What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-29 compared with 2023-03-31 · 129 added, 121 removed, 341 unchanged (42% of the section changed)

11 unchanged sentences

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 our 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 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 the COVID-19 pandemic, including 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;

• changes in the interest rate environment, including the recent past increases in the Federal Reserve benchmark rate and duration at which such elevated interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity;

• the impact of continuing high inflation and the current and future monetary policies of the Federal Reserve in response thereto;

• the effects of any federal government shutdowns;

• general economic conditions, either nationally or in our market areas, which 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 credit losses;

• our ability to access cost-effective funding;

9 unchanged sentences

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

• the transition away from LIBOR toward new interest rate benchmarks;

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

7 unchanged sentences

• our ability to pay dividends on our common stock;

• the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;

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

• the other risks described elsewhere in this Form 10 K and our other reports filed with the U.S.

• the other risks described elsewhere in this Form 10 K and our other reports filed with and furnished to the U.S.

Securities and Exchange Commission (“SEC”).

9 unchanged sentences

We may also recognize income from the sale of investment securities.

At December 31, 2022, on a consolidated basis, we had $1.3 billion in assets, $961.7 million in loans, $1.0 billion in deposits and $133.0 million in stockholders’ equity.

At December 31, 2023, on a consolidated basis, we had $ 1.5 billion in assets, $1.1 billion in loans, $1.0 billion in deposits and $134.9 million in stockholders’ equity.

First Bank Richmond’s risk-based capital ratio at December 31, 2023 was 14.1%, exceeding the 10.0% requirement for a well-capitalized institution.

8 unchanged sentences

See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.

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.

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.

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 unfunded 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 unfunded commitments is charged to operations periodically upon evaluation of the necessary balance in the allowance.

Available for Sale Securities .

Under Financial Accounting Standards Board (“FASB”) Codification Topic 320 (ASC320), Investments-Debt, investment securities must be classified as held to maturity, available for sale or trading.

8 unchanged sentences

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.

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.

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.

Management Strategy

29 unchanged sentences

As such, fluctuations in interest rates have a significant impact not only upon our net income but also upon the cash flows related to those assets and liabilities and the market value of our assets and liabilities.

In order to maintain what we believe to be acceptable levels of net interest income in

varying interest rate environments, we actively manage our interest rate risk and assume a moderate amount of interest rate risk consistent with board policies.

In order to maintain what we believe to be acceptable levels of net interest income in varying interest rate environments, we actively manage our interest rate risk and assume a moderate amount of interest rate risk consistent with board policies.

Selected Consolidated Financial and Other Data

The Financial Condition Data and Operating Data as of and for the years ended December 31, 2022 and 2021 are

derived from the audited financial statements and related notes included elsewhere in this Form 10-K.

The Financial Condition Data and Operating Data as of and for the years ended December 31, 2023 and 2022 are derived from the audited financial statements and related notes included elsewhere in this Form 10-K.

The following information is only a summary and is qualified in its entirety by the detailed information included elsewhere herein and should be read along with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.

12 unchanged sentences

_____________________

(1) Net of allowances for loan and lease losses, loans in process and deferred loan fees.

(1) Net of allowances for credit losses, loans in process and deferred loan fees.

Years Ended December 31,

4 unchanged sentences

Net interest income 37,662 41,639

Provision for loan and lease losses 600 1,430

Net interest income after provision for loan and lease losses 41,039 36,814

Provision for credit losses 532 600

Net interest income after provision for credit losses 37,130 41,039

Service charges on deposit accounts 1,115 1,050

2 unchanged sentences

Gain on loan and lease sales 518 639

Gain on sales of securities — 56

Other income 1,271 1,105

26 unchanged sentences

0.72 % 0.94 %

Allowance for loan and lease losses to non-performing loans and leases (4)

Allowance for credit losses on loans and leases to non-performing loans and leases (4)

195.80 % 135.28 %

Allowance for loan and lease losses to loans and leases 1.27 % 1.43 %

Net charge-offs/(recoveries) to average outstanding loans and leases during the period 0.03 % (0.01 %)

Allowance for credit losses on loans and leases to total gross loans and leases 1.42 % 1.27 %

Net charge-offs to average outstanding loans and leases during the period 0.06 % 0.03 %

Capital ratios:

27 unchanged sentences

Total assets increased $133.0 million, or 10.0%, to $1.5 billion at December 31, 2023 from December 31, 2022.

This increase was driven by a $128.8 million, or 15.5%, increase in the loan and lease portfolio, net of allowance for loan and lease losses, partially offset by a $75.0 million, or 20.5% decrease in investment securities, and a $7.1 million, or 30.9% decrease in cash and cash equivalents.

The increase in loans was primarily funded by a $105.1 million, or 11.7%, increase in deposits.

The increase was driven by a $128.4 million, or 13.3%, increase in the loan and lease portfolio, net of allowance for credit losses on loans and leases, partially offset by a $3.9 million, or 1.3% decrease in investment securities.

The increase in loans and leases was primarily funded by a $91.0 million, or 50.6%, increase in FHLB advances and a $35.9 million, or 3.6%, increase in deposits.

Loans and Leases.

Our loan and lease portfolio, net of allowance for loan and lease losses, increased $128.8 million, or 15.5%, to $961.7 million at December 31, 2022 from $832.8 million at December 31, 2021.

The majority of the growth occurred in construction and development loans which increased $46.2 million, or 49.4%, to $139.9 million, and in commercial real estate loans which increased $36.9 million, or 14.1%, to $298.1 million at December 31, 2022 compared to the prior year.

We also experienced a $17.5 million, or 16.3%, increase in multi-family loans, a $15.8 million, or 11.2%, increase in residential real estate loans (including home equity lines of credit), a $6.7 million, or 5.3%, increase in direct financing leases, and a $5.1 million, or 32.3%, increase in consumer loans.

Commercial and industrial loans increased by $700,000, or 0.7% at December 31, 2022 compared to a year ago, in spite of an $8.4 million, or 89.4%, decrease in outstanding PPP loans to $994,000 at December 31, 2022 from $9.4 million at December 31, 2021.

The following table presents information concerning the composition of our loan and lease portfolio in dollar amounts and in percentages (before deductions for loans in process, deferred fees and discounts and allowances for loan and lease losses) as of the dates indicated.

Our loan and lease portfolio, net of allowance for credit losses on loans and leases, increased $128.4 million, or 13.3%, to $1.1 billion at December 31, 2023 from $961.7 million at December 31, 2022.

The majority of the growth occurred in commercial real estate loans which increased $43.5 million, or 14.6%, to $341.6 million, and in direct financing leases which increased $23.1 million, or 17.3%, to $156.6 million at December 31, 2023 compared to the prior year.

We also experienced a $13.8 million, or 11.1%, increase in multi-family loans, a $15.9 million, or 10.1%, increase in residential real estate loans (including home equity lines of credit), a $17.9 million, or 12.8%, increase in construction and development loans, a $15.0 million, or 14.9% increase in commercial and industrial loans, and a $2.2 million, or 10.5%, increase in consumer loans.

At December 31,

16 unchanged sentences

Deferred fees and discounts 776 896

Allowance for loan and lease losses 12,413 12,108

Allowance for credit losses on loans and leases 15,663 12,413

Total loans and leases, net $ 1,090,073 $ 961,691

1 unchanged sentence

(1) Includes $6.4 million and $4.7 million of loans secured by second mortgages on residential properties at December 31, 2023 and 2022, respectively.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loan and leases more than 90 days past due, totaled $9.2 million, or 0.94%, of total loans and leases at December 31, 2022, compared to $8.0 million, or

0.95% of total loans and leases at December 31, 2021.

The increase in nonperforming loans was primarily attributable to a $1.3 million increase in commercial and industrial loans, primarily due to one loan of $1.3 million secured by business assets and a second mortgage past due more than 90 days and still accruing.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loan and leases more than 90 days past due, totaled $8.0 million, or 0.72% of total loans and leases at December 31, 2023, compared to $9.2 million, or 0.94% of total loans and leases at December 31, 2022.

The decrease in nonperforming loans was primarily attributable to a $1.3 million decrease in commercial and industrial loans, primarily due to one loan of $1.3 million secured by business assets and a second mortgage, previously past due more than 90 days and still accruing that was paid off in 2023.

At December 31, 2023, our largest nonperforming loan was a $4.9 million nonaccrual commercial construction and development loan that is currently subject to litigation between the developer and other parties.

At the time of origination, this loan had a loan to value ratio of 73%.

At December 31, 2022, TDRs totaled $428,000 compared to $456,000 at December 31, 2021, all of which were nonaccrual loans at those dates.

Allowance for Loan and Lease Losses.

Our allowance for loan and lease losses increased $305,000, or 2.5%, to $12.4 million at December 31, 2022 from $12.1 million at December 31, 2021.

At December 31, 2022, the allowance for loan and lease losses totaled 1.27% of total loans and leases outstanding compared to 1.43% at December 31, 2021.

Net charge-offs during the year ended 2022 were $295,000, or 0.03% of average loans and leases outstanding, compared to net recoveries of $92,000, or 0.01% of average loans and leases outstanding, during 2021.

The allowance for loan and lease losses to non-performing loans and leases was 135.3% at December 31, 2022, compared to 150.8% at December 31, 2021.

Allowance for Credit Losses.

On January 1, 2023, the Company 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 $15.7 million, or 1.42% of total loans and leases outstanding at December 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 Company established an allowance for credit losses on unfunded 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 $1.6 million at December 31, 2023.

Net charge-offs during 2023 were $678,000 compared to net charge-offs of $295,000 during 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 December 31, 2022, which evaluation included consideration of a potential recession due to inflation, rising interest rates, stock market volatility, and the Russia-Ukraine conflict.

The Company evaluated its exposure to potential loan and lease losses as of December 31, 2023, which evaluation included consideration of persistent inflation, higher interest rates, a weakened economic growth and unemployment outlook, stock market volatility, and increased geopolitical risk.

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, continue to be closely monitored.

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

Investment Securities.

Investment securities decreased $3.9 million, or 1.3%, to $287.6 million at December 31, 2023, from $291.6 million at December 31, 2022.

The decrease was primarily due to a $61.4 million downward mark-to-market adjustment in the fair value of securities available for sale and proceeds from maturities and paydowns of securities of $32.2 million, partially offset by the purchase of $22.5 million in securities.

Total deposits increased $105.1 million, or 11.7%, to $1.0 billion at December 31, 2022 from $900.2 million at December 31, 2021.

This increase in deposits was primarily due to an increase in brokered deposits of $136.1 million, or 111.8%, as well as an increase in savings and money market accounts of $26.7 million, or 10.5%.

These increases were partially offset by a decrease of $7.9 million, or 6.9%, in noninterest-bearing demand deposits, a $6.9 million, or 4.2%, decrease in interest-bearing demand deposits, and a $42.9 million, or 17.5%, decrease in non-brokered time deposits.

At December 31, 2022, brokered deposits equaled 25.7% of total deposits compared to $121.8 million, or 13.5% of total deposits at December 31, 2021.

The decrease was primarily due to maturities and paydowns of securities of $22.5 million, partially offset by a $8.5 million upward mark-to-market adjustment in the fair value of securities available for sale and the purchase of $11.2 million of new securities.

Total deposits increased $35.9 million, or 3.6%, to $1.0 billion at December 31, 2023 compared to December 31, 2022.

This increase was primarily due to an increase in non-brokered time deposits of $46.4 million, or 22.9%, as well as an increase in brokered time deposits of $10.9 million, or 4.2%.

These increases were partially offset by a decrease of $23.9 million, or 8.5%, in savings and money market accounts, and a $5.6 million, or 3.6%, decrease in interest-bearing demand deposits.

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.

At December 31, 2023, brokered deposits equaled $268.8 million, or 25.8% of total deposits compared to $257.9 million, or 25.7% of total deposits at December 31, 2022.

At December 31, 2023, noninterest-bearing deposits totaled $114.4 million, or 11.0% of total deposits, compared to $106.4 million, or 10.6%, of total deposits at December 31, 2022.

Total borrowings, consisting solely of FHLB advances, totaled $180.0 million at both December 31, 2022 and 2021.

As of December 31, 2023, approximately $216.0 million of our deposit portfolio, or 20.7% 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, consisting solely of FHLB advances, totaled $271.0 million at December 31, 2023, compared to $180.0 million at December 31, 2022.

The additional borrowings were used to fund loan growth.

Stockholders’ Equity.

Stockholders’ equity totaled $133.0 million at December 31, 2022, a decrease of $47.5 million, or 26.3%, from December 31, 2021.

The decrease in stockholders’ equity from December 31, 2021 primarily was the result of a reduction in accumulated comprehensive income of $48.5 million due to a greater mark-to-market adjustment to the investment portfolio as a result of higher interest rates, the payment of $4.4 million in dividends to Company stockholders, and the repurchase of $9.9 million of Company common stock, partially offset by net income of $13.0 million.

First Bank Richmond’s tangible common equity ratio and its risk-based capital ratios exceeded “well-capitalized” levels as defined by all regulatory standards as of December 31, 2022.

Stockholders’ equity totaled $134.9 million at December 31, 2023, an increase of $2.5 million, or 1.9%, from December 31, 2022.

The increase in stockholders’ equity primarily was the result of net income of $9.5 million and a decrease in Accumulated Other Comprehensive Loss (“AOCL”) of $6.7 million, partially offset by the payment of $5.9 million in dividends to Company stockholders, the repurchase of $6.3 million of Company common stock, and the one-time adjustment to retained earnings of $3.8 million for the adoption of CECL during the first quarter.

The decrease in AOCL is primarily due to the improvement in mark-to-market values associated with our available-for-sale investment securities portfolio.

At December 31, 2023, the available for sale portfolio had a net unrealized loss of $54.5 million compared to a net unrealized loss of $63.0 million at December 31, 2022.

The AOCL impact to equity, after tax effecting the unrealized loss, was $43.0 million at December 31, 2023, compared to $49.8 million at December 31, 2022.

First Bank Richmond was considered “well-capitalized” as defined by all regulatory standards as of December 31, 2023.

Comparison of Results of Operations for the Years Ended December 31, 2023 and 2022

Net income totaled $13.0 million for 2022 compared to $11.1 million in 2021, an increase of $1.8 million or 16.3%.

The increase in net income was due to a $5.9 million, or 12.9%, increase in interest income, an $830,000, or 58.0%, reduction in the provision for loan losses, partially offset by a $2.5 million, or 33.0%, increase in interest expense, a $549,000, or 10.1%, decrease in non-interest income, and a $1.5 million, or 5.3%, increase in non-interest expense.

Net income totaled $9.5 million for 2023 compared to $13.0 million in 2022, a decrease of $3.5 million or 26.8%.

The decrease in net income was due to a $19.5 million, or 191.1%, increase in interest expense, a $256,000, or 5.3%, decrease in non-interest income and a $583,000, or 1.9%, increase in non-interest expense, partially offset by a $15.6 million, or 30.0%, increase in interest income and a $1.3 million, or 45.5%, decrease in income tax expense.

Interest Income .

Total interest income for 2023 increased $15.6 million or 30.0% over 2022.

The increase primarily was a result of a $111.2 million increase in the average balance of loans and leases outstanding year-over-year, partially offset by a 19 basis point decrease in average yield on loans and leases, resulting in a $4.0 million increase in interest income on loans and leases.

Interest earned on investment securities, including FHLB stock, increased $1.8 million, or 34.3%, due to a 58 basis point increase in the average yield, partially offset by a $5.5 million decrease in the average balance of the portfolio.

cash and cash equivalents increased $101,000 due to an 89 basis point increase in the average yield, partially offset by a $10.0 million decrease in average balances.

The increase primarily was a result of an 80 basis point increase in the average yield on interest earning assets, alongside $114.1 million increase in the average balance of interest earning assets.

Interest earned on loans and leases increased $14.2 million, or 31.8%, due to a $146.6 million increase in the average balance of and a 66 basis point increase in the average yield earned on loans and leases.

Interest earned on investment securities, excluding FHLB stock, increased $491,000, or 7.3%, due to a 42 basis point increase in the average yield, partially offset by a $33.3 million decrease in the average balance of the portfolio.

Dividends on FHLB stock increased $452,000, or 113.3%, during 2023 compared to the prior year.

The average yield on FHLB stock during 2023 was 7.92%, up 387 basis points from 4.05% during the prior year, while the average balance of FHLB stock outstanding during 2023 was $10.8 million, up from $9.9 million during 2022.

Interest on cash and cash equivalents increased $409,000 due to a 298 basis point increase in the average yield.

Interest Expense .

Total interest expense increased $19.5 million, or 191.1%, to $29.7 million during 2023 compared to $10.2 million during 2022.

The increase was the result of an increase in the average balance in all categories of interest-bearing liabilities, and a 12 basis point increase in the average rate paid on interest-bearing liabilities.

The average balance of savings and money market accounts increased $37.3 million, or 15.1%, to $284.7 million in 2022 compared to $247.4 million in 2021, while the rate paid on these accounts increased 25 basis points to 0.76% in 2022 from 0.51% in 2021, resulting in a $897,000 increase in interest expense.

The average balance of interest-bearing checking accounts increased $10.3 million, or 6.6%, to $165.2 million in 2022 from $154.9 million in 2021, while the average rate paid on interest-bearing checking accounts increased nine basis points to 0.32% in 2022 from 0.23% in 2021, resulting in a $172,000 increase in interest expense.

Average balances of certificates of deposit increased $97.0 million, or 33.8% in 2022 from $287.1 million in 2021, while the rate paid on certificates of deposit remained the same in 2022 as 2021, resulting in a $1.1 million increase in interest expense.

The growth in certificates of deposit balances was due to a $112.7 million, or 231.6% increase in brokered certificates of deposit.

The average rate paid on brokered certificates of deposit increased to 1.17% in 2022 from 0.72% in 2021.

Interest expense on borrowings, consisting solely of FHLB advances, increased $345,000, or 12.6%, due to an 18 basis point increase on the average rate paid to 1.72% in 2022 from 1.54% in 2021, and a $1.4 million, or 0.8%, increase in the average balance of borrowings to $180.0 million in 2022 from $178.5 million in 2021.

The increase primarily was the result of an increase in the average cost of certificate of deposit accounts, savings and money market accounts, and borrowings and, to a lesser extent, an increase in average balance of certificate of deposit accounts and borrowings.

The average rate paid on certificate of deposit accounts increased 213 basis points to 3.29% from 1.16% in 2022, while the average balance of certificate of deposit accounts increased $125.3 million, or 32.6%, to $509.3 million in 2023 compared to $384.0 million in 2022, resulting a $12.3 million increase in interest expense.

The average rate paid on savings and money market accounts increased 106 basis points to 1.82% from 0.76% in 2022, while the average balance of those accounts decreased $10.2 million, or 3.6%, to $274.5 million in 2023 compared to $284.7 million in 2022, resulting a $2.8 million increase in interest expense.

The average balance of interest-bearing checking accounts decreased $17.2 million, or 10.4%, to $148.0 million in 2023 from $165.2 million in 2022, while the average rate paid on interest-bearing checking accounts increased 39 basis points to 0.71% in 2023 from 0.32% in 2022, resulting in a $520,000 increase in interest expense.

Interest expense on borrowings, consisting solely of FHLB advances, increased $3.8 million, or 124.4%, due to a 146 basis point increase on the average rate paid to 3.18% in 2023 from 1.72% in 2022, and a $38.1 million, or 21.1%, increase in the average balance of borrowings to $218.0 million in 2023 from $180.0 million in 2022.

Net Interest Income .

Net interest income before provision for loan and lease losses increased $3.4 million, or 8.9%, to $41.6 million in 2022 compared to $38.2 million in 2021, primarily due to a five basis point increase in the average interest rate spread, partially offset by the growth in average interest-bearing liabilities exceeding the growth in average interest-bearing assets.

Our net interest margin in 2022 was 3.36%, an increase of two basis points compared to 2021.

During the year, the recognition of deferred fees related to PPP loan forgiveness had a positive impact on the net interest margin.

The average yield on PPP loans was 9.41%, including the recognition of deferred fees, resulting in a positive impact to loan yield of three basis points during 2022, compared to an average yield of 8.62% with a positive impact to loan yield of 15 basis points during 2021.

Since March 2022, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Federal Reserve System has increased the target range for the federal funds rate by 425 basis points, including 125 basis points during the fourth quarter of 2022, to a range of 4.25% to 4.50%.

Net interest income before provision for credit losses decreased $4.0 million, or 9.5%, to $37.7 million in 2023 compared to $41.6 million in 2022, primarily due to a 78 basis point decrease in the average interest rate spread.

Our net interest margin in 2023 was 2.78%, a decrease of 58 basis points compared to 2022 as a result of a decline in net interest income coupled with an increase in average-interest earning assets during the year.

Since March 2022, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Federal Reserve System has increased the target range for the federal funds rate by 500 basis points, including 100 basis points during 2023, to a range of 5.25% to 5.50%.

While net interest income benefited from the repricing impact of the higher interest rate environment on earning asset yields, the benefits were offset by the higher cost of interest-bearing deposit accounts and borrowings which tend to be shorter in duration than our assets and re-price or reset faster than assets.

Provision for Loan and Lease Losses .

The provision for loan and lease losses in 2022 was $600,000, an $830,000, or 58.0%, decrease compared to $1.4 million in 2021.

The provision for loan and lease losses reflects the amount required to maintain the allowance for loan and leases losses at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves.

The provision for loan and leases losses for the current year primarily reflects loan growth and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to estimate loan and leases losses, partially offset by an improvement in the level of adversely classified loans.

Beginning in 2023, we will be required to adopt CECL, the FASB’s standard on accounting for expected credit losses.

The CECL impairment model is based on expected losses rather than incurred losses, which is what we currently use.

Under the new guidance, we must recognize our estimate of expected credit losses as an allowance.

The CECL model incorporates forward-looking information and results in earlier loss recognition than incurred loss models do.

Future assessments of the expected credit losses on loans and leases will not only be impacted by changes to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast and the period following the reasonable and supportable forecast period through the end of the asset’s contractual life.

As of the CECL adoption and day one measurement date of January 1, 2023, the Company expects to record a one-time cumulative-effect adjustment to retained earnings, net of income taxes, on the consolidated balance sheet.

The allowance will increase between $2.3 million and $3.0 million from December 31, 2022.

CECL also requires the establishment of a reserve for potential losses from unfunded commitments that is recorded in other liabilities, separate from the allowance for credit losses, which will be approximately $1.8 million to $2.5 million.

Also, as required by CECL, the Company reviewed the held-to-maturity debt securities portfolio and determined the expected losses were immaterial.

Net charge-offs in 2022 were $295,000 compared to net recoveries of $92,000 in 2021.

The allowance as a percentage of the total loan and lease portfolio was 1.27% at year-end 2022, compared to 1.43% at year-end 2021.

Net charge-offs in 2022 equaled 0.03% of total average loans and leases outstanding compared to net recoveries of 0.01% of total average loans and leases outstanding in 2021.

Provision for Credit Losses .

The provision for credit losses in 2023 was $532,000, a $68,000, or 11.3%, decrease compared to $600,000 in 2022.

The provision for credit losses reflects the amount required to maintain the allowance for credit losses at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves.

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 CECL methodology, and as a result the amounts are not directly comparable.

Net charge-offs during 2023 were $678,000 compared to net charge-offs of $295,000 in 2022.

The allowance for credit losses on loans and leases as a percentage of the total loan and lease portfolio was 1.42% at year-end 2023, compared to 1.27% at year-end 2022.

Net charge-offs in 2023 equaled 0.06% of total average loans and leases outstanding compared to net charge-offs of 0.03% of total average loans and leases outstanding in 2022.

Non-interest Income .

Total non-interest income decreased $256,000, or 5.3%, to $4.6 million for 2023 compared to $4.9 million for 2022.

The decrease was primarily driven by a decrease in net gains on loan and lease sales of $1.8 million, or 73.9%, to $639,000 in 2022 from $2.5 million in 2021, as mortgage banking activity declined due to lower refinancing activity, a lower supply of houses for sale in the Bank’s market area, and increases in residential mortgage rates.

Net gains on securities decreased $56,000, or 100.0%, as no securities were sold during 2022 compared to $5.3 million of securities sold in 2021.

Partially offsetting these decreases were loan and lease servicing fees, including mortgage servicing right impairment, of $862,000 during 2022, an increase of $946,000 compared to a loss of $84,000 during 2021, primarily due to a recovery of mortgage servicing rights of $380,000 in 2022 as a result of continued rising interest rates increasing the expected duration of our loans compared to recording a mortgage servicing rights impairment charge of $360,000 in 2021.

Service charges on deposit accounts increased $168,000, or 19.1%, to $1.0 million during 2022 compared to $882,000 during 2021 as a result of higher overdraft fees and ATM fees.

In addition, card fee income increased $123,000, or 11.3%, due to an overall increase in debit card usage and other income increased $81,000, or 7.9%, primarily due to increased wealth management income during 2022 compared to 2021.

The decrease was primarily driven by a decrease in loan and lease servicing fees of $414,000, or 48.0%, to $448,000 in 2023 from $862,000 in 2022, as a recovery of mortgage servicing rights of $380,000 was recognized in 2022 and not replicated in 2023.

Net gains on loan and lease sales decreased $121,000, or 19.0%, to $518,000 in 2023 from $639,000 in 2022, as mortgage banking activity declined due to lower refinancing activity, a lower supply of houses for sale in the Bank's

market area, and increases in residential mortgage rates.

Partially offsetting these decreases were increases in other income and service charges on deposit accounts.

Other income increased $165,000, or 14.9%, to $1.3 million during 2023 compared to $1.1 million during 2022 primarily due to fees earned from our participation in a loan hedging program with a correspondent bank, along with increased wealth management income.

Service charges on deposit accounts increased $65,000, or 6.2%, to $1.1 million during 2023 compared to $1.0 million during 2022 as a result of increased demand deposit account service fees and non-sufficient funds fees.

In addition, card fee income increased $49,000, or 4.1%, due to increased debit card usage.

Non-interest Expenses .

Total non-interest expense increased $1.5 million, or 5.3%, to $30.2 million during 2022 compared to 2021, with increases occurring in all non-interest expense categories other than equipment expenses and other expenses.

Salaries and employee benefits increased $335,000, or 1.8%, to $18.5 million in 2022 from $18.1 million in 2021, primarily due to increases in salaries resulting from the net addition of eight full-time-equivalent hires in 2022 and annual merit increases, partially offset by a $665,000 expense recorded in 2021 to complete the termination of the Company’s defined benefit pension plan which was not required in 2022.

Data processing expenses increased $532,000, or 24.4%, to $2.7 million in 2022 from $2.2 million in 2021 due to higher software expenses associated with the Company's continued investment in digital banking services.

Legal and professional fees increased $193,000, or 15.8%, to $1.4 million during 2022, compared to $1.2 million during 2021 due to expenses associated with the formation of First Insurance Management, Inc.

Deposit insurance expenses increased $193,000, or 64.1%, to $494,000 during 2022, compared to $301,000 during 2021 due to lower capital levels, a change in our loan composition and a greater use of wholesale certificates of deposit during 2022.

Net occupancy expenses increased $188,000, or 15.2%, to $1.4 million during 2022, compared to $1.2 million during 2021, due to increased building maintenance expenses.

These increases in non-interest expense were partially offset by a $38,000, or 2.9%, decrease in equipment expenses to $1.3 million in 2022 compared to 2021 due to depreciation charges, and a $12,000 decrease in other expenses.

Total non-interest expense increased $582,000, or 1.9%, to $30.7 million during 2023 compared to 2022, primarily due to increases in deposit insurance expense, data processing fees, and legal and professional fees, partially offset by decreases in salaries and employee benefits and equipment expenses.

Deposit insurance expense increased $669,000, or 135.4%, to $1.2 million in 2023 from $494,000 in 2022, due to a change in our asset and deposit mix, as well as an increase in the initial base deposit insurance assessment rate during 2023.

Data processing fees increased $636,000, or 23.4%, to $3.3 million in 2023 from $2.7 million in 2022, primarily due to increased software and core provider expenses.

Legal and professional fees increased $178,000, or 12.5%, to $1.6 million in 2023 from $1.4 in 2022, primarily due to increased accounting services expense.

Salaries and employee benefits decreased $1.0 million, or 5.6%, to $17.4 million in 2023 from $18.5 million in 2022, primarily due to decreased bonus expense.

Equipment expenses decreased $141,000, or 11.1%, to $1.1 million in 2023 from $1.3 million in 2022, primarily due to decreased depreciation expenses.

Income Tax Expense .

Income tax expense increased $348,000 in 2022 compared to 2021.

This increase in income tax expense was primarily due to pretax income increasing $2.2 million, or 16.0%, partially offset by a lower effective tax rate in 2022.

Income tax expense decreased $1.3 million in 2023 compared to 2022.

This decrease in income tax expense was primarily due to pretax income decreasing $4.7 million, or 30.1%, and a lower effective tax rate in 2023.

The effective tax rate for the year ended 2023 was 13.8% compared to 17.7% in 2022.

The decline in the effective tax rate primarily was due to the use of a pooled captive insurance company, which was formed during 2022, that allows the Company to assume more control over insurance risks, as well as tax deductions related to the employee stock ownership plan.

Average Balances, Interest and Average Yields/Cost

2 unchanged sentences

Average balances of loans and leases receivable include loans held for sale.

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

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.

53 unchanged sentences

Shareholders' equity totaled $134.9 million at December 31, 2023 and $132.4 million at December 31, 2022.

In addition to net income of $13.0 million, other sources of capital during 2022 included $799,000 related to the allocation of ESOP shares during the year and $1.5 million related to stock-based compensation.

Uses of capital during 2022 included $4.4 million of dividends paid on common stock, other comprehensive loss, net of tax, of $48.5 million and $9.9 million of stock repurchases.

The accumulated other comprehensive loss component of shareholders' equity was caused by changes to the unrealized gains and losses on available-for-sale securities as a result of the increase in market interest rates during 2022.

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

In addition to net income of $9.5 million, other sources of capital during 2023 included $612,000 related to the allocation of ESOP shares during the year, $1.6 million related to stock-based compensation and a decrease in AOCL of $6.7 million.

Uses of capital during 2023 included $5.9 million of dividends paid on common stock and $6.3 million of stock repurchases.

The decrease in AOCL primarily was due to the improvement in mark-to-market values associated with the Company's available-for-sale investment securities portfolio.

We paid regular quarterly cash dividends of $0.14 per common share during 2023, compared to $0.10 per share during 2022.

This equates to a dividend payout ratio of 62.4% in 2023 and 34.0% in 2022.

6 unchanged sentences

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

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

This repurchase program expired on July 3, 2022 with a total of 817,984 shares being repurchased.

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.

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

On June 6, 2023, the Company announced that the Board of Directors approved an amendment to the Company's existing stock repurchase program authorizing the purchase of up to 321,386 shares of the Company's issued and outstanding common stock in addition to the 827,554 shares that remained available for the repurchase at that date under the existing program, and extended the stock repurchase program's expiration date to June 6, 2024, unless completed sooner.

As of December 31, 2023, the Company had approximately 868,036 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 5 - "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."

21 unchanged sentences

These include payments related to (i) long-term borrowings (Note 10 - Federal Home Loan Bank Advances), (ii) time deposits with stated maturity dates (Note 9 - Deposits) and (iii) commitments to extend credit and standby letters of credit (Note 13 - Commitments and Contingent Liabilities).

We also incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets.

We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment.

The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations.

Based on our current capital allocation objectives for 2024, management does not expect cash expenditures for capital investment in premises and equipment to have a material effect on our liquidity, capital resources or operations.

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

1 unchanged sentence

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 to us paid by First Bank Richmond.

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

Regulatory Capital" in the accompanying notes to consolidated financial statements contained in Part II, Item 8 and "How We Are Regulated - Dividends" contained in Part I, Item I of this Form 10-K.

24 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis