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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-10 · 161 added, 242 removed, 181 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, 2022, and the consolidated results of operations for the three and nine month periods ended September 30, 2022, compared to the same periods in 2021, is intended to assist in understanding the financial condition and results of operations of the Company.

(the “Company”) at March 31, 2023, and the consolidated results of operations for the three month period ended March 31, 2023, compared to the same period in 2022, 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 direct and indirect subsidiaries, First Bank Richmond, which we sometimes refer to as the “Bank”, First Insurance Management, Inc., FB Richmond Holdings, Inc.

and FB Richmond Properties, Inc., 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:

• significant short-term interest rate increases by the Federal Reserve;

• recessionary pressures caused by inflation, Federal Reserve actions to combat inflation and ongoing supply chain disruptions caused by the novel coronavirus disease 2019 ("COVID-19") pandemic and the Russia-Ukraine conflict;

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

• 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, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession, the failure of the U.S.

Congress to increase the debt ceiling, or slowed economic growth caused by increasing political instability from acts of war including Russia's invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses to recent bank failures or new COVID-19 variants;

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

• changes in the level and direction of loan or lease delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan and lease losses;

• our ability to access cost-effective funding;

• our ability to access cost-effective funding including maintaining the confidence of depositors;

• unexpected outflows of uninsured deposits may require us to sell investment securities at a loss;

• fluctuations in real estate values, and residential, commercial, and multifamily real estate market conditions;

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• our ability to manage market risk, credit risk and operational risk in the current economic environment;

• the transition away from the London Interbank Offer Rate ("LIBOR") toward new interest rate benchmarks;

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

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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;

• 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;

• 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 may adversely affect our business, and the availability of resources to address such changes;

• our ability to pay dividends on our common stock;

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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 $141.3 million at September 30, 2022.

Total wealth management assets under management and administration were $138.0 million at March 31, 2023.

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

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

At September 30, 2022, on a consolidated basis, we had $1.3 billion in assets, $915.5 million in loans and leases, net of allowance, $958.6 million in deposits and $125.0 million in stockholders’ equity.

At September 30, 2022, First Bank Richmond’s total risk-based capital ratio was 14.74%, exceeding the 10.0% requirement for a well-capitalized institution.

For the nine months ended September 30, 2022, net income was $9.7 million, compared with net income of $8.4 million for the nine months ended September 30, 2021.

Critical Accounting Policies

Certain accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain.

Management believes that its critical accounting policies include determining the allowance for loan and lease losses, the valuation of foreclosed assets, mortgage servicing rights, valuation of intangible assets and securities, deferred tax asset and income tax accounting.

Allowance for Loan and Lease Losses.

We maintain an allowance for loan and lease losses to cover probable incurred credit losses at the balance sheet date.

Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

At March 31, 2023, on a consolidated basis, we had $1.4 billion in assets, $989.1 million in loans and leases, net of allowance, $1.0 billion in deposits and $136.1 million in stockholders’ equity.

At March 31, 2023, First Bank Richmond’s total risk-based capital ratio was 14.39%, exceeding the 10.0% requirement for a well-capitalized institution.

For the three months ended March 31, 2023, net income was $2.9 million, compared with net income of $3.0 million for the three months ended March 31, 2022.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with GAAP.

In doing so, we have to make estimates and assumptions.

Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

Accordingly, actual results could differ materially from our estimates.

We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

We have reviewed our critical accounting estimates with the audit committee of our Board of Directors.

There have been no significant changes during the three months ended March 31, 2023 to the critical accounting estimates reported in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Form 10-K, with the exception of the adoption on January 1, 2023 of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), commonly referred to as Current Expected Credit Loss, or CECL, as discussed below.

See "Critical Accounting Estimates" included in Part II, Item 7 of our 2022 Form 10-K for a further discussion of our Critical Accounting Estimates.

Allowance for Credit Losses.

The allowance for credit losses applies to all financial instruments carried at amortized cost.

We maintain an allowance for credit losses on loans and leases based on expected future credit losses at the balance sheet date.

Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan or lease balance is confirmed.

Subsequent recoveries, if any, are credited to the allowance.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

A provision for loan and lease losses is charged to operations based on our periodic evaluation of the necessary allowance balance.

We have an established process to determine the adequacy of the allowance for loan and lease losses.

The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors, all of which may be susceptible to significant change.

Mortgage Servicing Rights (“MSRs”).

MSRs associated with loans originated and sold, where servicing is retained, are capitalized and included in the consolidated balance sheet.

The value of the capitalized servicing rights represents the fair value of the right to service loans in the portfolio.

Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests.

The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance.

Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans.

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

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

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

A provision for credit losses for loans and leases is charged to operations based on our periodic evaluation of the necessary balance in the allowance.

Determining the appropriateness of the allowance for credit losses is complex and requires judgement by management on future factors that are unknown.

We have an established process to determine the adequacy of the allowance for credit losses.

The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on similarly-risked loans in their respective segments, the amounts and timing of expected future cash flows on collateral-dependent loans, movement through risk-ratings, economic forecasts, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors, all of which may be susceptible to significant change.

At January 1, 2023, we established an allowance for credit losses on off-balance sheet commitments as part of our transition to CECL.

This allowance is held and monitored separately from our allowance for credit losses on loans and leases and is periodically adjusted.

Significant estimates are used to determine the allowance, including expected future losses of the loan and lease portfolio, changes in composition, information about specific borrower situations and risk-rating adjustments, probability of funding, economic conditions and other factors, all of which may be susceptible to significant change.

A provision for credit losses for off-balance sheet commitments is charged to operations periodically upon evaluation of the necessary balance in the allowance.

Held to maturity securities are financial assets measured at amortized cost.

With the adoption of CECL, held to maturity securities are required to have an established allowance for credit losses that represents the portion of the amortized cost basis of a financial asset that is not expected to be collectable.

The Company follows the requirements of ASC 326 in determining the potential reserve needed on its held to maturity portfolio.

Available for Sale Securities.

Under Financial Accounting Standards Board (“FASB”) Codification Topic 320 (ASC 320), Investments-Debt, investment securities must be classified as held to maturity, available for sale or trading.

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

We evaluate all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if any other-than-temporary-impairments (“OTTI”) exist pursuant to guidelines established in ASC 320.

In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the

fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our ability and intent to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

We evaluate all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if any impairment exists as defined in ASC 326.

If an impairment has occurred, it must be determined if the impairment is due to credit or non-credit related factors.

In evaluating the possible impairment of securities, consideration is given to the extent to which the fair value is less than cost, the financial condition and near-term prospects of the issuer, and our ability and intent to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

If management determines that an investment experienced an OTTI, we must then determine the amount of the OTTI to be recognized in earnings.

If we do not intend to sell the security and it is more likely than not that we will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors.

The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.

The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes.

The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment.

If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.

Any recoveries related to the value of these securities are recorded as an unrealized gain (as accumulated other comprehensive income (loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold.

From time to time we may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

Deferred Tax Asset.

We have evaluated our deferred tax asset to determine if it is more likely than not that the asset will be utilized in the future.

Our most recent evaluation has determined that we will more likely than not be able to utilize our remaining deferred tax asset.

Income Tax Accounting.

We file a consolidated federal income tax return.

The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return.

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

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

Comparison of Financial Condition at September 30, 2022 and December 31, 2021

Total assets increased $11.0 million, or 0.9%, to $1.3 billion at September 30, 2022 from December 31, 2021.

The increase was primarily the result of an $82.6 million, or 9.9%, increase in loans and leases, net of allowance, to $915.5 million and a $12.8 million, or 117.9% increase in other assets to $23.6 million at September 30, 2022.

These increases were partially offset by decreases of $79.5 million or 21.7% in investment securities to $287.1 million, and $3.7 million or 16.0% in cash and cash equivalents to $19.4 million at September 30, 2022.

If management determines that an investment experienced an impairment that is credit-related, it must then be determined if we intend to sell the security, or if it is more likely than not that we will be required to sell the security, before the recovery of its amortized cost basis.

If either of these circumstances are present, then the impairment will be recognized in earnings with a corresponding adjustment to the amortized cost basis of the security.

If we do not intend to sell the security and it is more likely than not that we will not be required to sell the security before recovery of its amortized cost basis, the present values of expected cash flows to be collected from the security will be compared against the amortized cost basis of the security.

If the amortized cost basis of the security is greater than the present cash flows expected from the security, a credit loss would exist and it would determine the amount of allowance, if any, that would be deemed needed.

A needed allowance would result in an allowance recognized on the balance sheet, with a corresponding adjustment to earnings, limited to the amount that fair value is less than the amortized cost basis of the security.

After recognizing a credit loss through an allowance, periodic assessments are necessary to determine increases or decreases to the credit loss, which require adjustments to the allowance.

Any adjustments would be recognized through earnings, not to exceed the net amount of the allowance as limited to the amount that amortized cost exceeds fair value.

From time to time, we may dispose of a security in a loss position in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

Comparison of Financial Condition at March 31, 2023 and December 31, 2022

Total assets increased $33.6 million, or 2.5%, to $1.4 billion at March 31, 2023 from December 31, 2022.

The increase was primarily the result of a $27.4 million, or 2.9%, increase in loans and leases, net of allowance for credit losses, to $989.1 million, a $5.9 million, or 2.0%, increase in investment securities to $297.5 million and a $1.5 million, or 9.2%, increase in cash and cash equivalents to $17.4 million at March 31, 2023.

These increases were partially offset by a decrease of $747,000, or 3.1%, in other assets to $23.7 million at March 31, 2023.

Investment Securities.

Investment securities available-for-sale decreased $77.8 million, or 21.8%, to $279.7 million, while investment securities held-to-maturity decreased $1.7 million, or 18.6%, to $7.4 million at September 30, 2022 compared to December 31, 2021.

The decrease in investment securities primarily was the result of reinvesting only a portion of the normal recurring maturities and payments on securities and using the remainder 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.

Investment securities available-for-sale increased $6.8 million, or 2.4%, to $291.7 million, while investment securities held-to-maturity decreased $920,000, or 13.8%, to $5.8 million at March 31, 2023, compared to December 31, 2022.

The increase in investment securities available-for-sale was primarily due to purchases of $7.1 million and a $7.8 million mark-to-market adjustment on the investment portfolio, partially offset by maturities and paydowns of approximately $7.8 million.

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 $82.6 million, or 9.9%, to $915.5 million at September 30, 2022 from $832.8 million at December 31, 2021.

The increase in loans and leases was attributable primarily to an increase in commercial real estate loans, construction and development loans, and residential mortgage loans of $21.6 million, $46.4 million and $7.0 million, respectively.

Commercial and industrial loans decreased $3.0 million primarily due to a decrease of $8.2 million in Paycheck Protection Program ("PPP") loans resulting from loan forgiveness by the U.S.

Small business Administration ("SBA").

PPP loans totaled $1.2 million at September 30, 2022.

Loans held for sale totaled $78,000 and $558,000 at September 30, 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 $7.9 million or 0.85% of total loans and leases at September 30, 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 $1.9 million at September 30, 2022, compared to $1.8 million at December 31, 2021.

At September 30, 2022, troubled debt restructurings ("TDRs") totaled $430,000, compared to $456,000 at December 31, 2021, all of which were on nonaccrual status as of such dates.

Allowance for Loan and Lease Losses.

The allowance for loan and lease losses increased $448,000, or 3.7%, to $12.6 million at September 30, 2022 from $12.1 million at December 31, 2021.

At September 30, 2022, the allowance for loan and lease losses totaled 1.35% of total loans and leases outstanding, compared to 1.43% at December 31, 2021.

Net charge-offs during the first nine months of 2022 were $152,000, compared to net charge-offs of $167,000 during the first nine months of 2021.

The allowance for loan and lease losses to non-performing loans and leases was 159.12% at September 30, 2022, compared to 150.8% at December 31, 2021.

Loans and leases, net of allowance for credit losses on loans and leases, increased $27.4 million, or 2.9%, to $989.1 million at March 31, 2023 from $961.7 million at December 31, 2022.

The increase in loans and leases was attributable to an increase in commercial real estate loans, direct financing leases and multi-family loans of $23.2 million, $9.8 million and $7.5 million, respectively.

At March 31, 2023, there were no loans held for sale, compared to $474,000 at December 31, 2022.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loans and leases 90 days or more past due, totaled $8.6 million or 0.86% of total loans and leases at March 31, 2023, compared to $9.2 million or 0.94% of total loans and leases at December 31, 2022.

Accruing loans and leases past due 90 days or more totaled $3.0 million at March 31, 2023, compared to $3.2 million at December 31, 2022.

At March 31, 2023, troubled loan modifications totaled $60,000, compared to $428,000 at December 31, 2022, all of which were on nonaccrual status as of such dates.

Allowance for Credit Losses.

On January 1, 2023, the Bank adopted the accounting standard referred to as CECL.

As a result of the change in methodology from the incurred loss method to the CECL method, on January 1, 2023 the Company recorded a one-time adjustment from equity into the allowance for credit losses on loans and leases in the amount of $2.0 million, net of tax.

The allowance for credit losses on loans and leases totaled $15.5 million, or 1.54% of total loans and leases outstanding at March 31, 2023.

At December 31, 2022, prior to the adoption of CECL, the allowance for loan and lease losses totaled $12.4 million, or 1.27% of total loans and leases outstanding.

Additionally, as a part of CECL adoption, the Bank established an allowance for credit losses on off-balance sheet commitments by recording a one-time adjustment from equity of $1.8 million.

This allowance, which is reported in other liabilities on the Condensed Consolidated Balance Sheets, totaled $2.2 million at March 31, 2023.

Net recoveries during the first quarter of 2023 were $78,000 compared to net recoveries of $9,000 during the comparable quarter of 2022.

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, 2022, which evaluation included consideration of a potential recession due to inflation, rising interest rates and stock market volatility, as well as supply chain disruptions caused by the war in Ukraine.

The Company evaluated its exposure to potential loan and lease losses as of March 31, 2023, which evaluation included consideration of a potential recession due to inflation, rising interest rates, stock market volatility, and the Russia-Ukraine conflict.

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.

For additional information on the allowance for credit losses, see "Allowance for Credit Losses on Loans and Leases" and "Economic Outlook" in "Note 4 Loans, Leases and Allowance" of the "Notes to Condensed Consolidated Financial Statements" in this report.

Other Assets .

Other assets increased $12.8 million, or 117.9%, to $23.6 million at September 30, 2022 from $10.8 million at December 31, 2021, primarily as a result of a $14.4 million increase in deferred tax assets due to the mark-to-market adjustment on the available-for-sale investment portfolio.

Total deposits increased $58.5 million, or 6.5%, to $958.6 million at September 30, 2022, from $900.2 million at December 31, 2021.

The increase in deposits primarily was due to an increase in brokered time deposits of $72.2 million and savings and money market accounts of $20.7 million, partially offset by a decrease in other time deposits of $32.6 million.

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

Brokered deposits totaled $194.0 million, or 20.2% of total deposits, at September 30, 2022, compared to $121.8 million, or 13.5% of total deposits, at December 31, 2021.

At September 30, 2022, noninterest-bearing deposits totaled $114.8 million, or 12.0% 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 $7.0 million, or 3.9%, to $187.0 million at September 30, 2022 from $180.0 million at December 31, 2021.

Stockholders’ Equity.

Stockholders’ equity totaled $125.0 million at September 30, 2022, a decrease of $55.5 million, or 30.8%, from December 31, 2021.

The decrease in stockholders' equity from year-end 2021 primarily was the result of a reduction in accumulated comprehensive income of $54.0 million due to a greater mark-to-market adjustment to the investment portfolio as a result of higher interest rates, the payment of $3.3 million in dividends to Company stockholders, and the repurchase of $9.6 million of Company common stock, partially offset by net income of $9.7 million.

The Company repurchased 597,771 shares of Company common stock at an average price of $16.09 per share for a total of $9.6 million during the first nine months of 2022.

The Company’s equity to asset ratio was 9.8% at September 30, 2022.

At September 30, 2022, the Bank’s Tier 1 capital to total assets ratio was 11.3% 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, 2022 and 2021.

Net income for the three months ended September 30, 2022 was $3.2 million, a $76,000 or 2.5% increase from net income of $3.1 million for the three months ended September 30, 2021.

The $3.2 million in earnings equaled $0.29 diluted earnings per share for the third quarter of 2022, compared to $0.27 diluted earnings per share for the third quarter of 2021.

The increase in net income was the result of a $555,000 increase in net interest income, a $300,000 decrease in the provision for loan losses, a $39,000 increase in noninterest income and a $61,000 decrease in the provision for income taxes, partially offset by a $878,000 increase in noninterest expense.

Interest Income.

Interest income increased $1.3 million, or 10.7%, to $13.2 million during the quarter ended September 30, 2022, compared to $11.9 million during the quarter ended September 30, 2021.

Interest income on loans and leases increased $864,000, or 8.3%, to $11.3 million for the quarter ended September 30, 2022, from $10.4 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 $908.6 million for the quarter ended September 30, 2022, compared to $784.5 million for the quarter ended September 30, 2021.

The average yield on loans and leases was 4.98% for the quarter ended September 30, 2022, compared to 5.32% for the comparable quarter in 2021.

Interest income included $86,000 in fees earned related to PPP loans in the quarter ended September 30, 2022 compared to $876,000 during the same quarter in 2021.

As of September 30, 2022, total unrecognized fees on PPP loans were approximately $36,000.

Interest income on investment securities, including FHLB stock, increased $376,000, or 25.8%, to $1.8 million during the quarter ended September 30, 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 a 68 basis point increase in the average yield earned on investment securities, partially offset by a decrease in the average balances of $42.2 million.

The average balance of investment securities, including FHLB stock, was $321.1 million for the quarter ended September 30, 2022, compared to $363.3 million for the quarter ended September 30, 2021.

The average yield on investment securities, including FHLB stock, was 2.28% for the third quarter of 2022, compared to 1.60% for the third quarter of 2021.

Interest Expense.

Interest expense increased $715,000, or 36.8% to $2.7 million for the quarter ended September 30, 2022, compared to the quarter ended September 30, 2021.

Interest expense on deposits increased $545,000, or 43.5%, to $1.8 million for the quarter ended September 30, 2022, from the comparable quarter in 2021.

The increase in interest expense on deposits primarily was attributable to an increase of $122.2 million in average balance of, and a 16 basis point increase in the average rate paid on interest-bearing deposits.

The average rate paid on interest-bearing deposits was 0.86% for the quarter ended September 30, 2022, compared to 0.70% for the quarter ended September 30, 2021.

The average balance of interest-bearing deposits increased 17.1% to $836.0 million in the quarter ended September 30, 2022, compared to $713.9 million in the comparable quarter in 2021.

Interest expense on FHLB borrowings increased $170,000, or 24.7%, to $859,000 in the third quarter of 2022 compared to $689,000 for the same quarter in 2021, due to a 34 basis point increase in the average rate paid on borrowings to 1.88% during the three months ended September 30, 2022, from 1.54% for the comparable quarter in 2021, and a $3.1 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 $555,000, or 5.6%, to $10.5 million in the third quarter of 2022, compared to $10.0 million for the third quarter of 2021.

This increase was due to an increase in average interest-earning assets of $74.1 million in the third quarter of 2022 compared to the comparable quarter in 2021.

Net interest margin (annualized) was 3.39% for the three months ended September 30, 2022, compared to 3.42% for the three months ended September 30, 2021.

The decrease in net interest margin was primarily due to average interest-bearing liabilities increasing $125.3 million in the third quarter of 2022 compared to the comparable period in 2021 while average interest-earnings assets increased $74.1 million.

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 September 30, 2022, compared to a positive impact of 33 basis points to the yield on loans and leases in the comparable quarter in 2021.

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 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.

Three Months Ended September 30,

Outstanding Interest

(Dollars in thousands)

Interest-earning assets:

Loans and leases receivable $ 908,621 $ 11,302 4.98 % $ 784,531 $ 10,437 5.32 %

Securities 311,273 1,711 2.20 % 354,211 1,387 1.57 %

FHLB stock 9,795 121 4.94 % 9,081 69 3.04 %

Cash and cash equivalents and other 9,722 36 1.48 % 17,515 7 0.16 %

Total interest-earning assets 1,239,411 13,170 4.25 % 1,165,338 11,900 4.08 %

Non-earning assets 40,970 38,232

Total assets 1,280,381 1,203,570

Interest-bearing liabilities:

Savings and money market accounts 280,799 569 0.81 % 250,799 325 0.52 %

Interest-bearing checking accounts 169,306 163 0.39 % 166,138 98 0.24 %

Certificate accounts 385,943 1,067 1.11 % 296,954 830 1.12 %

Borrowings 182,533 859 1.88 % 179,413 689 1.54 %

Total interest-bearing liabilities 1,018,581 2,658 1.04 % 893,304 1,942 0.87 %

Noninterest-bearing demand deposits 112,558 105,976

Other liabilities 7,863 22,740

Other assets decreased $747,000, or 3.1%, to $23.7 million at March 31, 2023 from $24.5 million at December 31, 2022, primarily as a result of a decrease in deferred tax assets due to the mark-to-market adjustment on the investment portfolio.

Total deposits increased $24.8 million, or 2.5%, to $1.0 billion at March 31, 2023, from $1.0 billion at December 31, 2022.

The increase in deposits primarily was due to an increase in brokered time deposits of $33.3 million and other time deposits of $15.4 million, partially offset by a decrease in demand deposit accounts of $18.2 million.

Management attributes the shift in funds to customers taking advantage of higher rates being paid on time deposits in 2023 as a result of interest rate hikes enacted by the Federal Reserve.

Brokered deposits increased $33.3 million to $291.1 million, or 28.3% of total deposits, at March 31, 2023, compared to $257.9 million, or 25.7% of total deposits, at December 31, 2022.

At March 31, 2023, noninterest-bearing deposits totaled $96.8 million, or 9.4% of total deposits, compared to $106.4 million or 10.6% of total deposits at December 31, 2022.

As of March 31, 2023, approximately $197.7 million of our deposit portfolio or 19.2% of total deposits, excluding collateralized public deposits, was uninsured.

The uninsured amounts are estimated based on the methodologies and assumptions used for First Bank Richmond's regulatory reporting requirements.

Total borrowings, consisting solely of FHLB advances, increased $3.5 million to $183.5 million at March 31, 2023, compared to $180.0 million at December 31, 2022, which together with the increase in deposits were used to fund loan growth.

Stockholders’ Equity.

Total liabilities and stockholders' equity 1,280,381 1,203,570

Net interest income $ 10,512 $ 9,958

Net earning assets $ 220,830 $ 272,034

Net interest rate spread (1)

3.21 % 3.21 %

Net interest margin (2)

3.39 % 3.42 %

Average interest-earning assets to average interest-bearing liabilities

121.68 % 130.45 %

_____________

(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, 2022 totaled $200,000 compared to $500,000 for the three months ended September 30, 2021, a $300,000 or 60.0% decrease.

The decrease primarily was due to improvement in the overall economy from the effects of the COVID-19 pandemic, partially offset by the increase in the loan portfolio.

Net charge-offs during the third quarter of 2022 were $25,000, compared to net charge-offs of $82,000 in the third quarter of 2021.

While we believe the steps we have taken and continue to take are necessary to effectively manage our portfolio uncertainties relating to the level of our allowance for loan and lease losses remain heightened as a result of continued concern about a potential recession due to inflation, rising interest rates, stock market volatility and the Russia-Ukraine conflict.

Noninterest Income.

Noninterest income increased $39,000 or 3.4%, to $1.2 million for the quarter ended September 30, 2022, compared to $1.1 million for the comparable quarter in 2021.

The increase in noninterest income resulted primarily from a $417,000 or 230.0% increase in loan and lease servicing fees.

Loan and lease servicing fees in the third quarter of 2022 reflected a recovery of $114,000 to mortgage servicing rights compared to an impairment charge of $251,000 recorded in the third quarter of 2021.

Card fee income increased $32,000, or 11.9%, in the third quarter of 2022 due to higher card usage.

Service fees on deposit accounts increased $24,000, or 10.1%, in the third quarter of 2022 from the comparable quarter of 2021.

Other income increased $24,000, or 9.7%, in the third quarter of 2022 compared to the same period of 2021 primarily due to the

fees earned from our participation in a loan hedging program with a correspondent bank.

Partially offsetting these increases was a decrease in net gains on loan and lease sales of $441,000, or 79.1%, to $116,000 as mortgage banking activity declined primarily due to lower refinancing activity, a lower supply of houses for sale in the Bank's market area, and increases in residential mortgage rates.

Noninterest Expense.

Noninterest expense increased $878,000, or 12.8%, to $7.7 million for the three months ended September 30, 2022, from $6.8 million for the same period in 2021.

Salaries and employee benefits increased $493,000, or 11.7%, to $4.7 million for the quarter ended September 30, 2022, compared to the same quarter in 2021, primarily due to annual merit increases and the hiring of additional staff.

Data processing fees increased $231,000, or 45.0%, to $744,000 for the quarter ended September 30, 2022 compared to the third quarter of 2021, primarily due to the continued implementation and roll out of new digital banking modules during the third quarter and the Company's change to a new digital banking provider in the fourth quarter of 2021.

Other expenses increased $78,000, or 8.7%, to $966,000 in the third quarter of 2022 compared to the same quarter of 2021, primarily due to expenses related to employee professional development.

Income Tax Expense.

Income tax expense decreased $61,000 during the three months ended September 30, 2022, compared to the same period in 2021 due to a lower effective tax rate.

The effective tax rate for the third quarter of 2022 was 16.3% compared to 18.0% for the same quarter a year ago.

Comparison of Results of Operations for the Nine Months Ended September 30, 2022 and 2021.

Net income for the nine months ended September 30, 2022 was $9.7 million, a $1.2 million or 14.7%, increase from net income of $8.4 million for the nine months ended September 30, 2021.

The $9.7 million in earnings equaled $0.87 diluted earnings per share for the first nine months of 2022, compared to $0.72 diluted earnings per share for the first nine months of 2021.

The increase in net income was primarily the result of a $3.0 million increase in net interest income and an $830,000 decrease in the provision for loan losses, partially offset by an $838,000 decrease in noninterest income, a $1.5 million increase in noninterest expense and a $210,000 increase in the provision for income taxes.

Stockholders’ equity totaled $136.1 million at March 31, 2023, an increase of $3.2 million, or 2.4%, from December 31, 2022.

The increase in stockholders' equity from year-end 2022 resulted from $2.9 million in net income and a $6.2 million reduction in accumulated other comprehensive loss due to improvement in the fair market value of

the available for sale investment portfolio, partially offset by the payment of $1.5 million in dividends to Company stockholders, the repurchase of $1.2 million of Company common stock and the one-time adjustment to retained earnings of $3.8 million related to the adoption of CECL during the current quarter.

The Company repurchased 98,553 shares of Company common stock at an average price of $11.68 per share for a total of $1.2 million during the first three months of 2023.

The Company’s equity to asset ratio was 9.99% at March 31, 2023.

At March 31, 2023, the Bank’s Tier 1 capital to total assets ratio was 10.9% 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, 2023 and 2022.

Net income for the three months ended March 31, 2023 was $2.9 million, a $114,000 or 3.8% decrease from net income of $3.0 million for the three months ended March 31, 2022.

The $2.9 million in earnings equaled $0.27 diluted earnings per share for the first quarter of 2023, compared to $0.26 diluted earnings per share for the first quarter of 2022.

The decrease in net income was the result of decreases in net interest income of $183,000 and noninterest income of $19,000, and an increase in noninterest expense of $27,000, partially offset by decreases in the provision for credit losses of $30,000 and the provision for income taxes of $85,000.

Interest Income.

Interest income increased $3.7 million, or 10.8%, to $37.6 million during the nine months ended September 30, 2022, compared to $33.9 million during the nine months ended September 30, 2021.

Interest income on loans and leases increased $2.1 million, or 6.9%, to $32.3 million for the nine months ended September 30, 2022, from $30.2 million for the comparable period 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 28 basis points.

The average outstanding loan and lease balances were $878.3 million for the first nine months of 2022, compared to $775.6 million for the first nine months of 2021.

The average yield on loans and leases was 4.90% for the nine months ended September 30, 2022, compared to 5.18% for the comparable period in 2021.

Interest income also included $345,000 in fees earned related to PPP loans in the nine months ended September 30, 2022 compared to $2.2 million during the same period in 2021.

Interest income on investment securities, including FHLB stock, increased $1.5 million, or 40.9%, to $5.2 million during the nine months ended September 30, 2022, compared to the same period 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 $20.2 million and a 51 basis point increase in the average yield earned on investment securities.

The average balance of investment securities, including FHLB stock, was $339.0 million for the nine months ended September 30, 2022, compared to $318.8 million for the nine months ended September 30, 2021.

The average yield on investment securities, including FHLB stock, was 2.06% for the first nine months of 2022, compared to 1.55% for the first nine months of 2021.

Interest income increased $3.3 million, or 27.2%, to $15.2 million during the quarter ended March 31, 2023, compared to $11.9 million during the quarter ended March 31, 2022.

Interest income on loans and leases increased $2.9 million, or 28.5%, to $13.2 million for the quarter ended March 31, 2023, from $10.3 million for the comparable quarter in 2022, due to an increase in the average balance of loans and leases of $134.3 million, and an increase of 53 basis points in the average yield earned on loans and leases.

The average outstanding loan and lease balance was $984.2 million for the quarter ended March 31, 2023, compared to $849.9 million for the quarter ended March 31, 2022.

The average yield on loans and leases was 5.36% for the quarter ended March 31, 2023, compared to 4.83% for the comparable quarter in 2022.

Interest income on investment securities, including FHLB stock, increased $265,000, or 15.9%, to $1.9 million during the quarter ended March 31, 2023, compared to the same quarter in 2022.

The increase in interest income on investment securities from the comparable period in 2022 was due to a 64 basis point increase in the average yield earned on investment securities.

The average yield on investment securities, including FHLB stock, was 2.54% for the first quarter of 2023, compared to 1.84% for the first quarter of 2022.

The average balance of investment securities, including FHLB stock, was $305.0 million for the quarter ended March 31, 2023, compared to $363.2 million for the quarter ended March 31, 2022.

Interest Expense.

Interest expense increased $699,000, or 12.2%, to $6.4 million for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

Interest expense on deposits increased $660,000, or 18.0%, to $4.3 million for the nine months ended September 30, 2022, from the comparable period in 2021.

The increase in interest expense on deposits primarily was attributable to a $150.2 million increase in average interest-bearing deposit balances, partially offset by a three basis point decrease in the average rate paid on interest-bearing deposits to 0.70% during the nine months ended September 30, 2022, from 0.73% for the comparable period in 2021.

The average balance of interest-bearing deposits increased 22.5% to $818.7 million in the nine months ended September 30, 2022, compared to $668.5 million in the comparable period in 2021.

Interest expense on FHLB borrowings increased $40,000, or 1.9%, to $2.1 million in the first nine months of 2022 compared to $2.1 million for the same period in 2021, due to a $4.6 million increase in the average outstanding balance of borrowings partially offset by a one basis point decline in the average rate paid on borrowings to 1.58% during the nine months ended September 30, 2022, from 1.59% for the comparable period in 2021.

Interest expense increased $3.4 million to $5.3 million for the quarter ended March 31, 2023, compared to the quarter ended March 31, 2022.

Interest expense on deposits increased $2.8 million, or 222.5%, to $4.0 million for the quarter ended March 31, 2023, from the comparable quarter in 2022.

The increase in interest expense on deposits primarily was attributable to a $107.6 million increase in the average balance of, and a 116 basis point increase in the average rate paid on interest-bearing deposits.

The average rate paid on interest-bearing deposits was 1.79% for the quarter ended March 31, 2023, compared to 0.63% for the quarter ended March 31, 2022.

The average balance of interest-bearing deposits increased to $900.9 million, or 13.6%, in the quarter ended March 31, 2023, compared to $793.4 million in the comparable quarter in 2022.

Interest expense on FHLB borrowings increased $655,000, or 102.4%, to $1.3 million in the first quarter of 2023 compared to $640,000 for the same quarter in 2022, primarily due to an increase in the average rate paid on FHLB borrowings.

The average rate paid on FHLB borrowings was 2.61% for the quarter ended March 31, 2023, compared to 1.40% for the first quarter of 2022.

The average balance of FHLB borrowings totaled $198.5 million during the quarter ended March 31, 2023, compared to $183.5 million for the quarter ended March 31, 2022.

Net Interest Income.

Net interest income before the provision for loan and lease losses increased $3.0 million, or 10.5%, to $31.1 million in the first nine months of 2022, compared to $28.1 million for the first nine months of 2021.

This increase was due to an increase in average interest-earning assets and an eight basis point increase in the average interest rate spread during the first nine months of 2022 compared to the comparable period in 2021, partially offset by an increase in average interest-bearing liabilities.

Net interest margin (annualized) remained relatively unchanged at 3.37% for the nine months ended September 30, 2022, compared to 3.36% for the nine months ended September 30, 2021.

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 nine months ended September 30, 2022, compared to a positive impact of 17 basis points to the yield on loans and leases in the comparable period in 2021.

Net interest income before the provision for credit losses decreased $183,000, or 1.8%, to $9.9 million in the first quarter of 2023, compared to $10.1 million for the first quarter of 2022.

This decrease was due to a 37 basis point decrease in the average interest rate spread, partially offset by a $66.9 million increase in average interest earning assets.

Net interest margin (annualized) was 3.04% for the three months ended March 31, 2023, compared to 3.26% for the three months ended March 31, 2022.

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

Average Balances, Interest and Average Yields/Cost.

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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

32 unchanged sentences

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 nine months ended September 30, 2022 totaled $600,000 compared to $1.4 million for the nine months ended September 30, 2021, an $830,000 or 58.0% decrease.

The decrease primarily was due to improvement in the overall economy from the effects of the COVID-19 pandemic, partially offset by the increase in the loan portfolio.

Net charge-offs during the first nine months of 2022 were $152,000, compared to net charge-offs of $167,000 in the first nine months of 2021.

Provision for Credit Losses.

The provision for credit losses for the three months ended March 31, 2023 totaled $170,000, compared to a $200,000 provision for loan and lease losses for the three months ended March 31, 2022, a $30,000 or 14.9% decrease.

As a result of the adoption of CECL on January 1, 2023, the provision for credit losses calculated prior to that date was determined using the previously applied incurred loss methodology rather than the current expected credit losses methodology, and as a result the amounts are not directly comparable.

Net recoveries during the first quarter of 2023 were $78,000 compared to net recoveries of $9,000 in the first quarter of 2022.

While we believe the steps we have taken and continue to take are necessary to effectively manage our portfolio, uncertainties relating to the level of our allowance for credit losses remain heightened as a result of continued concern about a potential recession due to inflation, rising interest rates, stock market volatility and the Russia-Ukraine conflict.

Noninterest Income.

Noninterest income decreased $838,000, or 19.4%, to $3.5 million for the nine months ended September 30, 2022, compared to $4.3 million for the comparable period in 2021.

The decrease in noninterest income resulted primarily from a $1.5 million or 72.2% decrease in net gains on loan and lease sales to $581,000 during the first nine months of 2022, compared to $2.1 million during the first nine months of 2021.

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

During the nine months ended September 30, 2022, the Company sold $25.7 million of loans compared to the sale of $62.3 million of loans during the nine months ended September 30, 2021.

Partially offsetting the decrease in net gains on loan and leases, were increases in loan and lease servicing income of $480,000 to $442,000 for the first nine months of 2022 compared to a loss of $38,000 for the comparable period in 2021, primarily due to a recovery of $79,000 to the value of mortgage servicing rights in the first nine months of 2022, compared to an impairment of $231,000 in the first nine months of 2021.

In addition, service fees on deposit accounts increased $113,000, or 18.0%, to $743,000 for the nine months ended September 30, 2022, compared to $629,000 for the nine months ended September 30, 2021, primarily the result of increased overdraft fees, many of which were waived in the first nine months of 2021.

Card fee income increased $94,000, or 12.0%, to $878,000 in the first nine months of 2022 from $784,000 in the first nine months of 2021 due to increased debit card usage.

Noninterest income decreased $19,000 or 1.7%, to $1.1 million for the quarter ended March 31, 2023, compared to the comparable quarter in 2022.

The decrease in noninterest income resulted primarily from an $87,000 or 36.0% decrease in net gains on loan and lease sales to $156,000 during the first quarter of 2023, compared to $243,000 during the first quarter of 2022.

The decrease in net gains on loan and lease sales was due to increased mortgage rates causing decreased mortgage banking activity.

During the three months ended March 31, 2023, the Company sold $5.5 million of loans

compared to the sale of $10.6 million of loans during the three months ended March 31, 2022.

Card fee income increased $9,000, or 3.4%, to $287,000 in the first quarter of 2023 from $278,000 in the first quarter of 2022 due to increased card usage.

Loan and lease servicing income increased $92,000, to a gain of $120,000 for the first quarter of 2023 compared to a gain of $28,000 for the comparable quarter in 2022, as there was no impairment to the value of mortgage servicing rights recorded in the first quarter of 2023, compared to an impairment of $111,000 in the first quarter of 2022.

Service fees on deposit accounts increased $46,000, or 19.8%, to $281,000 for the quarter ended March 31, 2023, compared to $235,000 for the quarter ended March 31, 2022.

The increase in service fees on deposit accounts during the first quarter of 2023 compared to the first quarter of 2022 was primarily due to an increase in early withdrawal penalty fees, as customers withdrew funds to take advantage of higher interest rates.

Other income decreased $81,000, or 24.5%, for the first quarter of 2023 compared to the same quarter in 2022 primarily due to a commercial loan letter of credit fee of $58,000 recorded in the first quarter of 2022 which was not replicated during the current quarter.

Noninterest Expense.

Noninterest expense increased $1.5 million, or 7.3%, to $22.2 million for the nine months ended September 30, 2022, from $20.7 million for the same period in 2021.

Salaries and employee benefits increased $699,000, or 5.4%, to $13.7 million for the nine months ended September 30, 2022, compared to the same period in 2021, due to normal salary increases and the hiring of additional personnel.

Data processing fees increased $369,000, or 23.0%, to $2.0 million in the first nine months of 2022 compared to the same period of 2021, primarily due to the Company's change to a new digital banking provider in the fourth quarter of 2021.

Net occupancy expenses increased $102,000, or 10.8%, to $1.0 million for the first nine months of 2022 compared to the same period of 2021, primarily due to higher property taxes, utilities expense, and maintenance expense.

Legal and professional expenses increased $122,000, or 13.0%, to $1.1 million for the first nine months of 2022 compared to the same period of 2021, primarily due to increased strategic planning initiated by the Company in 2022.

Other expenses increased $177,000, or 7.0%, to $2.7 million in the first nine months of 2022, compared to the same period of 2021 primarily due to increased loan expenses, franchise tax expense, expenses related to employee professional development, and expenses related to brokered certificates of deposit, partially offset by a reduction in fraud losses.

Noninterest expense increased $27,000, or 0.4%, to $7.4 million for the three months ended March 31, 2023, from $7.3 million for the same period in 2022.

Salaries and employee benefits decreased $209,000, or 4.7%, to $4.2 million for the quarter ended March 31, 2023, from $4.5 million for the same quarter in 2022.

The decrease in salaries and benefits in the first quarter of 2023 from the first quarter of 2022 was primarily due to decreased bonus expense.

Data processing fees increased $178,000, or 27.0%, to $837,000 in the first quarter of 2023 compared to the same quarter of 2022, primarily due to increased software and core provider expenses.

Deposit insurance expense increased $87,000, or 107.4% from the comparable quarter in 2022 primarily due to a change in the asset and deposit mix.

Income Tax Expense.

Income tax expense increased $210,000 during the nine months ended September 30, 2022, compared to the same period in 2021 due to a higher level of pre-tax income.

The effective tax rate for the first nine months of 2022 was 18.0%, compared to an effective tax rate of 18.4% for the first nine months of 2021.

The slight decrease in the effective tax rate was due to municipal tax-free income representing a greater percentage of our pre-tax income.

Income tax expense decreased $85,000 during the three months ended March 31, 2023, compared to the same period in 2022 due to a lower level of pre-tax income.

The effective tax rate for the first quarter of 2023 was 15.5% compared to 17.0% for the same quarter a year ago.

Capital and Liquidity

Shareholders' equity totaled $125.0 million at September 30, 2022 and $180.5 million at December 31, 2021.

In addition to net income of $9.7 million, other sources of capital during the first nine months of 2022 included $622,000 related to the allocation of ESOP shares during the year and $1.2 million related to stock-based compensation.

Uses of capital during the first nine months of 2022 included $3.3 million of dividends paid on common stock, $54.0 million of other comprehensive loss, net of tax, and $9.6 million of stock repurchases.

The increase in the accumulated other comprehensive loss component of shareholders' equity was due to an increase in the unrealized loss on available-for-sale securities reflecting the increase in market interest rates during the current quarter.

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

Shareholders' equity totaled $136.1 million at March 31, 2023 and $133.0 million at December 31, 2022.

In addition to net income of $2.9 million, other sources of capital during the first quarter of 2023 included other comprehensive income, net of tax, of $6.2 million, $184,000 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 2023 included $1.5 million of dividends paid on common stock, $1.2 million of stock repurchases, and $3.8 million due to the one-time adjustment to retained earnings for the adoption of CECL.

The increase 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 $0.14 per common share during the first quarter of 2023, and regular quarterly dividends of $0.10 per common share during 2022.

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).

Assuming continued payment during 2023 at the current dividend rate of $0.14 per share, our average total dividend paid each quarter would be approximately $1.6 million based on the number of our currently outstanding shares at March 31, 2023.

Stock Repurchase Plans.

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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 our outstanding shares, which was completed on July 7, 2022.

On July 21, 2022, the Company announced a fourth stock repurchase program for up to 1,184,649 shares, or approximately 10% of the Company's then outstanding shares, which program will expire in July 2023 unless completed sooner.

On July 21, 2022, the Company announced that the Board of Directors authorized a fourth stock repurchase program for up to 1,184,649 shares, or approximately 10% of its then outstanding shares.

The fourth stock repurchase program will expire in July 2023, unless completed sooner.

As of March 31, 2023, the Company had approximately 1,023,843 shares available for repurchase under its existing stock repurchase program.

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

As of September 30, 2022, the Company had approximately 1,140,574 shares available for repurchase under its existing stock repurchase program.

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

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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.

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.

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

As of September 30, 2022, we had approximately $4.2 million held in an interest-bearing account at the Federal Reserve.

Our liquid assets in the form of cash and cash equivalents and investments available-for-sale totaled $309.1 million at March 31, 2023.

Certificates of deposit that are scheduled to mature in less than one year from March 31, 2023 totaled $357.3 million.

Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

As of March 31, 2023, we had approximately $5.6 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 September 30, 2022, based upon available, pledgeable collateral, our total remaining borrowing capacity with the FHLB was approximately $62.6 million.

Furthermore, at September 30, 2022, we had approximately $176.7 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 September 30, 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.

As of March 31, 2023, based upon available, pledgeable collateral, our total remaining borrowing capacity with the FHLB was approximately $75.9 million.

Furthermore, at March 31, 2023, we had approximately $143.8 million in securities that were unencumbered by a pledge and could be used to support additional borrowings of up to $139.3 million through repurchase agreements or the Federal Reserve discount window, as needed.

As of March 31, 2023, management was 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.

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

Net cash provided by operating activities for the nine months ended September 30, 2022 was $14.6 million, compared to $3.3 million of net cash provided by operating activities for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, net cash used in investing activities was $70.9 million, which consisted primarily of net change in loans receivable, compared to $176.0 million of net cash used in investing activities for the nine months ended September 30, 2021.

Net cash provided by financing activities for the nine months ended September 30, 2022 was $52.6 million, which was comprised primarily of net change in deposits, compared to $143.7 million of net cash provided by financing activities during the nine months ended September 30, 2021.

Net cash provided by operating activities for the three months ended March 31, 2023 was $3.6 million, compared to $3.9 million provided by operating activities for the three months ended March 31, 2022.

During the three months ended March 31, 2023, net cash used in investing activities was $27.9 million, which consisted primarily of net change in loans receivable, compared to $16.1 million of cash used in investing activities for the three months ended March 31, 2022.

Net cash provided by financing activities for the three months ended March 31, 2023 was $25.7 million, which was comprised primarily of net change in deposits, compared to $8.7 million provided by financing activities during the three months ended March 31, 2022.

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 2022 Form 10-K other than set forth above.

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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 paid by First Bank Richmond.

At September 30, 2022, Richmond Mutual Bancorporation, on an unconsolidated basis, had $26.9 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

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 up-streamed from First Bank Richmond and borrowings from outside sources.

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

At March 31, 2023, Richmond Mutual Bancorporation, on an unconsolidated basis, had $22.8 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

Regulatory Capital Requirements.

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

At September 30, 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.

At March 31, 2023, First Bank Richmond’s regulatory capital exceeded the FDIC regulatory requirements, and First Bank Richmond was well-capitalized under regulatory prompt corrective action standards.

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

Actual Required for Adequate Capital To Be Well

Actual Minimum for Capital Adequacy Purposes Categorized as "Well-Capitalized" Under Prompt Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio

(Dollars in thousands)

As of September 30, 2022

As of March 31, 2023

Total risk-based capital (to risk weighted assets) $ 166,213 14.4 % $ 92,385 8.0 % $ 115,482 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, 2022, the Bank’s CET1 capital exceeded the required capital conservation buffer.

At March 31, 2023, 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 were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at September 30, 2022, it would have exceeded all regulatory capital requirements.

If Richmond Mutual Bancorporation was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2023, 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