Richmond Mutual Bancorporation, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Management’s discussion and analysis of financial condition of the Richmond Mutual Bancorporation, Inc. (the “Company”) at 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. The terms “we,” “our,” “us,” or the “Company” refer to Richmond Mutual Bancorporation, Inc. and its consolidated subsidiary, First Bank Richmond, which we sometimes refer to as the “Bank,” unless the context otherwise requires. Cautionary Note Regarding Forward-Looking Statements Certain matters in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of words such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” These forward-looking statements include, but are not limited to: • statements of our goals, intentions and expectations; • statements regarding our business plans, prospects, growth and operating strategies; • statements regarding the quality of our loan and investment portfolios; and • estimates of our risks and future costs and benefits. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These forward-looking statements are based on our current beliefs and expectations and, by their nature, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Important factors that could cause our actual results to differ materially from the results anticipated or projected, include, but are not limited to, the following: • the effect of the novel coronavirus disease of 2019 (“COVID-19”), including on the Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity; • general economic conditions, either nationally or in our market areas, that are worse than expected; • changes in the level and direction of loan or lease delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan and lease losses; • our ability to access cost-effective funding; • fluctuations in real estate values, and residential, commercial, and multifamily real estate market conditions; • demand for loans and deposits in our market area; • our ability to implement and change our business strategies; 26 • 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; • adverse changes in the securities or secondary mortgage markets; • changes in the quality or composition of our loan, lease or investment portfolios; • our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on our information technology systems or on the third-party vendors who perform several of our critical processing functions; • the inability of third-party providers to perform as expected; • our ability to manage market risk, credit risk and operational risk in the current economic environment; • our ability to enter new markets successfully and capitalize on growth opportunities; • our ability to retain key employees; • our compensation expense associated with equity allocated or awarded to our employees; • changes in the financial condition, results of operations or future prospects of issuers of securities that we own; • our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto; • changes in consumer spending, borrowing and savings habits; • changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; including as a result of the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") and the Consolidated Appropriations Act, 2021 ("CAA 2021"); • legislative or regulatory changes such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and its implementing regulations that adversely affect our business, and the availability of resources to address such changes; • our ability to pay dividends on our common stock; • other economic, competitive, governmental, regulatory, and technical factors affecting our operations, pricing, products and services including as a result of the CAA 2021 and recent COVID vaccination effort; and • the other risks 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. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements. 27 Overview On February 6, 2019, the Board of Directors of First Mutual of Richmond, Inc. (the “MHC”), the parent mutual holding company of Richmond Mutual Bancorporation-Delaware, adopted a Plan of Reorganization and Stock Offering (the “Plan”). The Plan was approved by the Board of Governors of the Federal Reserve System (the “FRB”) and by the Indiana Department of Financial Institutions (the “IDFI”), as well as the voting members of the MHC at a special meeting of members held on June 19, 2019. Pursuant to the Plan, upon completion of the transaction, the MHC would convert from a mutual holding company to the stock holding company corporate structure, the MHC and Richmond Mutual Bancorporation-Delaware would cease to exist, and First Bank Richmond would become a wholly owned subsidiary of the Company, a newly formed Maryland corporation. The transaction was completed on July 1, 2019. In connection with the related stock offering, which was also completed on July 1, 2019, the Company sold 13,026,625 shares of common stock at $10.00 per share, for gross offering proceeds of approximately $130.3 million in its subscription offering and contributed 500,000 shares and $1.25 million to a newly formed charitable foundation, First Bank Richmond, Inc. Community Foundation (the “Foundation”). In certain circumstances, where appropriate, the terms “we”, “us”, “our” and the “Company” refer collectively to (i) RMB-Delaware and First Bank Richmond with respect to discussions in this document involving matters occurring prior to completion of the corporate reorganization and (ii) the Company and First Bank Richmond with respect to discussions in this document involving matters occurring post-corporate reorganization, in each case unless the context indicates another meaning. The Company is regulated by the FRB and the IDFI. Our corporate office is located at 31 North 9th Street, Richmond, Indiana, and our telephone number is (765) 962-2581. First Bank Richmond is an Indiana state-chartered commercial bank headquartered in Richmond, Indiana. The Bank was originally established in 1887 as an Indiana state-chartered mutual savings and loan association and in 1935 converted to a federal mutual savings and loan association, operating under the name First Federal Savings and Loan Association of Richmond. In 1993, the Bank converted to a state-chartered mutual savings bank and changed its name to First Bank Richmond, S.B. In 1998, the Bank, in connection with its non-stock mutual holding company reorganization, converted to a national bank charter operating as First Bank Richmond, National Association. In July 2007, Richmond Mutual Bancorporation-Delaware, the Bank’s then current holding company, acquired Mutual Federal Savings Bank headquartered in Sidney, Ohio. Mutual Federal Savings Bank was operated independently as a separately chartered, wholly owned subsidiary of Richmond Mutual Bancorporation-Delaware until 2016 when it was combined with the bank through an internal merger transaction that consolidated both banks into a single, more efficient commercial bank charter. In 2017, the Bank converted to an Indiana state-chartered commercial bank and changed its name to First Bank Richmond. 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. Administrative, trust and wealth management services are conducted through First Bank Richmond’s Corporate Office/Financial Center located in Richmond, Indiana. As an Indiana-chartered commercial bank, First Bank Richmond is subject to regulation by the IDFI and the Federal Deposit Insurance Corporation (“FDIC”). Our principal business consists of attracting deposits from the general public, as well as brokered deposits, and investing those funds primarily in loans secured by commercial and multi-family real estate, first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, direct financing leases and commercial and industrial loans. We also obtain funds by utilizing Federal Home Loan Bank (“FHLB”) advances. Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and government sponsored agency and municipal bonds. First Bank Richmond generates commercial, mortgage and consumer loans and leases and receives deposits from customers located primarily in Wayne and Shelby Counties, in Indiana and Shelby, Miami and Franklin (no deposits) Counties, in Ohio. We sometimes refer to these counties as our primary market area. First Bank Richmond’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Our leasing operation consists of direct investments in equipment that we lease (referred to as direct finance leases) to small businesses located throughout 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 28 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 $151.3 million at March 31, 2021. Our results of operations are primarily dependent on net interest income. Net interest income is the difference between interest income, which is the income that is earned on loans and investments, and interest expense, which is the interest that is paid on deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), and fees from sale of residential mortgage loans originated for sale in the secondary market. We also recognize income from the sale of investment securities. Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are 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 Certain accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan and lease losses, the valuation of foreclosed assets, mortgage servicing rights, valuation of intangible assets and securities, deferred tax asset and income tax accounting. Allowance for Loan and Lease Losses. We maintain an allowance for loan and lease losses to cover probable incurred credit losses at the balance sheet date. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. A provision for loan and lease losses is charged to operations based on our periodic evaluation of the necessary allowance balance. We have an established process to determine the adequacy of the allowance for loan and lease losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors, all of which may be susceptible to significant change. Mortgage Servicing Rights (“MSRs”). MSRs associated with loans originated and sold, where servicing is retained, are capitalized and included in the consolidated balance sheet. The value of the capitalized servicing rights represents the fair value of the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as a reduction in loan servicing fee income. 29 Securities. Under Financial Accounting Standards Board (“FASB”) Codification Topic 320 (ASC 320), Investments-Debt, investment securities must be classified as held to maturity, available for sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and we have the ability to hold the securities to maturity. Securities not classified as held to maturity are classified as available for sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and which do not affect earnings until realized. The fair values of our securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of our fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities. We evaluate all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if any other-than-temporary-impairments (“OTTI”) exist pursuant to guidelines established in ASC 320. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our ability and intent to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. If management determines that an investment experienced an OTTI, we must then determine the amount of the OTTI to be recognized in earnings. If we do not intend to sell the security and it is more likely than not that we will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the value of these securities are recorded as an unrealized gain (as accumulated other comprehensive income (loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold. From time to time we may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time. Deferred Tax Asset. We have evaluated our deferred tax asset to determine if it is more likely than not that the asset will be utilized in the future. Our most recent evaluation has determined that we will more likely than not be able to utilize our remaining deferred tax asset. Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. COVID 19 Response 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. 30 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. 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 March 31, 2021, 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 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 Multi-Family — — 4 8,868 Residential mortgage 5 450 3 163 Direct financing leases 19 756 20 494 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 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 % 31 Branch Operations and Additional Client Support 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 March 31, 2021 and December 31, 2020 General. 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 $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 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 $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 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 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 32 metrics are being reviewed and stress testing is being performed on the loan portfolio. Potentially higher risk segments of the portfolio, such as hotels and restaurants, are being closely monitored as are loan payment deferrals. Deposits. Total deposits increased $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. Borrowings. 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 $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. General. 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 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 $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 33 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 $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. The following tables set forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using quarterly balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Loan fees are included in interest income on loans and are not material. Three Months Ended March 31, 2021 2020 Average Balance Outstanding Interest Earned/ Paid Yield/ Rate Average Balance Outstanding Interest Earned/ Paid Yield/ Rate (Dollars in thousands) Interest-earning assets: Loans and leases receivable $ 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 % Total interest-earning assets 1,019,388 10,644 4.18 % 950,679 10,452 4.40 % Interest-bearing liabilities: Savings and money market accounts 223,560 278 0.50 % 163,948 292 0.71 % Interest-bearing checking accounts 142,457 81 0.23 % 104,154 82 0.31 % 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 % Net interest income $ 8,763 $ 7,888 Net earning assets $ 235,011 $ 240,077 Net interest rate spread (1) 3.22 % 2.96 % Net interest margin (2) 3.44 % 3.32 % Average interest-earning assets to average interest-bearing liabilities 129.96 % 133.79 % 34 _____________ (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 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 $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 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. Freezing the DB plan resulted in some immediate cost savings because future benefit accruals were stopped. However, the freeze did not impact unfunded liabilities or eliminate cost volatility. The frozen DB Plan remains subject to the interest rate, investment and demographic risks that apply to ongoing defined benefit plans. In addition, the frozen DB Plan is still subject to the same minimum funding, compliance, administrative and fiduciary requirements as an ongoing defined benefit plan. The Company still intends to terminate the Bank’s participation in the DB Plan, which will require it to pay an amount based on the underfunded status of the plan. As of 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 35 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 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. Liquidity We are required to have enough cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, liquid assets have been maintained above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and our ability to manage those requirements. We strive to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance in short-term investments at any given time will cover adequately any reasonably anticipated immediate need for funds. Additionally, First Bank Richmond maintains a relationship with the FHLB of Indianapolis which could provide funds on short-term notice if needed. Liquidity management is both a daily and long-term function of the management of our business. It is overseen by the Asset and Liability Management Committee. Excess liquidity is generally invested in short-term investments, such as overnight deposits and holding excess funds at the Federal Reserve Bank. On a long-term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed and municipal securities. First Bank Richmond can also generate funds from borrowings, primarily FHLB advances. In addition, we have historically sold eligible long-term, fixed-rate residential mortgage loans in the secondary market in order to reduce interest rate risk and to create another source of liquidity. At 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 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 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. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Bank. Liquidity, represented by cash, cash equivalents, and investment securities, is a product of our operating, investing and financing activities. Primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, excess funds are invested in short-term interest-earning assets, which provide liquidity to meet lending requirements. Cash is also generated through borrowings. FHLB advances are utilized to leverage our capital base and provide funds for lending and investment activities, as well as to enhance interest rate risk management. Cash and cash equivalents 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. 36 As a separate legal entity from the Bank, the Company must provide for its own liquidity. 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. In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements, including commitments to extend credit and unused lines of credit. These transactions involve varying degrees of off-balance sheet risks. While these commitments are contractual obligations and represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At March 31, 2021, we had $167.4 million in loan and lease commitments and unused lines of credit. 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. Capital Resources First Bank Richmond is subject to minimum capital requirements imposed by the FDIC. The FDIC may require us to have additional capital above the specific regulatory levels if it believes we are subject to increased risk due to asset problems, high interest rate risk and other risks. At 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. Actual Required for Adequate Capital To Be Well Capitalized 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 % Tier 1 risk-based capital (to risk weighted assets) 156,464 19.5 48,086 6.0 64,114 8.0 Common equity tier 1 capital (to risk weighted assets) 156,464 19.5 36,064 4.5 52,093 6.5 Tier 1 leverage (core) capital (to adjusted tangible assets) 156,464 14.2 44,120 4.0 55,150 5.0 As of December 31, 2020 Total risk-based capital (to risk weighted assets) $ 162,624 21.9 % $ 59,416 8.0 % $ 74,270 10.0 % Tier 1 risk-based capital (to risk weighted assets) 153,325 20.6 44,562 6.0 59,416 8.0 Common equity tier 1 capital (to risk weighted assets) 153,325 20.6 33,422 4.5 48,276 6.5 Tier 1 leverage (core) capital (to adjusted tangible assets) 153,325 14.3 42,939 4.0 53,673 5.0 Pursuant to the capital regulations of the FDIC and the other federal banking agencies, First Bank Richmond must maintain a capital conservation buffer consisting of additional common equity tier 1 (“CET1”) capital greater than 2.5% of risk-weighted assets above the required minimum levels of risk-based CET1 capital, tier 1 capital and total capital in order to avoid 37 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 March 31, 2021, it would have exceeded all regulatory capital requirements. Impact of Inflation The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the economic value of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of inflationary changes in the economy coincides with changes in interest rates. Since virtually all of our assets and liabilities are monetary in nature, interest rates generally have a more significant impact on our performance than does inflation. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There has not been any material change in the market risk disclosures contained in our 2020 Form 10-K.