease Losses.

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

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

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

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

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

Non-Interest Income.

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

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

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

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

Non-Interest Expense.

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

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

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

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

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

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

Income Tax Expense.

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

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

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

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

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

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

Interest Income.

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

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

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

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

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

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

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

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

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

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

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

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

Interest Expense.

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

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

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

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

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

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

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

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

Net Interest Income.

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

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

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

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

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

Average Balances, Interest and Average Yields/Cost.

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

Average balances have been calculated using quarterly balances.

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

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

Nine Months Ended September 30,

(Dollars in thousands)

Interest-earning assets:

Loans and leases receivable

Cash and cash equivalents and other

Total interest-earning assets

Interest-bearing liabilities:

Savings and money market accounts

Interest-bearing checking accounts

Certificate accounts

Total interest-bearing liabilities

Net interest income

Net earning assets

Net interest rate spread (1)

Net interest margin (2)

Average interest-earning assets to

average interest-bearing liabilities

3.44 % 3.32 %

Average interest-earning assets to average interest-bearing liabilities

129.96 % 133.79 %

_____________

(1) Annualized.

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Provision for Loan and Lease Losses.

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

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

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

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

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

The provision for loan and lease losses for the three months ended March 31, 2021 totaled $400,00 compared to $210,000 for the three months ended March 31, 2020, a $190,000 or 90.5% increase.

The increase in the provision for loan and lease losses was primarily due to the increase in non-performing loans experienced in the quarter.

Net charge-offs during the first quarter of 2021 were $27,000, compared to net recoveries of $7,000 in the first quarter of 2020.

Non-Interest Income.

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

sale of loans and leases.

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

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

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

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

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

Non-interest income increased $814,000 or 85.4%, to $1.8 million for the quarter ended March 31, 2021, compared to $953,000 for the comparable quarter in 2020.

The increase in noninterest income resulted primarily from the increase in the gain on sale of loans and leases, which increased $737,000, or 322.8%, to $965,000 during the first quarter of 2021, compared to $228,000 during the first quarter of 2020 as a result of continued strong mortgage banking activity during the current quarter due to continuing low interest rates.

There was no gain on the sale of securities recorded in the first quarter of 2021 while the Company recognized a net gain on the sale of securities of $69,000 in the first quarter of 2020.

Card fee income increased $63,000, or 35.0%, to $243,000 in the first quarter of 2021 from $180,000 in the first quarter of 2020 due to increased debit card usage.

Loan and lease servicing income decreased $40,000, to a loss of $105,000 for the first quarter of 2021 compared to a loss of $66,000 for the comparable quarter in 2020, due to a larger impairment of mortgage servicing rights in the first quarter of 2021 compared to the first quarter of 2020.

An impairment write down of $158,000 was recorded in the first quarter of 2021 compared to a write down of $114,000 in the first quarter of 2020.

Other loan fees increased $165,000, or 199.1%, to $248,000 in the first quarter of 2021 compared to the comparable quarter of 2020 primarily due to an increase in commercial loan processing fees of $168,000 over the comparable quarter of 2020.

Service fees on deposit accounts decreased $60,000, or 23.6%, to $194,000 for the quarter ended March 31, 2021, compared to $255,000 for the quarter ended March 31, 2020.

The decrease in service fees on deposit accounts during the first quarter of 2021 compared to the first quarter of 2020 was the result of higher customer balances maintained in deposit accounts.

Non-Interest Expense.

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

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

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

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

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

Non-interest expense increased $1.5 million, or 26.3%, to $7.0 million for the three months ended March 31, 2021, from $5.5 million for the same period in 2020.

Salaries and employee benefits increased $1.1 million, or 32.2%, to $4.4 million for the quarter ended March 31, 2021 from $3.4 million for the quarter ended March 31, 2020.

The increase in salaries and benefits from the first quarter of 2020 primarily was due to $508,000 of expenses associated with equity awards granted during the fourth quarter of 2020 following shareholder approval of the Company's equity incentive plan, increased pension expense of $182,000, and increased compensation expense of $380,000 primarily as a result of annual merit increases and additional staff.

Net occupancy expense increased $41,000, or 14.0% to $331,000 from $290,000 in the same quarter of 2020, primarily as a result of higher building maintenance expenses.

Equipment expense increased $81,000, or 31.5% to $337,000 from the comparable period in 2020, primarily due to increased depreciation expense associated with replacing the Bank's ATM machines during the last quarter of 2020.

Deposit insurance expense increased $15,000, or 26.8% compared to the first quarter of 2020 primarily due to growth in the Bank's balance sheet and subsequent decline in its leverage ratio.

