What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-12 compared with 2021-08-13 · 166 added, 190 removed, 284 unchanged (56% 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 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 “Company”) at September 30, 2021, and the consolidated results of operations for the three and nine month periods ended September 30, 2021, compared to the same periods 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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• 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;

• 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 ("SEC") 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");

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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.

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.

The Company, a Maryland corporation, is a bank holding company for its wholly owned subsidiary, First Bank Richmond.

Substantially all of the Company's business is conducted through First Bank Richmond.

The Company is regulated by the Board of Governors of the Federal Reserve System (the “FRB”) and the Indiana Department of Financial Institutions ("IDFI").

The Company's corporate office is located at 31 North 9th Street, Richmond, Indiana, and its telephone number is (765) 962-2581.

First Bank Richmond is an Indiana state-chartered commercial bank headquartered in Richmond, Indiana.

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

We seek leasing

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

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

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

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

Total wealth management assets under management and administration were $151.8 million at September 30, 2021.

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

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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.

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 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.

At September 30, 2021, on a consolidated basis, we had $1.2 billion in assets, $795.4 million in loans and leases, net of allowance, $824.3 million in deposits and $178.6 million in stockholders’ equity.

At September 30, 2021, First Bank Richmond’s total risk-based capital ratio was 17.63%, exceeding the 10.0% requirement for a well-capitalized institution.

For the nine months ended September 30, 2021, net income was $8.4 million, compared with net income of $7.5 million for the nine months ended September 30, 2020.

Critical Accounting Policies

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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.

When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine

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

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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.

Paycheck Protection Program ("PPP").

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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.

As of September 30, 2021, we had funded a total of 892 PPP loans totaling $103.1 million and the SBA had approved 732 loan forgiveness applications totaling $84.8 million.

PPP loans totaled $16.3 million at September 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 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 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.

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.

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

At September 30, 2021, we had no loans and leases that were subject to payment deferrals, compared to 48 loans and leases at December 31, 2020 totaling $54.7 million.

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 June 30, 2021, all of the Bank's branch lobbies were open.

As of September 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.

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.

The Company is aware of the 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 September 30, 2021 and December 31, 2020

Total assets increased $146.5 million, or 13.5%, to $1.2 billion at September 30, 2021 from $1.1 billion at December 31, 2020.

The increase was primarily a result of a $61.0 million, or 8.3%, increase in loans and leases, net of allowance, to $795.4 million at September 30, 2021 from $734.4 million at December 31, 2020, and a $110.9 million, or 43.2%, increase in investment securities to $367.7 million at September 30, 2021, compared to $256.7 million at December 31, 2020, partially offset by a $28.9 million, or 59.3%, decrease in cash and cash equivalents to $19.8 million at September 30, 2021, from $48.8 million at December 31, 2020.

Investment Securities.

Investment securities available-for-sale increased $113.6 million, or 46.5%, to $358.1 million, while investment securities held-to-maturity decreased $2.7 million, or 21.9%, to $9.5 million at September 30, 2021 compared to December 31, 2020.

The increase in investment securities available-for-sale was primarily the result of using our excess liquidity to purchase securities during the first nine months of 2021.

The decrease in investment securities held-to-maturity was the result of scheduled principal repayments and maturities.

Loans and Leases.

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.

Our loan and lease portfolio, net of allowance for loan and lease losses, increased $61.0 million, to $795.4 million at September 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 $36.7 million, an increase in construction and development loans of $24.1 million, an increase in commercial real estate loans of $7.6 million, and an increase in residential loans and leases of $6.0 million and $5.9 million respectively.

Commercial and industrial loans declined $21.0 million due to a decrease in PPP loans of $27.1 million resulting from PPP loan forgiveness by the SBA.

Loans held for sale totaled $903,000 and $2.0 million at September 30,2021 and December 31, 2020, respectively.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loans and leases more than 90 days past due, totaled $8.5 million or 1.05% of total loans and leases at September 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 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.

Accruing loans and leases past due more than 90 days at September 30, 2021 totaled $2.3 million, compared to $4.0 million at December 31, 2020.

At September 30, 2021, troubled debt restructurings ("TDRs") totaled $477,000, 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 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.

As of September 30, 2021, the Company had no outstanding loan and lease modifications qualifying under the CARES Act related to the COVID-19 pandemic.

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

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 $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.

The allowance for loan and lease losses increased $1.3 million, or 11.9%, to $11.8 million at September 30, 2021 from $10.6 million at December 31, 2020, primarily as a result of increases in the loan portfolio and level of nonperforming loans, partially offset by the continued improvement since December 31, 2020 in the national and local economy associated with the recovery from the COVID-19 pandemic which reduced the loss rates utilized to calculate the allowance for loan losses at September 30, 2021 as compared to the uncertain economic outlook and loss rates utilized at December 31, 2020.

At September 30, 2021, the allowance for loan and lease losses totaled 1.47% 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 September 30, 2021 and December 31, 2020 would increase three and eight basis points, respectively, if PPP loans, which totaled $16.3 million and $43.3 million at September 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 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.

Net charge-offs during the first nine months of 2021 were $167,000 or 0.02% of average

loans and leases outstanding, compared to net charge-offs of $110,000 during the first nine months of 2020.

The allowance for loan and lease losses to non-performing loans and leases was 139.2% at September 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 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 Company evaluated its exposure to potential loan and lease losses as of September 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.

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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 $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.

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

Total deposits increased $131.2 million, or 18.9%, to $824.3 million at September 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 businesses 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 $40.5 million to $63.8 million, or 7.7% of total deposits, at September 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.

Demand deposit and savings accounts increased $62.9 million to $513.4 million at September 30, 2021, compared to $450.6 million at December 31, 2020, which included a $7.4 million, or 7.5%, increase in noninterest-bearing deposits.

At September 30, 2021, noninterest-bearing deposits totaled $106.2 million, or 12.9% 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 $32.0 million to $202.0 million at September 30, 2021, compared to $170.0 million at December 31, 2020, which together with the increase in deposits, were used to fund loan growth and the purchase of investment securities.

Stockholders’ Equity.

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.

Stockholders’ equity totaled $178.6 million at September 30, 2021, a decrease of $14.1 million, or 7.3%, from December 31, 2020.

The decrease in stockholders' equity from year-end 2020 resulted from the repurchase of $11.2 million of Company common stock, the payment of $8.5 million in dividends to Company stockholders and a $5.0 million reduction in accumulated comprehensive income, partially offset by net income of $8.4 million in the first nine months of 2021.

The Company repurchased 777,692 shares of Company common stock at an average price of $14.38 per share for a total of $11.2 million during the first nine months of 2021.

The Company’s equity to asset ratio was 14.5% at September 30, 2021.

At September 30, 2021, the Bank’s Tier 1 capital to total assets ratio was 12.8% and the Bank’s capital was well in excess of all regulatory requirements.

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

Net income for the three months ended September 30, 2021 was $3.1 million, a $551,000 increase from net income of $2.5 million for the three months ended September 30, 2020.

The $3.1 million in earnings equaled $0.27 diluted earnings per share for the third quarter of 2021, compared to $0.21 diluted earnings per share for the third quarter of 2020.

The increase in net income was primarily the result of a $1.5 million increase in net interest income and an $800,000 decrease in the provision for loan losses, partially offset by a $848,000 decrease in noninterest income and a $859,000 increase in noninterest expense.

Interest Income.

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 income increased $1.2 million, or 10.7%, to $11.9 million during the quarter ended September 30, 2021, compared to $10.7 million during the quarter ended September 30, 2020.

Interest income on loans and leases increased $718,000, or 7.4%, to $10.4 million for the quarter ended September 30, 2021, from $9.7 million for the comparable quarter in 2020, due to higher average balances in the loan and lease portfolio and an increase in the average loan and lease yield of 18 basis points.

The average outstanding loan and lease balances were $784.5 million for the quarter ended September 30, 2021, compared to $756.3 million for the quarter ended September 30, 2020.

The average yield on loans and leases was 5.32% for the quarter ended September 30, 2021, compared to 5.14% for the comparable quarter in 2020.

Interest income also included $876,000 in fees earned related to PPP loans in the quarter ended September 30, 2021 compared to $269,000 during the same quarter in 2020.

As of September 30, 2021, total unrecognized fees on PPP loans were $700,000.

For the three months ended September 30, 2021, average PPP loans were $22.5 million and the average yield was 16.57%.

The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but will cease completely after the maturity of the loans.

Interest income on investment securities, including FHLB stock, increased $439,000, or 43.2%, to $1.5 million during the quarter ended September 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 $107.1 million.

The average balance of investment securities, including FHLB stock, was $363.3 million for the quarter ended September 30, 2021, compared to $256.2 million for the quarter ended September 30, 2020.

The average yield on investment securities, including FHLB stock, was 1.60% for the third quarter of 2021, compared to 1.59% for the third quarter of 2020.

Interest Expense.

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.

Interest expense decreased $366,000, or 15.8%, to $1.9 million for the quarter ended September 30, 2021, from $2.3 million for the quarter ended September 30, 2020.

Interest expense on deposits decreased $291,000, or 18.9%, to $1.3 million for the quarter ended September 30, 2021, from $1.5 million for the comparable quarter in 2020.

This decrease in interest expense was attributable to a decrease of 34 basis points in the average rate paid on interest-bearing deposits, partially offset by an increase of $118.5 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.

The average rate paid on interest-bearing deposits was 0.70% for the quarter ended September 30, 2021, compared to 1.04% for the quarter ended September 30, 2020.

The average balance of interest-bearing deposits increased to $713.9 million, or 19.9%, in the quarter ended September 30, 2021, compared to $595.4 million in the comparable quarter in 2020.

Interest expense on FHLB borrowings decreased $75,000, or 9.8%, to $689,000 in the third quarter of 2021 compared to $763,000 for the same quarter in 2020 due to a 15 basis point decline in the average rate paid on borrowings to 1.54% during the three months ended September 30, 2021, from 1.69% for the comparable quarter in 2020.

Net Interest Income.

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.

Net interest income before the provision for loan and lease losses increased $1.5 million, or 18.0%, to $10.0 million in the third quarter of 2021, compared to $8.4 million for the third quarter of 2020.

This increase was due to both an increase in average interest-earning assets and a 27 basis point increase in the net interest rate spread during the third quarter of 2021 compared to the comparable quarter in 2020.

Net interest margin (annualized) was 3.42% for the three months ended September 30, 2021, compared to 3.24% for the three months ended September 30, 2020.

The increase in net interest margin was due to both an increase in average earning assets and a 27 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.

The yield on the loan and lease portfolio was impacted by the PPP loan forgiveness activity during the third quarter of 2021 as PPP loans were 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 33 basis points during the quarter ended September 30, 2021, compared to a negative impact of 23 basis points to the yield on loans and leases in the comparable quarter in 2020.

Average Balances, Interest and Average Yields/Cost.

3 unchanged sentences

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

Three Months Ended June 30,

Three Months Ended September 30,

Outstanding Interest

27 unchanged sentences

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.

The provision for loan and lease losses for the three months ended September 30, 2021 totaled $500,000 compared to $1.3 million for the three months ended September 30, 2020, an $800,000 or 61.5% decrease.

The decrease 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 and nonperforming loans.

Net charge-offs during the third quarter of 2021 were $82,000, compared to net charge-offs of $12,000 in the third quarter of 2020.

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

1 unchanged sentence

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 income decreased $848,000 or 42.5%, to $1.1 million for the quarter ended September 30, 2021, compared to $2.0 million for the comparable quarter in 2020.

The decrease in noninterest income resulted primarily from a $771,000 or 58.1% decrease in net gains on loan and lease sales to $557,000 during the third quarter of 2021, compared to $1.3 million during the third quarter of 2020.

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

During the three months ended September 30, 2021, the Company sold $17.2 million of loans compared to the sale of $31.4 million of loans during the three months ended September 30, 2020.

There was a net gain on the sale of securities recorded in the third quarter of 2021 of $18,000 compared to a net gain on the sale of securities of $117,000 in the third quarter of 2020.

Card fee income increased $48,000, or 22.0%, to $266,000 in the third quarter of 2021 from $218,000 in the third quarter of 2020 due to increased debit card usage.

Loan and lease servicing income decreased $140,000, to a loss of $181,000 for the third quarter of 2021 compared to a loss of $42,000 for the comparable quarter in 2020, as the Company recorded an impairment of $251,000 to the value of its mortgage servicing rights in the third quarter of 2021, compared to a recovery of $6,000 in the third quarter of 2020.

Service fees on deposit accounts increased $86,000, or 56.8%, to $236,000 for

the quarter ended September 30, 2021, compared to $151,000 for the quarter ended September 30, 2020.

The increase in service fees on deposit accounts during the third quarter of 2021 compared to the third 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.

Noninterest expense increased $859,000, or 14.4%, to $6.8 million for the three months ended September 30, 2021, from $6.0 million for the same period in 2020.

Salaries and employee benefits increased $570,000, or 15.6%, to $4.2 million for the quarter ended September 30, 2021 from $3.6 million for the quarter ended September 30, 2020.

The increase in salaries and benefits from the third quarter of 2020 primarily was due to $388,000 of expenses associated with equity awards granted during the fourth quarter of 2020 and increased compensation expense of $154,000 primarily as a result of annual merit increases and additional staff.

Equipment expense increased $26,000, or 8.5%, to $334,000 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.

Data processing fees increased $66,000, or 14.9%, to $513,000 in the third quarter of 2021 compared to the same quarter of 2020, primarily due to the upgrading of our digital banking products.

Legal and professional fees increased $31,000, or 11.6% to $303,000 compared to the same quarter in 2020.

Other expenses increased $108,000, or 13.9%, to $888,000 in the third quarter of 2021 compared to the same quarter of 2020 primarily due to increased loan, tax and insurance expenses of $66,000 and expenses of $28,000 associated with converting our digital banking services to a new provider.

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.

Income tax expense increased $63,000 during the three months ended September 30, 2021, compared to the same period in 2020, primarily due to a higher level of pre-tax income offset by a lower tax rate.

The effective tax rate for the third quarter of 2021 was 18.0% compared to 19.5% for the same quarter a year ago.

Comparison of Results of Operations for the Nine Months Ended September 30, 2021 and 2020.

Net income for the nine months ended September 30, 2021 was $8.4 million, a $936,000 increase from net income of $7.5 million for the nine months ended September 30, 2020.

The $8.4 million in earnings equaled $0.72 diluted earnings per share for the first nine months of 2021, compared to $0.60 diluted earnings per share for the first nine months of 2020.

The increase in net income was primarily the result of a $3.6 million increase in net interest income and a $1.4 million decrease in the provision for loan losses, partially offset by a $542,000 decrease in noninterest income and a $3.5 million increase in noninterest expense.

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 income increased $2.0 million, or 6.4%, to $33.9 million during the nine months ended September 30, 2021, compared to $31.9 million during the nine months ended September 30, 2020.

Interest income on loans and leases increased $1.9 million, or 6.7%, to $30.2 million for the nine months ended September 30, 2021, from $28.3 million for the comparable quarter in 2020, due to higher average balances in the loan and lease portfolio, partially offset by a 27 basis point decline in the yield earned on loans and leases.

The average outstanding loan and lease balances were $775.6 million for the first nine months of 2021, compared to $691.9 million for the first nine months of 2020.

The average yield on loans and leases was 5.18% for the first nine months of 2021, compared to 5.45% for the comparable period in 2020.

Interest income also included $2.2 million in fees earned related to PPP loans in the nine months ended September 30, 2021 compared to $534,000 during the same period in 2020.

As of September 30, 2021, total unrecognized fees on PPP loans were approximately $700,000.

For the nine months ended September 30, 2021, average PPP loans were $40.0 million and the average yield was 8.43%.

Interest income on investment securities, including FHLB stock, increased $256,000, or 7.4%, to $3.7 million during the nine months ended September 30, 2021, from $3.5 million during the comparable period in 2020.

The increase in interest income on investment securities was due to an increase of $70.5 million in the average balance of investment securities, including FHLB stock, to $318.8 million for the nine months ended September 30, 2021, compared to $248.4 million for the nine months ended September 30, 2020.

The average yield on investment securities, including FHLB stock, was 1.55% for the first nine months of 2021, compared to 1.86% for the first nine months of 2020.

Interest income earned on cash and cash equivalents decreased to $20,000 in the first nine months of 2021 compared to $146,000 in the comparable period of 2020, due to the significantly lower yield earned on funds at the Federal Reserve after the rate reductions experienced in March 2020 as well as a $14.4 million reduction in average balances.

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.

Interest expense decreased $1.6 million, or 21.8%, to $5.7 million for the nine months ended September 30, 2021, from $7.3 million for the nine months ended September 30, 2020.

Interest expense on deposits decreased $1.4 million, or 27.8%, to $3.7 million for the nine months ended September 30, 2021, from $5.1 million for the comparable period in 2020.

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

The average rate paid on interest-bearing deposits was 0.73% for the nine months ended September 30, 2021, compared to 1.16% for the nine months ended September 30, 2020.

The average balance of

interest-bearing deposits increased to $668.5 million, or 15.0%, in the nine months ended September 30, 2021, compared to $581.5 million in the comparable period in 2020.

Interest expense on FHLB borrowings decreased $190,000, or 8.3%, to $2.1 million in the first nine months of 2021 compared to $2.3 million for the same period in 2020 due to a 14 basis point decline in the average rate paid on borrowings to 1.59% for the nine months ended September 30, 2021, compared to 1.73% for the same 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.

Net interest income before the provision for loan and lease losses increased $3.6 million, or 14.8%, to $28.1 million in the first nine months of 2021, compared to $24.5 million for the first nine months 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 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.

Net interest margin (annualized) was 3.36% for the nine months ended September 30, 2021, compared to 3.34% for the nine months ended September 30, 2020.

The yield on the loan and lease portfolio was impacted by the PPP loan activity during the first three quarters 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 17 basis points during the nine months ended September 30, 2021, compared to a negative impact of 15 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.

Six Months Ended June 30,

Nine Months Ended September 30,

Outstanding Interest

27 unchanged sentences

Provision for Loan and Lease Losses.

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.

The provision for loan and lease losses for the nine months ended September 30, 2021 totaled $1.4 million compared to $2.8 million for the nine months ended September 30, 2020, a $1.4 million or 49.5% 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 nine months of 2021.

Net charge-offs during the first nine months of 2021 were $167,000, compared to net charge-offs of $110,000 in the first nine months of 2020.

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 income decreased $542,000 or 11.2%, to $4.3 million for the nine months ended September 30, 2021, compared to $4.9 million for the comparable period in 2020.

The decrease resulted primarily from a decrease of $496,000, or 19.2%, to $2.1 million in net gain on sale of loans and leases during the first nine months of 2021, compared to $2.6 million during the first nine months of 2020.

During the nine months ended September 30, 2021, the Company sold $62.3 million of loans compared to the sale of $79.3 million of loans during the nine months ended September 30, 2020.

The net gain on the sale of securities recorded in the first nine months of 2021 was $56,000, a decrease of $141,000 from the net gain on the sale of securities of $196,000 in the first nine months of 2020 due to the declining mortgage banking activity discussed above.

Card fee income increased $184,000, or 30.7%, to $784,000 in the first nine months of 2021 from $600,000 in the first nine months of 2020 due to increased debit card usage.

Loan and lease servicing income decreased $232,000, to a loss of $38,000 for the first nine months of 2021 compared to income of $194,000 for the comparable period in 2020, due to impairment of mortgage servicing rights in the first nine months of 2021 of $231,000 compared to a recovery of mortgage servicing rights of $187,000 in the first nine months of 2020.

Service fees on deposit accounts increased $119,000, or 23.2%, to $629,000 for the nine months ended September 30, 2021, compared to $511,000 for the nine months ended September 30, 2020.

The increase in service fees on deposit accounts 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.

Noninterest expense increased $3.5 million, or 20.7%, to $20.7 million for the nine months ended September 30, 2021, from $17.2 million for the same period in 2020.

Salaries and employee benefits increased $2.7 million, or 26.2%, to $13.0 million for the nine months ended September 30, 2021 from $10.3 million for the nine months ended September 30, 2020.

The increase in salaries and benefits from the first nine months of 2020 primarily was due to $1.4 million of expenses associated with equity awards granted during the fourth quarter of 2020, increased pension expense of $322,000 due to the recognition of nine months of expense in 2021, compared to three months of expense in 2020 in connection with freezing of the defined benefit plan ("DB Plan"), and increased compensation expense of $764,000 primarily as a result of annual merit increases and additional staff.

Net occupancy expense increased $63,000, or 7.1% to $946,000 from $883,000 in the first nine months of 2020, primarily as a result of higher building maintenance expenses.

Equipment expense increased $141,000, or 16.7% to $986,000 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 $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 $98,000, or 11.7% to $938,000 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.

Other expenses increased $280,000, or 12.4%, to $2.5 million in the first nine months of 2021 compared to the same period of 2020 primarily due to expenses associated with loan administration and servicing increasing $131,000, losses related to electronic banking fraud on customers' accounts increasing $73,000, and franchise tax expense increasing $115,000, partially offset by a $79,000 decrease in insurance costs.

The Company froze its 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.

1 unchanged sentence

Income Tax Expense.

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.

Income tax expense increased $5,000 during the nine months ended September 30, 2021, compared to the same period in 2020, primarily due to a lower tax rate offsetting higher pre-tax income.

The effective tax rate for the first nine months of 2021 was 18.4% compared to 20.2% for the first nine 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.

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.

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.

1 unchanged sentence

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.

Additionally, First Bank Richmond maintains a relationship with the FHLB of Indianapolis which could provide funds on short notice if needed.

Liquidity management is both a daily and long-term function of the management of our business.

4 unchanged sentences

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

At September 30, 2021, the Bank had $225.7 million in cash and unpledged available-for-sale investment securities for its cash needs.

The Bank had the ability to borrow an additional $48.0 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 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 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.

At September 30, 2021, outstanding loan and lease commitments, including unused lines and letters of credit, totaled $177.9 million, including $84.0 million of undisbursed construction and land loans.

Certificates of deposit scheduled to mature in one year or less at September 30, 2021, totaled $168.1 million.

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

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

Cash and cash equivalents decreased $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.

Cash and cash equivalents decreased $28.9 million to $19.8 million as of September 30, 2021, from $48.8 million as of December 31, 2020.

Net cash provided by operating activities was $3.3 million for the nine months ended September 30, 2021.

Net cash used in investing activities totaled $176.0 million during the nine months ended September 30, 2021 and consisted primarily of increases in net loans and available-for-sale securities.

The $143.7 million of net cash provided by financing activities during the nine months ended September 30, 2021 was primarily the result of a $131.2 million net increase in deposits.

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

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.

At September 30, 2021, the Company, on an unconsolidated basis, had $21.6 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.

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

At June 30, 2021, we had $175.7 million in loan and lease commitments and unused lines of credit.

At September 30, 2021, we had $177.9 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 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.

At September 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 June 30, 2021

As of September 30, 2021

Total risk-based capital (to risk weighted assets) $ 165,046 17.6 % $ 74,911 8.0 % $ 93,639 10.0 %

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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 June 30, 2021 the Bank’s CET1 capital exceeded the required capital conservation buffer.

At September 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 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.

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.

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

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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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