Richmond Mutual Bancorporation, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors and Audit Committee Richmond Mutual Bancorporation, Inc. Richmond, Indiana Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Richmond Mutual Bancorporation (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), stockholders’ equity, and cash flows 1F for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ FORVIS, LLP (Formerly BKD, LLP) FORVIS, LLP We have served as the Company’s auditor since at least 1982; however, an earlier year cannot be determined. 7F Indianapolis, Indiana March 31, 2023 61 Richmond Mutual Bancorporation, Inc. Consolidated Balance Sheets December 31, 2022 and 2021 December 31, 2022 December 31, 2021 Assets Cash and due from banks $ 7,782,348 $ 8,473,558 Interest-bearing demand deposits 8,139,745 14,564,587 Cash and cash equivalents 15,922,093 23,038,145 Interest-bearing time deposits 490,000 — Investment securities - available for sale 284,899,665 357,537,845 Investment securities - held to maturity 6,672,233 9,040,825 Loans held for sale 473,700 557,500 Loans and leases, net of allowance for losses of $ 12,413,035 and $ 12,107,590 , respectively 961,690,677 832,846,017 Premises and equipment, net 13,668,496 14,347,088 Federal Home Loan Bank stock 9,947,300 9,992,400 Interest receivable 4,710,481 4,192,827 Mortgage-servicing rights 2,011,889 1,646,509 Cash surrender value of life insurance 3,674,499 3,619,140 Other assets 24,459,108 10,821,445 Total assets $ 1,328,620,141 $ 1,267,639,741 Liabilities Noninterest-bearing deposits $ 106,414,812 $ 114,302,794 Interest bearing deposits 898,845,958 785,872,606 Total deposits 1,005,260,770 900,175,400 Federal Home Loan Bank advances 180,000,000 180,000,000 Advances by borrowers for taxes and insurance 560,196 531,030 Interest payable 1,369,351 258,032 Other liabilities 8,451,521 6,193,944 Total liabilities 1,195,641,838 1,087,158,406 Commitments and Contingent Liabilities — — Stockholders' Equity Common stock, $ 0.01 par value Authorized - 90,000,000 shares Issued and outstanding - 11,784,246 shares and 12,400,195 shares at December 31, 2022 and 2021, respectively 117,842 124,002 Additional paid-in capital 106,088,897 114,339,810 Retained earnings 88,715,782 80,157,893 Unearned employee stock ownership plan (ESOP) ( 12,193,043 ) ( 12,928,359 ) Accumulated other comprehensive loss ( 49,751,175 ) ( 1,212,011 ) Total stockholders' equity 132,978,303 180,481,335 Total liabilities and stockholders' equity $ 1,328,620,141 $ 1,267,639,741 See Notes to Consolidated Financial Statements 62 Richmond Mutual Bancorporation, Inc. Consolidated Statements of Income Years Ended December 31, 2022 and 2021 2022 2021 Interest Income Loans and leases $ 44,593,660 $ 40,578,703 Investment securities 7,111,383 5,295,318 Other 152,958 51,975 Total interest income 51,858,001 45,925,996 Interest Expense Deposits 7,128,195 4,935,944 Borrowings 3,091,146 2,745,837 Total interest expense 10,219,341 7,681,781 Net Interest Income 41,638,660 38,244,215 Provision for losses on loans and leases 600,000 1,430,000 Net Interest Income After Provision for Losses on Loans and Leases 41,038,660 36,814,215 Non-interest Income Service charges on deposit accounts 1,049,777 881,586 Card fee income 1,209,528 1,086,576 Loan and lease servicing fees, including mortgage servicing right impairment 861,758 ( 84,333 ) Net gains on securities (includes $ 0 and $ 55,799 , related to accumulated other comprehensive loss reclassifications) — 55,799 Net gains on loan and lease sales 639,274 2,450,083 Other income 1,106,436 1,025,889 Total non-interest income 4,866,773 5,415,600 Non-interest Expenses Salaries and employee benefits 18,478,020 18,143,286 Net occupancy expenses 1,425,018 1,236,549 Equipment expenses 1,268,812 1,306,754 Data processing fees 2,712,950 2,181,012 Deposit insurance expense 494,000 301,000 Printing and office supplies 194,462 165,317 Legal and professional fees 1,420,352 1,226,469 Advertising expense 459,478 395,949 Bank service charges 137,601 129,015 Real estate owned expense 30,067 25,526 Other expenses 3,535,767 3,538,538 Total non-interest expenses 30,156,527 28,649,415 Income Before Income Tax Expense 15,748,906 13,580,400 Provision for income taxes (includes $ 0 and $ 11,718 , related to income tax expense from reclassification of items) 2,783,467 2,435,500 Net Income $ 12,965,439 $ 11,144,900 Earnings Per Share Basic $ 1.20 $ 0.98 Diluted $ 1.17 $ 0.96 See Notes to Consolidated Financial Statements 63 Richmond Mutual Bancorporation, Inc. Consolidated Statements of Comprehensive Loss Years Ended December 31, 2022 and 2021 2022 2021 Net Income $ 12,965,439 $ 11,144,900 Other Comprehensive Loss Unrealized loss on available-for-sale securities, net of tax benefit of $ 12,902,816 and $ 1,296,294 ( 48,539,164 ) ( 4,876,535 ) Less: reclassification adjustment for realized gains included in net income, net of tax expense of $ 0 and $ 11,718 — 44,081 ( 48,539,164 ) ( 4,920,616 ) Comprehensive (Loss) Income $ ( 35,573,725 ) $ 6,224,284 See Notes to Consolidated Financial Statements 64 Richmond Mutual Bancorporation, Inc. Consolidated Statements of Stockholders’ Equity Years Ended December 31, 2022 and 2021 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income (Loss) Total Shares Outstanding Amount Balances, December 31, 2020 13,193,760 $ 131,938 $ 124,246,425 $ 78,290,113 $ ( 13,664,373 ) $ 3,708,605 $ 192,712,708 Net income — — — 11,144,900 — — 11,144,900 Other comprehensive loss — — — — — ( 4,920,616 ) ( 4,920,616 ) ESOP shares earned — — 60,435 — 736,014 — 796,449 Granting of restricted stock awards 4,000 40 ( 40 ) — — — — Stock based compensation — — 1,811,089 — — — 1,811,089 Exercise of stock options 1 26,072 260 127,313 — — — 127,573 Common stock dividends ($ 0.78 per share) — — — ( 9,277,120 ) — — ( 9,277,120 ) Repurchase of common stock ( 823,637 ) $ ( 8,236 ) $ ( 11,905,412 ) $ — $ — $ — $ ( 11,913,648 ) Balances, December 31, 2021 12,400,195 124,002 114,339,810 80,157,893 ( 12,928,359 ) ( 1,212,011 ) 180,481,335 Net income — — — 12,965,439 — — 12,965,439 Other comprehensive loss — — — — — ( 48,539,164 ) ( 48,539,164 ) ESOP shares earned — — 63,430 — 735,316 — 798,746 Stock based compensation — — 1,538,737 — — — 1,538,737 Common stock dividends ($ 0.40 per share) — — — ( 4,407,550 ) — — ( 4,407,550 ) Repurchase of common stock ( 615,949 ) ( 6,160 ) ( 9,853,080 ) — — — ( 9,859,240 ) Balances, December 31, 2022 11,784,246 $ 117,842 $ 106,088,897 $ 88,715,782 $ ( 12,193,043 ) $ ( 49,751,175 ) $ 132,978,303 See Notes to Consolidated Financial Statements 1 The amount shown represents the number of shares issued in net-settled option transactions where some shares are netted from a portion of the exercises. 65 Richmond Mutual Bancorporation, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 2022 and 2021 2022 2021 Operating Activities Net income $ 12,965,439 $ 11,144,900 Items not requiring (providing) cash Provision for loan losses 600,000 1,430,000 Depreciation and amortization 1,063,691 1,124,474 Deferred income tax 1,035,000 2,268,000 Stock based compensation 1,538,737 1,811,089 Investment securities amortization, net 1,546,615 2,526,033 Investment securities gains — ( 55,799 ) Net gains on loan and lease sales ( 639,274 ) ( 2,450,083 ) Loss on sale of real estate owned 10,882 1,278 Accretion of loan origination fees ( 1,578,653 ) ( 3,138,208 ) Amortization of mortgage-servicing rights 224,274 412,941 ESOP shares expense 798,746 796,449 Increase in cash surrender value of life insurance ( 55,359 ) ( 93,404 ) Loans originated for sale ( 28,749,971 ) ( 79,981,656 ) Proceeds on loans sold 28,666,171 78,552,506 Net change in Interest receivable ( 517,654 ) 510,777 Other assets ( 2,117,372 ) ( 3,015,304 ) Multi-employer pension plan liability — ( 17,454,709 ) Other liabilities 2,257,577 ( 4,071,259 ) Interest payable 1,111,319 35,914 Net cash provided by (used in) operating activities 18,160,168 ( 9,646,061 ) Investing Activities Net change in interest-bearing time deposits ( 490,000 ) — Purchases of securities available for sale ( 22,532,827 ) ( 188,839,863 ) Proceeds from maturities and paydowns of securities available for sale 32,181,335 61,825,965 Proceeds from sales of securities available for sale — 5,296,930 Proceeds from maturities and paydowns of securities held to maturity 2,357,168 3,169,901 Net change in loans ( 127,384,295 ) ( 92,150,518 ) Proceeds from sales of real estate owned 84,652 30,270 Purchases of premises and equipment ( 385,099 ) ( 579,452 ) Change in FHLB stock 45,100 ( 942,800 ) Net cash used in investing activities ( 116,123,966 ) ( 212,189,567 ) Financing Activities Net change in Demand and savings deposits 11,892,698 125,089,675 Certificates of deposit 93,192,672 82,040,330 Advances by borrowers for taxes and insurance 29,166 38,506 Proceeds from FHLB advances 327,500,000 209,000,000 Repayment of FHLB advances ( 327,500,000 ) ( 199,000,000 ) Repurchase of common stock ( 9,859,240 ) ( 11,913,648 ) Proceeds from stock option exercises — 127,573 Dividends paid ( 4,407,550 ) ( 9,277,120 ) Net cash provided by financing activities 90,847,746 196,105,316 Net Change in Cash and Cash Equivalents ( 7,116,052 ) ( 25,730,312 ) Cash and Cash Equivalents, Beginning of Period 23,038,145 48,768,457 Cash and Cash Equivalents, End of Period $ 15,922,093 $ 23,038,145 Additional Cash Flows and Supplementary Information Interest paid $ 9,108,022 $ 7,645,867 Income tax paid 2,180,634 2,900,000 Transfers from loans to other real estate owned 115,965 27,000 Right of use assets obtained in exchange for new operating lease liabilities 504,682 — See Notes to Consolidated Financial Statements 66 Richmond Mutual Bancorporation, Inc. Notes to Consolidated Financial Statements December 31, 2022 and 2021 (Table Dollar Amounts in Thousands, Except Per Share Amounts) Note 1: Nature of Operations and Summary of Significant Accounting Policies 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” or “First Bank”), was succeeded by Richmond Mutual Bancorporation, Inc., a new Maryland corporation (the "Company”). As part of the corporate reorganization, First Mutual of Richmond, Inc.’s (the “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, the Company 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 the MHC’s ownership interest in the retained earnings of RMB-Delaware as of December 31, 2017 and March 31, 2019. First Bank 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 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 Counties in Ohio. First Bank’s loans and leases are generally secured by specific items of collateral including real property, consumer assets and business assets. When the word "loan" or "loans" is used in these financial statements it includes leases, unless the context indicates otherwise. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, loan servicing rights, and fair values of financial instruments. Consolidation - The consolidated financial statements include the accounts of the Company and First Bank and their direct and indirect subsidiaries after elimination of all material intercompany transactions. 67 Cash Equivalents - The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. Investment Securities - Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity or not classified as trading are classified as available for sale. Debt securities available for sale are carried at fair value with unrealized gains and losses reported separately in accumulated other comprehensive income (loss), net of tax. Equity securities are carried at fair value with changes in unrealized gains and losses recognized through net income. Trading account securities are held for resale in anticipation of short-term market movements and are valued at fair value. Gains and losses, both realized and unrealized, are included in other income. The Company accounts for recognition and presentation of other-than-temporary impairment in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Code ("ASC") 320-10. When the Company does not intend to sell a debt security, and it is more likely than not, the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive loss. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive loss for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. Purchased premiums and discounts on collateralized mortgage obligations (CMOs), real estate mortgage investment conduits (REMICs) and other mortgage related securities are amortized or accreted using the effective interest method. The period of amortization used is estimated based on anticipated principal prepayments. Differences between anticipated and actual prepayments result in adjustments which are charged or credited to income as an adjustment to yield. For classification purposes, REMICs are grouped with mortgage-backed securities. Leases - Lease financing consists of direct financing leases. Direct financing leases are carried at cost. Cost is defined as the total minimum lease payments receivable and the estimated residual value of the leased property, less the amount of unearned income. Unearned income on direct financing leases is recognized as income over the term of the lease using a method that approximates the interest method. Loans - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan. 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. 68 Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral. Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined. For all loan portfolio segments except residential and consumer loans, the Company promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral. 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. 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. Allowance for Loan and Lease Losses - The allowance for loan and lease losses is established as losses are estimated to have occurred through a provision for loan and lease losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 69 The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical charge-off experience by segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years . Management believes the three year historical loss experience methodology, on a weighted basis, is appropriate in the current economic environment. Other adjustments (qualitative/environmental considerations) for each segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due based on the loan’s current payment status and the borrower’s financial condition including available sources of cash flows. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for nonhomogeneous type loans such as commercial, nonowner residential and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Company utilizes the discounted cash flows to determine the level of impairment, the Company includes the entire change in the present value of cash flows as bad debt expense. The fair values of collateral dependent impaired loans are based on independent appraisals of the collateral. In general, the Company acquires an updated appraisal upon identification of impairment and annually thereafter for commercial, commercial real estate and multi-family loans. If the most recent appraisal is over a year old, and a new appraisal is not performed, due to lack of comparable values or other reasons, the existing appraisal is utilized and discounted based on the age of the appraisal, condition of the subject property, and overall economic conditions. After determining the collateral value as described, the fair value is calculated based on the determined collateral value, less selling expenses. The potential for outdated appraisal values is considered in the determination of the allowance for loan losses through an analysis of various trends and conditions including the local economy, trends in charge-offs and delinquencies, etc. and the related qualitative adjustments assigned by the Company. Segments of loans with similar risk characteristics are collectively evaluated for impairment based on the segment’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower. In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Company do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time 70 foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Company may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan. It is the Company’s policy to have any restructured loans, which are on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring, the Company reviews the loan to determine if it is appropriate to continue the accrual of interest on the restructured loan. With regard to determination of the amount of the allowance for credit losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously. Mortgage Loans Held for Sale – Mortgage loans originated and intended for sale in the secondary market are recorded at the lower of cost or fair value on an individual loan basis. Premises and Equipment - Premises and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. Federal Home Loan Bank (FHLB) stock - FHLB stock is a required investment for institutions that are members of the FHLB system. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment. Foreclosed Assets Held for Sale - Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets. Mortgage Servicing Rights - Mortgage servicing rights on originated loans that have been sold are initially recorded at fair value. Capitalized mortgage servicing rights, which include purchased servicing rights, are amortized in proportion to and over the period of estimated servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the predominant risk characteristics of the underlying loans. The predominant characteristic currently used for stratification is type of loan. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value. Low Income Housing Tax Credits (LIHTC) - The Company has invested in LIHTC through funds that assist corporations in investing in limited partnerships and limited liability companies that own, develop and operate low-income residential rental properties for purposes of qualifying for the LIHTC. These investments are accounted for under the proportional amortization method which recognizes the amortization of the investment in proportion to the tax credit and other tax benefits received. Long-lived Asset Impairment - The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value. No asset impairment was recognized during the years ended December 31, 2022 and 2021. 71 Revenue Recognition - ASC 606, “Revenue from Contracts with Customers," provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance enumerates five steps that entities should follow in achieving this core principle. Revenue generated from financial instruments, including loans and investment securities, are not included in the scope of ASC 606. Revenue-gathering activities that are within the scope of ASC 606 and that are presented as non-interest income in the Company’s consolidated statements of income include: – Service charges on deposit accounts – these include general service fees charged for deposit account maintenance and activity and transaction-based fees charged for certain services, such as debit card, wire transfer and overdraft activities. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services. – Card fee income – this includes debit card fees charged based on the volume and number of debit card transactions. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services. Income Tax - Income tax in the consolidated statements of operations includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company files consolidated income tax returns with its parent and subsidiary. Uncertain Tax Positions - The Company has adopted the provisions of ASC 740, Income Taxes , concerning the accounting and disclosures for uncertain tax positions, previously deferred by ASC 740-10-65. As part of the implementation of this standard, management evaluated its current tax positions and determined the adoption of this standard had no material impact on the consolidated financial statements of the Company. Share Based Compensation - At December 31, 2022, the Company had share-based compensation plans, which are described more fully in Note 14. All share-based payments are to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. The Company has recorded approximately $ 619,000 and $ 728,000 in compensation expense relating to vesting of stock options, which are recognized as they occur, for the year ended December 31, 2022 and 2021, respectively. Advertising Expense - The Company's advertising costs are expensed as incurred. Note 2: Accounting Pronouncements In March 2020, the COVID-19 coronavirus was identified as a global pandemic and began affecting the health of large populations around the world. As a result of the spread of COVID-19, economic uncertainties arose which can ultimately affect the financial position, results of operations and cash flows of the Company, as well as the Company's customers. In response to economic concerns over COVID-19, in March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was passed into law by Congress. The CARES Act included relief for individual Americans, health care workers, small businesses and certain industries hit hard by the COVID-19 pandemic. The 2021 Consolidated Appropriations Act , passed by Congress in December 2020, extended certain provisions of the CARES Act affecting the Company into 2021. The CARES Act included several provisions designed to help financial institutions like the Company in working with their customers. Section 4013 of the CARES Act, as extended, allows a financial institution to elect to suspend generally accepted accounting principles and regulatory determinations with respect to qualifying loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring ("TDR") until January 1, 2022. The Company has taken advantage of this provision to extend 72 certain payment modifications to loan customers in need. As of December 31, 2021, the Company had no modified loans outstanding under the CARES Act guidance. The CARES Act also approved the Paycheck Protection Program ("PPP"), administered by the Small Business Administration ("SBA") with funding provided by financial institutions. The 2021 Consolidated Appropriations Act approved a new round of PPP loans in 2021. The PPP provides loans to eligible businesses through financial institutions like First Bank, with loans being eligible for forgiveness of some or all of the principal amount by the SBA if the borrower meets certain requirements. The SBA guarantees repayment of the loans to First Bank if the borrower's loan is not forgiven and is then not repaid by the member. The Bank earns a 1% interest rate on PPP loans, plus a processing fee from the SBA for processing and originating a loan. The PPP expired on May 31, 2021. As of December 31, 2022, PPP loans outstanding totaled $ 944,000 . The Jumpstart Our Business Startups Act, or 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 Accounting Standards Update ("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 . This ASU provides transition relief for entities adopting the FASB’s credit losses standard, ASU No. 2016-13 and allows companies to irrevocably elect, upon adoption of ASU No. 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 No. 2019-04 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. As of the adoption and day one measurement date of January 1, 2023, the Company expects to record a one-time cumulative-effect adjustment to retained earnings, net of income taxes, on the consolidated balance sheet. The allowance will increase between $ 2.3 million and $ 3.0 million from December 31, 2022. CECL also requires the establishment of a reserve for potential losses from unfunded commitments that is recorded in other liabilities, separate from the allowance for credit losses, which will be approximately $ 1.8 million to 73 $ 2.5 million. Also, as required by CECL, the Company reviewed the held-to-maturity debt securities portfolio and determined the expected losses were immaterial. 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 the London Interbank Offer Rate ("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 No. 2020-04 to have a material impact on its consolidated financial statements. In October 2020, the FASB issued ASU No. 2020-08, Receivables – Nonrefundable Fees and Other Costs . ASU No. 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 No. 2020-08 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted ASU No. 2020-08 on January 1, 2021. The adoption of ASU No. 2020-08 did not have a material impact on the Company's consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . ASU No. 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 No. 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 adopted ASU No. 2019-12 on January 1, 2021. The adoption of ASU No. 2019-12 did not have a material impact on the Company's 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 No. 2018-13 on January 1, 2020. The adoption of ASU No. 2018-13 did not have a material impact on the Company’s consolidated financial statements. In February 2016, the FASB 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 became effective for annual periods and interim periods within those annual periods beginning after December 15, 2021. Based on leases outstanding as of December 31, 2021, this standard did 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 74 GAAP (Topic 842, Leases). The amendments in ASU No. 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. Note 3: Restriction on Cash and Due From Banks At December 31, 2022, the Company’s cash accounts exceeded federally insured limits by approximately $ 596,000 . The Company’s cash balances with the Federal Reserve Bank and the Federal Home Loan Bank, which are not federally insured, totaled approximately $ 7,124,000 at December 31, 2022. The Federal Reserve Board announced on March 15, 2020 the reduction of the reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated the restriction on the Company's cash and cash equivalents for December 31, 2022. Note 4: Investment Securities The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows: 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. treasury securities $ 3,487 $ — $ 27 $ 3,460 SBA Pools 6,768 1 634 6,135 Federal agencies 15,000 — 2,352 12,648 State and municipal obligations 171,495 4 34,457 137,042 Mortgage-backed securities - government-sponsored enterprises (GSE) residential 139,626 — 23,644 115,982 Corporate obligations 11,500 — 1,867 9,633 347,876 5 62,981 284,900 Held to maturity State and municipal obligations 6,672 17 112 6,577 6,672 17 112 6,577 Total investment securities $ 354,548 $ 22 $ 63,093 $ 291,477 75 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale SBA Pools $ 8,691 $ 29 $ 107 $ 8,613 Federal agencies 15,000 — 274 14,726 State and municipal obligations 166,489 2,261 1,298 167,452 Mortgage-backed securities – government-sponsored enterprises (GSE) residential 164,629 712 2,831 162,510 Corporate obligations 4,250 2 28 4,224 Equity securities 13 — — 13 359,072 3,004 4,538 357,538 Held to maturity State and municipal obligations 9,041 147 2 9,186 9,041 147 2 9,186 Total investment securities $ 368,113 $ 3,151 $ 4,540 $ 366,724 The amortized cost and fair value of securities at December 31, 2022, 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 Cost Fair Value Amortized Cost Fair Value Within one year $ 2,380 $ 2,373 $ 1,258 $ 1,250 One to five years 15,989 15,067 3,609 3,558 Five to ten years 43,524 39,024 915 922 After ten years 146,357 112,454 890 847 208,250 168,918 6,672 6,577 Mortgage-backed securities –GSE residential 139,626 115,982 — — Totals $ 347,876 $ 284,900 $ 6,672 $ 6,577 Securities with a carrying value of $ 134,302,000 and $ 136,463,000 were pledged at December 31, 2022 and 2021, respectively, to secure certain deposits and for other purposes as permitted or required by law. Proceeds from sales of securities available for sale during years ended December 31, 2022 and 2021 were $ 0 and $ 5,297,000 , respectively. Gross gains of $ 0 and $ 56,000 resulting from sales of available-for-sale securities were realized for the years ended December 31, 2022 and 2021, respectively. There were no gross losses realized from sales of available-for-sale securities for the years ended December 31, 2022, and 2021. Certain investments in debt securities are reported in the consolidated financial statements and notes at an amount less than their historical cost. Total fair value of these investments at December 31, 2022 and 2021 was $ 288,846,000 and $ 223,842,000 , which is approximately 99 % and 61 %, respectively, of the Company’s available-for-sale and held-to-maturity investment portfolio. 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. 76 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. The following tables show the Company’s investments’ 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 December 31, 2022 and 2021: 2022 Less Than 12 Months 12 Months or More Total Description of Securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-sale U.S. treasury securities $ 3,460 $ 27 $ — $ — $ 3,460 $ 27 SBA Pools 1,237 145 4,234 489 5,471 634 Federal agencies — — 12,648 2,352 12,648 2,352 State and municipal obligations 76,986 11,825 59,257 22,632 136,243 34,457 Mortgage-backed securities – GSE residential 32,446 3,440 83,537 20,204 115,983 23,644 Corporate obligations 7,044 1,456 2,589 411 9,633 1,867 Total available-for-sale 121,173 16,893 162,265 46,088 283,438 62,981 Held-to-maturity State and municipal obligations 4,995 108 413 4 5,408 112 Total temporarily impaired securities $ 126,168 $ 17,001 $ 162,678 $ 46,092 $ 288,846 $ 63,093 2021 Less Than 12 Months 12 Months or More Total Description of Securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-sale SBA Pools $ 2,838 $ 81 $ 3,214 $ 26 $ 6,052 $ 107 Federal agencies 14,726 274 — — 14,726 274 State and municipal obligations 74,235 1,044 7,809 254 82,044 1,298 Mortgage-backed securities – GSE residential 111,104 2,576 6,523 255 117,627 2,831 Corporate obligations 2,972 28 — — 2,972 28 Total available-for-sale 205,875 4,003 17,546 535 223,421 4,538 Held-to-maturity State and municipal obligations 421 2 — — 421 2 Total temporarily impaired securities $ 206,296 $ 4,005 $ 17,546 $ 535 $ 223,842 $ 4,540 Federal Agency Obligations and U.S. Treasury Securities The unrealized losses on the Company’s investments in direct obligations of U.S. federal agencies and treasury securities 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 77 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 December 31, 2022. SBA Pools and Mortgage-Backed Securities - GSE Residential The unrealized losses on the Company’s investment in SBA pools and mortgage-backed securities 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 December 31, 2022. State, Municipal, and Corporate Obligations The unrealized losses on the Company’s investments in securities of state, municipal, and corporate 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 bases 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 December 31, 2022. Note 5: Loans, Leases and Allowance Categories of loans and leases at December 31, 2022 and 2021 include: 2022 2021 Commercial mortgage $ 298,087 $ 261,202 Commercial and industrial 100,420 99,682 Construction and development 139,923 93,678 Multi-family 124,914 107,421 Residential mortgage 146,129 134,155 Home equity lines of credit 11,010 7,146 Leases 133,469 126,762 Consumer 21,048 15,905 975,000 845,951 Less Allowance for loan and lease losses 12,413 12,108 Deferred loan fees 896 997 $ 961,691 $ 832,846 78 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 December 31, 2022 and 2021: 2022 Commercial Mortgage Commercial and Industrial Construction and Development Multi-Family Residential Mortgage Home Equity Leases Consumer Total Allowance for loan and lease losses: Balance, January 1 $ 4,742 $ 1,639 $ 2,286 $ 1,875 $ 263 $ 29 $ 1,079 $ 195 $ 12,108 Provision (recovery) charged to expense ( 19 ) ( 478 ) 569 80 ( 200 ) ( 16 ) 488 176 600 Charge-offs — — — — ( 19 ) — ( 512 ) ( 150 ) ( 681 ) Recoveries 53 130 — — 32 10 141 20 386 Balance, December 31 $ 4,776 $ 1,291 $ 2,855 $ 1,955 $ 76 $ 23 $ 1,196 $ 241 $ 12,413 Individually evaluated for impairment $ — $ 281 $ 750 $ — $ — $ — $ — $ — $ 1,031 Collectively evaluated for impairment 4,776 1,010 2,105 1,955 76 23 1,196 241 11,382 Balance, December 31 $ 4,776 $ 1,291 $ 2,855 $ 1,955 $ 76 $ 23 $ 1,196 $ 241 $ 12,413 Loans and Leases: Individually evaluated for impairment $ — $ 961 $ 4,900 $ — $ 113 $ — $ — $ — $ 5,974 Collectively evaluated for impairment 298,087 99,459 135,023 124,914 146,016 11,010 133,469 21,048 969,026 Ending balance: December 31 $ 298,087 $ 100,420 $ 139,923 $ 124,914 $ 146,129 $ 11,010 $ 133,469 $ 21,048 $ 975,000 2021 Commercial Mortgage Commercial and Industrial Construction and Development Multi-Family Residential Mortgage Home Equity Leases Consumer Total Allowance for loan and lease losses: Balance, January 1 $ 4,628 $ 2,271 $ 1,068 $ 1,039 $ 323 $ 18 $ 1,054 $ 185 $ 10,586 Provision (recovery) charged to expense 111 ( 736 ) 1,218 836 ( 333 ) 11 282 41 1,430 Charge-offs ( 26 ) ( 28 ) — — ( 102 ) — ( 474 ) ( 106 ) ( 736 ) Recoveries 29 132 — — 375 — 217 75 828 Balance, December 31 $ 4,742 $ 1,639 $ 2,286 $ 1,875 $ 263 $ 29 $ 1,079 $ 195 $ 12,108 Individually evaluated for impairment $ — $ 299 $ 750 $ — $ — $ — $ — $ — $ 1,049 Collectively evaluated for impairment 4,742 1,340 1,536 1,875 263 29 1,079 195 11,059 Balance, December 31 $ 4,742 $ 1,639 $ 2,286 $ 1,875 $ 263 $ 29 $ 1,079 $ 195 $ 12,108 Loans and Leases: Individually evaluated for impairment $ 128 $ 995 $ 4,900 $ — $ 119 $ — $ — $ — $ 6,142 Collectively evaluated for impairment 261,074 98,687 88,778 107,421 134,036 7,146 126,762 15,905 839,809 Ending balance: December 31 $ 261,202 $ 99,682 $ 93,678 $ 107,421 $ 134,155 $ 7,146 $ 126,762 $ 15,905 $ 845,951 79 First Bank rates all loans by credit quality using the following designations: Grade 1 - Exceptional Exceptional loans are top-quality loans to individuals whose financial credentials are well known to the Company. These loans have excellent sources of repayment, are well documented and/or virtually free of risk (i.e., CD secured loans). Grade 2 - Quality Loans These loans 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 ("DFI") 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. These loans have adequate sources of repayment with little identifiable risk of collection and they conform to Company policy and DFI/FDIC regulations. Grade 4 - Acceptable but Monitored Loans 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 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 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 in the Company’s credit position at some future date. Special Mention loans 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 has a higher probability of default than a grade 1-4 or "pass" rated loan, its default is not imminent. Grade 6 - Substandard Loans 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 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 have a high probability of payment default, or they have other well-defined weaknesses. Such loans have a distinct potential for loss; however, an individual loan’s potential for loss does not have to be distinct for the loan to be rated substandard. The following are examples of situations that might cause a loan to be graded a “6”: • Cash flow deficiencies (losses) jeopardize future loan payments; • Sale of noncollateral assets has become a primary source of loan 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 repayment; 80 • The borrower is bankrupt or for any other reason future repayment is dependent on court action. Grade 7 - Doubtful A loan 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 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. Grade 8 - Loss Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets are not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be affected in the future. The risk characteristics of each loan 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 and Development 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 81 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 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. 82 The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2022 and 2021: Pass Special Mention Substandard Doubtful Loss Total December 31, 2022 Commercial mortgage $ 296,253 $ 1,277 $ 557 $ — $ — $ 298,087 Commercial and industrial 92,620 2,605 5,195 — — 100,420 Construction and development 135,023 — 4,900 — — 139,923 Multi-family 124,914 — — — — 124,914 Residential mortgage 144,190 — 1,939 — — 146,129 Home equity lines of credit 10,958 — 52 — — 11,010 Leases 133,254 152 34 29 — 133,469 Consumer 21,015 — 33 — — 21,048 Total $ 958,227 $ 4,034 $ 12,710 $ 29 $ — $ 975,000 Pass Special Mention Substandard Doubtful Loss Total December 31, 2021 Commercial mortgage $ 256,043 $ 5,031 $ 128 $ — $ — $ 261,202 Commercial and industrial 91,082 7,191 1,409 — — 99,682 Construction and development 88,778 — 4,900 — — 93,678 Multi-family 107,421 — — — — 107,421 Residential mortgage 132,223 — 1,932 — — 134,155 Home equity lines of credit 7,097 — 49 — — 7,146 Leases 126,707 — 13 42 — 126,762 Consumer 15,883 — 22 — — 15,905 Total $ 825,234 $ 12,222 $ 8,453 $ 42 $ — $ 845,951 The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during the past year. The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of December 31, 2022 and 2021: 2022 Delinquent Loans Total Portfolio Loans Total Loans >90 Days Accruing 30-59 Days Past Due 60-89 Days Past Due 90 Days and Over Total Past Due Current Commercial mortgage $ 26 $ — $ — $ 26 $ 298,061 $ 298,087 $ — Commercial and industrial — — 2,202 2,202 98,218 100,420 1,285 Construction and development — — 4,900 4,900 135,023 139,923 — Multi-family — — — — 124,914 124,914 — Residential mortgage 272 129 1,938 2,339 143,790 146,129 1,825 Home equity lines of credit — — 30 30 10,980 11,010 30 Leases 204 25 — 229 133,240 133,469 — Consumer 171 59 33 263 20,785 21,048 33 Totals $ 673 $ 213 $ 9,103 $ 9,989 $ 965,011 $ 975,000 $ 3,173 83 2021 Delinquent Loans Total Portfolio Loans Total Loans >90 Days Accruing 30-59 Days Past Due 60-89 Days Past Due 90 Days and Over Total Past Due Current Commercial mortgage $ 29 $ — $ 128 $ 157 $ 261,045 $ 261,202 $ — Commercial and industrial 33 579 366 978 98,704 99,682 — Construction and development 55 96 4,900 5,051 88,627 93,678 — Multi-family — — — — 107,421 107,421 — Residential mortgage 710 174 1,932 2,816 131,339 134,155 1,813 Home equity lines of credit 131 — 12 143 7,003 7,146 12 Leases 144 82 — 226 126,536 126,762 — Consumer 59 30 22 111 15,794 15,905 22 Totals $ 1,161 $ 961 $ 7,360 $ 9,482 $ 836,469 $ 845,951 $ 1,847 The following tables present the Company’s impaired loans as of December 31, 2022 and 2021: 2022 Recorded Balance Unpaid Principal Balance Specific Allowance Average Investment in Impaired Loans Interest Income Recognized Loans without a specific valuation allowance Commercial mortgage $ — $ 59 $ — $ 49 $ 12 Commercial and industrial 366 567 — 366 — Residential mortgage 113 241 — 116 4 $ 479 $ 867 $ — $ 531 $ 16 Loans with a specific valuation allowance Commercial and industrial $ 595 $ 643 $ 281 $ 607 $ 18 Construction and development 4,900 4,900 750 4,900 — $ 5,495 $ 5,543 $ 1,031 $ 5,507 $ 18 Total impaired loans Commercial mortgage $ — $ 59 $ — $ 49 $ 12 Commercial and industrial 961 1,210 281 973 18 Construction and development 4,900 4,900 750 4,900 — Residential mortgage 113 241 — 116 4 Total impaired loans $ 5,974 $ 6,410 $ 1,031 $ 6,038 $ 34 84 2021 Recorded Balance Unpaid Principal Balance Specific Allowance Average Investment in Impaired Loans Interest Income Recognized Loans without a specific valuation allowance Commercial mortgage $ 128 $ 199 $ — $ 124 $ 36 Commercial and industrial 367 566 — 389 2 Residential mortgage 119 244 — 172 7 $ 614 $ 1,009 $ — $ 685 $ 45 Loans with a specific valuation allowance Commercial and industrial $ 628 $ 658 $ 299 $ 653 $ 31 Construction and development 4,900 4,900 750 3,920 — $ 5,528 $ 5,558 $ 1,049 $ 4,573 $ 31 Total impaired loans Commercial mortgage $ 128 $ 199 $ — $ 124 $ 36 Commercial and industrial 995 1,224 299 1,042 33 Construction and development 4,900 4,900 750 3,920 — Residential mortgage 119 244 — 172 7 Total impaired loans $ 6,142 $ 6,567 $ 1,049 $ 5,258 $ 76 The following table presents the Company’s nonaccrual loans at December 31, 2022 and 2021: 2022 2021 Commercial mortgage $ — $ 128 Commercial and industrial 961 995 Construction and development 4,900 4,900 Residential mortgage 113 119 Leases 29 42 $ 6,003 $ 6,184 During 2022 and 2021, there were no newly classified TDRs. At December 31, 2022 and 2021, the balance of real estate owned included $ 57,000 and $ 27,000 , respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At December 31, 2022 and 2021, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds were in process was $ 1,071,000 and $ 885,000 , respectively. The following lists the components of the net investment in leases: 2022 2021 Total minimum lease payments to be received $ 147,520 $ 140,214 Initial direct costs 8,058 7,035 155,578 147,249 Less: Unearned income ( 22,109 ) ( 20,487 ) Net investment in leases $ 133,469 $ 126,762 First Bank did not service any leases for the benefit of others totaled at December 31, 2022 and 2021, respectively. Historically, certain leases have also been sold with partial recourse. First Bank estimates and 85 records its obligation based upon historical loss percentages. At both December 31, 2022 and 2021, First Bank had no recourse obligations recorded or exposure on leases sold. The following summarizes the future minimum lease payments receivable in subsequent years: 2023 $ 54,309 2024 42,244 2025 28,664 2026 16,250 2027 5,438 Thereafter 615 $ 147,520 Note 6: Premises and Equipment 2022 2021 Cost Land $ 3,061 $ 3,061 Buildings 15,616 15,501 Furniture and equipment 7,592 8,044 Computer software 1,264 1,955 Construction in progress 470 307 Total cost 28,003 28,868 Accumulated depreciation and amortization ( 14,335 ) ( 14,521 ) Net $ 13,668 $ 14,347 Note 7: Leases The Company enters into leases for certain retail branches, land, and office space. Operating leases are included in other assets and the lease liability is included in other liabilities in our balance sheets. The Company does not have any finance leases. Right-of-use (ROU) assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate at commencement date in determining the present value of lease payments when the rate implicit in a lease is not known. The Company's incremental borrowing rate is based on the FHLB amortizing advance rate, adjusted for the lease term and other factors. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The Company's leases are generally for periods of five to 15 years with various renewal options. The exercise of such lease renewal options is not included in the present value of lease obligations unless it is reasonably certain that the option will be exercised. The Company has lease agreements which contain both lease and non-lease components such as common area maintenance charges, real estate taxes, and insurance. Non-lease components are not included in the measurement of the lease liability and are recognized in expense when incurred. The Company has elected not to recognize short-term leases, with original lease terms of twelve months or less, on the Company's balance sheet. Certain of the Company's lease arrangements include rental payments adjusted periodically for inflation. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. 86 Supplemental balance sheet information related to leases is presented in the table below as of December 31, 2022: 2022 Operating lease assets $ 505 Total lease assets $ 505 Operating lease liabilities $ 507 Total lease liabilities $ 507 Weighted average remaining lease term (years) Operating leases 8.2 Weighted average discount rate Operating leases 3.37 % The table below presents the components of lease expense for the year ended December 31, 2022: 2022 Lease cost: Operating lease cost $ 83 Total lease cost: $ 83 Supplemental cash flow information related to leases is presented in the tables below. Maturity of lease liabilities 2023 $ 65 2024 68 2025 69 2026 72 2027 72 2028 and after 239 Total lease payments $ 585 Less: Present value discount 78 Present value of lease liabilities $ 507 Note 8: Loan Servicing Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others totaled $ 226,634,000 and $ 226,260,000 at December 31, 2022 and 2021, respectively. The aggregate fair value of capitalized servicing rights at December 31, 2022 and 2021 totaled approximately $ 2,012,000 and $ 1,647,000 , respectively. Comparable market values and a valuation model that calculates the 87 present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage-servicing rights. 2022 2021 Servicing Rights Balances, beginning of period $ 2,027 $ 1,732 Servicing rights capitalized 209 708 Amortization of servicing rights ( 224 ) ( 413 ) Balances, end of period 2,012 2,027 Valuation allowances Balances, beginning of period 380 20 Additions 111 538 Reductions ( 491 ) ( 178 ) Balances, end of period — 380 Servicing Rights, net $ 2,012 $ 1,647 Note 9: Deposits 2022 2021 Demand deposits $ 414,870 $ 419,106 Savings deposits 129,640 113,510 Brokered certificates 257,889 121,751 Certificates and other time deposits greater than $250,000 43,757 61,296 Other certificates and time deposits 159,105 184,512 $ 1,005,261 $ 900,175 Certificates maturing in years ending December 31: 2023 $ 314,283 2024 98,631 2025 35,739 2026 8,044 2027 3,614 Thereafter 440 $ 460,751 88 Note 10: Federal Home Loan Bank Advances First Bank has Federal Home Loan Bank advances, with interest rates ranging from 0.61 % to 4.74 %. The maturities of FHLB advances at December 31, 2022 are as follows: FHLB Advances 2023 $ 27,000 2024 31,000 2025 16,000 2026 18,000 2027 — Thereafter 88,000 $ 180,000 First mortgage loans and investment securities totaling $ 332,818,000 and $ 349,821,000 were pledged as collateral for FHLB advances at December 31, 2022 and 2021, respectively. Certain advances are subject to restrictions or penalties in the event of prepayment. FHLB advances totaling $ 88,000,000 are subject to an option by the FHLB to put the entire advance to a periodic adjustable rate on the lock-out date. The adjustable rate would be for the remaining term at a predetermined rate based on SOFR. If the FHLB exercises its option to convert the advance to an adjustable rate, the advance will be prepayable at the Company’s option, at par and without a penalty. The Bank has an available line of credit with the FHLB totaling $ 10,000,000 . The line of credit expires April 2023; however, it is renewed annually, and bears interest at a rate equal to the current variable advance rate. At December 31, 2022, the current interest rate was 4.74 %. There were no amounts outstanding on the line at December 31, 2022 or 2021. 89 Note 11: Income Tax 2022 2021 Income tax expense (benefit) Currently payable Federal $ 1,987 $ ( 15 ) State ( 51 ) 182 Deferred Federal 633 2,330 State 214 ( 62 ) Total income tax expense $ 2,783 $ 2,435 Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 21% $ 3,307 $ 2,852 Tax-exempt interest ( 730 ) ( 628 ) Effect of state income taxes 128 95 ESOP 167 167 Cash surrender value - life insurance ( 18 ) ( 20 ) Low income housing tax credit ( 12 ) ( 136 ) Small insurance captive premiums ( 131 ) — Other 72 105 Actual tax expense $ 2,783 $ 2,435 A cumulative deferred tax asset is included in other assets. The components of the asset are as follows: 2022 2021 Assets Allowance for loan losses $ 3,031 $ 2,956 Net operating loss carryforward 106 1,243 Nonaccrual interest 74 76 Investment basis 4 4 Deferred compensation 488 462 Unrealized loss on securities available for sale 13,223 322 Charitable contributions 632 933 Other 1,634 1,017 Total assets 19,192 7,013 Liabilities FHLB stock dividend 164 175 State taxes 152 193 Mortgage-servicing rights 491 402 Other 437 349 Total liabilities 1,244 1,119 Net deferred tax asset $ 17,948 $ 5,894 90 As of December 31, 2022, the Company had approximately $ 3,011,000 of federal charitable contribution carryforwards, which will begin to expire in 2024, and no federal or state net operating loss carryforwards. At December 31, 2022 and 2021, the Company determined that it is more likely than not that the deferred tax assets will be realized, largely based on available tax planning strategies and its projections of future taxable income. Therefore, no valuation reserve was recorded at December 31, 2022 and 2021. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning the evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies and assessments of current and future economic and business conditions. Positive evidence includes current positive earnings trends and the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. Failure to achieve sufficient projected taxable income might affect the ultimate realization of the net deferred tax assets. Note 12: Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss, included in stockholders' equity, are as follows: 2022 2021 Net unrealized loss on available-for-sale securities $ ( 62,976 ) $ ( 1,534 ) Tax benefit 13,225 322 Net-of-tax amount $ ( 49,751 ) $ ( 1,212 ) Note 13: Commitments and Contingent Liabilities In the normal course of business, there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. First Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. First Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated statements of financial condition. Financial instruments whose contract amounts represent credit risk as of December 31, 2022 and 2021, were as follows: 2022 2021 Commitments to extend credit $ 278,946 $ 195,891 Standby letters of credit $ 1,696 $ 3,528 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the subsidiary upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include residential real estate, income-producing commercial properties, or other assets of the borrower. Standby letters of credit are conditional commitments issued by the subsidiary to guarantee the performance of the customer to a third party. 91 Note 14: Benefit Plans 401(k) The Company has a retirement savings 401(k) plan, in which substantially all employees may participate. The Company matches employees' contributions at the rate of 50 percent for the first 6 percent of base salary contributed by participants. The Company’s expense for the plan was $ 227,000 and $ 226,000 for the years ended December 31, 2022 and 2021, respectively. Employee Stock Ownership Plan As part of the 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 price of $ 13.59 per share on the open market with funds provided by a loan from the Company. The Company is obligated at the option of each beneficiary to repurchase shares of the ESOP upon the beneficiary’s termination or after retirement. Dividends on unallocated shares used to repay the loan for the Company are recorded as a reduction of the loan or accrued interest, as applicable. Dividends on allocated shares paid to participants are reported as compensation expense. Unearned ESOP shares, which are not vested, are excluded from the computation of average shares outstanding for earnings per share calculation. Accordingly, $ 12,193,000 and $ 12,928,000 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity at December 31, 2022 and December 31, 2021, respectively. Shares are released to participants proportionately as the loan is repaid. ESOP expense for the years ended December 31, 2022 and 2021 was $ 799,000 and $ 796,000 , respectively. December 31, 2022 December 31, 2021 Earned ESOP shares 184,882 130,775 Unearned ESOP shares 897,248 951,355 Total ESOP shares 1,082,130 1,082,130 Quoted per share price $ 13.01 $ 16.05 Fair value of earned shares (in thousands) $ 2,405 $ 2,099 Fair value of unearned shares (in thousands) $ 11,673 $ 15,269 Richmond Mutual Bancorporation, Inc. 2020 Equity Incentive Plan On September 15, 2020, the Company's stockholders approved the Richmond Mutual Bancorporation, Inc. 2020 Equity Incentive Plan ("2020 EIP") which provides for the grant to eligible participants of up to (i) 1,352,662 shares of Company common stock to be issued upon the exercise of stock options and stock appreciation rights and (ii) 541,065 shares of Company common stock to participants as restricted stock awards (which may be in the form of shares of common stock or share units giving the participant the right to receive shares of common stock at a specified future date). 92 Restricted Stock Awards. On October 1, 2020, the Company awarded 449,086 shares of common stock under the 2020 EIP with a grant date fair value of $ 10.53 per share (total fair value of $ 4.7 million at issuance) to eligible participants. On April 1, 2021, the Company awarded an additional 4,000 shares of common stock under the 2020 EIP with a grant date fair value of $ 13.86 (total fair value of $ 55,000 at issuance) to eligible participants. These awards vest in five equal annual installments with the first vesting occurring on June 30, 2021. Forfeited shares may be awarded to other eligible recipients in future grants until the 2020 EIP terminates in September 2030. The following table summarizes the restricted stock awards activity in the 2020 EIP for the year ended December 31, 2022. Year Ended December 31, 2022 Number of Restricted Shares Weighted Average Grant Date Fair Value Non-vested, beginning of year 348,395 $ 10.56 Granted — — Vested ( 87,104 ) 10.56 Forfeited — — Non-vested, end of year 261,291 $ 10.56 Total compensation cost recognized in the income statement for restricted stock awards during 2022 and 2021 was $ 920,000 and $ 1,083,000 , respectively, and the related tax benefit recognized was $ 193,000 and $ 227,000 , respectively. As of December 31, 2022, unrecognized compensation expense related to restricted stock awards was $ 2.3 million. Stock Option Plan. On October 1, 2020, the Company awarded options to purchase 1,095,657 shares of common stock under the 2020 EIP with an exercise price $ 10.53 per share, the fair value of a share of the Company's common stock on the date of the grant, to eligible participants. On April 1, 2021, the Company awarded options to purchase 8,000 shares of common stock under the 2020 EIP with an exercise price of $ 13.86 per share, the fair value of the Company's common stock on the date of the grant, to eligible participants. The options awarded vest in five equal annual installments with the first vesting occurring on June 30, 2021. Forfeited options may be awarded to other eligible recipients in future grants until the 2020 EIP terminates in September 2030. A net-settle stock option exercise may occur by the option holder by withholding the exercise price from the number of shares that would otherwise be delivered upon a cash exercise of the option. The withheld shares are canceled and no longer available for future grant. The following table summarizes the stock option activity in the 2020 EIP during the year ended December 31, 2022. 2022 Number of Shares Weighted-Average Exercise Price Balance at beginning of year 1,050,961 $ 10.56 Granted — — Exercised — — Forfeited/expired — — Balance at end of year 1,050,961 10.56 Exercisable at end of year 413,120 $ 10.56 93 The fair value of options granted is estimated on the date of grant using a Black Scholes model with the following assumptions: April 1, 2021 Dividend yields 1.90 % Volatility factors of expected market price of common stock 26.98 % Risk-free interest rates 1.16 % Expected life of options 6.1 years A summary of the status of the Company stock option shares as of December 31, 2022 is presented below. Shares Weighted Average Grant Date Fair Value Non-vested, beginning of year 850,458 $ 2.91 Vested ( 212,617 ) 2.91 Granted — — Forfeited — — Non-vested, end of year 637,841 $ 2.91 Total compensation cost recognized in the income statement for option-based payment arrangements during 2022 and 2021 was $ 619,000 and $ 728,000 , and the related tax benefit recognized was $ 69,000 and $ 80,000 , respectively. As of December 31, 2022, unrecognized compensation expense related to the stock option awards was $ 1.5 million. Note 15: Earnings Per Share Basic earnings per share ("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 (in thousands, except for share and per share data): 94 For the Year Ended For the Year Ended December 31, 2022 December 31, 2021 Net income $ 12,965 $ 11,145 Shares outstanding for Basic EPS: Average shares outstanding 12,001,527 12,731,735 Less: average restricted stock award shares not vested 304,246 390,365 Less: average unearned ESOP Shares 930,787 984,893 Shares outstanding for Basic EPS 10,766,494 11,356,477 Additional Dilutive Shares 291,684 275,855 Shares outstanding for Diluted EPS 11,058,178 11,632,332 Basic EPS $ 1.20 $ 0.98 Diluted EPS $ 1.17 $ 0.96 Note 16: Dividend and Capital Restrictions The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. Generally, the Bank's payment of dividends is limited to net income for the current year plus the two preceding calendar years, less capital distributions paid over the comparable time period. The Bank’s payment of dividends is also subject to the restrictions of the capital conservation buffer as discussed in Note 17. Note 17: Regulatory Capital First Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under U.S. GAAP, regulatory reporting requirements and regulatory capital standards. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, First Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements. Quantitative measures established by regulatory capital standards to ensure capital adequacy require First Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), common equity Tier I capital (as defined) to total risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2022, that First Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2022, the most recent notification from the regulators categorized First Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, First Bank must maintain minimum total risk-based capital, Tier I risk-based capital, common equity Tier I risk-based capital and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed First Bank’s category. 95 First Bank’s actual and required capital amounts and ratios are as follows: Actual Minimum for Capital Adequacy Purposes Minimum to be Categorized as "Well-Capitalized" Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 2022 Total capital (to risk-weighted assets) $ 164,804 14.3 % $ 92,134 8.0 % $ 115,168 10.0 % Tier I capital (to risk-weighted assets) 152,391 13.2 69,101 6.0 92,134 8.0 Common Equity Tier I capital (to risk-weighted assets) 152,391 13.2 51,826 4.5 74,859 6.5 Tier I leverage capital (to average assets) 152,391 11.2 54,421 4.0 68,026 5.0 As of December 31, 2021 Total capital (to risk-weighted assets) $ 169,589 17.3 % $ 78,590 8.0 % $ 98,238 10.0 % Tier I capital (to risk-weighted assets) 157,481 16.0 58,943 6.0 78,590 8.0 Common Equity Tier I capital (to risk-weighted assets) 157,481 16.0 44,207 4.5 63,855 6.5 Tier I leverage capital (to average assets) 157,481 12.5 50,284 4.0 62,855 5.0 The above minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including share repurchases, dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer was 2.50 % of total risk weighted assets at both December 31, 2022 and December 31, 2021. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Note 18: Related Party Transactions The Company has entered into transactions with certain directors, executive officers and its affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates, as those prevailing at the same time for comparable transactions with other customers. The aggregate amount of loans to such related parties at December 31, 2022 and 2021 was approximately $ 7,988,000 and $ 9,080,000 , respectively. Annual activity consisted of the following: 2022 2021 Balance, beginning of the year $ 9,080 $ 9,111 New loans — — Change in composition — ( 28 ) Repayments ( 1,092 ) ( 3 ) Balance, end of the year $ 7,988 $ 9,080 Deposits from related parties held by the Company at December 31, 2022 and 2021 totaled $ 5,317,000 and $ 5,499,000 , respectively. 96 Note 19: Fair Values 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 and are significant to the fair value of the assets or liabilities 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 December 31, 2022 and 2021: Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2022 Available-for-sale securities U.S. Treasury securities $ 3,460 $ 3,460 $ — $ — SBA Pools 6,135 — 6,135 — Federal agencies 12,648 — 12,648 — State and municipal obligations 137,042 — 137,042 — Mortgage-backed securities - GSE residential 115,982 — 115,982 — Corporate obligations 9,633 — 9,633 — $ 284,900 $ 3,460 $ 281,440 $ — 97 Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2021 Available-for-sale securities SBA Pools $ 8,613 $ — $ 8,613 $ — Federal agencies 14,726 — 14,726 — State and municipal obligations 167,452 — 167,452 — Mortgage-backed securities - GSE residential 162,510 — 162,510 — Corporate obligations 4,224 — 4,224 — Equity securities 13 13 — — $ 357,538 $ 13 $ 357,525 $ — 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 year ended December 31, 2022. 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, mortgage-backed securities, and SBA pools. 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 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 measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2022 and 2021: Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2022 Impaired loans, collateral dependent $ 314 $ — $ — $ 314 Mortgage-servicing rights 2,012 — — 2,012 December 31, 2021 Impaired loans, collateral dependent $ 4,587 $ — $ — $ 4,587 Mortgage-servicing rights 1,647 — — 1,647 98 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 and Leases, Net of Allowance for Loan and Lease Losses 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 yearly basis by obtaining an independent valuation. The valuation is reviewed by management for accuracy and for potential impairment. 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 December 31, 2022 and 2021: Fair Value at December 31, 2022 Valuation Technique Unobservable Inputs Range Collateral-dependent impaired loans $ 314 Appraisal Marketability discount 0 %- 42 % Mortgage-servicing rights $ 2,012 Discounted cash flow Discount rate 10 % 99 Fair Value at December 31, 2021 Valuation Technique Unobservable Inputs Range Collateral-dependent impaired loans $ 4,587 Appraisal Marketability discount 0 % - 39 % Mortgage-servicing rights $ 1,647 Discounted cash flow Discount rate 10 % Fair Value of Financial Instruments The following tables present estimated fair values of the Company’s financial instruments at December 31, 2022 and 2021. Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2022 Financial assets Cash and cash equivalents $ 15,922 $ 15,922 $ — $ — Interest-earning time deposits 490 — 490 — Available-for-sale securities 284,900 3,460 281,440 — Held-to-maturity securities 6,672 — 6,577 — Loans held for sale 474 — — 433 Loans and leases receivable, net 961,691 — — 883,169 Federal Reserve and FHLB stock 9,947 — 9,947 — Interest receivable 4,710 — 4,710 — Financial liabilities Deposits 1,005,261 — 996,375 — FHLB advances 180,000 — 174,426 — Interest payable 1,369 — 1,369 — Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2021 Financial assets Cash and cash equivalents $ 23,038 $ 23,038 $ — $ — Available-for-sale securities 357,538 13 357,525 — Held-to-maturity securities 9,041 — 9,186 — Loans held for sale 558 — — 555 Loans and leases receivable, net 832,846 — — 833,975 Federal Reserve and FHLB stock 9,992 — 9,992 — Interest receivable 4,193 — 4,193 — Financial liabilities Deposits 900,175 — 900,528 — FHLB advances 180,000 — 185,065 — Interest payable 258 — 258 — 100 While these estimates of fair value are based on management’s judgment of the most appropriate factors, there is no assurance that were the Company to have disposed of such items at December 31, 2022 and 2021, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 2022 and 2021 should not necessarily be considered to apply at subsequent dates. The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value. Cash and Cash Equivalents, Interest-Earning Time Deposits and Federal Reserve and Federal Home Loan Bank Stock – The carrying amount approximates fair value. Held-to-Maturity Securities – Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans and Leases – The fair value of loans and leases is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value. Deposits – Deposits include demand deposits, savings accounts, NOW accounts and money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. Interest Receivable and Interest Payable – The carrying amount approximates fair value. Federal Home Loan Bank Advances – Rates currently available to the Company for borrowings with similar terms and remaining maturities are used to estimate the fair value of existing debt. 101 Note 20: Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company: Condensed Balance Sheets 2022 2021 Assets Cash and cash equivalents $ 26,229 $ 21,545 Investment in subsidiaries 103,520 156,269 Other assets 5,625 4,950 Total assets $ 135,374 $ 182,764 Other Liabilities $ 2,396 $ 2,283 Stockholders' Equity 132,978 180,481 Total liabilities and stockholders' equity $ 135,374 $ 182,764 Condensed Statements of Income and Comprehensive (Loss) Income 2022 2021 Income: Dividends from bank subsidiary $ 20,000 $ 10,000 Other income 439 464 Total income 20,439 10,464 Other expenses 3,264 3,329 Income before income tax benefit and undistributed subsidiary income (loss) 17,175 7,135 Income tax expense (benefit) ( 632 ) ( 639 ) Equity in undistributed income of subsidiaries (dividends in excess of net income): Bank subsidiary ( 5,472 ) 3,371 Captive subsidiary 630 — Net income $ 12,965 $ 11,145 Comprehensive (loss) income $ ( 35,574 ) $ 6,224 102 Condensed Statements of Cash Flows 2022 2021 Operating Activities Net income $ 12,965 $ 11,145 Adjustments to reconcile net income to net cash from operating activities: Dividends in excess of net income (equity in undistributed net income of subsidiaries) 4,842 ( 3,371 ) ESOP expense 799 796 Stock based compensation 1,539 1,811 Changes in other assets and other liabilities ( 944 ) ( 509 ) Net cash provided by operating activities 19,201 9,872 Investing Activities Capitalization of subsidiary ( 250 ) — Net cash used in investing activities ( 250 ) — Financing Activities Dividends paid ( 4,408 ) ( 9,277 ) Repurchase of common stock ( 9,859 ) ( 11,914 ) Proceeds from stock option exercises — 128 Net cash used in financing activities ( 14,267 ) ( 21,063 ) Net Change in Cash and Cash Equivalents 4,684 ( 11,191 ) Cash and Cash Equivalents, Beginning of Period 21,545 32,736 Cash and Cash Equivalents, End of Period $ 26,229 $ 21,545 The prior year income statement and cash flow presented above were revised to conform with the presentation of current year financial statements. As a result, the following changes were made to the 2021 statements: • Dividends received from subsidiary are presented in total income. • Equity in undistributed income of subsidiaries reflects the difference in subsidiary income and dividends received. • No investing activities are reported in the Condensed Statement of Cash Flows. The above changes had no effect on 2021 Net Income. Note 21: Significant Estimates and Concentrations Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk. Other significant estimates and concentrations not discussed in those footnotes include: General Litigation – The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company. Note 22: Subsequent Events Subsequent events have been evaluated through March 31, 2023, which is the date the consolidated financial statements were issued. 103 104 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None.