Richmond Mutual Bancorporation, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Richmond Mutual Bancorporation, Inc. Condensed Consolidated Balance Sheets Assets September 30, 2020 December 31, 2019 (Unaudited) Cash and due from banks $ 11,675,692 $ 9,088,398 Interest-bearing demand deposits 5,022,239 31,508,479 Cash and cash equivalents 16,697,931 40,596,877 Investment securities - available for sale 231,849,589 201,783,851 Investment securities - held to maturity 12,314,909 15,917,394 Loans and leases, net of allowance for losses of $ 9,809,000 and $ 7,089,000 , respectively 750,646,193 687,258,190 Premises and equipment, net 14,757,618 14,087,169 Federal Home Loan Bank stock 9,169,600 7,600,400 Interest receivable 4,830,417 3,052,380 Mortgage-servicing rights 1,504,675 1,033,217 Cash surrender value of life insurance 3,930,151 3,839,911 Other assets 9,188,440 10,872,682 Total assets $ 1,054,889,523 $ 986,042,071 Liabilities Non-interest bearing deposits $ 88,714,105 $ 60,297,443 Interest bearing deposits 574,342,883 556,921,370 Total deposits 663,056,988 617,218,813 Federal Home Loan Bank advances 176,000,000 154,000,000 Advances by borrowers for taxes and insurance 561,540 545,498 Interest payable 241,872 296,774 Multi-employer pension plan liability 17,454,709 17,454,709 Other liabilities 5,899,989 8,738,831 Total liabilities 863,215,098 798,254,625 Commitments and Contingent Liabilities - - Stockholders' Equity Common stock, $ 0.01 par value Authorized - 90,000,000 shares Issued and outstanding – 12,944,546 shares and 13,526,625 shares, respectively 129,445 135,266 Additional paid-in capital 125,920,717 132,601,876 Retained earnings 76,372,877 70,111,434 Unearned employee stock ownership plan (ESOP) ( 13,848,900 ) ( 14,400,386 ) Accumulated other comprehensive income (loss) 3,100,286 ( 660,744 ) Total stockholders' equity 191,674,425 187,787,446 Total liabilities and stockholders' equity $ 1,054,889,523 $ 986,042,071 See Notes to Condensed Consolidated Statements. 1 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Income (Loss) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Interest Income Loans and leases $ 9,556,197 $ 9,318,054 $ 27,928,259 $ 27,247,406 Investment securities 1,017,201 862,331 3,458,621 2,760,808 Other 9,376 626,705 145,853 954,274 Total interest income 10,582,774 10,807,090 31,532,733 30,962,488 Interest Expense Deposits 1,545,183 2,033,000 5,074,191 6,027,160 Borrowings 763,055 864,957 2,272,700 2,423,784 Total interest expense 2,308,238 2,897,957 7,346,891 8,450,944 Net Interest Income 8,274,536 7,909,133 24,185,842 22,511,544 Provision for losses on loans and leases 1,300,000 705,000 2,830,000 1,715,000 Net Interest Income After Provision for Losses on Loans and Leases 6,974,536 7,204,133 21,355,842 20,796,544 Non-Interest Income Service charges on deposit accounts 150,653 295,703 510,922 779,147 Card fee income 218,482 189,583 599,837 542,072 Loan and lease servicing fees ( 41,657 ) 68,079 193,881 280,282 Net gains on securities (includes $ 117,304 , $ 21,827 , $ 196,317 and $ 83,059 , respectively, related to accumulated other comprehensive loss reclassifications) 117,304 21,827 196,317 83,059 Net gains on loan and lease sales 1,327,639 231,534 2,586,515 442,332 Other loan fees 173,803 211,249 501,379 454,283 Other income 209,503 129,121 602,581 370,281 Total non-interest income 2,155,727 1,147,096 5,191,432 2,951,456 Non-Interest Expenses Salaries and employee benefits 3,647,479 3,840,806 10,281,475 12,632,760 Net occupancy expenses 307,925 275,535 882,915 825,480 Equipment expenses 308,146 250,173 844,849 725,818 Data processing fees 446,543 442,082 1,395,417 1,280,248 Deposit insurance expense 80,000 23,983 196,000 316,983 Printing and office supplies 32,440 45,099 91,080 114,119 Legal and professional fees 271,137 310,561 839,318 816,315 Advertising expense 71,090 197,799 260,903 494,475 Bank service charges 40,278 29,383 106,098 93,652 Real estate owned expense 350 7,481 3,516 44,874 Loss on sale of real estate owned - 5,287 - 11,780 Donation to establish First Bank Richmond Charitable Foundation - 6,250,000 - 6,250,000 Other expenses 779,791 821,575 2,254,922 2,302,257 Total non-interest expenses 5,985,179 12,499,764 17,156,493 25,908,761 Income Before Income Tax Expense (Benefit) 3,145,084 ( 4,148,535 ) 9,390,781 ( 2,160,761 ) Provision (benefit) for income taxes (includes $ 24,634 , $ 5,661 , $ 41,226 and $ 21,544 , respectively, related to income tax expense from reclassification of items) 613,531 (898,200 ) 1,900,905 (617,800 ) Net Income (Loss) $ 2,531,553 $ ( 3,250,335 ) $ 7,489,876 $ ( 1,542,961 ) Earnings (Loss) Per Share Basic $ 0.21 $( 0.26 ) $ 0.60 $( 0.26 ) Diluted $ 0.21 $( 0.26 ) $ 0.60 $( 0.26 ) See Notes to Condensed Consolidated Statements. 2 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Net Income (Loss) $ 2,531,553 $ ( 3,250,335 ) $ 7,489,876 $ ( 1,542,961 ) Other Comprehensive Income Unrealized gain on available-for-sale securities, net of tax expense of $ 45,101 , $ 175,173 , $ 1,040,994 and $ 1,400,357 , respectively. 169,667 500,236 3,916,120 3,998,774 Less: reclassification adjustment for realized gains included in net income, net of tax expense of $ 24,634 , $ 5,661 , $ 41,226 and $ 21,544 , respectively. 92,670 16,166 155,090 61,516 76,997 484,070 3,761,030 3,937,258 Comprehensive Income (Loss) $ 2,608,550 $ ( 2,766,265 ) $ 11,250,906 $ 2,394,297 See Notes to Condensed Consolidated Statements. 3 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) Accumulated Common Stock Additional Unearned Other Shares Paid-in Retained ESOP Comprehensive Outstanding Amount Capital Earnings Shares Income/(Loss) Total Balances, June 30, 2020 13,526,625 $ 135,266 $ 132,563,670 $ 74,446,405 $ ( 14,032,728 ) $ 3,023,289 $ 196,135,902 Net income - - - 2,531,553 - - 2,531,553 Other comprehensive income - - - - - 76,997 76,997 ESOP shares earned - - ( 32,281 ) - 183,828 - 151,547 Common stock dividends ($0.05 per share) - - - ( 605,081 ) - - ( 605,081 ) Repurchase of common stock ( 582,079 ) ( 5,821 ) ( 6,610,672 ) - - - ( 6,616,493 ) Balances, September 30, 2020 12,944,546 $ 129,445 $ 125,920,717 $ 76,372,877 $ ( 13,848,900 ) $ 3,100,286 $ 191,674,425 Accumulated Common Stock Additional Unearned Other Shares Paid-in Retained ESOP Comprehensive Outstanding Amount Capital Earnings Shares Income/(Loss) Total Balances, December 31, 2019 13,526,625 $ 135,266 $ 132,601,876 $ 70,111,434 $ ( 14,400,386 ) $ ( 660,744 ) $ 187,787,446 Net income - - - 7,489,876 - - 7,489,876 Other comprehensive income - - - - - 3,761,030 3,761,030 ESOP shares earned - - ( 70,487 ) - 551,486 - 480,999 Common stock dividends ($0.05 per share) - - - ( 1,228,433 ) - - ( 1,228,433 ) Repurchase of common stock ( 582,079 ) ( 5,821 ) ( 6,610,672 ) - - - ( 6,616,493 ) Balances, September 30, 2020 12,944,546 $ 129,445 $ 125,920,717 $ 76,372,877 $ ( 13,848,900 ) $ 3,100,286 $ 191,674,425 Accumulated Common Stock Additional Unearned Other Shares Paid-in Retained ESOP Comprehensive Outstanding Amount Capital Earnings Shares Income/(Loss) Total Balances, June 30, 2019 100 $ 1 $ 12,750,999 $ 79,187,692 $ - $ ( 925,098 ) $ 91,013,594 Net loss — — — (3,250,335 ) — — (3,250,335 ) Other comprehensive income - - - - - 484,070 484,070 ESOP shares earned - - ( 751 ) - 122,100 - 121,349 Issuance of common stock, net of offering costs 13,026,625 130,266 127,596,674 - ( 14,706,315 ) - 113,020,625 Stock contributed to charitable foundation 500,000 5,000 4,995,000 - - - 5,000,000 Reorganization of Richmond Mutual Bancorporation ( 100 ) ( 1 ) ( 12,750,999 ) 6,715,602 - - ( 6,035,398 ) Balances, September 30, 2019 13,526,625 $ 135,266 $ 132,590,923 $ 82,652,959 $ ( 14,584,215 ) $ ( 441,028 ) $ 200,353,905 Accumulated Common Stock Additional Unearned Other Shares Paid-in Retained ESOP Comprehensive Outstanding Amount Capital Earnings Shares Income/(Loss) Total Balances, December 31, 2018 100 $ 1 $ 12,750,999 $ 77,480,318 $ - $ ( 4,378,286 ) $ 85,853,032 Net loss — — — (1,542,961 ) — — (1,542,961 ) Other comprehensive income - - - - - 3,937,258 3,937,258 ESOP shares earned - - ( 751 ) - 122,100 - 121,349 Issuance of common stock, net of offering costs 13,026,625 130,266 127,596,674 - ( 14,706,315 ) - 113,020,625 Stock contributed to charitable foundation 500,000 5,000 4,995,000 - - - 5,000,000 Reorganization of Richmond Mutual Bancorporation ( 100 ) ( 1 ) ( 12,750,999 ) ( 6,715,602 ) - - ( 6,035,398 ) Balances, September 30, 2019 13,526,625 $ 135,266 $ 132,590,923 $ 82,652,959 $ ( 14,584,215 ) $ ( 441,028 ) $ 200,353,905 See Notes to Condensed Consolidated Statements. 4 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2020 2019 Operating Activities Net income $ 7,489,876 $ ( 1,542,961 ) Items not requiring (providing) cash Provision for loan losses 2,830,000 1,715,000 Depreciation and amortization 740,482 681,666 Deferred income tax ( 679,933 ) ( 792,858 ) Investment securities (accretion) amortization, net 1,848,533 678,412 Investment securities gains ( 196,317 ) ( 83,059 ) Gain on sale of loans and leases held for sale ( 2,586,515 ) ( 442,332 ) Loss on sale of real estate owned - 11,780 Accretion of loan origination fees ( 849,503 ) ( 141,547 ) Amortization of mortgage-servicing rights 355,146 144,522 Common stock contributed to Foundation — 5,000,000 ESOP shares expense 480,999 121,349 Increase in cash surrender value of life insurance ( 90,240 ) ( 91,306 ) Loans originated for sale ( 79,876,240 ) ( 17,573,565 ) Proceeds on loans sold 81,621,903 18,314,415 Net change in Interest receivable ( 1,778,037 ) ( 114,032 ) Other assets 1,152,716 ( 173,475 ) Other liabilities ( 2,838,842 ) 1,203,832 Interest payable ( 54,902 ) 3,529 Net cash provided by operating activities 7,569,126 6,919,370 Investing Activities Purchases of securities available for sale ( 129,901,076 ) ( 109,895,626 ) Proceeds from maturities and paydowns of securities available for sale 68,279,489 11,047,791 Proceeds from sales of securities available for sale 34,737,656 57,703,608 Proceeds from maturities and paydowns of securities held to maturity 3,585,017 4,314,977 Net change in loans ( 65,198,318 ) ( 42,036,916 ) Purchases of premises and equipment ( 1,410,931 ) ( 670,429 ) Proceeds from sales of real estate owned — 95,644 Purchase of FHLB stock ( 1,569,200 ) ( 1,039,800 ) Net cash used in investing activities ( 91,477,363 ) ( 80,480,751 ) Financing Activities Net change in Demand and savings deposits 71,899,362 8,739,009 Certificates of deposit ( 26,061,187 ) ( 21,567,752 ) Advances by borrowers for taxes and insurance 16,042 82,831 Proceeds from FHLB advances 64,000,000 71,000,000 Repayment of FHLB advances ( 42,000,000 ) ( 66,100,000 ) Repayment of other borrowings - ( 5,207,256 ) Proceeds from stock conversion - 113,020,625 Repurchase of common stock ( 6,616,493 ) - Dividends paid (1,228,433 ) — Net cash provided by financing activities 60,009,291 99,967,457 Net Change in Cash and Cash Equivalents ( 23,898,946 ) 26,406,076 Cash and Cash Equivalents, Beginning of Period 40,596,877 14,971,170 Cash and Cash Equivalents, End of Period $ 16,697,931 $ 41,377,246 Additional Cash Flows and Supplementary Information Interest paid $ 7,401,793 $ 8,447,415 Transfers from loans to other real estate owned 31,548 5,400 See Notes to Condensed Consolidated Statements. 5 Richmond Mutual Bancorporation, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands) Note 1: Basis of Presentation On July 1, 2019, Richmond Mutual Bancorporation, Inc., a Delaware corporation (“RMB-Delaware”), completed its reorganization from a mutual holding company form of organization to a stock form of organization (“corporate reorganization”). RMB-Delaware, which owned 100% of First Bank Richmond (the “Bank”), was succeeded by Richmond Mutual Bancorporation, Inc., a new Maryland corporation (“RMB-Maryland”). As part of the corporate reorganization, First Mutual of Richmond, Inc.’s (“MHC”) ownership interest in RMB-Delaware was sold in a public offering. Gross proceeds from the offering were $ 130.3 million. In conjunction with the corporate reorganization, RMB-Maryland contributed 500,000 shares and $ 1.25 million of cash to a newly formed charitable foundation, First Bank Richmond, Inc. Community Foundation (the “Foundation”). Additionally, a “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to MHC’s ownership interest in the retained earnings of RMB-Delaware as of December 31, 2017 and March 31, 2019. In certain circumstances, where appropriate, the terms “Company”, “we”, “us” and “our” refer collectively to (i) RMB-Delaware and First Bank Richmond with respect to discussions in this document involving matters occurring prior to completion of the corporate reorganization and (ii) RMB-Maryland and First Bank Richmond with respect to discussions in this document involving matters occurring post-corporate reorganization, in each case unless the context indicates another meaning. The costs of the corporate reorganization and the issuance of the common stock have been deducted from the sales proceeds of the offering. The accompanying unaudited condensed consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or note disclosures necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on March 30, 2020 (SEC File No. 001-38956). However, in the opinion of management, all adjustments which are necessary for a fair presentation of the consolidated financial statements have been included. Those adjustments consist only of normal recurring adjustments. The results of operations for the period are not necessarily indicative of the results to be expected for the full year. Loans For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. The Company charges off residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance, which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value, less costs to sell when the loan is 120 days past due, charge-off of unsecured open-end loans when the loan is 90 days past due, and charge down to the net realizable value when other secured loans are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off. For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status. 6 When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six months. Note 2: Accounting Pronouncements On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which provides relief from certain accounting and financial reporting requirements under U.S. GAAP. Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for troubled debt restructurings (TDRs) under ASC 310-40 for loan modifications related to the novel coronavirus disease of 2019 (“COVID-19”) pandemic. In addition, on April 7, 2020, a group of banking agencies issued an interagency statement (“Interagency Statement”) for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs. The Interagency Statement was originally issued on March 22, 2020, but the banking agencies revised it to address the relationship between their TDR accounting and disclosure guidance and the TDR guidance in Section 4013 of the CARES Act. Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. The Interagency Statement indicates that a lender can conclude that a borrower is not experiencing financial difficulty if either (1) short-term (e.g., six months) modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented, or (2) the modification or deferral program is mandated by the federal government or a state government. Accordingly, any loan modification made in response to the COVID-19 pandemic that meets either of these practical expedients would not be considered a TDR. The Company adopted this guidance effective March 27, 2020. In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-08, “Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”). ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. ASU 2020-08 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements. The JOBS Act, which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” The Company qualifies as and has elected to be an emerging growth company under the JOBS Act. An emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. The Company has elected to comply with new or amended accounting pronouncements in the same manner as a private company. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326). The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief” (ASU 2019-05). This ASU provides transition relief for entities adopting 7 the FASB’s credit losses standard, ASU 2016-13 and allows companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for certain financial instruments. In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (ASU 2019-04). This ASU clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments. In October 2019, the FASB voted to extend the implementation of ASU No. 2016-13 for certain financial institutions including smaller reporting companies. As a result, ASU 2016-13 will be effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is evaluating its current expected loss methodology on the loan and investment portfolios to identify the necessary modifications in accordance with this standard. The Company has not quantified the impact of these ASUs. The Company is in the early stages of evaluating its historical data available for use in adoption of the new credit loss standards. Additionally, we are forming an implementation team that will meet on a regular basis to coordinate efforts of our accounting, credit and operations areas. We will continue to evaluate methodologies available to us under the new standard. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . ASU 2019-12 provides that state franchise or similar taxes that are based, at least in part on an entity’s income, be included in an entity’s income tax recognized as income-based taxes. The ASU further clarifies that the effect of any change in tax laws or rates used in the computation of the annual effective tax rate are required to be reflected in the first interim period that includes the enactment date of the legislation. Technical changes to eliminate exceptions to Topic 740 related to intra-period tax allocations for entities with losses from continuing operations, deferred tax liabilities related to change in ownership of foreign entities, and interim-period tax allocations for businesses with losses where the losses are expected to be realized. The amendments in ASU 2019-12 are effective for public business entities with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect ASU 2019-12 to have a material impact on its consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement . This ASU contains some technical adjustments related to the fair value disclosure requirements of public companies. Included in this ASU is the additional disclosure requirement of unrealized gains and losses for the period in recurring level 3 fair value disclosures and the range and weighted average of significant unobservable inputs, among other technical changes. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements. In February 2016, the FASB has issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. For the Company, the amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2020. Based on leases outstanding as of December 31, 2019, the new standard will not have a material impact on the Company’s balance sheet or income statement. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provide entities with an additional (and optional) transition method to adopt the new lease standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with current GAAP (Topic 842, Leases). The amendments in ASU 2018-11 also provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met. 8 Note 3: Investment Securities The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows: September 30, 2020 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale U.S. treasury securities $ 4,999 $ - $ - $ 4,999 SBA Pools 14,907 97 100 14,904 Federal agencies 7,998 14 5 8,007 State and municipal obligations 74,798 1,898 263 76,433 Mortgage-backed securities - government-sponsored enterprises (GSE) residential 125,210 2,370 86 127,494 Equity securities 13 - - 13 227,925 4,379 454 231,850 Held to maturity State and municipal obligations 12,315 329 - 12,644 12,315 329 - 12,644 Total investment securities $ 240,240 $ 4,708 $ 454 $ 244,494 December 31, 2019 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale U.S. Treasury securities $ 2,997 $ - $ 6 $ 2,991 SBA Pools 14,497 - 114 14,383 Federal agencies 21,765 - 119 21,646 State and municipal obligations 45,635 357 152 45,840 Mortgage-backed securities - government-sponsored enterprises (GSE) residential 117,769 111 969 116,911 Equity securities 13 - - 13 202,676 468 1,360 201,784 Held to maturity State and municipal obligations 15,917 244 5 16,156 15,917 - 5 16,156 Total investment securities $ 218,593 $ 712 $ 1,365 $ 217,940 9 The amortized cost and fair value of securities at September 30, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Available for Sale Held to Maturity Amortized Fair Amortized Fair Cost Value Cost Value Within one year $ 5,933 $ 5,940 $ 2,442 $ 2,455 One to five years 5,875 6,081 6,785 6,969 Five to ten years 26,270 26,715 2,028 2,141 After ten years 64,624 65,607 1,060 1,079 102,702 104,343 12,315 12,644 Mortgage-backed securities - GSE residential 125,210 127,494 - - Equity securities 13 13 - - Totals $ 227,925 $ 231,850 $ 12,315 $ 12,644 Securities with a carrying value of $ 99,128 ,000 and $ 114,907 ,000 were pledged at September 30, 2020 and December 31, 2019, respectively, to secure certain deposits and for other purposes as permitted or required by law. Proceeds from sales of securities available for sale for the three and nine months ended September 30, 2020 were $ 12,560 ,000 and $ 34,738 ,000, respectively. For the three and nine months ended September 30, 2019, proceeds from sales of securities were $ 35,247 ,000 and $ 57,704 ,000 respectively. Gross gains were recognized on the sale of securities available-for-sale for the three and nine months ended September 30, 2020 and 2019 of $ 120 ,000, $ 255 ,000, $ 104 ,000 and $ 170 ,000, respectively. Gross losses were recognized on the sale of securities available for sale for the three and nine months ended September 30, 2020 of $ 3 ,000 and $ 59 ,000, respectively. Gross losses were recognized on the sale of securities available for sale for the three and nine months ended September 30, 2019 of $ 82 ,000 and $ 87 ,000, respectively. Certain investments in debt securities, as reflected in the table below, are reported in the condensed consolidated financial statements and notes at an amount less than their historical cost. Total fair value of these investments at September 30, 2020 and December 31, 2019 was $ 42,956 ,000 and $ 138,391 ,000, respectively, which is approximately 18 % and 63 % of the Company’s aggregated available-for-sale and held-to-maturity investment portfolio at those dates, respectively. These declines primarily resulted from changes in market interest rates since their purchase. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any other securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. 10 The following tables show the Company’s investments by gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2020 and December 31, 2019: September 30, 2020 Less Than 12 Months 12 Months or More Total Description of Fair Unrealized Fair Unrealized Fair Unrealized Securities Value Losses Value Losses Value Losses Available-for-sale SBA Pools $ 6,618 $ 53 $ 4,742 $ 47 $ 11,360 $ 100 Federal agencies 995 5 - - 995 5 State and municipal obligations 14,278 263 - - 14,278 263 Mortgage-backed securities - GSE residential 15,449 84 874 2 16,323 86 Total available-for-sale 37,340 405 5,616 49 42,956 454 Total temporarily impaired securities $ 37,340 $ 405 $ 5,616 $ 49 $ 42,956 $ 454 December 31, 2019 Less Than 12 Months 12 Months or More Total Description of Fair Unrealized Fair Unrealized Fair Unrealized Securities Value Losses Value Losses Value Losses Available-for-sale U.S. Treasury securities $ 2,991 $ 6 $ - $ - $ 2,991 $ 6 SBA Pools 14,262 114 - - 14,262 114 Federal agencies 9,657 109 2,990 10 12,647 119 State and municipal obligations 12,606 130 2,948 22 15,554 152 Mortgage-backed securities - GSE residential 57,928 464 34,344 505 92,272 969 Total available-for-sale 97,444 823 40,282 537 137,726 1,360 Held-to-maturity State and municipal obligations 665 5 - - 665 5 Total temporarily impaired securities $ 98,109 $ 828 $ 40,282 $ 537 $ 138,391 $ 1,365 Federal Agencies. The unrealized losses on the Company’s investments in direct obligations of U.S. federal agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020. Mortgage-Backed Securities – GSE Residential and SBA Pools. The unrealized losses on the Company’s investment in mortgage-backed securities and SBA pools were caused by interest rate changes and illiquidity. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020. State and Municipal Obligations. The unrealized losses on the Company’s investments in securities of state and municipal obligations were caused by interest rate changes and illiquidity. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020. 11 Note 4: Loans, Leases and Allowance The following table shows the composition of the loan and lease portfolio at September 30, 2020 and December 31, 2019: September 30, December 31, 2020 2019 Commercial mortgage $ 245,651 $ 229,410 Commercial and industrial 141,142 84,549 Construction and development 55,694 53,426 Multi-family 63,237 66,002 Residential mortgage 122,456 131,294 Home equity 6,211 6,996 Direct financing leases 115,108 109,592 Consumer 13,101 13,534 762,600 694,803 Less Allowance for loan and lease losses 9,809 7,089 Deferred loan fees 2,145 456 $ 750,646 $ 687,258 The following tables present the activity in the allowance for loan and lease losses for the three and nine months ended September 30, 2020 and 2019. Commercial Commercial and Residential Mortgage (1) Industrial Mortgage (2) Leases Consumer Total Three Months Ended September 30, 2020: Balance, beginning of period $ 5,517 $ 1,710 $ 308 $ 838 $ 148 $ 8,521 Provision (credit) for losses 1,509 ( 353 ) 10 93 41 1,300 Charge-offs - - - ( 110 ) ( 26 ) ( 136 ) Recoveries 4 30 17 70 3 124 Balance, end of period $ 7,030 $ 1,387 $ 335 $ 891 $ 166 $ 9,809 Nine Months Ended September 30, 2020: Balance, beginning of period $ 4,564 $ 1,852 $ 109 $ 426 $ 138 $ 7,089 Provision (credit) for losses 2,426 ( 535 ) 220 662 57 2,830 Charge-offs - - ( 35 ) ( 300 ) ( 47 ) ( 382 ) Recoveries 40 70 41 103 18 272 Balance, end of period $ 7,030 $ 1,387 $ 335 $ 891 $ 166 $ 9,809 (1) Commercial mortgage includes commercial and multifamily real estate loans. (2) Residential mortgage includes one- to four-family and home equity loans. 12 Commercial Commercial and Residential Mortgage (1) Industrial Mortgage (2) Leases Consumer Total Three Months Ended September 30, 2019: Balance, beginning of period $ 3,892 $ 1,768 $ 122 $ 385 $ 114 $ 6,281 Provision (credit) for losses 586 11 ( 34 ) 71 71 705 Charge-offs ( 14 ) - ( 6 ) ( 107 ) ( 51 ) ( 178 ) Recoveries 4 2 22 54 6 88 Balance, end of period $ 4,468 $ 1,781 $ 104 $ 403 $ 140 $ 6,896 Nine Months Ended September 30, 2019: Balance, beginning of period $ 3,147 $ 1,817 $ 139 $ 389 $ 108 $ 5,600 Provision (credit) for losses 1,321 206 ( 41 ) 121 108 1,715 Charge-offs ( 14 ) ( 250 ) ( 42 ) ( 284 ) ( 100 ) ( 690 ) Recoveries 14 8 48 177 24 271 Balance, end of period $ 4,468 $ 1,781 $ 104 $ 403 $ 140 $ 6,896 (1) Commercial mortgage includes commercial and multifamily real estate loans. (2) Residential mortgage includes one- to four-family and home equity loans. The following tables present the balance in the allowance for loan and lease losses and the recorded investment in loans and leases based on portfolio segment and impairment method as of September 30, 2020 and December 31, 2019: September 30, 2020 Commercial Commercial and Residential Mortgage (1) Industrial Mortgage (2) Leases Consumer Total Allowance for loan and lease losses: Individually evaluated for impairment $ 150 $ 52 $ - $ - $ - $ 202 Collectively evaluated for impairment 6,880 1,335 335 891 166 9,607 Balance, September 30 $ 7,030 $ 1,387 $ 335 $ 891 $ 166 $ 9,809 Loans and leases: Individually evaluated for impairment $ 835 $ 507 $ 314 $ - $ - $ 1,656 Collectively evaluated for impairment 398,576 127,617 102,727 115,108 16,916 760,944 Ending balance:September 30 $ 399,411 $ 128,124 $ 103,041 $ 115,108 $ 16,916 $ 762,600 (1) Commercial mortgage includes commercial and multifamily real estate loans. (2) Residential mortgage includes one- to four-family and home equity loans. December 31, 2019 Commercial Commercial and Residential Mortgage (1) Industrial Mortgage (2) Leases Consumer Total Allowance for loan and lease losses: Individually evaluated for impairment $ - $ 202 $ - $ - $ - $ 202 Collectively evaluated for impairment 4,564 1,650 109 426 138 6,887 Balance, December 31 $ 4,564 $ 1,852 $ 109 $ 426 $ 138 $ 7,089 Loans and leases: Individually evaluated for impairment $ 803 $ 694 $ 347 $ - $ - $ 1,844 Collectively evaluated for impairment 377,494 73,920 114,061 109,592 17,892 692,959 Ending balance:December 31 $ 378,297 $ 74,614 $ 114,408 $ 109,592 $ 17,892 $ 694,803 (1) Commercial mortgage includes commercial and multifamily real estate loans. (2) Residential mortgage includes one- to four-family and home equity loans. 13 The Company rates all loans and leases by credit quality using the following designations: Grade 1 – Exceptional Exceptional loans and leases are top-quality loans to individuals whose financial credentials are well known to the Company. These loans and leases have excellent sources of repayment, are well documented and/or virtually free of risk (i.e., CD secured loans). Grade 2 – Quality Loans and Leases These loans and leases have excellent sources of repayment with no identifiable risk of collection, and they conform in all respects to Company policy and Indiana Department of Financial Institutions (“IDFI”) and Federal Deposit Insurance Corporation (“FDIC”) regulations. Documentation exceptions are minimal or are in the process of being corrected and are not of a type that could subsequently expose the Company to risk of loss. Grade 3 – Acceptable Loans This category is for “average” quality loans and leases. These loans and leases have adequate sources of repayment with little identifiable risk of collection and they conform to Company policy and IDFI/FDIC regulations. Grade 4 – Acceptable but Monitored Loans and leases in this category may have a greater than average risk due to financial weakness or uncertainty but do not appear to require classification as special mention or substandard loans. Loans and leases rated “4” need to be monitored on a regular basis to ascertain that the reasons for placing them in this category do not advance or worsen. Grade 5 – Special Mention Loans and leases in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company’s credit position at some future date. Special Mention loans and leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. This special mention rating is designed to identify a specific level of risk and concern about an asset’s quality. Although a special mention loan or leases has a higher probability of default than a pass rated loan or lease, its default is not imminent. Grade 6 – Substandard Loans and leases in this category are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans and leases so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans and leases have a high probability of payment default, or they have other well-defined weaknesses. Such loans and leases have a distinct potential for loss; however, an individual loan’s or lease’s potential for loss does not have to be distinct for the loan or lease to be rated substandard. The following are examples of situations that might cause a loan or lease to be graded a “6”: · Cash flow deficiencies (losses) jeopardize future loan or lease payments. · Sale of non-collateral assets has become a primary source of loan or lease repayment. · The relationship has deteriorated to the point that sale of collateral is now the Company’s primary source of repayment, unless this was the original source of loan or lease repayment. · The borrower is bankrupt or for any other reason future repayment is dependent on court action. 14 Grade 7 – Doubtful A loan or lease classified as doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. A doubtful loan or lease has a high probability of total or substantial loss. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Because of high probability of loss, nonaccrual accounting treatment will be required for doubtful loans and leases. Grade 8 – Loss Loans and leases classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan or lease has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan or lease even though partial recovery may be effected in the future. The risk characteristics of each loan and lease portfolio segment are as follows: Commercial and Industrial Commercial and industrial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial Mortgage including Construction Loans in this segment include commercial loans, commercial construction loans, and multi-family loans. This segment also includes loans secured by 1-4 family residences which were made for investment purposes. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus nonowner-occupied loans. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. Residential, Brokered and Consumer Residential, brokered and consumer loans consist of three segments – residential mortgage loans, brokered mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Brokered mortgages are purchased residential mortgage loans meeting the Company’s criteria established 15 for originating residential mortgage loans. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Leases Lease financing consists of direct financing leases and are used by commercial customers to finance capital purchases of equipment. The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant. A determination is made as to the applicant’s financial condition and ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved. The following tables present the credit risk profile of the Company’s loan and lease portfolio based on rating category and payment activity as of September 30, 2020 and December 31, 2019: September 30, 2020 Commercial Construction Commercial and and Multi- Residential Home Mortgage Industrial Development Family Mortgage Equity Leases Consumer Total 1-4 Pass $ 236,663 $ 134,410 $ 55,694 $ 63,237 $ 119,342 $ 6,066 $ 115,024 $ 13,093 $ 743,529 5 Special Mention 7,416 3,912 - - 167 61 - - 11,556 6 Substandard 1,572 2,820 - - 2,947 84 18 8 7,449 7 Doubtful - - - - - - 66 - 66 8 Loss - - - - - - - - - $ 245,651 $ 141,142 $ 55,694 $ 63,237 $ 122,456 $ 6,211 $ 115,108 $ 13,101 $ 762,600 December 31, 2019 Commercial Construction Commercial and and Multi- Residential Home Mortgage Industrial Development Family Mortgage Equity Leases Consumer Total 1-4 Pass $ 220,240 $ 75,814 $ 53,426 $ 66,002 $ 127,888 $ 6,871 $ 109,424 $ 13,519 $ 673,184 5 Special Mention 7,489 5,731 - - 189 64 - - 13,473 6 Substandard 1,681 3,004 - - 3,217 61 94 15 8,072 7 Doubtful - - - - - - 74 - 74 8 Loss - - - - - - - - - $ 229,410 $ 84,549 $ 53,426 $ 66,002 $ 131,294 $ 6,996 $ 109,592 $ 13,534 $ 694,803 The following tables present the Company’s loan and lease portfolio aging analysis of the recorded investment in loans and leases as of September 30, 2020 and December 31, 2019: September 30, 2020 Delinquent Loans Total Portfolio Total Loans and Leases 30-59 Days 60-89 Days 90 Days and Total Past Loans and > 90 Days Past Due Past Due Over Due Current Leases Accruing Commercial mortgage $ - $ - $ 76 $ 76 $ 245,575 $ 245,651 $ - Commercial and industrial 65 303 452 820 140,322 141,142 - Construction and development - - - - 55,694 55,694 - Multi-family - - - - 63,237 63,237 - Residential mortgage 972 604 2,447 4,023 118,433 122,456 2,320 Home equity 69 - 41 110 6,101 6,211 41 Leases 59 30 44 133 114,975 115,108 - Consumer 101 14 8 123 12,978 13,101 8 Totals $ 1,266 $ 951 $ 3,068 $ 5,285 $ 757,315 $ 762,600 $ 2,369 16 December 31, 2019 Delinquent Loans Total Portfolio Total Loans and Leases 30-59 Days 60-89 Days 90 Days and Total Past Loans and > 90 Days Past Due Past Due Over Due Current Leases Accruing Commercial mortgage $ 217 $ - $ 184 $ 401 $ 229,009 $ 229,410 $ - Commercial and industrial 220 1,092 438 1,750 82,799 84,549 3 Construction and development - 257 249 506 52,920 53,426 249 Multi-family - - - - 66,002 66,002 - Residential mortgage 762 240 2,452 3,454 127,840 131,294 2,256 Home equity 189 36 15 240 6,756 6,996 15 Leases 108 29 79 216 109,376 109,592 49 Consumer 271 35 15 321 13,213 13,534 15 Totals $ 1,767 $ 1,689 $ 3,432 $ 6,888 $ 687,915 $ 694,803 $ 2,587 The following tables present the Company’s impaired loans and specific valuation allowance at September 30, 2020 and December 31, 2019: September 30, 2020 Unpaid Recorded Principal Specific Balance Balance Allowance Impaired loans without a specific valuation allowance Commercial mortgage $ 210 $ 255 $ - Commercial and industrial 452 781 - Residential mortgage 259 499 - $ 921 $ 1,535 $ - Impaired loans with a specific valuation allowance Commercial mortgage $ 625 $ 625 $ 150 Commercial and industrial 55 65 52 Residential mortgage 55 55 - $ 735 $ 745 $ 202 Total impaired loans Commercial mortgage $ 835 $ 880 $ 150 Commercial and industrial 507 846 52 Residential mortgage 314 554 - Total impaired loans $ 1,656 $ 2,280 $ 202 17 December 31, 2019 Unpaid Recorded Principal Specific Balance Balance Allowance Impaired loans without a specific valuation allowance Commercial mortgage $ 803 $ 1,256 $ - Commercial and industrial 435 3,220 - Residential mortgage 347 614 - $ 1,585 $ 5,090 $ - Impaired loans with a specific valuation allowance Commercial and industrial $ 259 $ 266 $ 202 $ 259 $ 266 $ 202 Total impaired loans Commercial mortgage $ 803 $ 1,256 $ - Commercial and industrial 694 3,486 202 Residential mortgage 347 614 - Total impaired loans $ 1,844 $ 5,356 $ 202 The following tables present the Company’s average investment in impaired loans and interest income recognized for the three and nine months ended September 30, 2020 and 2019. Average Investment in Interest Impaired Income Loans Recognized Three Months Ended September 30, 2020: Total impaired loans Commercial mortgage $ 841 $ 12 Commercial and industrial 488 5 Residential mortgage 269 6 Total impaired loans $ 1,598 $ 23 Average Investment in Interest Impaired Income Loans Recognized Nine Months Ended September 30, 2020: Total impaired loans Commercial mortgage $ 819 $ 30 Commercial and industrial 586 33 Residential mortgage 298 12 Total impaired loans $ 1,703 $ 75 18 Average Investment in Interest Impaired Income Loans Recognized Three Months Ended September 30, 2019: Total impaired loans Commercial mortgage $ 684 $ 10 Commercial and industrial 858 11 Residential mortgage 363 6 Total impaired loans $ 1,905 $ 27 Average Investment in Interest Impaired Income Loans Recognized Nine Months Ended September 30, 2019: Total impaired loans Commercial mortgage $ 706 $ 32 Commercial and industrial 950 51 Residential mortgage 375 14 Total impaired loans $ 2,031 $ 97 The following table presents the Company’s nonaccrual loans and leases at September 30, 2020 and December 31, 2019: September 30, December 31, 2020 2019 Commercial mortgage $ 211 $ 342 Commercial and industrial 507 494 Residential mortgage 219 315 Leases 66 74 $ 1,003 $ 1,225 During the three and nine months ended September 30, 2020 and 2019, there were no newly classified troubled debt restructured loans or leases (“TDRs”). For the three and nine months ended September 30, 2020 and 2019, the Company recorded no charge-offs related to TDRs. As of both September 30, 2020 and December 31, 2019, TDRs had a related allowance of $ 52 ,000. During the three and nine months ended September 30, 2020, there were no TDRs for which there was a payment default within the first 12 months of the modification. The Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. As of September 30, 2020, the Company had 70 loan and lease modifications outstanding related to the COVID-19 pandemic with an outstanding loan balance totaling $35.3 million in accordance with the CARES Act. Accordingly, the Company does not account for such loan modifications as TDRs. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. 19 At September 30, 2020 and December 31, 2019, the balance of real estate owned includes $ 32 ,000 and $ 0 , respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At September 30, 2020 and December 31, 2019, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds were in process was $ 283 ,000 and $ 190 ,000, respectively. The following lists the components of the net investment in direct financing leases: September 30, December 31, 2020 2019 Total minimum lease payments to be received $ 126,853 $ 120,570 Initial direct costs 6,027 5,720 132,880 126,290 Less: Unearned income ( 17,772 ) ( 16,698 ) Net investment in direct finance leases $ 115,108 $ 109,592 Leases serviced by First Bank Richmond for the benefit of others totaled approximately $ 189,000 and $ 715,000 at September 30, 2020 and December 31, 2019, respectively. Additionally, certain leases have been sold with partial recourse. First Bank Richmond estimates and records its obligation based upon historical loss percentages. At September 30, 2020 and December 31, 2019, First Bank Richmond has recorded a recourse obligation on leases sold with recourse of $ 0 , and has a maximum exposure of $ 411,000 for these leases. The following table summarizes the future minimum lease payments receivable subsequent to September 30, 2020: 2020 $ 13,643 2021 45,969 2022 32,333 2023 20,299 2024 11,089 Thereafter 3,520 $ 126,853 Note 5: Fair Value of Financial Instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities 20 Recurring Measurements The following tables present the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2020 and December 31, 2019: Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Fair Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) September 30, 2020 Available-for-sale securities U.S. Treasury securities $ 4,999 $ - $ 4,999 $ - SBA Pools 14,904 - 14,904 - Federal agencies 8,007 - 8,007 - State and municipal obligations 76,433 - 76,433 - Mortgage-backed securities - GSE residential 127,494 - 127,494 - Equity securities 13 13 - - $ 231,850 $ 13 $ 231,837 $ - Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Fair Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) December 31, 2019 Available-for-sale securities U.S. Treasury securities $ 2,991 $ - $ 2,991 $ - SBA Pools 14,383 - 14,383 - Federal agencies 21,646 - 21,646 - State and municipal obligations 45,840 - 45,840 - Mortgage-backed securities - GSE residential 116,911 - 116,911 - Equity securities 13 13 - - $ 201,784 $ 13 $ 201,771 $ - Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the nine months ended September 30, 2020. Available-for-Sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy, which includes equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include agency securities, obligations of state and political subdivisions, and mortgage-backed securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other 21 benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Nonrecurring Measurements The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2020 and December 31, 2019: Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Fair Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) September 30, 2020 Impaired loans, collateral dependent $ 533 $ - $ - $ 533 Mortgage-servicing rights 1,505 - - 1,505 December 31, 2019 Impaired loans, collateral dependent $ 57 $ - $ - $ 57 Mortgage-servicing rights 1,033 - - 1,033 Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Collateral-Dependent Impaired Loans, Net of ALLL The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results. Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans. Mortgage-Servicing Rights Mortgage-servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, mortgage-servicing rights are classified within Level 3 of the hierarchy. Mortgage-servicing rights are tested for impairment on a quarterly basis based on an independent valuation. The valuation is reviewed by management for accuracy and for potential impairment. 22 Unobservable (Level 3) Inputs The following tables present the fair value measurement of assets recognized in the accompanying consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2020 and December 31, 2019: Fair Value at September 30, Valuation Unobservable 2020 Technique Inputs Range Collateral-dependent $ 533 Appraisal Marketability 0 % - 12 % impaired loans discount Mortgage-servicing rights $ 1,505 Discounted Discount rate 10 % cash flow Fair Value at December 31, Valuation Unobservable 2019 Technique Inputs Range Collateral-dependent $ 57 Appraisal Marketability 0 % - 75 % impaired loans discount Mortgage-servicing rights $ 1,033 Discounted Discount rate 10 % cash flow 23 Fair Value of Financial Instruments The following tables present estimated fair values of the Company’s financial instruments at September 30, 2020 and December 31, 2019. Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Carrying Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) September 30, 2020 Financial assets Cash and cash equivalents $ 16,698 $ 16,698 $ - $ - Available-for-sale securities 231,850 13 231,837 - Held-to-maturity securities 12,315 - 12,644 - Loans and leases receivable, net 750,646 - - 773,331 Federal Reserve and FHLB stock 9,170 - 9,170 - Interest receivable 4,830 - 4,830 - Financial liabilities Deposits 663,057 - 665,623 - FHLB advances 176,000 - 183,716 - Interest payable 242 - 242 - Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Carrying Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) December 31, 2019 Financial assets Cash and cash equivalents $ 40,597 $ 40,597 $ - $ - Available-for-sale securities 201,784 13 201,771 - Held-to-maturity securities 15,917 - 16,156 - Loans and leases receivable, net 687,258 - - 687,789 Federal Reserve and FHLB stock 7,600 - 7,600 - Interest receivable 3,052 - 3,052 - Financial liabilities Deposits 617,219 - 619,635 - FHLB advances 154,000 - 155,304 - Interest payable 297 - 297 - 24 Note 6: Earnings per Share Basic EPS is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted EPS includes the dilutive effect of additional potential common shares from stock compensation awards, but excludes awards considered participating securities. ESOP shares are not considered outstanding for EPS until they are earned. The following table presents the computation of basic and diluted EPS for the periods indicated: Three Months Ended Nine Months Ended September 30, 2020 September 30, 2020 Net income $ 2,531,553 $ 7,489,876 Shares outstanding for Basic EPS: Average shares outstanding 13,313,399 13,455,031 Less: average unearned ESOP Shares 1,032,367 1,045,788 Shares outstanding for Basic EPS 12,281,032 12,409,243 Additional Dilutive Shares - - Shares outstanding for Diluted EPS 12,281,032 12,409,243 Basic Earnings Per Share $ 0.21 $ 0.60 Diluted Earnings Per Share $ 0.21 $ 0.60 For the Period July 2, 2019 to July 2, 2019 to September 30, 2019 September 30, 2019 Net income (loss) $ ( 3,250,335 ) Shares outstanding for Basic EPS: Average shares outstanding 13,526,625 Less: average unearned ESOP Shares 1,052,804 Shares outstanding for Basic EPS 12,473,821 Additional Dilutive Shares - Shares outstanding for Diluted EPS 12,473,821 Basic Earnings (loss) Per Share $ ( 0.26 ) Diluted Earnings (loss) Per Share $ ( 0.26 ) Note 7: Employee Stock Ownership Plan As part of the corporate reorganization and related stock offering, the Company established an Employee Stock Ownership Plan (ESOP) covering substantially all employees. The ESOP acquired 1,082,130 shares of Company common stock at an average of $13.59 per share on the open market with funds provided by a loan from the Company. Accordingly, $14,706,000 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity. Shares are released to participants proportionately as the loan is repaid. 25 ESOP expense for the three months ended September 30, 2020 and 2019 was $151,548 and $121,000, respectively. ESOP expense for the nine months ended September 30, 2020 was $481,000 and $121,000, respectively. September 30, 2020 September 30, 2019 Earned ESOP shares 63,125 9,018 Unearned ESOP shares 1,019,005 1,073,112 Total ESOP shares 1,082,130 1,082,130 Quoted per share price $ 10.58 $ 13.99 Fair value of earned shares $ 667,863 $ 126,162 Fair value of unearned shares $ 10,781,073 $ 15,012,837 Note 8: Benefit Plans The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (the “DB Plan”), an industry-wide, tax-qualified defined-benefit pension plan. As previously disclosed, the Company has frozen and intends to terminate the Bank’s participation in the DB Plan, which will require it to pay an amount based on the underfunded status of the plan. As of September 30, 2020, the Company has accrued $17.5 million for this expense. The actual termination expense of the DB Plan may be higher or lower than the amount currently accrued for by the Company depending on a number of factors, including but not limited to the interest rate environment and the valuation of plan assets. Due to the current low interest rate environment, terminating the DB Plan at this time would require the Company to incur a substantial additional expense, in the range of approximately $8.0 million to $10.0 million, over and above the amount presently accrued. As a result, the Company’s Board of Directors will continue to monitor and evaluate the timing of, and costs associated with, termination of the DB Plan. Any additional expenses associated with the termination of the DB Plan will negatively impact our results of operations in the future. Note 9: Subsequent Event Subsequent to September 30, 2020, the Company completed its previously announced stock repurchase program, repurchasing the remaining 94,232 shares at an average price of $11.07 per share. On October 21, 2020, the Board of Directors of the Company authorized a second stock repurchase program for up to 664,969 shares, or approximately 5%, of its outstanding shares. 26