Legal and professional fees increased $105,000, or 43.6% to $347,000 compared to the same quarter in 2020 primarily due to expenses associated with the contract renewal of the Company's data core processing, and routine litigation matters.

Advertising expense declined $26,000 or 23.3%, from the first quarter of 2020, primarily due to less media advertising during the first quarter of 2021.

Other expenses increased $107,000, or 16.1%, to $771,000 in the first quarter of 2021 compared to the same quarter of 2020 primarily due to loan related expenses increasing $40,000, debit card expenses increasing $8,000, and franchise tax expense increasing $70,000.

The Company froze its defined benefit plan (“DB Plan”) in October 2019 with the intent to terminate it.

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

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

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

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

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

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

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

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

As of March 31, 2021, the Company has accrued $17.5 million for this expense.

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

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

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

As a result, the Company’s Board of Directors will continue

to monitor and evaluate the timing of, and costs associated with, termination of the DB Plan.

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

Income Tax Expense.

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

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

Income tax expense decreased $65,000 during the three months ended March 31, 2021, compared to the same period in 2020, primarily due to a lower tax rate.

The effective tax rate for the first quarter of 2021 was 18.7% compared to 21.1% for the same quarter a year ago.

We are required to have enough cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operations.

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

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

At March 31, 2021, the Bank had $249.8 million in cash and unpledged available-for-sale investment securities for its cash needs.

The Bank had the ability to borrow an additional $34.2 million in FHLB advances based on existing collateral pledged.

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

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

At March 31, 2021, we had no borrowings from the PPPLF, with the ability to borrow up to $54.7 million based on PPP loans unpledged at that date.

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

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

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

At March 31, 2021, outstanding loan and lease commitments, including unused lines and letters of credit, totaled $167.3 million, including $88.0 million of undisbursed construction and land loans.

Certificates of deposit scheduled to mature in one year or less at March 31, 2021, totaled $54.4 million.

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

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

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

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

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

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

Cash and cash equivalents increased $16.8 million to $65.5 million as of March 31, 2021, from $48.8 million as of December 31, 2020.

Net cash used in operating activities was $2.4 million for the three months ended March 31, 2021.

Net cash used in investing activities totaled $42.1 million during the three months ended March 31, 2021 and consisted primarily of increases in net loans and available-for-sale securities.

The $61.3 million of net cash provided by financing activities during the three months ended March 31, 2021 was primarily the result of a $64.0 million net increase in deposits.

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

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

At March 31, 2021, the Company, on an unconsolidated basis, had $29.6 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

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

Management believes that its primary liquidity sources of loan repayments, maturing investment securities, available FHLB borrowing, possible utilization of the PPPLF facility, and access to the brokered CD market are sufficient in the economic environment created by the COVID-19 pandemic.

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

Further, management is not aware of any current recommendations by regulatory agencies, which, if they were to be implemented, would have this effect.

Off-Balance Sheet Activities

In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements, including commitments to extend credit and unused lines of credit.

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

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

At March 31, 2021, we had $167.4 million in loan and lease commitments and unused lines of credit.

Further, management is not aware of any current recommendations by regulatory agencies, which, if they were to be implemented, would have this effect.

Capital Resources

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

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

At March 31, 2021 First Bank Richmond’s regulatory capital exceeded the FDIC regulatory requirements, and First Bank Richmond was well-capitalized under regulatory prompt corrective action standards.

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

Adequate Capital

As of September 30, 2020

Actual Required for Adequate Capital To Be Well

Amount Ratio Amount Ratio Amount Ratio

(Dollars in thousands)

As of March 31, 2021

Total risk-based capital (to risk weighted assets) $ 166,493 20.8 % $ 64,114 8.0 % $ 80,143 10.0 %

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Tier 1 leverage (core) capital (to adjusted tangible assets) 153,325 14.3 42,939 4.0 53,673 5.0

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

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

limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.

At March 31, 2021 the Bank’s CET1 capital exceeded the required capital conservation buffer.

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

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

If Richmond Mutual Bancorporation was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2021, it would have exceeded all regulatory capital requirements.

Impact of Inflation

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While management believes that inflation affects the economic value of total assets, it believes that it is difficult to assess the overall impact.

Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of inflationary

changes in the economy coincides with changes in interest rates.

Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of inflationary changes in the economy coincides with changes in interest rates.

Since virtually all of our assets and liabilities are monetary in nature, interest rates generally have a more significant impact on our performance than does inflation.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis