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Item 2. Management’s Discussion and Analysis

2024-08-09 compared with 2024-05-14 · 212 added, 110 removed, 191 unchanged (63% of the section changed)

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

(the “Company”) at March 31, 2024, and the consolidated results of operations for the three month period ended March 31, 2024, compared to the same period in 2023, is intended to assist in understanding the financial condition and results of operations of the Company.

(the “Company”) at June 30, 2024, and the consolidated results of operations for the three and six month periods ended June 30, 2024, compared to the same periods in 2023, is intended to assist in understanding the financial condition and results of operations of the Company.

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

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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;

• changes in the interest rate environment, including the recent increases in the Board of Governors of the Federal Reserve System (the "Federal Reserve") benchmark rate and duration at which such increased 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 shutdown;

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

• adverse impacts to economic conditions in our local market areas and other markets where we have lending relationships;

• effects of employment levels, labor shortages and inflation, a recession, or slowed economic growth;

• changes in the interest rate environment, including past increases in the Board of Governors of the Federal Reserve System (the "Federal Reserve") benchmark rate and the duration of such increased levels;

• the impact of inflation and the Federal Reserve monetary policies;

• effects of any federal government shutdown;

• 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;

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• competition among depository and other financial institutions and equipment financing companies;

• the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;

• 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;

• bank failures or other adverse developments at banks and related negative press about the banking industry in general on investor and depositor sentiment;

• 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;

• results of examinations by regulatory authorities and potential requirements to increase credit loss allowances, write-down assets, reclassify assets, change our regulatory capital position, or affect our liquidity and earnings;

• the inability of third-party providers to perform as expected;

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• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission ("SEC") or the Public Company Accounting Oversight Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

• 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;

• legislative or regulatory changes, including changes in banking, securities, tax law, regulatory policies, and principles;

• our ability to pay dividends on our common stock;

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

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

• the effects of climate change, severe weather, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, civil unrest, and other external eventss;

• 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, 2023 (“2023 Form 10-K”).

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

We seek leasing

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

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

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

Total wealth management assets under management and administration were $180.2 million at March 31, 2024.

Total wealth management assets under management and administration were $180.9 million at June 30, 2024.

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

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

At March 31, 2024, on a consolidated basis, we had $1.5 billion in assets, $1.1 billion in loans and leases, net of allowance, $1.1 billion in deposits and $132.4 million in stockholders’ equity.

At March 31, 2024, First Bank Richmond’s total risk-based capital ratio was 14.1%, exceeding the 10.0% requirement for a well-capitalized institution.

For the three months ended March 31, 2024, net income was $2.4 million, compared with net income of $2.9 million for the three months ended March 31, 2023.

At June 30, 2024, on a consolidated basis, we had $1.5 billion in assets, $1.1 billion in loans and leases, net of allowance, $1.1 billion in deposits and $131.1 million in stockholders’ equity.

At June 30, 2024, First Bank Richmond’s total risk-based capital ratio was 14.21%, exceeding the 10.0% requirement for a well-capitalized institution.

For the six months ended June 30, 2024, net income was $4.4 million, compared with net income of $5.6 million for the six months ended June 30, 2023.

Critical Accounting Estimates

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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, 2024 to the critical accounting estimates reported in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2023 Form 10-K.

There have been no significant changes during the six months ended June 30, 2024 to the critical accounting estimates reported in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2023 Form 10-K.

See "Critical Accounting Estimates" included in Part II, Item 7 of our 2023 Form 10-K for a further discussion of our Critical Accounting Estimates.

Comparison of Financial Condition at March 31, 2024 and December 31, 2023

Total assets increased $26.6 million, or 1.8%, to $1.5 billion at March 31, 2024 from December 31, 2023.

The increase was primarily the result of a $33.1 million, or 3.0%, increase in loans and leases, net of allowance for credit losses, to $1.1 billion, partially offset by a $6.6 million, or 2.3%, decrease in investment securities to $281.0 million at March 31, 2024.

Comparison of Financial Condition at June 30, 2024 and December 31, 2023

Total assets increased $34.1 million, or 2.3%, to $1.5 billion at June 30, 2024 from December 31, 2023.

The increase was primarily the result of a $50.5 million, or 4.6%, increase in loans and leases, net of allowance for credit losses, to $1.1 billion, partially offset by a $15.6 million, or 5.4%, decrease in investment securities to $272.0 million at June 30, 2024.

Investment Securities.

Investment securities available for sale totaled $276.3 million and $282.7 million, while investment securities held to maturity totaled $4.7 million and $4.9 million at March 31, 2024 and December 31, 2023, respectively.

The $6.3 million or 2.2% decrease in investment securities available for sale was primarily due to maturities and principal repayments of $4.4 million and a $3.6 million downward mark-to-market adjustment on the investment portfolio.

Investment securities available for sale totaled $267.3 million and $282.7 million, while investment securities held to maturity totaled $4.7 million and $4.9 million at June 30, 2024 and December 31, 2023, respectively.

The $15.3 million, or 5.4%, decrease in investment securities available for sale was primarily due to maturities and principal repayments of $8.4 million, a $5.2 million downward mark-to-market adjustment on the investment portfolio due to increased market rates of interest, and $3.8 million in sales of securities.

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

The proceeds received from the maturities, repayments, and sales of securities were used to fund loan growth.

Loans and Leases.

Loans and leases, net of allowance for credit losses on loans and leases, increased $33.1 million, or 3.0%, to $1.1 billion at March 31, 2024 from December 31, 2023.

The increase in loans and leases was attributable to an increase in multi-family loans, residential mortgage loans, and commercial and industrial loans of $15.0 million, $8.9 million and $8.2 million, respectively.

At March 31, 2024, loans held for sale totaled $85,000, compared to $794,000 at December 31, 2023.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loans and leases 90 days or more past due, totaled $6.9 million, or 0.61% of total loans and leases at March 31, 2024, compared to $8.0 million or 0.72% of

total loans and leases at December 31, 2023.

Accruing loans and leases past due 90 days or more totaled $1.9 million at March 31, 2024, compared to $1.7 million at December 31, 2023.

Loans and leases, net of allowance for credit losses on loans and leases, increased $50.5 million, or 4.6%, to $1.1 billion at June 30, 2024 from December 31, 2023.

The increase in loans and leases was attributable to increases in multi-family loans, commercial real estate loans, residential mortgage loans, and commercial and industrial loans of $35.5 million, $14.6 million, $12.9 million and $11.7 million, respectively.

At June 30, 2024, loans held for sale totaled $370,000, compared to $794,000 at December 31, 2023.

Nonaccrual loans and leases totaled $5.1 million at June 30, 2024, compared to $6.3 million at December 31, 2023.

Accruing loans and leases past due 90 days or more totaled $2.6 million at June 30, 2024, compared to $1.7 million at December 31, 2023.

Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loans and leases 90 days or more past due, totaled $7.7 million, or 0.67% of total loans and leases, at June 30, 2024, compared to $8.0 million, or 0.72% of total loans and leases, at December 31, 2023.

Allowance for Credit Losses.

The allowance for credit losses on loans and leases increased $162,000, or 1.0%, to $15.8 million at March 31, 2024 from December 31, 2023.

At March 31, 2024, the allowance for credit losses on loans and leases totaled 1.39% of total loans and leases outstanding.

The allowance for credit losses on loans and leases increased $219,000, or 1.4%, to $15.9 million at June 30, 2024 from December 31, 2023.

At June 30, 2024, the allowance for credit losses on loans and leases totaled 1.37% of total loans and leases outstanding.

At December 31, 2023, the allowance for credit losses on loans and leases totaled $15.7 million, or 1.42% of total loans and leases outstanding.

Net charge-offs during the first quarter of 2024 were $324,000 compared to net recoveries of $78,000 during the comparable quarter of 2023.

Net charge-offs during the first half of 2024 were $774,000 compared to net charge-offs of $137,000 during the first half of 2023.

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, 2024, which evaluation included consideration of a potential recession due to inflation, stock market volatility, and overall geopolitical tensions.

The Company evaluated its exposure to potential loan and lease losses as of June 30, 2024, which evaluation included consideration of a potential recession due to inflation, stock market volatility, and overall geopolitical tensions.

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

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Other Assets .

Other assets decreased $511,000, or 2.1%, to $24.3 million at March 31, 2024 from $24.8 million at December 31, 2023, primarily due to standard amortization of prepaid assets.

Total deposits increased $28.5 million, or 2.7%, to $1.1 billion at March 31, 2024 from December 31, 2023.

The increase in deposits primarily was due to an increase in brokered time deposits of $22.5 million and other time deposits of $11.1 million, partially offset by a decrease in demand deposit accounts of $3.9 million.

Brokered deposits totaled $291.3 million, or 27.2% of total deposits, at March 31, 2024, compared to $268.8 million, or 25.8% of total deposits, at December 31, 2023.

At March 31, 2024, noninterest-bearing deposits totaled $108.8 million, or 10.2% of total deposits, compared to $114.4 million or 11.0% of total deposits at December 31, 2023.

As of March 31, 2024, approximately $206.9 million of our deposit portfolio, or 19.3% of total deposits, excluding collateralized public deposits, was uninsured.

Other assets decreased $471,000, or 1.9%, to $24.3 million at June 30, 2024 from $24.8 million at December 31, 2023, primarily due to standard amortization of prepaid assets.

Total deposits increased $58.9 million, or 5.7%, to $1.1 billion at June 30, 2024 from December 31, 2023.

The increase in deposits primarily was due to an increase in non-brokered time deposits of $32.2 million, which were used to fund loan demand, and savings and money-market accounts of $26.7 million.

These increases were partially offset by a decrease in demand deposit accounts of $18.6 million.

Brokered deposits totaled $287.5 million, or 26.1% of total deposits, at June 30, 2024, compared to $268.8 million, or 25.8% of total deposits, at December 31, 2023.

At June 30, 2024, noninterest-bearing deposits totaled $102.3 million, or 9.3% of total deposits, compared to $114.4 million, or 11.0% of total deposits, at December 31, 2023.

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

As of June 30, 2024, approximately $253.0 million of our deposit portfolio, or 21.4% of total deposits, excluding collateralized public deposits, was uninsured.

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

Total borrowings, consisting solely of FHLB advances, increased $2.0 million to $273.0 million at March 31, 2024, compared to $271.0 million at December 31, 2023, which together with the increase in deposits were used to fund loan growth.

Total borrowings, consisting solely of FHLB advances, decreased $19.0 million, or 7.0%, to $252.0 million at June 30, 2024, compared to $271.0 million at December 31, 2023.

The decrease in borrowing was mainly driven by an increase in deposits during the period, which reduced our need for additional borrowing.

Stockholders’ Equity.

Stockholders’ equity totaled $132.4 million at March 31, 2024, a decrease of $2.5 million, or 1.8%, from December 31, 2023.

Stockholders’ equity totaled $131.1 million at June 30, 2024, a decrease of $3.7 million, or 2.8%, from December 31, 2023.

The decrease in stockholders' equity from year-end 2023 resulted from the repurchase of $2.2 million of Company common stock, an increase in Accumulated Other Comprehensive Loss ("AOCL") of $4.1 million, and the payment of $2.9 million in dividends to Company stockholders, partially offset by $4.4 million in net income.

The increase in AOCL is primarily due to the decline 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 $58.1 million at March 31, 2024.

The AOCL impact to equity, after tax affecting the unrealized loss, was $45.9 million at March 31, 2024 compared to $43.0 million at December 31, 2023.

This decline in value from December 31, 2023 to March 31, 2024 was due to interest rate changes, not credit quality.

The Company repurchased 92,613 shares of Company common stock at an average price of $11.58 per share for a total of $1.1 million during the first three months of 2024.

The Company's equity to asset ratio was 8.90% at March 31, 2024.

At March 31, 2024, the Bank's Tier 1 capital to total assets ratio was 10.67% 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, 2024 and 2023.

Net income for the three months ended March 31, 2024 was $2.4 million, a $535,000 or 18.4% decrease from net income of $2.9 million for the three months ended March 31, 2023.

Diluted earnings per share were $0.23 for the first quarter of 2024, compared to $0.27 diluted earnings per share for the first quarter of 2023.

The decrease in net income was the result of a decrease in net interest income of $38,000, and an increase in noninterest expense of $696,000, partially offset by an increase in noninterest income of $32,000 and a decrease in the provision for income taxes of $180,000.

The increase in the AOCL was primarily due to the decline 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 $59.7 million at June 30, 2024.

The AOCL impact to equity, after tax affecting the unrealized loss, was $47.2 million at June 30, 2024 compared to $43.0 million at December 31, 2023.

This decline in value from December 31, 2023 to June 30, 2024 was due to interest rate changes, not credit quality.

The Company repurchased 189,928 shares of Company common stock at an average price of $11.63 per share for a total of $2.2 million during the first six months of 2024.

The Company's equity to asset ratio was 8.77% at June 30, 2024.

At June 30, 2024, the Bank's Tier 1 capital to total assets ratio was 10.65% and the Bank's capital was well in excess of all regulatory requirements.

Comparison of Results of Operations for the Three Months Ended June 30, 2024 and 2023.

Net income for the three months ended June 30, 2024 was $2.1 million, a $632,000 or 23.5% decrease from net income of $2.7 million for the three months ended June 30, 2023.

Diluted earnings per share were $0.20 for the second quarter of 2024, compared to $0.26 diluted earnings per share for the second quarter of 2023.

The decrease in net income was the result of an increase in noninterest expense of $716,000, and an increase in the provision for credit losses of $262,000, partially offset by an increase in net interest income of $243,000 and a decrease in the provision for income taxes of $170,000.

Interest Income.

Interest income increased $4.3 million, or 28.4%, to $19.5 million during the quarter ended March 31, 2024, compared to $15.2 million during the quarter ended March 31, 2023.

Interest income on loans and leases increased $4.1 million, or 30.8%, to $17.3 million for the quarter ended March 31, 2024, from $13.2 million for the comparable quarter in

Interest income increased $3.9 million, or 23.8%, to $20.1 million during the quarter ended June 30, 2024, compared to $16.2 million during the quarter ended June 30, 2023.

Interest income on loans and leases increased $3.7 million, or 26.3%, to $17.8 million for the quarter ended June 30, 2024, from $14.1 million for the comparable quarter in 2023,

due to an increase in the average balance of loans and leases of $120.3 million, and an increase of 72 basis points in the average yield earned on loans and leases.

The average outstanding loan and lease balance was $1.1 billion for the quarter ended March 31, 2024, compared to $984.2 million for the quarter ended March 31, 2023.

The average yield on loans and leases was 6.13% for the quarter ended March 31, 2024, compared to 5.36% for the comparable quarter in 2023.

Interest income on investment securities, excluding FHLB stock, was unchanged from the comparable quarter in 2023.

The average yield on investment securities, excluding FHLB stock, was 2.53% for the first quarter of 2024, compared to 2.44% for the first quarter of 2023.

The average balance of investment securities, excluding FHLB stock, was $284.0 million for the quarter ended March 31, 2024, compared to $294.9 million for the quarter ended March 31, 2023.

Dividends on FHLB stock increased $186,000, or 134.8%, during the quarter ended March 31, 2024, from the comparable quarter in 2023, resulting in an average yield on FHLB stock of 9.44% for the three months ended March 31, 2024, compared to 5.50% for the three months ended March 31, 2023.

Interest income on cash and cash equivalents increased $73,000, or 112.4%, during the quarter ended March 31, 2024, from the comparable quarter in 2023, due to a 126 basis point increase in the average yield and a $4.3 million increase in the average balance of cash and cash equivalents.

The average outstanding loan and lease balance was $1.1 billion for the quarter ended June 30, 2024, compared to $1.0 billion for the quarter ended June 30, 2023.

The average yield on loans and leases was 6.20% for the quarter ended June 30, 2024, compared to 5.48% for the comparable quarter in 2023.

Interest income on investment securities, excluding FHLB stock, decreased $76,000, or 4.2%, for the second quarter of 2024 from the comparable quarter in 2023.

The average yield on investment securities, excluding FHLB stock, increased to 2.54% for the second quarter of 2024, compared to 2.46% for the second quarter of 2023.

The average balance of investment securities, excluding FHLB stock, decreased to $273.1 million for the quarter ended June 30, 2024, compared to $294.1 million for the quarter ended June 30, 2023.

Dividends on FHLB stock increased $142,000, or 78.9%, during the quarter ended June 30, 2024, from the comparable quarter in 2023, resulting in an average yield on FHLB stock of 9.26% for the three months ended June 30, 2024, compared to 7.10% for the three months ended June 30, 2023.

Interest income on cash and cash equivalents increased $83,000, or 62.5%, during the quarter ended June 30, 2024, from the comparable quarter in 2023, due to a 102 basis point increase in the average yield and a $3.8 million increase in the average balance of cash and cash equivalents.

Interest Expense.

Interest expense increased $4.4 million, or 81.8%, to $9.7 million for the quarter ended March 31, 2024, compared to the quarter ended March 31, 2023.

Interest expense on deposits increased $3.0 million, or 75.5%, to $7.1 million for the quarter ended March 31, 2024, from the comparable quarter in 2023.

The increase in interest expense on deposits primarily was attributable to a $44.3 million increase in the average balance of, and a 120 basis point increase in the average rate paid on interest-bearing deposits.

The average rate paid on interest-bearing deposits was 2.99% for the quarter ended March 31, 2024, compared to 1.79% for the quarter ended March 31, 2023.

The average balance of interest-bearing deposits was $945.2 million for the quarter ended March 31, 2024, compared to $900.9 million in the comparable quarter in 2023.

Interest expense on FHLB borrowings increased $1.3 million, or 101.6%, to $2.6 million in the first quarter of 2024 compared to $1.3 million for the same quarter in 2023, primarily due to an increase in the average rate paid on FHLB borrowings.

The average rate paid on FHLB borrowings was 3.77% for the quarter ended March 31, 2024, compared to 2.61% for the first quarter of 2023.

The average balance of FHLB borrowings totaled $277.2 million during the quarter ended March 31, 2024, compared to $198.5 million for the quarter ended March 31, 2023.

Interest expense increased $3.6 million, or 52.5%, to $10.5 million for the quarter ended June 30, 2024, compared to the quarter ended June 30, 2023.

Interest expense on deposits increased $2.5 million, or 44.3%, to $8.0 million for the quarter ended June 30, 2024, from the comparable quarter in 2023.

The increase in interest expense on deposits primarily was attributable to a $49.0 million increase in the average balance of, and an 87 basis point increase in the average rate paid on, interest-bearing deposits.

The average rate paid on interest-bearing deposits was 3.23% for the quarter ended June 30, 2024, compared to 2.35% for the quarter ended June 30, 2023.

The average balance of interest-bearing deposits was $991.1 million for the quarter ended June 30, 2024, compared to $942.2 million in the comparable quarter in 2023.

Interest expense on FHLB borrowings increased $1.2 million, or 86.4%, to $2.5 million in the second quarter of 2024 compared to $1.3 million for the same quarter in 2023, primarily due to an increase in the average rate paid on FHLB borrowings and, to a lesser extent, an increase in the average balance of such borrowings.

The average rate paid on FHLB borrowings was 3.89% for the quarter ended June 30, 2024, compared to 2.73% for the second quarter of 2023.

The average balance of FHLB borrowings totaled $257.9 million during the quarter ended June 30, 2024, compared to $197.1 million for the quarter ended June 30, 2023.

Net Interest Income.

Net interest income before the provision for credit losses decreased $38,000, or 0.4%, to $9.8 million for the first quarter of 2024, compared to $9.9 million for the first quarter of 2023.

This decrease was due to a 48 basis point decrease in the average interest rate spread, partially offset by a $138.4 million increase in average interest earning assets.

Net interest margin (annualized) was 2.74% for the three months ended March 31, 2024, compared to 3.04% for the three months ended March 31, 2023.

Net interest income before the provision for credit losses increased $243,000, or 2.6%, to $9.6 million for the second quarter of 2024, compared to $9.3 million for the second quarter of 2023.

This increase was due to a $107.0 million increase in average interest earning assets, partially offset by a 24 basis point decrease in the average interest rate spread.

Net interest margin (annualized) was 2.64% for the three months ended June 30, 2024, compared to 2.77% for the three months ended June 30, 2023.

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.

During the first half of 2023, in response to continuing elevated inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve System increased the target range for the federal funds rate by 100 basis points, 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.

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

Three Months Ended March 31,

Three Months Ended June 30,

Outstanding Interest

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Provision for Credit Losses.

The provision for credit losses for the three months ended March 31, 2024 totaled $183,000, compared to $170,000 for the three months ended March 31, 2023, a $13,000 or 7.7% increase.

Net charge-offs during the first quarter of 2024 were $324,000 compared to net recoveries of $78,000 in the first quarter of 2023.

The provision for credit losses for the three months ended June 30, 2024 totaled $270,000, compared to $8,000 for the three months ended June 30, 2023.

Net charge-offs during the second quarter of 2024 were $450,000 compared to $215,000 in the second quarter of 2023.

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, stock market volatility, and overall geopolitical tensions.

Noninterest Income.

Noninterest income increased $32,000 or 2.9%, to $1.1 million for the quarter ended March 31, 2024, compared to the same quarter in 2023.

The increase in noninterest income resulted primarily from an increase in other income and loan and lease servicing fees, partially offset by decreases in net gains on loan and lease sales and service charges on deposit accounts.

Other income increased $66,000, or 26.3%, to $319,000 for the quarter ended March 31, 2024, compared to $253,000 for the comparable quarter in 2023 due to increased wealth management income.

Loan and lease servicing fees increased $7,000, or 6.0%, for the quarter ended March 31, 2024 compared to the comparable quarter in 2023.

Noninterest income decreased $66,000, or 5.6%, to $1.1 million for the quarter ended June 30, 2024, compared to the same quarter in 2023.

The decrease in noninterest income resulted primarily from decreases in net gains on loan and lease sales and net losses on sales of securities available for sale, partially offset by increases in service charges on deposit accounts and loan and lease servicing fees.

Net gains on loan and lease sales decreased $64,000, or 41.4%, compared to the same quarter in 2023, due to decreased mortgage banking activity.

Service fees on deposit accounts decreased $8,000, or 2.9%, in the first quarter of 2024 from the comparable quarter in 2023.

Net losses on sales of securities available for sale totaled $62,000 for the three months ended June 30, 2024, while there were no sales of securities in the comparable quarter of 2023.

Service fees on deposit accounts increased $34,000, or 12.3%, in the second quarter of 2024 from the comparable quarter in 2023, due to higher transaction activity and account maintenance fees, coupled with year-over-year deposit growth.

Loan and lease servicing fees increased $22,000, or 20.1%, for the quarter ended June 30, 2024 compared to the comparable quarter in

2023 due to increased loan participation income.

In addition, other income increased $16,000, or 4.8%, to $341,000 for the quarter ended June 30, 2024, compared to $325,000 for the comparable quarter in 2023 due to increased wealth management income.

Card fee income decreased $11,000, or 3.8%, to $313,000 for the quarter ended June 30, 2024 compared to the same quarter in 2023.

Noninterest Expense.

Noninterest expense increased $696,000, or 9.5%, to $8.1 million for the three months ended March 31, 2024, from $7.4 million for the same period in 2023.

Salaries and employee benefits increased $332,000, or 7.8%, to $4.6 million for the quarter ended March 31, 2024, from $4.2 million for the same quarter in 2023.

The increase in salaries and benefits was primarily due to increased employee benefits expense.

Data processing fees increased $70,000, or 8.4%, to $907,000 in the first quarter of 2024 compared to the same quarter of 2023, primarily due to increased software and core provider expenses.

Noninterest expense increased $716,000, or 9.8%, to $8.1 million for the three months ended June 30, 2024, from $7.3 million for the same period in 2023.

Salaries and employee benefits increased $400,000, or 9.4%, to $4.7 million for the quarter ended June 30, 2024, from $4.3 million for the same quarter in 2023.

The increase in salaries and benefits was primarily driven by higher employee benefits expenses, including health insurance, as well as increased compensation costs.

Deposit insurance expense increased $188,000, or 97.9%, from the comparable quarter in 2023 primarily due to a change in the asset and deposit mix.

Legal and professional fees increased $124,000, or 34.9%, to $481,000 from the comparable quarter in 2023 primarily due to professional services expenses related to auditing and internal process enhancements.

Data processing fees increased $57,000, or 7.0%, to $879,000 in the second quarter of 2024 compared to the same quarter of 2023, primarily due to increased software and core provider expenses.

Other expenses decreased $43,000, or 4.7%, to $874,000 during the second quarter of 2024, compared to the same quarter of 2023, primarily due to decreased employee expenses and loan closing expenses.

Income Tax Expense.

The provision for income taxes decreased $180,000 during the three months ended March 31, 2024, compared to the same period in 2023, due to a lower level of pre-tax income.

The effective tax rate for the first quarter of 2024 was 12.9% compared to 15.5% for the same quarter a year ago.

The decrease in the effective tax rate was a result of the use of a captive insurance company, which allows the Company to assume more control over insurance risks and resulted in a more tax-efficient structure.

The provision for income taxes decreased $170,000 during the three months ended June 30, 2024, compared to the same period in 2023, due to a lower level of pre-tax income.

The effective tax rate for the second quarter of 2024 was 12.9% compared to 15.0% for the same quarter a year ago.

The decrease in the effective tax rate was a result of lower pre-tax income, allowing a greater favorable impact of tax-exempt interest and deductions.

Comparison of Results of Operations for the Six Months Ended June 30, 2024 and 2023.

Net income for the six months ended June 30, 2024 was $4.4 million, a $1.2 million or 20.8% decrease from net income of $5.6 million for the six months ended June 30, 2023.

Diluted earnings per share were $0.43 for the first six months of 2024, compared to $0.53 diluted earnings per share for the first six months of 2023.

The decrease in net income primarily was the result of an increase in noninterest expense of $1.4 million and an increase in the provision for credit losses of $275,000, partially offset by an increase in net interest income of $205,000, and a decrease in the provision for income taxes of $350,000.

Interest Income.

Interest income increased $8.2 million, or 26.0%, to $39.6 million during the six months ended June 30, 2024, compared to $31.4 million during the six months ended June 30, 2023.

Interest income on loans and leases increased $7.8 million, or 28.5%, to $35.1 million for the six months ended June 30, 2024, from $27.3 million for the comparable period in 2023, due to an increase in the average balance of loans and leases of $130.7 million, and an increase of 74 basis points in the average yield earned on loans and leases.

The average outstanding loan and lease balance was $1.1 billion for the first six months of 2024, compared to $1.0 billion for the first six months of 2023.

The average yield on loans and leases was 6.16% for the six months ended June 30, 2024, compared to 5.42% for the comparable period in 2023.

Interest income on investment securities, excluding FHLB stock, decreased $75,000, or 2.1%, to $3.5 million from the comparable period in 2023, due to a nine basis point increase in the average yield, partially offset by a decrease in the average balance of investment securities.

The average yield on investment securities, excluding FHLB stock, was 2.54% for the first six months of 2024, compared to 2.45% for the first six months of 2023.

The average balance of investment securities, excluding FHLB stock, was $278.5 million for the six months ended June 30, 2024, compared to $294.5 million for the six months ended June 30, 2023.

Dividends on FHLB stock increased $328,000, or 103.1%, during the six months ended June 30, 2024, from the comparable period in 2023, resulting in an average yield on FHLB stock of 9.35% for the six months ended June 30, 2024, compared to 6.31% for the six months ended June 30, 2023.

Interest income on cash and cash equivalents increased $157,000, or 78.9%, during the six months ended June 30, 2024, from the comparable period in 2023, due to a 157 basis point increase in the average yield and a $4.1 million increase in the average balance of cash and cash equivalents.

Interest Expense.

Interest expense increased $8.0 million, or 65.3%, to $20.2 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Interest expense on deposits increased $5.5 million, or 57.4%, to $15.1 million for the six months ended June 30, 2024, from the comparable period in 2023.

The increase in interest expense on deposits was attributable to a $46.5 million increase in the average balance of, and a 103 basis point increase in the average rate paid on, interest-bearing deposits.

The average rate paid on interest-bearing deposits was 3.11% for the six months ended June 30, 2024, compared to 2.08% for the six months ended June 30, 2023.

The average balance of interest-bearing deposits was $968.2 million for the six months ended June 30, 2024, compared to $921.7 million in the comparable period in 2023.

expense on FHLB borrowings increased $2.5 million, or 93.9%, to $5.1 million in the first six months of 2024 compared to $2.6 million for the same period in 2023, due to increases in the average rate paid on, and average balance of, FHLB borrowings.

The average rate paid on FHLB borrowings was 3.83% for the six months ended June 30, 2024, an increase of 16 basis points from 2.67% for the first six months of 2023.

The average balance of FHLB borrowings totaled $267.6 million during the six months ended June 30, 2024, up $69.8 million from $197.8 million for the six months ended June 30, 2023.

Net Interest Income.

Net interest income before the provision for credit losses increased $205,000, or 1.1%, to $19.4 million for the first six months of 2024, compared to $19.2 million for the first six months of 2023.

This increase was due to a $6.3 million increase in average net earning assets, partially offset by a 36 basis point decrease in the average interest rate spread.

Net interest margin (annualized) was 2.69% for the six months ended June 30, 2024, compared to 2.90% for the six months ended June 30, 2023.

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 table sets 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.

Six Months Ended June 30,

Outstanding Interest

(Dollars in thousands)

Interest-earning assets:

Loans and leases receivable $ 1,137,522 $ 35,062 6.16 % $ 1,006,806 $ 27,291 5.42 %

Securities 278,505 3,531 2.54 % 294,510 3,606 2.45 %

FHLB stock 13,818 646 9.35 % 10,087 318 6.31 %

Cash and cash equivalents and other 15,232 357 4.69 % 11,114 200 3.60 %

Total interest-earning assets 1,445,077 39,596 5.48 % 1,322,517 31,415 4.75 %

Non-earning assets 43,365 43,909

Total assets 1,488,442 1,366,426

Interest-bearing liabilities:

Savings and money market accounts 274,724 3,182 2.32 % 283,840 2,353 1.66 %

Interest-bearing checking accounts 146,244 819 1.12 % 149,787 425 0.57 %

Certificate accounts 547,207 11,066 4.04 % 488,034 6,792 2.78 %

Borrowings 267,552 5,120 3.83 % 197,823 2,641 2.67 %

Total interest-bearing liabilities 1,235,727 20,187 3.27 % 1,119,484 12,211 2.18 %

Noninterest-bearing demand deposits 107,750 100,271

Other liabilities 13,984 13,660

Stockholders' equity 130,981 133,011

Total liabilities and stockholders' equity 1,488,442 1,366,426

Net interest income $ 19,409 $ 19,204

Net earning assets $ 209,350 $ 203,033

Net interest rate spread (1)

2.21 % 2.57 %

Net interest margin (2)

2.69 % 2.90 %

Average interest-earning assets to average interest-bearing liabilities

116.94 % 118.14 %

_____________

(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 six months ended June 30, 2024 totaled $454,000, compared to $178,000 for the six months ended June 30, 2023, a $275,000 or 154.4% increase.

The increased provision was due to an increase in the loan portfolio, as well as an increase in net charge-offs during the period.

Net charge-offs during the first half of 2024 were $774,000 compared to $137,000 in the first half of 2023.

Noninterest Income.

Noninterest income decreased $34,000, or 1.5%, to $2.2 million for the six months ended June 30, 2024, compared to the same period in 2023.

The decrease in noninterest income resulted primarily from decreases in net gains on loan and lease sales and net losses on sales of securities available for sale, partially offset by increases in other income, service charges on deposit accounts, and loan and lease servicing fees.

Net gains on loan and lease sales decreased $100,000, or 32.3%, compared to the same period in 2023, due to decreased mortgage banking activity.

Net losses on sales of securities available for sale totaled $62,000 for the first half of 2024, while there were no sales of securities in the first half of 2023.

Other income increased $82,000, or 14.2%, to $660,000 for the six months ended June 30, 2024, compared to $578,000 for the comparable period in 2023 due to increased wealth management income.

Loan and lease servicing fees increased $29,000, or 12.7%, for the six months ended June 30, 2024 compared to the comparable period in 2023.Service fees on deposit accounts increased $26,000, or 4.6%, in the first six months of 2024 from the comparable period in 2023 due to higher transaction activity and account maintenance fees, coupled with year-over-year deposit growth.

Noninterest Expense.

Noninterest expense increased $1.4 million, or 9.6%, to $16.1 million for the six months ended June 30, 2024, from $14.7 million for the same period in 2023.

Salaries and employee benefits increased $732,000, or 8.6%, to $9.2 million for the six months ended June 30, 2024, from $8.5 million for the same period in 2023.

The increase in salaries and benefits was primarily driven by higher employee benefits expenses, including health insurance, as well as increased compensation costs.

Deposit insurance expense increased $423,000, or 117.5%, from the comparable quarter in 2023 primarily due to a change in the asset and deposit mix.

Legal and professional fees increased $246,000, or 36.9%, to $913,000 for the six months ended June 30, 2024 compared to $667,000 for the comparable period in 2023 due to other professional service expenses related to auditing and internal process enhancements.

Data processing fees increased $127,000, or 7.7%, to $1.8 million in the first six months of 2024 compared to the same period of 2023, primarily due to increased software and core provider expenses.

Income Tax Expense.

The provision for income taxes decreased $350,000 during the six months ended June 30, 2024, compared to the same period in 2023, due to a lower level of pre-tax income.

The effective tax rate for the first half of 2024 was 12.9% compared to 15.3% for the same period a year ago.

The decrease in the effective tax rate was a result of lower pre-tax income, allowing a greater favorable impact of tax-exempt interest and deductions.

Capital and Liquidity

Shareholders' equity totaled $132.4 million at March 31, 2024 and $134.9 million at December 31, 2023.

In addition to net income of $2.4 million, other sources of capital during the first quarter of 2024 included $154,000 related to the allocation of ESOP shares and $367,000 related to stock-based compensation.

Uses of capital during the first three months of 2024 included $2.8 million in AOCL, $1.4 million of dividends paid on common stock, and $1.1 million of stock repurchases.

The increase in the AOCL 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 2024, and regular quarterly dividends of $0.14 per common share during 2023.

Shareholders' equity totaled $131.1 million at June 30, 2024 and $134.9 million at December 31, 2023.

In addition to net income of $2.1 million, other sources of capital during the second quarter of 2024 included $156,000 related to the allocation of ESOP shares and $364,000 related to stock-based compensation.

Uses of capital during the first six months of 2024 included $1.3 million in AOCL, $1.4 million of dividends paid on common stock, and $1.1 million of stock repurchases.

The increase in the AOCL component of shareholders' equity was caused by increases to the unrealized losses on available for sale securities due to rising market interest rates.

We paid a regular quarterly dividend of $0.14 per common share during the second quarter of 2024, and regular quarterly dividends of $0.14 per common share during 2023.

We currently expect to continue our 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 2024 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, 2024.

Assuming continued payment during 2024 at the current dividend rate of $0.14 per share, our average total dividend paid each quarter would be approximately $1.5 million based on the number of our currently outstanding shares at June 30, 2024.

Stock Repurchase Plans.

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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 remaining available for repurchase at that date under the existing program, and extending the stock repurchase program's expiration date to June 6, 2024, unless completed sooner.

As of March 31, 2024, the Company had approximately 775,423 shares available for repurchase under its existing stock repurchase program.

On May 16, 2024, the Company announced that the Board of Directors approved an extension of the Company's existing stock repurchase program, which had been scheduled to expire on June 6, 2024, for an additional year, now set to expire on June 6, 2025.

As of June 30, 2024, the Company had approximately 678,108 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.

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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 $296.6 million at March 31, 2024.

Certificates of deposit that are scheduled to mature in less than one year from March 31, 2024 totaled $325.4 million.

Our liquid assets in the form of cash and cash equivalents and investments available for sale totaled $286.4 million at June 30, 2024.

Certificates of deposit scheduled to mature in less than one year from June 30, 2024 totaled $352.9 million.

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

As of March 31, 2024, we had approximately $8.1 million held in an interest-bearing account at the Federal Reserve.

As of June 30, 2024, we had approximately $7.8 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, 2024, based upon available, pledgeable collateral, our total remaining borrowing capacity with the FHLB was approximately $91.3 million.

Furthermore, at March 31, 2024, we had approximately $145.1 million in securities that were unencumbered by a pledge and could be used to support additional borrowings through repurchase agreements or the Federal Reserve discount window, as needed.

As of March 31, 2024, management was not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

As of June 30, 2024, based upon available, pledgeable collateral, our total remaining borrowing capacity with the FHLB was approximately $118.5 million.

Furthermore, at June 30, 2024, we had approximately $201.5 million in securities that were unencumbered by a pledge and could be used to support additional borrowings through repurchase agreements or the Federal Reserve discount window, as needed.

As of June 30, 2024, management was not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

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

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

Net cash provided by operating activities for the three months ended March 31, 2024 was $2.2 million, compared to $3.6 million provided by operating activities for the three months ended March 31, 2023.

During the three months ended March 31, 2024, net cash used in investing activities was $30.2 million, which consisted primarily of a $31.7 million net change in loans receivable, compared to $27.9 million of cash used in investing activities for the three months ended March 31, 2023.

Net cash provided by financing activities for the three months ended March 31, 2024 was $28.1 million, which was comprised primarily of a $28.5 million net change in deposits, compared to $25.7 million provided by financing activities during the three months ended March 31, 2023.

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 2023 Form 10-K other than set forth above.

Net cash provided by operating activities for the six months ended June 30, 2024 was $5.1 million, compared to $6.4 million provided by operating activities for the six months ended June 30, 2023.

During the six months ended June 30, 2024, net cash used in investing activities was $41.2 million, which consisted primarily of a $49.6 million net change in loans receivable, compared to $78.6 million of cash used in investing activities for the six months ended June 30, 2023.

Net cash provided by financing activities for the six months ended June 30, 2024 was $34.9 million, which was comprised primarily of a $58.9 million net change in deposits, compared to $73.8 million provided by financing activities during the six months ended June 30, 2023.

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 2023 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.

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

At March 31, 2024, Richmond Mutual Bancorporation, on an unconsolidated basis, had $10.1 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

At June 30, 2024, Richmond Mutual Bancorporation, on an unconsolidated basis, had $7.1 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

Regulatory Capital Requirements.

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

At March 31, 2024, First Bank Richmond’s regulatory capital exceeded the FDIC regulatory requirements, and First Bank Richmond was well-capitalized under regulatory prompt corrective action standards.

At June 30, 2024, First Bank Richmond’s regulatory capital exceeded the FDIC regulatory requirements, and First Bank Richmond was well-capitalized under regulatory prompt corrective action standards.

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

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(Dollars in thousands)

As of March 31, 2024

As of June 30, 2024

Total risk-based capital (to risk weighted assets) $ 180,073 14.2 % $ 101,398 8.0 % $ 126,748 10.0 %

8 unchanged sentences

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, 2024, the Bank’s CET1 capital exceeded the required capital conservation buffer.

At June 30, 2024, 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, 2024, it would have exceeded all regulatory capital requirements.

If Richmond Mutual Bancorporation was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at June 30, 2024, it would have exceeded all regulatory capital requirements.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis