Richmond Mutual Bancorporation, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Management’s discussion and analysis of financial condition of the Richmond Mutual Bancorporation, Inc. (the “Company”) at September 30, 2024, and the consolidated results of operations for the three and nine month periods ended September 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. The terms “we,” “our,” “us,” or the “Company” refer to Richmond Mutual Bancorporation, Inc. and its consolidated direct and indirect subsidiaries, including First Bank Richmond, which we sometimes refer to as the “Bank,” unless the context otherwise requires. Cautionary Note Regarding Forward-Looking Statements Certain matters in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of words such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” These forward-looking statements include, but are not limited to: • statements of our goals, intentions and expectations; • statements regarding our business plans, prospects, growth and operating strategies; • statements regarding the quality of our loan and investment portfolios; and • estimates of our risks and future costs and benefits. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These forward-looking statements are based on our current beliefs and expectations and, by their nature, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Important factors that could cause our actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: • 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 increases or decreases in the Board of Governors of the Federal Reserve System (the "Federal Reserve") benchmark rate and the duration of such changed 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; • our ability to access cost-effective funding including maintaining the confidence of depositors; • unexpected outflows of uninsured deposits may require us to sell investment securities at a loss; 30 • fluctuations in real estate values, and residential, commercial, and multi-family real estate market conditions; • demand for loans and deposits in our market area; • our ability to implement and change our business strategies; • competition among depository and other financial institutions and equipment financing companies; • bank failures or other adverse developments at 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 our loans and leases; • 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 our third-party vendors; • 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; • our ability to manage market risk, credit risk and operational risk in the current economic environment; • our ability to enter new markets successfully and capitalize on growth opportunities; • our ability to attract and retain key employees; • our compensation expense associated with equity allocated or awarded to our employees; • changes in the financial condition, results of operations or future prospects of issuers of securities that we own; • our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto; • changes in consumer spending, borrowing and savings habits; • changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission ("SEC") or the Public Company Accounting Oversight Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; • legislative or regulatory changes, 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; 31 • 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 events; and • the other risks detailed in this report and from time to time in our other filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”). We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements. Overview The Company, a Maryland corporation, is a bank holding company for its wholly owned subsidiary, First Bank Richmond. Substantially all of the Company's business is conducted through First Bank Richmond. The Company is regulated by the Federal Reserve and the Indiana Department of Financial Institutions ("IDFI"). The Company's corporate office is located at 31 North 9th Street, Richmond, Indiana, and its telephone number is (765) 962-2581. First Bank Richmond is an Indiana state-chartered commercial bank headquartered in Richmond, Indiana. The Bank was originally established in 1887 as an Indiana state-chartered mutual savings and loan association and in 1935 converted to a federal mutual savings and loan association, operating under the name First Federal Savings and Loan Association of Richmond. In 1993, the Bank converted to a state-chartered mutual savings bank and changed its name to First Bank Richmond, S.B. In 1998, the Bank, in connection with its non-stock mutual holding company reorganization, converted to a national bank charter operating as First Bank Richmond, National Association. In July 2007, Richmond Mutual Bancorporation-Delaware, the Bank’s then current holding company, acquired Mutual Federal Savings Bank headquartered in Sidney, Ohio. Mutual Federal Savings Bank was operated independently as a separately chartered, wholly owned subsidiary of Richmond Mutual Bancorporation-Delaware until 2016 when it was combined with the bank through an internal merger transaction that consolidated both banks into a single, more efficient commercial bank charter. In 2017, the Bank converted to an Indiana state-chartered commercial bank and changed its name to First Bank Richmond. The former Mutual Federal Savings Bank continues to operate in Ohio under the name Mutual Federal, a division of First Bank Richmond. First Bank Richmond provides full banking services through its seven full- and one limited-service offices located in Cambridge City (1), Centerville (1), Richmond (5) and Shelbyville (1), Indiana, its five full-service offices located in Piqua (2), Sidney (2) and Troy (1), Ohio, and its loan production office in Columbus, Ohio. Administrative, trust and wealth management services are conducted through First Bank Richmond’s Corporate Office/Financial Center located in Richmond, Indiana. As an Indiana-chartered commercial bank, First Bank Richmond is subject to regulation by the IDFI and the Federal Deposit Insurance Corporation (“FDIC”). Our principal business consists of attracting deposits from the general public, as well as brokered deposits, and investing those funds primarily in loans secured by commercial and multi-family real estate, first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, direct financing leases and commercial and industrial loans. We also obtain funds by utilizing Federal Home Loan Bank (“FHLB”) advances. Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and government sponsored agency and municipal bonds. First Bank Richmond generates commercial, mortgage and consumer loans and leases and receives deposits from customers located primarily in Wayne and Shelby Counties, in Indiana and Shelby, Miami and Franklin (no deposits) Counties, in Ohio. We sometimes refer to these counties as our primary market area. First Bank Richmond’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Our leasing operation consists of direct investments in equipment that we lease (referred to as direct finance leases) to small businesses located throughout the United States. Our lease portfolio consists of various kinds of equipment, generally technology-related, such as computer systems, medical equipment and general manufacturing, industrial, construction and transportation equipment. We seek leasing transactions where we believe the equipment leased is integral to the lessee's business. We also provide trust and wealth management services, including serving as executor and trustee under wills and deeds and as guardian and custodian of employee benefits, and manage private investment accounts for individuals and institutions. Total wealth management assets under management and administration were $189.5 million at September 30, 2024. 32 Our results of operations are primarily dependent on net interest income. Net interest income is the difference between interest income, which is the income that is earned on loans and investments, and interest expense, which is the interest that is paid on deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), and fees from sale of residential mortgage loans originated for sale in the secondary market. We also recognize income from the sale of investment securities. Changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. At September 30, 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 $140.0 million in stockholders’ equity. At September 30, 2024, First Bank Richmond’s total risk-based capital ratio was 14.35%, exceeding the 10.0% requirement for a well-capitalized institution. For the nine months ended September 30, 2024, net income was $6.9 million, compared with net income of $7.5 million for the nine months ended September 30, 2023. Critical Accounting Estimates We prepare our consolidated financial statements in accordance with GAAP. In doing so, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We have reviewed our critical accounting estimates with the audit committee of our Board of Directors. There have been no significant changes during the nine months ended September 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 September 30, 2024 and December 31, 2023 General. Total assets increased $31.5 million, or 2.2%, to $1.5 billion at September 30, 2024 from December 31, 2023. The increase was primarily the result of a $50.9 million, or 4.7%, increase in loans and leases, net of allowance for credit losses, to $1.1 billion, partially offset by a $16.3 million, or 5.7%, decrease in investment securities to $271.3 million at September 30, 2024. Investment Securities. Investment securities available for sale totaled $267.3 million and $282.7 million, while investment securities held to maturity totaled $4.1 million and $4.9 million at September 30, 2024 and December 31, 2023, respectively. The $15.4 million, or 5.5%, decrease in investment securities available for sale was primarily due to maturities and principal repayments of $16.4 million and $6.9 million in sales of securities, partially offset by a $5.2 million upward mark-to-market adjustment on the investment portfolio due to the decline in market interest rates at the end of the current quarter. 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 $50.9 million, or 4.7%, to $1.1 billion at September 30, 2024 from December 31, 2023. The increase in loans and leases was attributable to increases in multi-family loans, commercial and industrial loans, residential mortgage loans, and commercial real estate loans of $45.0 million, $11.2 million, $10.8 million and $6.8 million, respectively. At September 30, 2024, loans held for sale totaled $220,000, compared to $794,000 at December 31, 2023. Nonaccrual loans and leases totaled $5.1 million at September 30, 2024, compared to $6.3 million at December 31, 2023. The decrease in nonaccrual loans reflects a $1.2 million decline in nonaccrual commercial and industrial loans which were paid-off during the period. Accruing loans and leases past due 90 days or more totaled $1.6 million at September 30, 2024, compared to $1.7 million at December 31, 2023. Nonperforming loans and leases, consisting of nonaccrual loans and 33 leases and accruing loans and leases 90 days or more past due, totaled $6.7 million, or 0.58% of total loans and leases, at September 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 $110,000, or 0.7%, to $15.8 million at September 30, 2024 from December 31, 2023. At September 30, 2024, the allowance for credit losses on loans and leases totaled 1.36% 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 nine months of 2024 were $1.2 million, compared to net charge-offs of $436,000 during the first nine months 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 September 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. For additional information on the allowance for credit losses, see "Allowance for Credit Losses on Loans and Leases" and "Economic Outlook" in "Note 4 Loans, Leases and Allowance" of the "Notes to Condensed Consolidated Financial Statements" in this report. Other Assets . Other assets decreased $3.2 million, or 12.8%, to $21.6 million at September 30, 2024 from $24.8 million at December 31, 2023, primarily caused by a decrease in our deferred tax asset due to the upward mark-to-market adjustment on the investment portfolio. Deposits. Total deposits increased $48.0 million, or 4.6%, to $1.1 billion at September 30, 2024 from December 31, 2023. The increase in deposits primarily was due to an increase in non-brokered time deposits of $41.6 million, which were used to fund loan demand, and savings and money-market accounts of $27.0 million. These increases were partially offset by a decrease in demand deposit accounts of $31.4 million. Brokered deposits totaled $279.6 million, or 25.7% of total deposits, at September 30, 2024, compared to $268.8 million, or 25.8% of total deposits, at December 31, 2023. At September 30, 2024, noninterest-bearing deposits totaled $98.5 million, or 9.0% 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 September 30, 2024, approximately $224.6 million of our deposit portfolio, or 20.6% of total deposits, excluding collateralized public deposits, was uninsured. The uninsured amounts are estimated based on the methodologies and assumptions used for First Bank Richmond's regulatory reporting requirements. Borrowings. Total borrowings, consisting solely of FHLB advances, decreased $19.0 million, or 7.0%, to $252.0 million at September 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 $140.0 million at September 30, 2024, an increase of $5.2 million, or 3.8%, from December 31, 2023. The increase in stockholders' equity from year-end 2023 resulted from net income of $6.9 million and a decrease in accumulated other comprehensive loss ("AOCL") of $4.1 million, partially offset by the payment of $4.3 million in dividends to Company stockholders, and the repurchase of $3.1 million of Company common stock. 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 $49.3 million at September 30, 2024. The AOCL impact to equity, after tax affecting the unrealized loss, was $39.0 million at September 30, 2024 compared to $43.0 million at December 31, 2023. The Company repurchased 261,234 shares of Company common stock at an average price of $11.85 per share for a total of $3.1 million during the first nine months of 2024. The Company's equity to asset ratio was 9.38% at September 30, 2024. At September 30, 2024, the Bank's Tier 1 capital to total assets ratio was 10.73% and the Bank's capital was well in excess of all regulatory requirements. Comparison of Results of Operations for the Three Months Ended September 30, 2024 and 2023. General. Net income for the three months ended September 30, 2024 was $2.5 million, a $523,000 or 26.8% increase from net income of $1.9 million for the three months ended September 30, 2023. Diluted earnings per share were $0.24 for the third quarter of 2024, compared to $0.19 diluted earnings per share for the third quarter of 2023. The increase in net income primarily was the result of a $305,000 increase in net interest income, a reversal of the provision for credit losses of $99,000 in the third quarter of 2024, compared to a provision for credit losses of $50,000 for the quarter ended September 30, 2023, and a $168,000 increase in noninterest income, partially offset by a $96,000 increase in the provision for income taxes. 34 Interest Income. Interest income increased $2.8 million, or 16.4%, to $20.3 million during the quarter ended September 30, 2024, compared to $17.4 million during the quarter ended September 30, 2023. Interest income on loans and leases increased $2.8 million, or 18.3%, to $18.1 million for the quarter ended September 30, 2024, from $15.3 million for the comparable quarter in 2023, due to an increase in the average balance of loans and leases of $84.3 million, and an increase of 56 basis points in the average yield earned on loans and leases. The average outstanding loan and lease balance was $1.2 billion for the quarter ended September 30, 2024, compared to $1.1 billion for the quarter ended September 30, 2023. The average yield on loans and leases was 6.27% for the quarter ended September 30, 2024, compared to 5.71% for the comparable quarter in 2023. Interest income on investment securities, excluding FHLB stock, decreased $102,000, or 5.7%, for the third quarter of 2024 from the comparable quarter in 2023. The decrease was due to a $12.7 million decrease in the average balance, primarily as a result of proceeds received from sales, maturities and paydowns on securities being used to fund loan growth, and a three basis point decrease in the average yield earned on investment securities. The average yield on investment securities, excluding FHLB stock, decreased to 2.51% for the third quarter of 2024, compared to 2.54% for the third quarter of 2023. The average balance of investment securities, excluding FHLB stock, decreased to $270.9 million for the quarter ended September 30, 2024, compared to $283.6 million for the quarter ended September 30, 2023. Dividends on FHLB stock increased $63,000, or 26.4%, during the quarter ended September 30, 2024, from the comparable quarter in 2023, resulting in an average yield on FHLB stock of 8.69% for the three months ended September 30, 2024, compared to 8.75% for the three months ended September 30, 2023. Interest income on cash and cash equivalents increased $86,000, or 84.3%, during the quarter ended September 30, 2024, from the comparable quarter in 2023, due to an 81 basis point increase in the average yield and a $5.5 million increase in the average balance of cash and cash equivalents. Interest Expense. Interest expense increased $2.5 million, or 30.7%, to $10.8 million for the quarter ended September 30, 2024, compared to the quarter ended September 30, 2023. Interest expense on deposits increased $2.0 million, or 31.9%, to $8.3 million for the quarter ended September 30, 2024, from the comparable quarter in 2023. The increase in interest expense on deposits primarily was attributable to a $61.8 million increase in the average balance of, and a 64 basis point increase in the average rate paid on, interest-bearing deposits. The average rate paid on interest-bearing deposits was 3.33% for the quarter ended September 30, 2024, compared to 2.69% for the quarter ended September 30, 2023. The average balance of interest-bearing deposits was $1.0 billion for the quarter ended September 30, 2024, compared to $939.2 million in the comparable quarter in 2023. Interest expense on FHLB borrowings increased $529,000, or 26.9%, to $2.5 million in the third quarter of 2024 compared to $2.0 million for the same quarter in 2023, due to increases in the average rate paid on FHLB borrowings of 58 basis points and the average balance of such borrowings of $20.0 million. The average rate paid on FHLB borrowings was 4.08% for the quarter ended September 30, 2024, compared to 3.50% for the third quarter of 2023. The average balance of FHLB borrowings totaled $244.8 million during the quarter ended September 30, 2024, compared to $224.8 million for the quarter ended September 30, 2023. Net Interest Income. Net interest income before the (reversal of)/provision for credit losses increased $305,000, or 3.3%, to $9.4 million for the third quarter of 2024, compared to $9.1 million for the third quarter of 2023. This increase was due to an $80.0 million increase in average interest earning assets, partially offset by a 13 basis point decrease in the average interest rate spread. Net interest margin (annualized) was 2.60% for the three months ended September 30, 2024, compared to 2.66% for the three months ended September 30, 2023. The decrease in net interest margin primarily was due to the rate paid on interest-bearing liabilities increasing faster than the yield on interest-earning assets. Between March 2022 and January 2024, in response to continuing elevated inflation, the Federal Open Market Committee of the Federal Reserve hiked interest rates a total of 11 times, to a range of 5.25% to 5.50% until September 18, 2024 when the rates were reduced to the range of 4.75% to 5.00%. While 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 reprice or reset faster than 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. 35 Three Months Ended September 30, 2024 2023 Average Balance Outstanding Interest Earned/ Paid Yield/ Rate Average Balance Outstanding Interest Earned/ Paid Yield/ Rate (Dollars in thousands) Interest-earning assets: Loans and leases receivable $ 1,153,325 $ 18,071 6.27 % $ 1,069,049 $ 15,270 5.71 % Securities 270,857 1,700 2.51 % 283,600 1,802 2.54 % FHLB stock 13,907 302 8.69 % 10,923 239 8.75 % Cash and cash equivalents and other 15,874 188 4.74 % 10,371 102 3.93 % Total interest-earning assets 1,453,963 20,261 5.57 % 1,373,943 17,413 5.07 % Non-earning assets 40,485 45,175 Total assets 1,494,448 1,419,118 Interest-bearing liabilities: Savings and money market accounts 290,108 1,779 2.45 % 260,386 1,184 1.82 % Interest-bearing checking accounts 140,028 431 1.23 % 146,084 283 0.77 % Certificate accounts 570,820 6,121 4.29 % 532,721 4,851 3.64 % Borrowings 244,793 2,497 4.08 % 224,750 1,968 3.50 % Total interest-bearing liabilities 1,245,749 10,828 3.48 % 1,163,941 8,286 2.85 % Noninterest-bearing demand deposits 101,239 112,109 Other liabilities 13,200 13,945 Stockholders' equity 134,260 129,123 Total liabilities and stockholders' equity 1,494,448 1,419,118 Net interest income $ 9,433 $ 9,127 Net earning assets $ 208,214 $ 210,002 Net interest rate spread (1) 2.09 % 2.22 % Net interest margin (2) 2.60 % 2.66 % Average interest-earning assets to average interest-bearing liabilities 11,671.00 % 118.04 % _____________ (1) Annualized. Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities. (2) Annualized. Net interest margin represents net interest income divided by average total interest-earning assets. (Reversal of)/Provision for Credit Losses. A reversal of the provision for credit losses of $99,000 was recognized during the three months ended September 30, 2024, compared to a provision for credit losses of $50,000 for the three months ended September 30, 2023. Net charge-offs during the third quarter of 2024 were $464,000, compared to $299,000 in the third quarter of 2023. The reversal of provision for credit losses during the quarter was due to the availability of increased details within certain loan categories, which allowed for more precise risk profiling. Additionally, macroeconomic inputs, credit metrics, and refreshed loss driver data were updated to further refine our allowance calculation. 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 $168,000, or 14.5%, to $1.3 million for the quarter ended September 30, 2024, compared to the same quarter in 2023. The increase in noninterest income resulted primarily from increases in net gains on loan and lease sales and service charges on deposit accounts, partially offset by a decrease in other income. Net gains on loan and lease sales increased $122,000, or 135.8%, compared to the same quarter in 2023, due to increased mortgage banking activity. Service fees on deposit accounts increased $51,000, or 18.5%, in the third quarter of 2024 36 from the comparable quarter in 2023, due to higher transaction activity and early withdraw penalty fees, coupled with year-over-year deposit growth. Other income decreased $24,000, or 6.3%, to $354,000 for the quarter ended September 30, 2024, compared to $378,000 for the comparable quarter in 2023 due to fees earned from our participation in a loan hedging program with a correspondent bank in 2023. Net gains on sales of securities available for sale totaled $11,000 for the three months ended September 30, 2024, while there were no sales of securities in the comparable quarter of 2023. Loan and lease servicing fees increased $11,000, or 9.5%, for the quarter ended September 30, 2024 compared to the comparable quarter in 2023 due to increased loan participation income. Card fee income decreased $2,000, or 0.8%, to $301,000 for the quarter ended September 30, 2024 compared to the same quarter in 2023. Noninterest Expense. Noninterest expense totaled $8.0 million for both the three months ended September 30, 2024 and the three months ended September 30, 2023. Salaries and employee benefits increased $204,000, or 4.7%, to $4.6 million for the quarter ended September 30, 2024, from $4.4 million for the same quarter in 2023. The increase in salaries and benefits was primarily driven by higher health insurance, as well as increased compensation costs. Deposit insurance expense increased $100,000, or 35.7%, from the comparable quarter in 2023 primarily due to a change in the asset and deposit mix. Legal and professional fees decreased $65,000, or 12.3%, to $463,000 from the comparable quarter in 2023 primarily due to reduced accounting services expenses. Data processing fees increased $40,000, or 4.7%, to $894,000 in the third quarter of 2024 compared to the same quarter of 2023, primarily due to increased core provider expenses. Other expenses decreased $236,000, or 20.4%, to $918,000 during the third quarter of 2024, compared to the same quarter of 2023, primarily due to reduced fraud losses and loan closing expenses. Income Tax Expense. The provision for income taxes increased $96,000 during the three months ended September 30, 2024, compared to the same period in 2023, due to a higher level of pre-tax income. The effective tax rate for the third quarter of 2024 was 13.0% compared to 12.3% for the same quarter a year ago. The increase in the effective tax rate was a result of a higher level of pre-tax income, reducing the favorable impact of tax-exempt interest and deductions. Comparison of Results of Operations for the Nine Months Ended September 30, 2024 and 2023. General. Net income for the nine months ended September 30, 2024 was $6.9 million, a $644,000 or 8.5% decrease from net income of $7.5 million for the nine months ended September 30, 2023. Diluted earnings per share were $0.68 for the first nine months of 2024, compared to $0.72 diluted earnings per share for the first nine months of 2023. The decrease in net income was the result of a $1.4 million increase in noninterest expense and a $127,000 increase in the provision for credit losses, partially offset by a $510,000 increase in net interest income, a $134,000 increase in noninterest income, and a $254,000 decrease in the provision for income taxes. Interest Income. Interest income increased $11.0 million, or 22.6%, to $59.9 million during the nine months ended September 30, 2024, compared to $48.8 million during the nine months ended September 30, 2023. Interest income on loans and leases increased $10.6 million, or 24.8%, to $53.1 million for the nine months ended September 30, 2024, from $42.6 million for the comparable period in 2023, due to an increase in the average balance of loans and leases of $115.0 million, and an increase of 68 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 nine months of 2024, compared to $1.0 billion for the first nine months of 2023. The average yield on loans and leases was 6.20% for the nine months ended September 30, 2024, compared to 5.52% for the comparable period in 2023. Interest income on investment securities, excluding FHLB stock, decreased $176,000, or 3.3%, to $5.2 million from the comparable period in 2023, due to a decrease in the average balance of investment securities, partially offset by a five basis point increase in the average yield. The average yield on investment securities, excluding FHLB stock, was 2.53% for the first nine months of 2024, compared to 2.48% for the first nine months of 2023. The average balance of investment securities, excluding FHLB stock, was $275.9 million for the nine months ended September 30, 2024, compared to $290.8 million for the nine months ended September 30, 2023. Dividends on FHLB stock increased $390,000, or 70.0%, during the nine months ended September 30, 2024, from the comparable period in 2023, resulting in an average yield on FHLB stock of 9.12% for the nine months ended September 30, 2024, compared to 7.16% for the nine months ended September 30, 2023. Interest income on cash and cash equivalents increased $243,000, or 80.5%, during the nine months ended September 30, 2024, from the comparable period in 2023, due to a 99 basis point increase in the average yield and a $4.6 million increase in the average balance of cash and cash equivalents. Interest Expense. Interest expense increased $10.5 million, or 51.3%, to $31.0 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. Interest expense on deposits increased $7.5 million, or 47.3%, to $23.4 million for the nine months ended September 30, 2024, from the comparable period in 2023. The 37 increase in interest expense on deposits was attributable to a $51.6 million increase in the average balance of, and a 90 basis point increase in the average rate paid on, interest-bearing deposits. The average rate paid on interest-bearing deposits was 3.19% for the nine months ended September 30, 2024, compared to 2.28% for the nine months ended September 30, 2023. The average balance of interest-bearing deposits was $979.2 million for the nine months ended September 30, 2024, compared to $927.6 million in the comparable period in 2023. Interest expense on FHLB borrowings increased $3.0 million, or 65.3%, to $7.6 million in the first nine months of 2024 compared to $4.6 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 3.91% for the nine months ended September 30, 2024, an increase of 94 basis points from 2.97% for the first nine months of 2023. The average balance of FHLB borrowings totaled $259.9 million during the nine months ended September 30, 2024, up $53.0 million from $206.9 million for the nine months ended September 30, 2023. Net Interest Income. Net interest income before the provision for credit losses increased $510,000, or 1.8%, to $28.8 million for the first nine months of 2024, compared to $28.3 million for the first nine months of 2023. This increase was due to a $3.6 million increase in average net earning assets, partially offset by a 28 basis point decrease in the average interest rate spread. Net interest margin (annualized) was 2.66% for the nine months ended September 30, 2024, compared to 2.82% for the nine months ended September 30, 2023. The decrease in net interest margin primarily was 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. 38 Nine Months Ended September 30, 2024 2023 Average Balance Outstanding Interest Earned/ Paid Yield/ Rate Average Balance Outstanding Interest Earned/ Paid Yield/ Rate (Dollars in thousands) Interest-earning assets: Loans and leases receivable $ 1,142,828 $ 53,133 6.20 % $ 1,027,782 $ 42,562 5.52 % Securities 275,903 5,232 2.53 % 290,820 5,408 2.48 % FHLB stock 13,848 947 9.12 % 10,369 557 7.16 % Cash and cash equivalents and other 15,480 545 4.69 % 10,877 302 3.70 % Total interest-earning assets 1,448,059 59,857 5.51 % 1,339,848 48,829 4.86 % Non-earning assets 42,399 44,335 Total assets 1,490,458 1,384,183 Interest-bearing liabilities: Savings and money market accounts 279,890 4,961 2.36 % 275,936 3,537 1.71 % Interest-bearing checking accounts 144,157 1,250 1.16 % 148,539 708 0.64 % Certificate accounts 555,136 17,188 4.13 % 503,093 11,644 3.09 % Borrowings 259,911 7,617 3.91 % 206,897 4,609 2.97 % Total interest-bearing liabilities 1,239,094 31,016 3.34 % 1,134,465 20,498 2.41 % Noninterest-bearing demand deposits 105,564 104,260 Other liabilities 13,718 13,757 Stockholders' equity 132,082 131,701 Total liabilities and stockholders' equity 1,490,458 1,384,183 Net interest income $ 28,841 $ 28,331 Net earning assets $ 208,965 $ 205,383 Net interest rate spread (1) 2.17 % 2.45 % Net interest margin (2) 2.66 % 2.82 % Average interest-earning assets to average interest-bearing liabilities 116.86 % 118.10 % _____________ (1) Annualized. Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities. (2) Annualized. Net interest margin represents net interest income divided by average total interest-earning assets. Provision for Credit Losses. The provision for credit losses for the nine months ended September 30, 2024 totaled $355,000, compared to $228,000 for the nine months ended September 30, 2023, a $127,000 or 55.6% 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 nine months of 2024 were $1.2 million, compared to $436,000 in the first nine months 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 $134,000, or 3.9%, to $3.6 million for the nine months ended September 30, 2024, compared to the same period in 2023. The increase in noninterest income resulted primarily from increases in service charges on deposit accounts and other income and, to a lesser extent, increases in net gains on loan and lease sales and loan and lease servicing fees, partially offset by net losses on sales of securities available for sale. Service fees on deposit accounts increased $77,000, or 9.2%, in the first nine 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. Other income increased $58,000, or 6.1%, to $1.0 million for the nine months ended September 30, 2024, compared to $956,000 for the comparable period in 2023 due to increased wealth management income. Net gains on loan and lease sales increased $22,000, or 5.4%, 39 compared to the same period in 2023, due to increased mortgage banking activity. Loan and lease servicing fees increased $40,000, or 11.7%, for the nine months ended September 30, 2024 compared to the comparable period in 2023. Net losses on sales of securities available for sale totaled $51,000 for the first nine months of 2024, while there were no sales of securities in the first nine months of 2023. Noninterest Expense. Noninterest expense increased $1.4 million, or 6.2%, to $24.1 million for the nine months ended September 30, 2024, from $22.7 million for the same period in 2023. Salaries and employee benefits increased $935,000, or 7.3%, to $13.8 million for the nine months ended September 30, 2024, from $12.9 million for the same period in 2023. The increase in salaries and benefits was primarily driven by higher health insurance and compensation costs. Deposit insurance expense increased $523,000, or 81.7%, from the comparable quarter in 2023 primarily due to a change in the asset and deposit mix. Legal and professional fees increased $181,000, or 15.1%, to $1.4 million for the nine months ended September 30, 2024 compared to $1.2 million for the comparable period in 2023 due to other professional service expenses related to auditing and internal process enhancements. Data processing fees increased $168,000, or 6.7%, to $2.7 million in the first nine 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 $254,000 during the nine months ended September 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 nine months of 2024 was 12.9% compared to 14.5% 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 Capital. Shareholders' equity totaled $140.0 million at September 30, 2024 and $134.9 million at December 31, 2023. In addition to net income of $6.9 million, other sources of capital during the first nine months of 2024 included $476,000 related to the allocation of ESOP shares, $1.1 million related to stock-based compensation, and a $4.1 million reduction in AOCL. Uses of capital during the first nine months of 2024 included $4.3 million of dividends paid on common stock and $3.1 million of stock repurchases. We paid a regular quarterly dividend of $0.14 per common share during both the third quarter of 2024 and 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 $1.5 million based on the number of our currently outstanding shares at September 30, 2024. Stock Repurchase Plans. From time to time, our Board of Directors has authorized stock repurchase plans. In general, stock-repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Repurchased shares also help 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 an additional 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, and extending the stock repurchase program's expiration date to June 6, 2024, unless completed sooner. On May 16, 2024, the Company announced that the Board of Directors approved a further extension of the Company's existing stock repurchase program, setting a new expiration date of June 6, 2025. As of September 30, 2024, approximately 606,802 shares remained available for repurchase under its existing stock repurchase program. The repurchase program does not obligate the Company to purchase any particular number of shares. See Part II, Item 2 - "Unregistered Sales of Equity Securities and Use of Proceeds." Liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet. Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets. 40 Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities held to maturity, sales of fixed rate residential mortgage loans in the secondary market, and federal funds sold and resell agreements. Liability liquidity generally is provided by access to funding sources which include core deposits and advances from the FHLB and other borrowing relationships with third party financial institutions. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. Our liquid assets in the form of cash and cash equivalents and investments available for sale totaled $287.1 million at September 30, 2024. Certificates of deposit scheduled to mature in less than one year from September 30, 2024 totaled $349.2 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. As of September 30, 2024, we had approximately $8.1 million held in an interest-bearing account at the Federal Reserve. We also have the ability to borrow funds as a member of the FHLB. As of September 30, 2024, based upon available, pledgeable collateral, our total remaining borrowing capacity with the FHLB was approximately $120.7 million. Furthermore, at September 30, 2024, we had approximately $179.8 million in securities that were unencumbered by a pledge and could be used to support additional borrowings through repurchase agreements or the Federal Reserve discount window, as needed. As of September 30, 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. Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities for the nine months ended September 30, 2024 was $8.0 million, compared to $8.3 million for the nine months ended September 30, 2023. During the nine months ended September 30, 2024, net cash used in investing activities was $30.3 million, which consisted primarily of a $49.3 million increase in loans receivable, compared to $100.6 million of cash used in investing activities for the nine months ended September 30, 2023. Net cash provided by financing activities for the nine months ended September 30, 2024 was $21.7 million, which was comprised primarily of a $48.0 million increase in deposits, compared to $97.0 million provided by financing activities during the nine months ended September 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. In addition to its own operating expenses, Richmond Mutual Bancorporation is responsible for paying for any stock repurchases, dividends declared to its stockholders and other general corporate expenses. Since Richmond Mutual Bancorporation is a holding company and does not conduct operations, its primary sources of liquidity are interest on investment securities purchased with proceeds from our initial public offering, dividends up-streamed from First Bank Richmond and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid to us by First Bank Richmond. At September 30, 2024, Richmond Mutual Bancorporation, on an unconsolidated basis, had $6.7 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs. Regulatory Capital Requirements. First Bank Richmond is subject to minimum capital requirements imposed by the FDIC. The FDIC may require us to have additional capital above the specific regulatory levels if it believes we are subject to increased risk due to asset problems, high interest rate risk and other risks. At September 30, 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. 41 Actual Minimum for Capital Adequacy Purposes Categorized as "Well-Capitalized" Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) As of September 30, 2024 Total risk-based capital (to risk weighted assets) $ 180,328 14.3 % $ 100,548 8.0 % $ 125,685 10.0 % Tier 1 risk-based capital (to risk weighted assets) 164,609 13.1 75,411 6.0 100,548 8.0 Common equity tier 1 capital (to risk weighted assets) 164,609 13.1 56,558 4.5 81,695 6.5 Tier 1 leverage (core) capital (to adjusted tangible assets) 164,609 10.7 61,340 4.0 76,675 5.0 As of December 31, 2023 Total risk-based capital (to risk weighted assets) $ 174,938 14.1 % $ 99,247 8.0 % $ 124,059 10.0 % Tier 1 risk-based capital (to risk weighted assets) 159,409 12.8 74,435 6.0 99,247 8.0 Common equity tier 1 capital (to risk weighted assets) 159,409 12.8 55,826 4.5 80,638 6.5 Tier 1 leverage (core) capital (to adjusted tangible assets) 159,409 10.6 59,931 4.0 74,914 5.0 Pursuant to the capital regulations of the FDIC and the other federal banking agencies, First Bank Richmond must maintain a capital conservation buffer consisting of additional common equity tier 1 (“CET1”) capital greater than 2.5% of risk-weighted assets above the required minimum levels of risk-based CET1 capital, tier 1 capital and total capital in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At September 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 September 30, 2024, it would have exceeded all regulatory capital requirements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There has not been any material change in the market risk disclosures contained in our 2023 Form 10-K.