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Item 2. Management’s Discussion and Analysis

2022-05-13 compared with 2021-11-12 · 153 added, 264 removed, 186 unchanged (69% of the section changed)

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

(the “Company”) at September 30, 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 “Company”) at March 31, 2022, and the consolidated results of operations for the three month period ended March 31, 2022, compared to the same period in 2021, is intended to assist in understanding the financial condition and results of operations of the Company.

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

The terms “we,” “our,” “us,” or the “Company” refer to Richmond Mutual Bancorporation, Inc.

and its consolidated subsidiary, First Bank Richmond, which we sometimes refer to as the “Bank,” unless the context otherwise requires.

and its consolidated direct and indirect subsidiaries, First Bank Richmond, which we sometimes refer to as the “Bank” and FB Richmond Holdings, Inc., unless the context otherwise requires.

Cautionary Note Regarding Forward-Looking Statements

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

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

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

• potential adverse impacts to economic conditions in the Company's local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, generally, resulting from the novel coronavirus disease 2019 (“COVID-19") pandemic and any governmental or societal responses thereto;

• changes in economic conditions, either nationally or in our market area;

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

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• 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");

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

• legislative or regulatory changes that adversely affect our business, including as a result of COVID-19, and the availability of resources to address such changes;

• our ability to pay dividends on our common stock;

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

• other economic, competitive, governmental, regulatory, and technical factors affecting our operations, pricing, products and services;

• the other risks detailed in this report and from time to time in our other filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”).

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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 $151.8 million at September 30, 2021.

Total wealth management assets under management and administration were $149.4 million at March 31, 2022.

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.

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 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.

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.

At March 31, 2022, on a consolidated basis, we had $1.3 billion in assets, $850.0 million in loans and leases, net of allowance, $909.5 million in deposits and $157.3 million in stockholders’ equity.

At March 31, 2022, First Bank Richmond’s total risk-based capital ratio was 16.81%, exceeding the 10.0% requirement for a well-capitalized institution.

For the three months ended March 31, 2022, net income was $3.0 million, compared with net income of $2.6 million for the three months ended March 31, 2021.

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

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

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

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The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

COVID 19 Response

Paycheck Protection Program ("PPP").

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.

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.

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

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

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

As of 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 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.

COVID-19 Impact to the Company

The Company is actively monitoring and responding to the effects of the rapidly-changing COVID 19 pandemic.

The Company maintains its commitment to supporting its community and customers during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers.

As of March 31, 2022, all banking branches are open with normal hours and substantially all employees have returned to their routine working environments.

The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.

Comparison of Financial Condition at March 31, 2022 and December 31, 2021

Total assets decreased $11.5 million, or 0.9%, to $1.3 billion at March 31, 2022 from December 31, 2021.

The decrease was primarily the result of a $31.6 million, or 8.6%, decrease in investment securities to $335.0 million and a $3.5 million, or 15.0% decrease in cash and cash equivalents to $19.6 million at March 31, 2022.

These decreases were partially offset by increases of $17.1 million, or 2.1%, in loans and leases, net of allowance, to $850.0 million and $6.9 million, or 64.2%, in other assets to $17.8 million at March 31, 2022.

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.

Investment securities available-for-sale decreased $30.7 million, or 8.6%, to $326.8 million, while investment securities held-to-maturity decreased $894,000, or 9.9%, to $8.1 million at March 31, 2022 compared to December 31, 2021.

The decrease in investment securities available-for-sale was primarily the result of a portion of the

maturing securities and payments on securities being used to fund growth in the loan and lease portfolio, as well as greater mark-to-market adjustments to the portfolio due to increases in unrealized losses.

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 $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 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.

Our loan and lease portfolio, net of allowance for loan and lease losses, increased $17.1 million, or 2.1%, to $850.0 million at March 31, 2022 from $832.8 million at December 31, 2021.

The increase in loans and leases was attributable to increases in multi-family loans of $9.0 million, construction and development loans of $8.4 million and leases of $3.7 million, partially offset by declines in commercial mortgage loans of $3.4 million and commercial and industrial loans of $3.1 million.

The decline in commercial and industrial loans was due to a decrease in PPP loans of $3.4 million to $6.0 million at March 31, 2022, resulting from PPP loan forgiveness by the SBA.

Loans held for sale totaled $583,000 and $558,000 at March 31, 2022 and December 31, 2021, respectively.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loans and leases more than 90 days past due, totaled $8.0 million or 0.92% of total loans and leases at March 31, 2022, compared to $8.0 million or 0.95% of total loans and leases at December 31, 2021.

Accruing loans and leases past due more than 90 days totaled $1.8 million at both dates.

At March 31, 2022, troubled debt restructurings ("TDRs") totaled $442,000, compared to $456,000 at December 31, 2021.

The CARES Act amended generally accepted accounting principles with respect to the modification of loans to borrowers affected by the COVID-19 pandemic.

Among other criteria, this guidance provided that short-term loan modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs.

As of September 30, 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.

As of March 31, 2022, the Company had no outstanding loan and lease modifications qualifying under the CARES Act related to the COVID-19 pandemic.

Allowance for Loan and Lease Losses.

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 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.

The allowance for loan and lease losses increased $209,000, or 1.7%, to $12.3 million at March 31, 2022 from $12.1 million at December 31, 2021.

At both March 31, 2022 and December 31, 2021 the allowance for loan and lease losses totaled 1.43% of total loans and leases outstanding.

Net recoveries during the first quarter of 2022 were $9,000, compared to net charge-offs of $27,000 during the first quarter of 2021.

The allowance for loan and lease losses to non-performing loans and leases was 154.9% at March 31, 2022, compared to 150.8% at December 31, 2021.

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

The Company evaluated its exposure to potential loan and lease losses as of September 30, 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.

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

The Company evaluated its exposure to potential loan and lease losses as of March 31, 2022, which evaluation included consideration of potential credit losses due to economic conditions driven by any lingering impact of the COVID-19 pandemic.

Any lingering impact of the pandemic on the Company’s deposit and loan customers is still not fully known at this time.

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

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 $62.9 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.

Other Assets .

Other assets increased $6.9 million, or 64.2%, to $17.8 million at March 31, 2022 from $10.8 million at December 31, 2021, primarily as a result of a $6.4 million increase in deferred tax assets due to the mark-to-market adjustment on the available-for-sale investment portfolio.

Total deposits increased $9.3 million, or 1.0%, to $909.5 million at March 31, 2022, from $900.2 million at December 31, 2021.

The increase in deposits primarily was due to an increase in savings and money market accounts of $21.2 million, partially offset by a decrease in time deposits of $13.8 million.

Management attributes the shift in funds to customers anticipating potentially higher rates being paid on time deposits in 2022 in connection with the expected interest rate hikes by the Federal Reserve this year.

Brokered deposits decreased $1.7 million to $120.1 million, or 13.2% of total deposits, at March 31, 2022, compared to $121.8 million, or 13.5% of total deposits, at December 31, 2021.

At March 31, 2022, noninterest-bearing deposits totaled $113.7 million, or 12.5% of total deposits, compared to $114.3 million or 12.7% of total deposits at December 31, 2021.

Total borrowings, consisting solely of FHLB advances, increased $2.0 million to $182.0 million at March 31, 2022, compared to $180.0 million at December 31, 2021, which together with the increase in deposits, were used to fund loan growth.

Stockholders’ Equity.

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.

Stockholders’ equity totaled $157.3 million at March 31, 2022, a decrease of $23.1 million, or 12.8%, from December 31, 2021.

The decrease in stockholders' equity from year-end 2021 resulted from an accumulated other comprehensive loss of $24.1 million due to a greater mark-to-market adjustment to the investment portfolio as a result of higher interest rates, the payment of $1.1 million in dividends to Company stockholders, and the repurchase of $1.5 million of

Company common stock, partially offset by net income of $3.0 million.

The Company repurchased 90,191 shares of Company common stock at an average price of $16.62 per share for a total of $1.5 million during the first three months of 2022.

The Company’s equity to asset ratio was 12.5% at March 31, 2022.

At March 31, 2022, the Bank’s Tier 1 capital to total assets ratio was 12.6% 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, 2022 and 2021.

Net income for the three months ended March 31, 2022 was $3.0 million, a $455,000 or 17.8% increase from net income of $2.6 million for the three months ended March 31, 2021.

The $3.0 million in earnings equaled $0.26 diluted earnings per share for the first quarter of 2022, compared to $0.22 diluted earnings per share for the first quarter of 2021.

The increase in net income was primarily the result of a $1.1 million increase in net interest income and a $200,000 decrease in the provision for loan losses, partially offset by a $412,000 decrease in noninterest income and a $356,000 increase in noninterest expense.

Interest Income.

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%.

Interest income increased $1.1 million, or 9.7%, to $11.9 million during the quarter ended March 31, 2022, compared to $10.9 million during the quarter ended March 31, 2021.

Interest income on loans and leases increased $399,000, or 4.0%, to $10.3 million for the quarter ended March 31, 2022, from $9.9 million for the comparable quarter in 2021, due to higher average balances in the loan and lease portfolio, partially offset by a decrease in the average loan and lease yield of 34 basis points.

The average outstanding loan and lease balances were $849.9 million for the quarter ended March 31, 2022, compared to $763.8 million for the quarter ended March 31, 2021.

The average yield on loans and leases was 4.83% for the quarter ended March 31, 2022, compared to 5.17% for the comparable quarter in 2021.

Interest income also included $174,000 in fees earned related to PPP loans in the quarter ended March 31, 2022 compared to $773,000 during the same quarter in 2021.

As of March 31, 2022, total unrecognized fees on PPP loans were $210,000.

For the three months ended March 31, 2022, average PPP loans were $7.8 million and the average yield was 9.92%.

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 $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 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 $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 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.

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 September 30,

Outstanding Interest

(Dollars in thousands)

Interest-earning assets:

Loans and leases receivable $ 784,531 $ 10,437 5.32 % $ 756,307 $ 9,720 5.14 %

Securities 354,211 1,387 1.57 % 247,113 891 1.44 %

FHLB stock 9,081 69 3.04 % 9,083 126 5.55 %

Cash and cash equivalents and other 17,515 7 0.16 % 28,096 9 0.13 %

Total interest-earning assets 1,165,338 11,900 4.08 % 1,040,599 10,746 4.13 %

Interest-bearing liabilities:

Savings and money market accounts 250,799 325 0.52 % 189,848 243 0.51 %

Interest-bearing checking accounts 166,138 98 0.24 % 123,271 68 0.22 %

Certificate accounts 296,954 830 1.12 % 282,306 1,234 1.75 %

Borrowings 179,413 689 1.54 % 180,913 763 1.69 %

Total interest-bearing liabilities 893,304 1,942 0.87 % 776,338 2,308 1.19 %

Net interest income $ 9,958 $ 8,438

Net earning assets $ 272,034 $ 264,261

Net interest rate spread (1)

3.21 % 2.94 %

Net interest margin (2)

3.42 % 3.24 %

Average interest-earning assets to average interest-bearing liabilities

130.45 % 134.04 %

_____________

(1) Annualized.

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

(2) Annualized.

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

Provision for Loan and Lease Losses.

The provision for loan and lease losses for the three months ended September 30, 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.

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 $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 $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 $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 $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 $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 income on investment securities, including FHLB stock, increased $659,000, or 65.3%, to $1.7 million during the quarter ended March 31, 2022, compared to the same quarter in 2021.

The increase in interest income on investment securities from the comparable period in 2021 was due to an increase in the average balances of $93.4 million and a 34 basis point increase in the average yield earned on investment securities.

The average balance of investment securities, including FHLB stock, was $363.2 million for the quarter ended March 31, 2022, compared to $269.8 million for the quarter ended March 31, 2021.

The average yield on investment securities, including FHLB stock, was 1.84% for the first quarter of 2022, compared to 1.50% for the first quarter of 2021.

Interest Expense.

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.

Interest expense remained relatively flat at $1.9 million for the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021.

Interest expense on deposits increased $61,000, or 5.2%, to $1.2 million for the quarter ended March 31, 2022, from the comparable quarter in 2021.

The increase in interest expense on deposits primarily was attributable to a $179.0 million increase in average interest-bearing deposit balances, partially offset by a 43 basis point decrease in the average rate paid on certificate of deposit accounts.

The average rate paid on interest-bearing deposits was 0.63% for the quarter ended March 31, 2022, compared to 0.77% for the quarter ended March 31, 2021.

The average balance of interest-bearing deposits increased to $793.4 million, or 29.1%, in the quarter ended March 31, 2022, compared to $614.4 million in the comparable quarter in 2021.

Interest expense on FHLB borrowings decreased $54,000, or 7.8%, to $640,000 in the first quarter of 2022 compared to $694,000 for the same quarter in 2021, due to a 23 basis point decline in the average rate paid on borrowings to 1.40% during the three months ended March 31, 2022, from 1.63% for the comparable quarter in 2021, partially offset by a $13.5 million increase in the average outstanding balance of borrowings during the current quarter compared to the same period in 2021.

Net Interest Income.

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 3.36% 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.

Net interest income before the provision for loan and lease losses increased $1.1 million, or 11.7%, to $10.1 million in the first quarter of 2022, compared to $9.0 million for the first quarter of 2021.

This increase was due to an increase in average interest-earning assets, partially offset by a two basis point decrease in the average interest rate spread during the first quarter of 2022 compared to the comparable quarter in 2021.

Net interest margin (annualized) was 3.26% for the three months ended March 31, 2022, compared to 3.38% for the three months ended March 31, 2021.

The decrease in net interest margin was primarily due to the yield on interest-earning assets dropping faster than the rate paid on interest-bearing liabilities.

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 five basis points during the quarter ended March 31, 2022, compared to a positive impact of 17 basis points to the yield on loans and leases in the comparable quarter in 2021.

Average Balances, Interest and Average Yields/Cost.

Average balances have been calculated using quarterly balances.

Average balances have been calculated using daily balances.

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

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

Nine Months Ended September 30,

Three Months Ended March 31,

Outstanding Interest

27 unchanged sentences

Provision for Loan and Lease Losses.

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.

The provision for loan and lease losses for the three months ended March 31, 2022 totaled $200,000 compared to $400,000 for the three months ended March 31, 2021, a $200,000 or 50.0% decrease.

Net recoveries during the first quarter of 2022 were $9,000, compared to net charge-offs of $27,000 in the first quarter of 2021.

While we believe the steps we have taken and continue to take are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration and impact of the COVID-19 pandemic, uncertainties relating to our allowance for loan losses are heightened as a result of any possible continuing effects of the COVID-19 pandemic.

Noninterest Income.

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.

Noninterest income decreased $412,000 or 27.0%, to $1.1 million for the quarter ended March 31, 2022, compared to $1.5 million for the comparable quarter in 2021.

The decrease in noninterest income resulted primarily from a $722,000 or 74.8% decrease in net gains on loan and lease sales to $243,000 during the first quarter of 2022, compared to $965,000 during the first quarter of 2021.

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.

During the three months ended March 31, 2022, the Company sold $10.6 million of loans compared to the sale of $25.8 million of loans during the three months ended March 31, 2021.

Card fee income increased $35,000, or 14.5%, to $278,000 in

the first quarter of 2022 from $243,000 in the first quarter of 2021 due to increased debit card usage.

Loan and lease servicing income increased $133,000, to a gain of $28,000 for the first quarter of 2022 compared to a loss of $105,000 for the comparable quarter in 2021, as the Company recorded an impairment of $111,000 to the value of its mortgage servicing rights in the first quarter of 2022, compared to an impairment of $158,000 in the first quarter of 2021.

Service fees on deposit accounts increased $40,000, or 20.6%, to $235,000 for the quarter ended March 31, 2022, compared to $194,000 for the quarter ended March 31, 2021.

The increase in service fees on deposit accounts during the first quarter of 2022 compared to the first quarter of 2021 was primarily the result of increased overdraft fees, many of which were waived in the first quarter of 2021.

Noninterest Expense.

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.

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.

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.

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

Noninterest expense increased $356,000, or 5.1%, to $7.3 million for the three months ended March 31, 2022, from $7.0 million for the same period in 2021.

Salaries and employee benefits were relatively steady at $4.5 million for the quarter ended March 31, 2022, compared to the same quarter in 2021.

Data processing fees increased $133,000, or 25.2%, to $659,000 in the first quarter of 2022 compared to the same quarter of 2021, primarily due to the upgrading of our digital banking products.

Other expenses increased $185,000, or 24.0%, to $956,000 in the first quarter of 2022 compared to the same quarter of 2021 primarily due to increased loan expenses, franchise tax expense, and expenses related to employee professional development.

Income Tax Expense.

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.

Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained.

Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and our ability to manage those requirements.

We strive to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance in short-term investments at any given time will cover adequately any reasonably anticipated immediate need for funds.

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

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

It is overseen by the Asset and Liability Management Committee.

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

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

First Bank Richmond can also generate funds from borrowings, primarily FHLB advances.

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

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

At September 30, 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.

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

Liquidity, represented by cash, cash equivalents, and investment securities, is a product of our operating, investing and financing activities.

Primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided from operations.

While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

In addition, excess funds are invested in short-term interest-earning assets, which provide liquidity to meet lending requirements.

Cash is also generated through borrowings.

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

Cash and cash equivalents 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 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.

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.

These transactions involve varying degrees of off-balance sheet risks.

While these commitments are contractual obligations and represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon.

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

At 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.

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

Capital Resources

Income tax expense increased $28,000 during the three months ended March 31, 2022, compared to the same period in 2021 due to a higher level of pre-tax income, partially offset by a lower effective tax rate.

The effective tax rate for the first quarter of 2022 was 17.0% compared to 18.7% for the same quarter a year ago.

Capital and Liquidity

Shareholders' equity totaled $157.3 million at March 31, 2022 and $180.5 million at December 31, 2021.

In addition to net income of $3.0 million, other sources of capital during the first quarter of 2022 included $226,000 related to the allocation of ESOP shares during the year and $379,000 related to stock-based compensation.

Uses of capital during the first three months of 2022 included $1.1 million of dividends paid on common stock, other comprehensive loss, net of tax, of $24.1 million and $1.5 million of stock repurchases.

The decrease in the accumulated other comprehensive income/loss component of shareholders' equity was caused by changes to the unrealized gains and losses on available-for-sale securities.

We paid a regular quarterly dividend of $0.10 per common share during the first quarter of 2022, and regular quarterly dividends of $0.07 per common share and a special dividend of $0.50 per common share during 2021.

We currently expect to continue the current practice of paying regular quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice.

Assuming continued payment during 2022 at the current dividend rate of $0.10 per share, our average total dividend paid each quarter would be approximately $1.2 million based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards).

Stock Repurchase Plans.

From time to time, our board of directors has authorized stock repurchase plans.

In general, stock-repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders.

Shares purchased under such plans also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.

On May 19, 2021, the Board of Directors authorized a third stock repurchase program for up to 1,263,841 shares, or approximately 10% of its outstanding shares.

This repurchase program commenced on July 3, 2021, and will expire on July 3, 2022 unless completed sooner.

The repurchase program does not obligate the Company to purchase any particular number of shares.

See Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.

Liquidity measures the ability to meet current and future cash flow needs as they become due.

The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities.

The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds.

The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost.

We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet.

Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets.

Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future.

Liquid assets generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities held to maturity, sales of fixed rate residential mortgage loans in the secondary market, and federal funds

sold and resell agreements.

Liability liquidity generally is provided by access to funding sources which include core deposits and advances from the FHLB and other borrowing relationships with third party financial institutions.

Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate.

Liquidity risk management is an important element in our asset/liability management process.

We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management.

These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs.

As of March 31, 2022, we had approximately $10.9 million held in an interest-bearing account at the Federal Reserve.

We also have the ability to borrow funds as a member of the FHLB.

As of March 31, 2022, based upon available, pledgeable collateral, our total remaining borrowing capacity with the FHLB was approximately $70.0 million.

Furthermore, at March 31, 2022, we had approximately $204.5 million in securities that were unencumbered by a pledge and could be used to support additional borrowings through repurchase agreements or the Federal Reserve discount window, as needed.

As of March 31, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.

Our cash flows are comprised of three primary classifications:

cash flows from operating activities, investing activities, and financing activities.

Net cash provided by operating activities for the three months ended March 31, 2022 was $3.9 million, compared to $2.4 million used in operating activities for the three months ended March 31, 2021.

During the three months ended March 31, 2022, net cash used in investing activities was $16.1 million, which consisted primarily of net change in loans receivable, compared to $42.1 million of cash used in investing activities for the three months ended March 31, 2021.

Net cash provided by financing activities for the three months ended March 31, 2022 was $8.7 million, which was comprised primarily of net change in deposits, compared to $61.3 million provided by financing activities during the three months ended March 31, 2021.

Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our liquidity and capital resources since the information disclosed in our 2021 Form 10-K other than set forth above.

Richmond Mutual Bancorporation is a separate legal entity from First Bank Richmond and must provide for its own liquidity.

In addition to its own operating expenses, Richmond Mutual Bancorporation is responsible for paying for any stock repurchases, dividends declared to its stockholders and other general corporate expenses.

Since Richmond Mutual Bancorporation is a holding company and does not conduct operations, its primary sources of liquidity are interest on investment securities purchased with proceeds from our initial public offering, dividends upstreamed from First Bank Richmond and borrowings from outside sources.

Banking regulations may limit the amount of dividends that may be to us paid by First Bank Richmond.

At March 31, 2022, Richmond Mutual Bancorporation, on an unconsolidated basis, had $18.2 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

Regulatory Capital Requirements.

First Bank Richmond is subject to minimum capital requirements imposed by the FDIC.

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

At 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.

At March 31, 2022, 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 September 30, 2021

As of March 31, 2022

Total risk-based capital (to risk weighted assets) $ 173,358 16.8 % $ 82,488 8.0 % $ 103,110 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 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 September 30, 2021, it would have exceeded all regulatory capital requirements.

At March 31, 2022, 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 Federal Reserve Board 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, 2022, 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