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Item 2. Management’s Discussion and Analysis

2021-08-13 compared with 2021-05-14 · 222 added, 159 removed, 252 unchanged (60% 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 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 “Company”) at June 30, 2021, and the consolidated results of operations for the three and six month periods ended June 30, 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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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.

Total wealth management assets under management and administration were $154.0 million at June 30, 2021.

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

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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.

At June 30, 2021, on a consolidated basis, we had $1.2 billion in assets, $785.3 million in loans and leases, net of allowance, $793.1 million in deposits and $182.6 million in stockholders’ equity.

At June 30, 2021, First Bank Richmond’s total risk-based capital ratio was 19.06%, exceeding the 10.0% requirement for a well-capitalized institution.

For the six months ended June 30, 2021, net income was $5.3 million, compared with net income of $5.0 million for the six months ended June 30, 2020.

Critical Accounting Policies

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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.

On December 27, 2020, the Consolidated Appropriations Act, 2021, or CAA, was signed into law.

This legislation included another round of COVID-19 stimulus funding, including approximately $285 billion in funding to reopen the U.S.

Small Business Administration's ("SBA") PPP which initially expired on August 8, 2020.

The new round of COVID-19 stimulus funding under the PPP concluded May 31, 2021.

During the second quarter of 2021 we processed 81 applications for new PPP loans totaling $3.0 million.

As of June 30, 2021, we had funded a total of 892 PPP loans totaling $103.1 million and the SBA had approved 524 loan forgiveness applications totaling $68.5 million with no additional applications pending approval.

PPP loans totaled $34.6 million at June 30, 2021.

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 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 second quarter of 2021 have significantly declined.

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 %

Deferred loans and leases are re-evaluated at the end of the initial deferral period and will either return to the original loan or lease 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 June 30, 2021, the number of loans and leases granted payment deferrals was six, representing $2.5 million in loans and leases outstanding, down from 33 loans and leases at March 31, 2021 totaling $24.6 million and 48 loans and leases at December 31, 2020 totaling $54.7 million.

Deferred loans relating to higher risk segments of our portfolio are closely monitored, such as hospitality loans including restaurants and hotels.

As of June 30, 2021, we had no deferred loans relating to this portion of our portfolio.

Of the loans and leases currently deferred at June 30, 2021, none were new deferrals and all were repeat deferrals.

Branch Operations and Additional Client Support

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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.

As of June 30, 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

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.

The Company is aware of the recent surge in COVID-19 infections arising out of the so-called Delta variant and is prepared to restore other protocols, as may prove to be necessary.

Comparison of Financial Condition at June 30, 2021 and December 31, 2020

Total assets increased $104.3 million, or 9.6%, to $1.2 billion at June 30, 2021 from $1.1 billion at December 31, 2020.

The increase was primarily a result of a $50.9 million, or 6.9%, increase in loans and leases, net of allowance to $785.3 million at June 30, 2021 from $734.4 million at December 31, 2020;

and an $82.9 million, or 32.3%, increase in investment securities to $339.6 million at June 30, 2021, compared to $256.7 million at December 31, 2020.

Offsetting the increase in loans and investments was a $31.7 million, or 65.0%, decrease in cash and cash equivalents to $17.1 million at June 30, 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.

Our loan and lease portfolio, net of allowance for loan and lease losses, increased $50.9 million, to $785.3 million at June 30, 2021 from $734.4 million at December 31, 2020.

The increase in loans and leases was attributable to an increase in multi-family loans of $24.5 million, an increase in construction and development loans of $22.3 million, and an increase in residential loans and leases of $3.9 million and $3.8 million respectively.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loans and leases more than 90 days past due, totaled $7.7 million or 0.97% of total loans and leases at June 30, 2021, compared to $4.8 million or 0.65% 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 between the developer and other parties.

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.

Accruing loans and leases past due more than 90 days at June 30, 2021 totaled $2.0 million, compared to $4.0 million at December 31, 2020.

At June 30, 2021, TDRs totaled $513,000, 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.

As of June 30, 2021, the Company had outstanding six loan and lease modifications qualifying under the CARES Act related to the COVID-19 pandemic with an outstanding loan and lease balance totaling $2.5 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.

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.

The allowance for loan and lease losses increased $845,000, or 8.0%, to $11.4 million at June 30, 2021 from $10.6 million at December 31, 2020.

At June 30, 2021, the allowance for loan and lease losses totaled 1.43% of total loans and leases outstanding compared to 1.42% at December 31, 2020.

The allowance for loan and lease losses to total loans at June 30, 2021 and December 31, 2020 would increase seven and eight basis points, respectively, if PPP loans, which totaled $34.6 million and $43.3 million at June 30, 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.

Net charge-offs during the first six months of 2021 were $85,000 or 0.02% of average loans and leases outstanding, compared to net charge-offs of $98,000 during the first six months of 2020.

The allowance for loan and lease losses to non-performing loans and leases was 147.6% at June 30, 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 Company evaluated its exposure to potential loan and lease losses as of June 30, 2021, which evaluation included consideration of potential credit losses due to the ongoing economic uncertainties driven by the impact of the COVID-19 pandemic, which have lingered due to the lagging vaccination rates and an increase in cases within our markets related to the Delta variant.

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.

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

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

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

Total deposits increased $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.

Total deposits increased $100.0 million, or 14.4%, to $793.1 million at June 30, 2021, from $693.0 million at December 31, 2020.

The increase in deposits 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 the first quarter 2021.

Brokered deposits increased $18.4 million to $41.7 million, or 5.3% of total deposits, at June 30, 2021, compared to $23.3 million, or 3.4% of total deposits, at December 31, 2020.

Management increased longer-term brokered deposits as a result of continued low rates being offered in the brokered CD market.

Demand deposit and savings accounts increased $62.0 million to $512.6 million at June 30, 2021, compared to $450.6 million at December 31, 2020, which included an $11.8 million, or 12.0%, increase in noninterest-bearing deposits.

At June 30, 2021, noninterest-bearing deposits totaled $110.5 million, or 13.9% 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, increased $19.0 million to $189.0 million at June 30, 2021, compared to $170.0 million at December 31, 2020, which together with the increase in deposits, was used to fund loan growth and purchase of investment securities.

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.

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.

Stockholders’ equity totaled $182.6 million at June 30, 2021, a decrease of $10.1 million, or 5.3%, from December 31, 2020.

The decrease in stockholders' equity from year-end 2020 resulted from the repurchase of $7.2 million of Company common stock, the payment of $7.7 million in dividends to Company stockholders and a $2.0 million reduction in accumulated comprehensive income, partially offset by net income of $5.3 million in the first half of 2021.

The Company repurchased 512,783 shares of Company common stock at an average price of $13.99 per share for a total of $7.2 million during the first six months of 2021.

The Company’s equity to asset ratio was 15.4% at June 30, 2021.

At June 30, 2021, the Bank’s Tier 1 capital to total assets ratio was 13.7% and the Bank’s capital was well in excess of all regulatory requirements.

Comparison of Results of Operations for the Three Months Ended June 30, 2021 and 2020.

Net income for the three months ended June 30, 2021 was $2.8 million, a $275,000 increase from net income of $2.5 million for the three months ended June 30, 2020.

The $2.8 million in earnings equaled $0.24 diluted earnings per share for the second quarter of 2021, compared to $0.20 diluted earnings per share for the second 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 income increased $349,000, or 3.3%, to $10.8 million during the quarter ended June 30, 2021, compared to $10.5 million during the quarter ended June 30, 2020.

Interest income on loans and leases increased $284,000, or 3.1%, to $9.6 million for the quarter ended June 30, 2021, from $9.3 million for the comparable quarter in 2020, due to higher average balances in the loan and lease portfolio, partially offset by a five basis point decline in yield to 4.93%

The average outstanding loan and lease balances were $778.4 million for the quarter ended June 30, 2021, compared to $747.9 million for the quarter ended June 30, 2020.

The average yield on loans and leases was 4.93% for the quarter ended June 30, 2021, compared to 4.98% for the comparable quarter in 2020.

Interest income also included $696,000 in fees earned related to PPP loans in the quarter ended June 30, 2021 compared to $261,000 during the same quarter in 2020.

Interest income on investment securities, including FHLB stock, increased $70,000, or 6.0%, to $1.2 million during the quarter ended June 30, 2021, compared to the same quarter in 2020.

The increase in interest income on investment securities from the comparable period in 2020 was due to an increase in the average balances of $65.7 million, partially offset by a decrease in the weighted average yield of 29 basis points.

The average balance of investment securities, including FHLB stock, was $322.4 million for the quarter ended June 30, 2021, compared to $256.6 million for the quarter ended June 30, 2020.

The average yield on investment securities, including FHLB stock, was 1.55% for the second quarter of 2021, compared to 1.84% for the second quarter of 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

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.

Interest expense decreased $553,000, or 22.3%, to $1.9 million for the quarter ended June 30, 2021, from $2.5 million for the quarter ended June 30, 2020.

Interest expense on deposits decreased $483,000, or 28.3%, to $1.2 million for the quarter ended June 30, 2021, from $1.7 million for the comparable quarter in 2020.

This decrease in interest expense was attributable to a decrease of 41 basis points in the average rate paid on interest-bearing deposits, partially offset by an increase of $73.9 million in average interest-bearing deposit balances.

The weighted average rate paid on interest-bearing deposits was 0.72% for the quarter ended June 30, 2021, compared to 1.13% for the quarter ended June 30, 2020.

Average balance of interest-bearing deposits increased to $676.2 million, or 12.3%, in the quarter ended June 30, 2021, compared to $602.3 million in the comparable quarter in 2020.

Interest expense on FHLB borrowings decreased $70,000, or 9.0%, to $701,000 in the second quarter of 2021 compared to $770,000 for the same quarter in 2020.

The average balance of FHLB borrowings totaled $173.1 million during the quarter ended June 30, 2021, compared to $181.8 million for the quarter ended June 30, 2020.

The weighted average rate paid on FHLB borrowings was 1.62% for the quarter ended June 30, 2021, a seven basis point decline from 1.69% 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.

Net interest income before the provision for loan and lease losses increased $902,000, or 11.2%, to $8.9 million in the second quarter of 2021, compared to $8.0 million for the second quarter of 2020.

This increase was due to both an increase in average interest-earning assets and a 25 basis point increase in the net interest rate spread during the second quarter of 2021 compared to the comparable quarter in 2020.

Net interest margin (annualized) was 3.18% for the three months ended June 30, 2021, compared to 3.03% for the three months ended June 30, 2020.

The increase in net interest margin was due to both an increase in average earning assets and a 25 basis point increase in the net interest rate spread.

The yield on the loans and lease portfolio was impacted by the PPP loan activity during the second 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 recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA.

The average yield on PPP loans, including the recognition of deferred fees, resulted in a positive impact to the yield on loans and leases of three basis points during the quarter ended June 30, 2021, compared to a negative impact of 12 basis points to the yield on loans and leases in the comparable quarter in 2020.

Average Balances, Interest and Average Yields/Cost.

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

Average balances have been calculated using 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 June 30,

Outstanding Interest

(Dollars in thousands)

Interest-earning assets:

Loans and leases receivable $ 778,430 $ 9,592 4.93 % $ 747,865 $ 9,308 4.98 %

Securities 313,327 1,185 1.51 % 247,594 1,120 1.81 %

FHLB stock 9,050 64 2.83 % 9,035 58 2.57 %

Cash and cash equivalents and other 22,839 6 0.11 % 54,806 11 0.08 %

Total interest-earning assets 1,123,646 10,847 3.86 % 1,059,300 10,497 3.96 %

Interest-bearing liabilities:

Savings and money market accounts 253,086 317 0.50 % 183,415 253 0.55 %

Interest-bearing checking accounts 152,596 88 0.23 % 115,091 66 0.23 %

Certificate accounts 270,497 816 1.21 % 303,805 1,385 1.82 %

Borrowings 173,077 701 1.62 % 181,824 770 1.69 %

Total interest-bearing liabilities 849,256 1,922 0.91 % 784,135 2,474 1.26 %

Net interest income $ 8,925 $ 8,023

Net earning assets $ 274,390 $ 275,165

Net interest rate spread (1)

2.95 % 2.70 %

Net interest margin (2)

3.18 % 3.03 %

Average interest-earning assets to average interest-bearing liabilities

132.31 % 135.09 %

_____________

(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 June 30, 2021 totaled $530,000 compared to $1.3 million for the three months ended June 30, 2020, a $790,000 or 59.8% decrease.

The decrease in the provision for loan and lease losses was primarily due to improvement in the overall economy from the effects of the COVID-19 pandemic and the positive effects of the government's response to the pandemic on the Bank's loan portfolio, partially offset by the increase in the loan portfolio.

Net charge-offs during the second quarter of 2021 were $58,000, compared to net charge-offs of $106,000 in the second quarter of 2020.

Recently, we have seen most of our market areas reporting a fairly significant increase in COVID transmissions, which we understand from our public health authorities is largely attributed to lagging vaccination rates and an increase in cases related to the Delta variant.

To date, we are not seeing renewed business activity restrictions in our primary markets.

To the extent business activity restrictions are renewed, due to COVID-19 or otherwise, this will likely affect our business operations which may, in turn, require us to increase our allowance through our provision for loan and lease losses which would adversely affect our financial performance.

Noninterest Income.

Noninterest income decreased $178,000 or 8.5%, to $1.9 million for the quarter ended June 30, 2021, compared to $2.1 million for the comparable quarter in 2020.

The decrease in noninterest income resulted primarily from the decrease in gains on loan and lease sales, which decreased $461,000, or 44.8%, to $569,000 during the second quarter of 2021, compared to $1.0 million during the second quarter of 2020.

The decrease in gains on loan and lease sales was due to declining mortgage banking activity primarily resulting from lower refinancing activity and a lower level of supply of houses for sale in the Bank's market area.

There was a net gain on the sale of securities recorded in the second quarter of 2021 of $38,000 compared to a net gain on the sale of securities of $10,000 in the second quarter of 2020.

Card fee income increased $73,000, or 36.2%, to $275,000 in the second quarter of 2021 from $202,000 in the second quarter of 2020 due to increased debit card usage.

Loan and lease servicing income decreased $52,000, to $249,000 for the second quarter of 2021 compared to $301,000 for the comparable quarter in 2020, due to a smaller recovery of mortgage servicing rights in the first quarter of 2021 compared to the first quarter of 2020.

The Company recorded a recovery of $178,000 to the value of its mortgage servicing

rights in the second quarter of 2021, compared to a recovery of $296,000 in the second quarter of 2020.

Other loan fees increased $90,000, or 36.9%, to $335,000 in the second quarter of 2021 compared to the comparable quarter of 2020 primarily due to an increase in commercial loan processing fees of $162,000 over the comparable quarter of 2020.

Service fees on deposit accounts increased $93,000, or 88.2%, to $199,000 for the quarter ended June 30, 2021, compared to $106,000 for the quarter ended June 30, 2020.

The increase in service fees on deposit accounts during the second quarter of 2021 compared to the second quarter of 2020 was primarily the result of the resumption of overdraft fees after the suspension of such fees in 2020 during the height of the COVID-19 pandemic.

Noninterest Expense.

Noninterest expense increased $1.2 million, or 21.8%, to $6.9 million for the three months ended June 30, 2021, from $5.6 million for the same period in 2020.

Salaries and employee benefits increased $1.0 million, or 31.9%, to $4.3 million for the quarter ended June 30, 2021 from $3.3 million for the quarter ended June 30, 2020.

The increase in salaries and benefits from the second quarter of 2020 primarily was due to $528,000 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 $173,000, increased health insurance costs of $54,000, and increased compensation expense of $222,000 primarily as a result of annual merit increases and additional staff.

Equipment expense increased $34,000, or 12.2%, to $315,000 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.

Data processing fees increased $91,000, or 19.2%, to $563,000 in the second quarter of 2021 compared to the same quarter of 2020, primarily due to the process of upgrading our digital banking environment.

Legal and professional fees decreased $38,000, or 11.7% to $289,000 compared to the same quarter in 2020.

Other expenses increased $65,000, or 8.0%, to $876,000 in the second 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.

Income Tax Expense.

Income tax expense increased $7,000 during the three months ended June 30, 2021, compared to the same period in 2020, primarily due to a level of pre-tax income offset by a lower tax rate.

The effective tax rate for the second quarter of 2021 was 18.7% compared to 20.2% for the same quarter a year ago.

Comparison of Results of Operations for the Six Months Ended June 30, 2021 and 2020.

Net income for the six months ended June 30, 2021 was $5.3 million, a $386,000 increase from net income of $5.0 million for the six months ended June 30, 2020.

The $5.3 million in earnings equaled $0.45 diluted earnings per share for the first half of 2021, compared to $0.40 diluted earnings per share for the first half of 2020.

Interest Income.

Interest income increased $542,000, or 2.6%, to $21.5 million during the six months ended June 30, 2021, compared to $20.9 million during the six months ended June 30, 2020.

Interest income on loans and leases increased $849,000, or 4.6%, to $19.2 million for the six months ended June 30, 2021, from $18.4 million for the comparable quarter in 2020, due to higher average balances in the loan and lease portfolio.

The average outstanding loan and lease balances were $722.3 million for the first half of the year 2021, compared to $692.1 million for the first half of 2020.

The average yield on loans and leases was 5.32% for the first six months of 2021, compared to 5.31% for the comparable period in 2020.

Interest income also included $1.3 million in fees earned related to PPP loans in the six months ended June 30, 2021 compared to $261,000 during the same period in 2020.

As of June 30, 2021, total unrecognized fees on PPP loans were $1.5 million.

Interest income on investment securities, including FHLB stock, decreased $183,000, or 7.5%, to $2.3 million during the six months ended June 30, 2021, from $2.4 million during the comparable period in 2020.

The decrease in interest income on investment securities was due to a decrease in the weighted average yield of 48 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 $296.2 million for the six months ended June 30, 2021, compared to $244.4 million for the six months ended June 30, 2020.

The average yield on investment securities, including FHLB stock, was 1.52% for the first half of 2021, compared to 2.00% for the first half of 2020.

Interest income earned on cash and cash equivalents decreased to $13,000 in the first half of 2021 compared to $136,000 in the comparable period of 2020.

The decrease in interest income earned on cash and cash equivalents 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 $1.2 million, or 24.5%, to $3.8 million for the six months ended June 30, 2021, from $5.0 million for the six months ended June 30, 2020.

Interest expense on deposits decreased $1.1 million, or 31.7%, to $2.4 million for the six months ended June 30, 2021, from $3.5 million for the comparable period 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 0.75% for the six

months ended June 30, 2021, compared to 1.23% for the six months ended June 30, 2020.

Average balance of interest-bearing deposits increased to $645.4 million, or 12.4%, in the six months ended June 30, 2021, compared to $574.4 million in the comparable period in 2020.

Interest expense on FHLB borrowings decreased $115,000, or 7.6%, to $1.4 million in the first half of 2021 compared to $1.5 million for the same period in 2020.

The average balance of FHLB borrowings totaled $171.5 million during the six months ended June 30, 2021, compared to $172.9 million for the six months ended June 30, 2020.

The weighted average rate paid on FHLB borrowings was 1.63% for the six months ended June 30, 2021, a 12 basis point decline from 1.75% for the comparable period in 2020.

Net Interest Income.

Net interest income before the provision for loan and lease losses increased $1.8 million, or 11.2%, to $17.7 million in the first half of 2021, compared to $15.9 million for the first half of 2020.

This increase was primarily due to an increase in average interest-earning assets.

Net interest margin (annualized) was 3.38% for the six months ended June 30, 2021, compared to 3.25% for the six months ended June 30, 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.

The yield on the loan and lease portfolio was impacted by the PPP loan activity during the first half of 2021 as PPP loans are originated at an interest rate of 1%, although the effective yield is higher as a result of the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA.

The average yield on PPP loans,including the recognition of deferred fees, resulted in a positive impact to the yield on loans and leases of eight basis points during the six months ended June 30, 2021, compared to a negative impact of eight basis points to the yield on loans and leases in the comparable period in 2020.

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 March 31,

Six Months Ended June 30,

Outstanding Interest

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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.

The provision for loan and lease losses for the six months ended June 30, 2021 totaled $930,000 compared to $1.5 million for the six months ended June 30, 2020, a $600,000 or 39.2% decrease.

The decrease in the provision for loan and lease losses was primarily due to improvement in the overall economy from the effects of the COVID-19 pandemic and the positive effects of the government's response to the pandemic on the Bank's loan and lease portfolio partially offset by the increase in the loan portfolio and non-performing loans experienced in the first half of 2021.

Net charge-offs during the first half of 2021 were $85,000, compared to net charge-offs of $98,000 in the first half of 2020.

To date, we are not seeing renewed business activity restrictions in our primary markets.

To the extent business activity restrictions are renewed, due to COVID-19 or otherwise, this will likely affect our business operations which may, in turn, require us to increase our allowance through the provision for loan and lease losses which would adversely affect our financial performance.

Noninterest Income.

Noninterest income increased $636,000 or 20.9%, to $3.7 million for the six months ended June 30, 2021, compared to $3.0 million for the comparable period in 2020.

The increase in noninterest income resulted primarily from the increase in the gain on sale of loans and leases, which increased $275,000, or 21.9%, to $1.5 million during the first half of 2021, compared to $1.3 million during the first half of 2020 as a result of continued strong mortgage banking activity during the current year due to continuing low interest rates.

There was a net gain on the sale of securities recorded in the first half of 2021 of $38,000, while the Company recognized a net gain on the sale of securities of $79,000 in the first half of 2020.

Card fee income increased $136,000, or 35.6%, to $517,000 in the first six months of 2021 from $381,000 in the first six months of 2020 due to increased debit card usage.

Loan and lease servicing income decreased $92,000, to $143,000 for the first half of 2021 compared to $236,000 for the comparable period in 2020, due to a smaller recovery of impairment of mortgage servicing rights in the first quarter of 2021 compared to the first quarter of 2020.

In the first half of 2021, the Company recorded a recovery to the value of its mortgage servicing rights of $20,000, compared to a recovery of $182,000 in the first half of 2020.

Other loan fees increased $255,000, or 78.0%, to $583,000 in the first six months of 2021 compared to the comparable period of 2020 primarily due to an increase in commercial loan processing fees of $330,000 over the first half of 2020.

Service fees on deposit accounts increased $33,000, or 9.1%, to $393,000 for the six months ended June 30, 2021, compared to $360,000 for the six months ended June 30, 2020.

The increase in service fees on deposit accounts during the first six months of 2021 compared to the first six months of 2020 was primarily due to the resumption of charging overdraft fees after the suspension of such fees in 2020 during the height of the COVID-19 pandemic.

Noninterest Expense.

Noninterest expense increased $2.7 million, or 24.0%, to $13.9 million for the six months ended June 30, 2021, from $11.2 million for the same period in 2020.

Salaries and employee benefits increased $2.1 million, or 32.0%, to $8.8 million for the six months ended June 30, 2021 from $6.6 million for the six months ended June 30, 2020.

The increase in salaries and benefits from the first half of 2020 primarily was due to $1.0 million 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 $354,000, and increased compensation expense of $627,000 primarily as a result of annual merit increases and additional staff.

Net occupancy expense increased $49,000, or 8.6% to $624,000 from $575,000 in the first half of 2020, primarily as a result of higher building maintenance expenses.

Equipment expense increased $115,000, or 21.4% to $652,000 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.

Deposit insurance expense increased $19,000, or 16.4% compared to the first six months of 2020 primarily due to growth in the Bank's balance sheet.

Legal and professional fees increased $67,000, or 11.8% to $635,000 compared to the same period 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 $24,000 or 12.6%, from the first six months of 2020.

Other expenses increased $172,000, or 11.7%, to $1.6 million in the first half of 2021 compared to the same period of 2020 primarily due to losses related to electronic banking fraud on customers' accounts increasing $73,000, and franchise tax expense increasing $115,000.

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

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.

See Note 7 of the Notes to Condensed Consolidated Financial Statements in this report for additional information relating to the Company’s DB Plan.

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.

Income tax expense decreased $58,000 during the six months ended June 30, 2021, compared to the same period in 2020, primarily due to a lower tax rate.

The effective tax rate for the first six months of 2021 was 18.7% compared to 20.6% for the first six months of 2020.

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

At June 30, 2021, the Bank had $177.9 million in cash and unpledged available-for-sale investment securities for its cash needs.

The Bank had the ability to borrow an additional $51.0 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.

At June 30, 2021, we had no borrowings from the PPPLF, with the ability to borrow up to $34.6 million based on PPP loans unpledged at that date.

On June 25, 2021 the Federal Reserve announced that the PPPLF program would terminate on July 30, 2021.

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.

At June 30, 2021, outstanding loan and lease commitments, including unused lines and letters of credit, totaled $175.7 million, including $93.2 million of undisbursed construction and land loans.

Certificates of deposit scheduled to mature in one year or less at June 30, 2021, totaled $153.7 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 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.

Cash and cash equivalents decreased $31.7 million to $17.1 million as of June 30, 2021, from $48.8 million as of December 31, 2020.

Net cash used in operating activities was $2.5 million for the six months ended June 30, 2021.

Net cash used in investing activities totaled $133.4 million during the six months ended June 30, 2021 and consisted primarily of increases in net loans and available-for-sale securities.

The $104.2 million of net cash provided by financing activities during the six months ended June 30, 2021 was primarily the result of a $100.0 million net increase in deposits.

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.

At June 30, 2021, the Company, on an unconsolidated basis, had $16.6 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.

Management believes that its primary liquidity sources of loan repayments, maturing investment securities, available FHLB borrowing and access to the brokered CD market are sufficient in the current economic environment.

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

At June 30, 2021, we had $175.7 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.

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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 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.

At June 30, 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.

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(Dollars in thousands)

As of March 31, 2021

As of June 30, 2021

Total risk-based capital (to risk weighted assets) $ 171,023 19.1 % $ 71,798 8.0 % $ 89,748 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 March 31, 2021 the Bank’s CET1 capital exceeded the required capital conservation buffer.

At June 30, 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

If Richmond Mutual Bancorporation was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at June 30, 2021, it would have exceeded all regulatory capital requirements.

Impact of Price Changes and Inflation

The effects of price changes and inflation can vary substantially for most financial institutions.

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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