Richmond Mutual Bancorporation, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Management’s discussion and analysis of financial condition of the Richmond Mutual Bancorporation, Inc. (the “Company”) at March 31, 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” and FB Richmond Holdings, Inc., unless the context otherwise requires. Cautionary Note Regarding Forward-Looking Statements Certain matters in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of words such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” These forward-looking statements include, but are not limited to: • statements of our goals, intentions and expectations; • statements regarding our business plans, prospects, growth and operating strategies; • statements regarding the quality of our loan and investment portfolios; and • estimates of our risks and future costs and benefits. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These forward-looking statements are based on our current beliefs and expectations and, by their nature, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Important factors that could cause our actual results to differ materially from the results anticipated or projected, include, but are not limited to, the following: • 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 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; 29 • demand for loans and deposits in our market area; • our ability to implement and change our business strategies; • competition among depository and other financial institutions and equipment financing companies; • inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans and leases we have made and make; • adverse changes in the securities or secondary mortgage markets; • changes in the quality or composition of our loan, lease or investment portfolios; • our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on our information technology systems or on the third-party vendors who perform several of our critical processing functions; • the inability of third-party providers to perform as expected; • our ability to manage market risk, credit risk and operational risk in the current economic environment; • 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; • our ability to retain key employees; • our compensation expense associated with equity allocated or awarded to our employees; • changes in the financial condition, results of operations or future prospects of issuers of securities that we own; • our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto; • changes in consumer spending, borrowing and savings habits; • changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission ("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 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; • other economic, competitive, governmental, regulatory, and technical factors affecting our operations, pricing, products and services; and • the other risks detailed in this report and from time to time in our other filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”). 30 We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements. Overview The Company, a Maryland corporation, is a bank holding company for its wholly owned subsidiary, First Bank Richmond. Substantially all of the Company's business is conducted through First Bank Richmond. The Company is regulated by the Board of Governors of the Federal Reserve System (the “FRB”) and the Indiana Department of Financial Institutions ("IDFI"). The Company's corporate office is located at 31 North 9th Street, Richmond, Indiana, and its telephone number is (765) 962-2581. First Bank Richmond is an Indiana state-chartered commercial bank headquartered in Richmond, Indiana. The Bank was originally established in 1887 as an Indiana state-chartered mutual savings and loan association and in 1935 converted to a federal mutual savings and loan association, operating under the name First Federal Savings and Loan Association of Richmond. In 1993, the Bank converted to a state-chartered mutual savings bank and changed its name to First Bank Richmond, S.B. In 1998, the Bank, in connection with its non-stock mutual holding company reorganization, converted to a national bank charter operating as First Bank Richmond, National Association. In July 2007, Richmond Mutual Bancorporation-Delaware, the Bank’s then current holding company, acquired Mutual Federal Savings Bank headquartered in Sidney, Ohio. Mutual Federal Savings Bank was operated independently as a separately chartered, wholly owned subsidiary of Richmond Mutual Bancorporation-Delaware until 2016 when it was combined with the bank through an internal merger transaction that consolidated both banks into a single, more efficient commercial bank charter. In 2017, the Bank converted to an Indiana state-chartered commercial bank and changed its name to First Bank Richmond. The former Mutual Federal Savings Bank continues to operate in Ohio under the name Mutual Federal, a division of First Bank Richmond. First Bank Richmond provides full banking services through its seven full- and one limited-service offices located in Cambridge City (1), Centerville (1), Richmond (5) and Shelbyville (1), Indiana, its five full-service offices located in Piqua (2), Sidney (2) and Troy (1), Ohio, and its loan production office in Columbus, Ohio. Administrative, trust and wealth management services are conducted through First Bank Richmond’s Corporate Office/Financial Center located in Richmond, Indiana. As an Indiana-chartered commercial bank, First Bank Richmond is subject to regulation by the IDFI and the Federal Deposit Insurance Corporation (“FDIC”). Our principal business consists of attracting deposits from the general public, as well as brokered deposits, and investing those funds primarily in loans secured by commercial and multi-family real estate, first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, direct financing leases and commercial and industrial loans. We also obtain funds by utilizing Federal Home Loan Bank (“FHLB”) advances. Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and government sponsored agency and municipal bonds. First Bank Richmond generates commercial, mortgage and consumer loans and leases and receives deposits from customers located primarily in Wayne and Shelby Counties, in Indiana and Shelby, Miami and Franklin (no deposits) Counties, in Ohio. We sometimes refer to these counties as our primary market area. First Bank Richmond’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Our leasing operation consists of direct investments in equipment that we lease (referred to as direct finance leases) to small businesses located throughout the United States. Our lease portfolio consists of various kinds of equipment, generally technology-related, such as computer systems, medical equipment and general manufacturing, industrial, construction and transportation equipment. We seek leasing transactions where we believe the equipment leased is integral to the lessee's business. We also provide trust and wealth management services, including serving as executor and trustee under wills and deeds and as guardian and custodian of employee benefits, and manage private investment accounts for individuals and institutions. Total wealth management assets under management and administration were $138.0 million at March 31, 2023. Our results of operations are primarily dependent on net interest income. Net interest income is the difference between interest income, which is the income that is earned on loans and investments, and interest expense, which is the interest that is paid on deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), and fees from sale of residential mortgage loans originated for sale in the secondary market. We also recognize income from the sale of investment securities. 31 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 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 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. 32 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. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and we have the ability to hold the securities to maturity. Securities not classified as held to maturity are classified as available for sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and which do not affect earnings until realized. The fair values of our securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of our fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities. We evaluate all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if any 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 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 General. 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 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. 33 Loans and Leases. 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 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 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. Deposits. 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. Borrowings. 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. 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 34 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. General. 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 $3.3 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 $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 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. 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. 35 Three Months Ended March 31, 2023 2022 Average Balance Outstanding Interest Earned/ Paid Yield/ Rate Average Balance Outstanding Interest Earned/ Paid Yield/ Rate (Dollars in thousands) Interest-earning assets: Loans and leases receivable $ 984,202 $ 13,193 5.36 % $ 849,936 $ 10,266 4.83 % Securities 294,947 1,796 2.44 % 353,285 1,586 1.80 % FHLB stock 10,038 138 5.50 % 9,908 83 3.35 % Cash and cash equivalents and other 9,565 66 2.76 % 18,704 7 0.15 % Total interest-earning assets 1,298,752 15,193 4.68 % 1,231,833 11,942 3.88 % Non-earning assets 44,264 35,471 Total assets 1,343,016 1,267,304 Interest-bearing liabilities: Savings and money market accounts 279,510 996 1.43 % 264,822 336 0.51 % Interest-bearing checking accounts 153,216 189 0.49 % 165,619 98 0.24 % Certificate accounts 468,220 2,842 2.43 % 362,945 814 0.90 % Borrowings 198,517 1,295 2.61 % 183,500 640 1.40 % Total interest-bearing liabilities 1,099,463 5,322 1.94 % 976,886 1,888 0.77 % Noninterest-bearing demand deposits 97,278 110,882 Other liabilities 14,004 5,910 Stockholders' equity 132,271 173,626 Total liabilities and stockholders' equity 1,343,016 1,267,304 Net interest income $ 9,871 $ 10,054 Net earning assets $ 199,289 $ 254,947 Net interest rate spread (1) 2.74 % 3.11 % Net interest margin (2) 3.04 % 3.26 % Average interest-earning assets to average interest-bearing liabilities 118.13 % 126.10 % _____________ (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 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 $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 36 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 $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 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 Capital. 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 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. 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 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. See Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds. Liquidity. 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 37 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. 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 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. 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, 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. 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 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. First Bank Richmond is subject to minimum capital requirements imposed by the FDIC. The FDIC may require us to have additional capital above the specific regulatory levels if it believes we are subject to increased risk due to asset problems, high interest rate risk and other risks. At March 31, 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. 38 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 March 31, 2023 Total risk-based capital (to risk weighted assets) $ 166,213 14.4 % $ 92,385 8.0 % $ 115,482 10.0 % Tier 1 risk-based capital (to risk weighted assets) 151,738 13.1 69,289 6.0 92,385 8.0 Common equity tier 1 capital (to risk weighted assets) 151,738 13.1 51,967 4.5 75,063 6.5 Tier 1 leverage (core) capital (to adjusted tangible assets) 151,738 10.9 55,436 4.0 69,295 5.0 As of December 31, 2022 Total risk-based capital (to risk weighted assets) $ 164,804 14.3 % $ 92,134 8.0 % $ 115,168 10.0 % Tier 1 risk-based capital (to risk weighted assets) 152,391 13.2 69,101 6.0 92,134 8.0 Common equity tier 1 capital (to risk weighted assets) 152,391 13.2 51,826 4.5 74,859 6.5 Tier 1 leverage (core) capital (to adjusted tangible assets) 152,391 11.2 54,421 4.0 68,026 5.0 Pursuant to the capital regulations of the FDIC and the other federal banking agencies, First Bank Richmond must maintain a capital conservation buffer consisting of additional common equity tier 1 (“CET1”) capital greater than 2.5% of risk-weighted assets above the required minimum levels of risk-based CET1 capital, tier 1 capital and total capital in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At March 31, 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 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There has not been any material change in the market risk disclosures contained in our 2022 Form 10-K.