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 Financial Statements We have audited the accompanying consolidated balance sheets of Richmond Mutual Bancorporation, Inc. (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income (loss), comprehensive income (loss) stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2020 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020 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/ BKD, LLP BKD, LLP We have served as the Company’s auditor since at least 1990; however, an earlier year cannot be reliably determined. Indianapolis, Indiana March 31, 2021 68 Table of Contents Richmond Mutual Bancorporation, Inc. Consolidated Balance Sheets December 31, 2020 and 2019 December 31, 2020 December 31, 2019 Assets Cash and due from banks $ 16,748,093 $ 9,088,398 Interest-bearing demand deposits 32,020,364 31,508,479 Cash and cash equivalents 48,768,457 40,596,877 Investment securities - available for sale 244,505,189 201,783,851 Investment securities - held to maturity 12,225,275 15,917,394 Loans and leases, net of allowance for losses of $ 10,586,480 and $ 7,088,958 , respectively 736,400,098 687,258,190 Premises and equipment, net 14,892,110 14,087,169 Federal Home Loan Bank stock 9,049,600 7,600,400 Interest receivable 4,703,604 3,052,380 Mortgage-servicing rights 1,712,138 1,033,217 Cash surrender value of life insurance 3,525,736 3,839,911 Other assets 8,410,450 10,872,682 Total assets $ 1,084,192,657 $ 986,042,071 Liabilities Noninterest-bearing deposits $ 98,724,887 $ 60,297,443 Interest bearing deposits 594,320,508 556,921,370 Total deposits 693,045,395 617,218,813 Federal Home Loan Bank advances 170,000,000 154,000,000 Advances by borrowers for taxes and insurance 492,524 545,498 Interest payable 222,118 296,774 Multi-employer pension plan liability 17,454,709 17,454,709 Other liabilities 10,265,203 8,738,831 Total liabilities 891,479,949 798,254,625 Commitments and Contingent Liabilities — — Stockholders' Equity Common stock, $ 0.01 par value Authorized - 90,000,000 shares Issued and outstanding - 13,193,760 shares and 13,526,625 shares at December 31, 2020 and 2019, respectively 131,938 135,266 Additional paid-in capital 124,246,425 132,601,876 Retained earnings 78,290,113 70,111,434 Unearned employee stock ownership plan (ESOP) ( 13,664,373 ) ( 14,400,386 ) Accumulated other comprehensive gain (loss) 3,708,605 ( 660,744 ) Total stockholders' equity 192,712,708 187,787,446 Total liabilities and stockholders' equity $ 1,084,192,657 $ 986,042,071 See Notes to Consolidated Financial Statements 69 Table of Contents Richmond Mutual Bancorporation, Inc. Consolidated Statements of Income (Loss) Years Ended December 31, 2020 and 2019 2020 2019 Interest Income Loans and leases $ 37,777,490 $ 36,559,926 Investment securities 4,411,750 3,847,101 Other 152,336 1,150,873 Total interest income 42,341,576 41,557,900 Interest Expense Deposits 6,382,623 8,018,394 Borrowings 3,010,032 3,138,084 Total interest expense 9,392,655 11,156,478 Net Interest Income 32,948,921 30,401,422 Provision for losses on loans and leases 3,770,000 2,600,000 Net Interest Income After Provision for Losses on Loans and Leases 29,178,921 27,801,422 Non-interest Income Service charges on deposit accounts 730,847 1,078,285 Card fee income 842,902 748,510 Loan and lease servicing fees 381,552 144,238 Net gains on securities (includes $ 196,317 and $ 97,580 , related to accumulated other comprehensive loss reclassifications) 196,317 97,580 Net gains on loan and lease sales 3,632,579 646,754 Other loan fees 696,287 545,378 Other income 844,828 599,089 Total non-interest income 7,325,312 3,859,834 Non-interest Expenses Salaries and employee benefits 14,394,287 14,550,526 Multi-employer pension plan expense 386,683 20,492,021 Net occupancy expenses 1,163,910 1,167,754 Equipment expenses 1,175,771 1,000,534 Data processing fees 1,850,832 1,745,853 Deposit insurance expense 248,155 270,983 Printing and office supplies 120,949 149,779 Legal and professional fees 1,131,600 1,007,590 Advertising expense 371,755 823,516 Bank service charges 129,950 135,650 Real estate owned expense 4,753 28,368 Loss on sale of real estate owned — 43,871 Donation to establish First Bank Richmond, Inc. Charitable Foundation — 6,250,000 Other expenses 3,030,484 3,371,710 Total non-interest expenses 24,009,129 51,038,155 Income Before Income Tax Expense (Benefit) 12,495,104 ( 19,376,899 ) Provision (benefit) for income taxes (includes $ 41,227 and $ 25,309 , related to income tax expense from reclassification of items) 2,477,453 ( 5,292,413 ) Net Income (Loss) $ 10,017,651 $ ( 14,084,486 ) Earnings (Loss) Per Share Basic (for 2019 period: July 2, 2019 to December 31, 2019) $ 0.82 $ ( 1.27 ) Diluted (for 2019 period: July 2, 2019 to December 31, 2019) $ 0.82 $ ( 1.27 ) See Notes to Consolidated Financial Statements 70 Table of Contents Richmond Mutual Bancorporation, Inc. Consolidated Statements of Comprehensive Income (Loss) Years Ended December 31, 2020 and 2019 2020 2019 Net Income (Loss) $ 10,017,651 $ ( 14,084,486 ) Other Comprehensive Income Unrealized gain on available-for-sale securities, net of tax expense of $ 1,202,699 and $ 1,327,234 4,524,439 3,789,813 Less: reclassification adjustment for realized gains included in net income, net of tax expense of $ 41,227 and $ 25,309 155,090 72,271 4,369,349 3,717,542 Comprehensive Income (Loss) $ 14,387,000 $ ( 10,366,944 ) See Notes to Consolidated Financial Statements 71 Table of Contents Richmond Mutual Bancorporation, Inc. Consolidated Statements of Stockholders’ Equity Years Ended December 31, 2020 and 2019 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income (Loss) Total Shares Outstanding Amount Balances, December 31, 2018 100 $ 1 $ 12,750,999 $ 77,480,318 $ — $ ( 4,378,286 ) $ 85,853,032 Net loss — — — ( 14,084,486 ) — — ( 14,084,486 ) Other comprehensive income — — — — — 3,717,542 3,717,542 ESOP shares earned — — 10,202 — 305,929 — 316,131 Issuance of common stock, net of offering costs 13,026,625 130,266 127,596,674 — ( 14,706,315 ) — 113,020,625 Stock contributed to charitable foundation 500,000 5,000 4,995,000 — — — 5,000,000 Reorganization of Richmond Mutual Bancorporation ( 100 ) ( 1 ) ( 12,750,999 ) 6,715,602 — — ( 6,035,398 ) Balances, December 31, 2019 13,526,625 135,266 132,601,876 70,111,434 ( 14,400,386 ) ( 660,744 ) 187,787,446 Net income — — — 10,017,651 — — 10,017,651 Other comprehensive income — — — — — 4,369,349 4,369,349 ESOP shares earned — — ( 88,506 ) — 736,013 — 647,507 Granting of restricted stock awards 449,086 4,491 ( 4,491 ) — — — — Stock based compensation — — 810,881 — — — 810,881 Common stock dividends ($ 0.15 per share) — — — ( 1,838,972 ) — — ( 1,838,972 ) Repurchase of common stock ( 781,951 ) ( 7,819 ) ( 9,073,335 ) — — — ( 9,081,154 ) Balances, December 31, 2020 13,193,760 $ 131,938 $ 124,246,425 $ 78,290,113 $ ( 13,664,373 ) $ 3,708,605 $ 192,712,708 See Notes to Consolidated Financial Statements 72 Table of Contents Richmond Mutual Bancorporation, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 2020 and 2019 2020 2019 Operating Activities Net income (loss) $ 10,017,651 $ ( 14,084,486 ) Items not requiring (providing) cash Provision for loan losses 3,770,000 2,600,000 Depreciation and amortization 1,001,463 898,311 Deferred income tax ( 35,000 ) ( 6,239,000 ) Stock based compensation 810,881 — Investment securities (accretion) amortization, net 2,617,575 1,221,613 Investment securities gains ( 196,317 ) ( 97,580 ) Gain on sale of loans and leases held for sale ( 3,632,579 ) ( 646,754 ) Loss on sale of premises and equipment 42,968 — Accretion of loan origination fees ( 1,735,552 ) ( 190,508 ) Amortization of mortgage-servicing rights 465,079 192,966 Multi-employer pension plan expense — 19,298,000 Common stock contributed to Foundation — 5,000,000 ESOP shares expense 647,507 316,131 Decrease (increase) in cash surrender value of life insurance 314,174 ( 121,691 ) Loans originated for sale ( 105,499,317 ) ( 27,746,922 ) Proceeds on loans sold 107,159,767 27,842,122 Net change in Interest receivable ( 1,651,224 ) ( 366,370 ) Other assets 1,025,766 253,190 Other liabilities 1,526,372 2,221,973 Interest payable ( 74,656 ) ( 253,975 ) Net cash provided by operating activities 16,574,558 10,097,020 Investing Activities Purchases of securities available for sale ( 167,378,042 ) ( 164,291,637 ) Proceeds from maturities and paydowns of securities available for sale 93,106,632 22,947,574 Proceeds from sales of securities available for sale 34,737,656 65,892,348 Proceeds from maturities and paydowns of securities held to maturity 3,669,856 5,114,909 Net change in loans ( 50,093,990 ) ( 34,604,814 ) Proceeds from sales of real estate owned — 172,778 Purchases of premises and equipment ( 1,880,372 ) ( 960,004 ) Proceeds from sale of premises and equipment 31,000 — Purchase of FHLB stock ( 1,449,200 ) ( 1,039,800 ) Net cash used in investing activities ( 89,256,460 ) ( 106,768,646 ) Financing Activities Net change in Demand and savings deposits 114,773,005 23,588,184 Certificates of deposit ( 38,946,423 ) ( 27,006,191 ) Advances by borrowers for taxes and insurance ( 52,974 ) 1,971 Proceeds from FHLB advances 64,000,000 85,000,000 Repayment of FHLB advances ( 48,000,000 ) ( 67,100,000 ) Repayment of other borrowings — ( 5,207,256 ) Proceeds from stock conversion — 113,020,625 Repurchase of common stock ( 9,081,154 ) — Dividends paid ( 1,838,972 ) — Net cash provided by financing activities 80,853,482 122,297,333 Net Change in Cash and Cash Equivalents 8,171,580 25,625,707 Cash and Cash Equivalents, Beginning of Period 40,596,877 14,971,170 Cash and Cash Equivalents, End of Period $ 48,768,457 $ 40,596,877 Additional Cash Flows and Supplementary Information Interest paid $ 9,467,311 $ 11,410,453 Income tax paid $ 1,050,000 $ — Transfers from loans to other real estate owned 31,548 43,200 See Notes to Consolidated Financial Statements 73 Table of Contents Richmond Mutual Bancorporation, Inc. Notes to Consolidated Financial Statements December 31, 2020 and 2019 (Table Dollar Amounts in Thousands) 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 (“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 MHC’s ownership interest in the retained earnings of RMB-Delaware as of December 31, 2017 and March 31, 2019. The costs of the corporate reorganization and the issuance of the common stock have been deducted from the sales proceeds of the offering. 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 are generally secured by specific items of collateral including real property, consumer assets and business assets. 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. Additionally, the uncertainties related to the Covid-19 pandemic could cause significant changes to these estimates compared to what was known at the time these consolidated financial statements were prepared. 74 Table of Contents Consolidation - The consolidated financial statements include the accounts of the Company and First Bank after elimination of all material intercompany transactions. 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 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. 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 75 Table of Contents placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. 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 is established as losses are estimated to have occurred through a provision for loan 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. 76 Table of Contents 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 77 Table of Contents 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. 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 stock is a required investment for institutions that are members of the Federal Home Loan Bank (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 on originated loans that have been sold are initially recorded at fair value. Capitalized 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 low income housing tax credits 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 Housing Tax credit. 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, 2020 and 2019. Revenue Recognition - Accounting Standards Codification 606, “Revenue from Contracts with Customers” (ASC 606) provides that an entity should recognize revenue to depict the transfer of promised 78 Table of Contents 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 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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (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, 2020, the Company had share-based compensation plans, which are described more fully in Note 13. 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 $ 323,000 in compensation expense relating to vesting of stock options, which are recognized as they occur, for the year ended December 31, 2020. Advertising Expense - The Company's advertising costs are expensed as incurred. COVID-19 - On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which provides relief from certain accounting and financial reporting requirements under U.S. GAAP. Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for troubled debt restructurings ("TDRs") under ASC 310-40 for loan modifications related to the novel coronavirus disease of 2019 (“COVID-19”) pandemic. In addition, on April 7, 2020, a group of banking agencies issued an interagency statement (“Interagency Statement”) for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs. The Interagency Statement was originally issued on March 22, 2020, but the banking agencies revised it to address the relationship between their TDR accounting and disclosure guidance and the TDR guidance in Section 4013 of the CARES Act. Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. The Interagency Statement indicates that a lender can conclude that a borrower is not experiencing financial difficulty if either (1) short-term (e.g., six months) modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented, or (2) the modification or deferral program is mandated by the federal government or a state government. Accordingly, any loan modification made in response to the 79 Table of Contents COVID-19 pandemic that meets either of these practical expedients would not be considered a TDR. The Company adopted this guidance effective March 27, 2020. 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 certain payment modifications to loan customers in need. As of December 31, 2020, the Company has 48 loans outstanding for $ 54.7 million that were modified during 2020 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 the Company, 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 the Company if the borrower's loan is not forgiven and is then not repaid by the member. The Company earns a 1% interest rate on PPP loans, plus a processing fee from the SBA for processing and originating a loan. The company originated approximately $ 64.9 million in PPP loans during 2020, of which approximately $ 43.3 are still outstanding at December 31, 2020. The JOBS Act, which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” The Company qualifies as and has elected to be an emerging growth company under the JOBS Act. An emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. The Company has elected to comply with new or amended accounting pronouncements in the same manner as a private company. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326). The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an 80 Table of Contents organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief” (ASU 2019-05). This ASU provides transition relief for entities adopting the FASB’s credit losses standard, ASU 2016-13 and allows companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for certain financial instruments. In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (ASU 2019-04). This ASU clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments. In October 2019, the FASB voted to extend the implementation of ASU No. 2016-13 for certain financial institutions including smaller reporting companies. As a result, ASU 2016-13 will be effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is evaluating its current expected loss methodology on the loan and investment portfolios to identify the necessary modifications in accordance with this standard. The Company has not quantified the impact of these ASUs. The Company is in the early stages of evaluating its historical data available for use in adoption of the new credit loss standards. Additionally, we are forming an implementation team that will meet on a regular basis to coordinate efforts of our accounting, credit and operations areas. We will continue to evaluate methodologies available to us under the new standard. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements. In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-08, “Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”). ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. ASU 2020-08 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . ASU 2019-12 provides that state franchise or similar taxes that are based, at least in part on an entity’s income, be included in an entity’s income tax recognized as income-based taxes. The ASU further clarifies that the effect of any change in tax laws or rates used in the computation of the annual effective tax rate are required to be reflected in the first interim period that includes the enactment date of the legislation. Technical changes to eliminate exceptions to Topic 740 related to intra-period tax allocations for entities with losses from continuing operations, deferred tax liabilities related to change in ownership of foreign entities, and interim-period tax allocations for businesses with losses where the losses are expected to be realized. The amendments in ASU 2019-12 are effective for public business entities with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect ASU 2019-12 to have a material impact on its consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement . This ASU contains some technical adjustments related to the fair value disclosure requirements of public companies. Included in this ASU is the additional disclosure requirement of unrealized gains and losses for the period in recurring level 3 fair value disclosures and the range and weighted average of significant unobservable inputs, among other 81 Table of Contents technical changes. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. For the Company, the amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2021. Based on leases outstanding as of December 31, 2020, the new standard will not have a material impact on the Company’s balance sheet or income statement. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provide entities with an additional (and optional) transition method to adopt the new lease standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with current GAAP (Topic 842, Leases). The amendments in ASU 2018-11 also provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met. Note 3: Restriction on Cash and Due From Banks At December 31, 2020, the Company’s cash accounts exceeded federally insured limits by approximately $ 8,229,000 . The Company’s cash balances with the Federal Reserve Bank and the Federal Home Loan Bank, which are not federally insured, totaled approximately $ 31,924,000 at December 31, 2020. 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 a portion of the Company's cash and cash equivalents for December 31, 2020. Note 4: Investment Securities The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows: 82 Table of Contents 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale SBA Pools $ 16,283 $ 111 $ 94 $ 16,300 Federal agencies 5,760 12 15 5,757 State and municipal obligations 93,616 2,778 109 96,285 Mortgage-backed securities - government-sponsored enterprises (GSE) residential 124,139 2,080 69 126,150 Equity securities 13 — — 13 239,811 4,981 287 244,505 Held to maturity State and municipal obligations 12,225 295 — 12,520 12,225 295 — 12,520 Total investment securities $ 252,036 $ 5,276 $ 287 $ 257,025 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. treasury securities $ 2,997 $ — $ 6 $ 2,991 SBA Pools 14,497 — 114 14,383 Federal agencies 21,765 — 119 21,646 State and municipal obligations 45,635 357 152 45,840 Mortgage-backed securities – government-sponsored enterprises (GSE) residential 117,769 111 969 116,911 Equity securities 13 — — 13 202,676 468 1,360 201,784 Held to maturity State and municipal obligations 15,917 244 5 16,156 15,917 244 5 16,156 Total investment securities $ 218,593 $ 712 $ 1,365 $ 217,940 83 Table of Contents The amortized cost and fair value of securities at December 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Available for Sale Held to Maturity Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ 933 $ 937 $ 2,931 $ 2,944 One to five years 5,864 6,059 6,207 6,357 Five to ten years 26,315 26,903 2,027 2,142 After ten years 82,547 84,443 1,060 1,077 115,659 118,342 12,225 12,520 Mortgage-backed securities –GSE residential 124,139 126,150 — — Equity securities 13 13 — — Totals $ 239,811 $ 244,505 $ 12,225 $ 12,520 Securities with a carrying value of $ 88,370,000 and $ 114,907,000 were pledged at December 31, 2020 and 2019, 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, 2020 and 2019 were $ 34,738,000 and $ 65,892,000 , respectively. Gross gains of $ 260,000 and $ 184,000 resulting from sales of available-for-sale securities were realized for the years ended December 31, 2020 and 2019, respectively. Gross losses of $ 63,000 and $ 86,000 were realized from sales of available-for-sale securities for the years ended December 31, 2020 and 2019, respectively. 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, 2020 and 2019 was $ 45,299,000 and $ 138,391,000 , which is approximately 18 % and 63 %, 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. 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. 84 Table of Contents 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, 2020 and 2019: 2020 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 $ 5,213 $ 46 $ 5,687 $ 48 $ 10,900 $ 94 Federal agencies 985 15 — — 985 15 State and municipal obligations 8,587 109 — — 8,587 109 Mortgage-backed securities – GSE residential 24,013 67 684 2 24,697 69 Total available-for-sale 38,798 237 6,371 50 45,169 287 Held-to-maturity State and municipal obligations 130 — — — 130 — Total temporarily impaired securities $ 38,928 $ 237 $ 6,371 $ 50 $ 45,299 $ 287 2019 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 $ 2,991 $ 6 $ — $ — $ 2,991 $ 6 SBA Pools 14,262 114 — — 14,262 114 Federal agencies 9,657 109 2,990 10 12,647 119 State and municipal obligations 12,606 130 2,948 22 15,554 152 Mortgage-backed securities – GSE residential 57,928 464 34,344 505 92,272 969 Total available-for-sale 97,444 823 40,282 537 137,726 1,360 Held-to-maturity State and municipal obligations 665 5 — — 665 5 Total temporarily impaired securities $ 98,109 $ 828 $ 40,282 $ 537 $ 138,391 $ 1,365 Federal Agencies 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 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, 2020. SBA Pools and Mortgage-Backed Securities - GSE Residential 85 Table of Contents 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, 2020. State and Municipal Obligations The unrealized losses on the Company’s investments in securities of state and municipal obligations were caused by interest rate changes and illiquidity. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost 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, 2020. -Note 5: Loans, Leases and Allowance Categories of loans at December 31, 2020 and 2019 include: 2020 2019 Commercial mortgage $ 247,564 $ 229,410 Commercial and industrial 122,831 84,549 Construction and development 58,424 53,426 Multi-family 55,998 66,002 Residential mortgage 127,108 131,294 Home equity lines of credit 5,982 6,996 Direct financing leases 117,171 109,592 Consumer 13,257 13,534 748,335 694,803 Less Allowance for loan and lease losses 10,586 7,089 Deferred loan fees 1,349 456 $ 736,400 $ 687,258 86 Table of Contents The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2020 and 2019: 2020 Commercial Mortgage Commercial and Industrial Residential Mortgage Leases Consumer Total Allowance for loan losses: Balance, January 1 $ 4,564 $ 1,852 $ 109 $ 426 $ 138 $ 7,089 Provision (recovery) charged to expense 3,191 ( 695 ) 150 915 209 3,770 Charge-offs — — ( 36 ) ( 408 ) ( 151 ) ( 595 ) Recoveries 42 91 47 121 21 322 Balance, December 31 $ 7,797 $ 1,248 $ 270 $ 1,054 $ 217 $ 10,586 Individually evaluated for impairment $ 150 $ 52 $ — $ — $ — $ 202 Collectively evaluated for impairment 7,647 1,196 270 1,054 217 10,384 Balance, December 31 $ 7,797 $ 1,248 $ 270 $ 1,054 $ 217 $ 10,586 Loans: Individually evaluated for impairment $ 701 $ 493 $ 269 $ — $ — $ 1,463 Collectively evaluated for impairment 404,278 106,794 101,380 117,171 17,249 746,872 Ending balance: December 31 $ 404,979 $ 107,287 $ 101,649 $ 117,171 $ 17,249 $ 748,335 2019 Commercial Mortgage Commercial and Industrial Residential Mortgage Leases Consumer Total Allowance for loan losses: Balance, January 1 $ 3,147 $ 1,817 $ 139 $ 389 $ 108 $ 5,600 Provision (recovery) charged to expense 1,413 934 ( 28 ) 154 127 2,600 Charge-offs ( 15 ) ( 909 ) ( 66 ) ( 315 ) ( 123 ) ( 1,428 ) Recoveries 19 10 64 198 26 317 Balance, December 31 $ 4,564 $ 1,852 $ 109 $ 426 $ 138 $ 7,089 Individually evaluated for impairment $ — $ 202 $ — $ — $ — $ 202 Collectively evaluated for impairment 4,564 1,650 109 426 138 6,887 Balance, December 31 $ 4,564 $ 1,852 $ 109 $ 426 $ 138 $ 7,089 Loans: Individually evaluated for impairment $ 803 $ 694 $ 347 $ — $ — $ 1,844 Collectively evaluated for impairment 377,494 73,920 114,061 109,592 17,892 692,959 Ending balance: December 31 $ 378,297 $ 74,614 $ 114,408 $ 109,592 $ 17,892 $ 694,803 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). 87 Table of Contents 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; • The borrower is bankrupt or for any other reason future repayment is dependent on court action. 88 Table of Contents 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 loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan 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 Loans in this segment include commercial loans, commercial construction loans, and multi-family loans. This segment also includes loans secured by 1-4 family residences which were made for investment purposes. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus nonowner-occupied loans. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. 89 Table of Contents 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. 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, 2020 and 2019: 2020 Commercial Mortgage Commercial and Industrial Construction and Development Multi- Family Residential Mortgage Home Equity Leases Consumer Total 1-4 Pass $ 239,055 $ 114,411 $ 53,524 $ 55,998 $ 123,963 $ 5,916 $ 117,136 $ 13,256 $ 723,259 5 Special Mention 6,976 5,542 4,900 — — — — — 17,418 6 Substandard 1,533 2,878 — — 3,145 66 15 1 7,638 7 Doubtful — — — — — — 20 20 8 Loss — — — — — — — — — $ 247,564 $ 122,831 $ 58,424 $ 55,998 $ 127,108 $ 5,982 $ 117,171 $ 13,257 $ 748,335 2019 Commercial Mortgage Commercial and Industrial Construction and Development Multi- Family Residential Mortgage Home Equity Leases Consumer Total 1-4 Pass $ 220,240 $ 75,814 $ 53,426 $ 66,002 $ 127,888 $ 6,871 $ 109,424 $ 13,519 $ 673,184 5 Special Mention 7,489 5,731 — — 189 64 — — 13,473 6 Substandard 1,681 3,004 — — 3,217 61 94 15 8,072 7 Doubtful — — — — — — 74 — 74 8 Loss — — — — — — — — — $ 229,410 $ 84,549 $ 53,426 $ 66,002 $ 131,294 $ 6,996 $ 109,592 $ 13,534 $ 694,803 The 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. 90 Table of Contents The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of December 31, 2020 and 2019: 2020 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 $ 340 $ — $ 1,177 $ 1,517 $ 246,047 $ 247,564 $ 1,100 Commercial and industrial 1,251 203 439 1,893 120,938 122,831 — Construction and development — 4,900 — 4,900 53,524 58,424 — Multi-family — — — — 55,998 55,998 — Residential mortgage 1,913 243 2,680 4,836 122,272 127,108 2,554 Home equity 138 15 25 178 5,804 5,982 25 Leases 234 65 — 299 116,872 117,171 — Consumer 318 129 317 764 12,493 13,257 317 Totals $ 4,194 $ 5,555 $ 4,638 $ 14,387 $ 733,948 $ 748,335 $ 3,996 2019 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 $ 217 $ — $ 184 $ 401 $ 229,009 $ 229,410 $ — Commercial and industrial 220 1,092 438 1,750 82,799 84,549 3 Construction and development — 257 249 506 52,920 53,426 249 Multi-family — — — — 66,002 66,002 — Residential mortgage 762 240 2,452 3,454 127,840 131,294 2,256 Home equity 189 36 15 240 6,756 6,996 15 Leases 108 29 79 216 109,376 109,592 49 Consumer 271 35 15 321 13,213 13,534 15 Totals $ 1,767 $ 1,689 $ 3,432 $ 6,888 $ 687,915 $ 694,803 $ 2,587 91 Table of Contents The following tables present the Company’s impaired loans as of December 31, 2020 and 2019: 2020 Recorded Balance Unpaid Principal Balance Specific Allowance Average Investment in Impaired Loans Interest Income Recognized Loans without a specific valuation allowance Commercial mortgage $ 76 $ 86 $ — $ 235 $ 10 Commercial and industrial 439 770 — 432 29 Residential mortgage 269 491 — 292 13 $ 784 $ 1,347 $ — $ 959 $ 52 Loans with a specific valuation allowance Commercial mortgage $ 625 $ 625 $ 150 $ 561 $ 28 Commercial and industrial 54 64 52 135 7 $ 679 $ 689 $ 202 $ 696 $ 35 Total impaired loans Commercial mortgage $ 701 $ 711 $ 150 $ 796 $ 38 Commercial and industrial 493 834 52 567 36 Residential mortgage 269 491 — 292 13 Total impaired loans $ 1,463 $ 2,036 $ 202 $ 1,655 $ 87 2019 Recorded Balance Unpaid Principal Balance Specific Allowance Average Investment in Impaired Loans Interest Income Recognized Loans without a specific valuation allowance Commercial mortgage $ 803 $ 1,256 $ — $ 726 $ 64 Commercial and industrial 435 3,220 — 798 59 Residential mortgage 347 614 — 369 19 $ 1,585 $ 5,090 $ — $ 1,893 $ 142 Loans with a specific valuation allowance Commercial and industrial $ 259 $ 266 $ 202 $ 101 $ 14 $ 259 $ 266 $ 202 $ 101 $ 14 Total impaired loans Commercial mortgage $ 803 $ 1,256 $ — $ 726 $ 64 Commercial and industrial 694 3,486 202 899 73 Residential mortgage 347 614 — 369 19 Total impaired loans $ 1,844 $ 5,356 $ 202 $ 1,994 $ 156 92 Table of Contents The following table presents the Company’s nonaccrual loans at December 31, 2020 and 2019: 2020 2019 Commercial mortgage $ 76 $ 342 Commercial and industrial 493 494 Residential mortgage 214 315 Leases 20 74 $ 803 $ 1,225 During 2020 and 2019, there were no newly classified troubled debt restructured loans. At December 31, 2020 and 2019, the balance of real estate owned includes $ 32,000 and $ 0 , respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At December 31, 2020 and 2019, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds were in process was $ 283,000 and $ 190,000 , respectively. The following lists the components of the net investment in direct financing leases: 2020 2019 Total minimum lease payments to be received $ 129,114 $ 120,570 Initial direct costs 6,353 5,720 135,467 126,290 Less: Unearned income ( 18,296 ) ( 16,698 ) Net investment in direct financing leases $ 117,171 $ 109,592 The amount of leases serviced by First Bank for the benefit of others was approximately $ 86,000 and $ 715,000 at December 31, 2020 and 2019, respectively. Additionally, certain leases have been sold with partial recourse. First Bank estimates and records its obligation based upon historical loss percentages. At December 31, 2020 and 2019, First Bank has recorded a recourse obligation on leases sold with recourse of $ 0 , and has a maximum exposure of $ 86,000 and $ 411,000 , respectively, for these leases. The following summarizes the future minimum lease payments receivable in subsequent years: 2021 $ 49,907 2022 35,846 2023 23,762 2024 13,872 2025 5,012 Thereafter 715 $ 129,114 93 Table of Contents Note 6: Premises and Equipment 2020 2019 Cost Land $ 3,061 $ 3,061 Buildings 14,908 14,969 Furniture and equipment 8,837 8,167 Computer software 2,588 1,935 Construction in progress 512 393 Total cost 29,906 28,525 Accumulated depreciation and amortization ( 15,014 ) ( 14,438 ) Net $ 14,892 $ 14,087 Note 7: 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 $ 193,649,000 and $ 134,013,000 at December 31, 2020 and 2019, respectively. The aggregate fair value of capitalized servicing rights at December 31, 2020, 2019 and 2018 totaled approximately $ 1,712,000 , $ 1,033,000 and $ 1,227,000 , respectively. Comparable market values and a valuation model that calculates the 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. 2020 2019 Servicing Rights Balances, beginning of period $ 1,340 $ 1,332 Servicing rights capitalized 857 201 Amortization of servicing rights ( 465 ) ( 193 ) Balances, end of period 1,732 1,340 Valuation allowances Balances, beginning of period 307 105 Additions 114 202 Reductions ( 401 ) — Balances, end of period 20 307 Servicing Rights, net $ 1,712 $ 1,033 94 Table of Contents Note 8: Deposits 2020 2019 Demand deposits $ 355,543 $ 262,333 Savings deposits 95,033 73,471 Brokered certificates 23,275 56,650 Certificates and other time deposits of $250,000 or more 48,968 43,830 Other certificates and time deposits 170,226 180,935 $ 693,045 $ 617,219 Certificates maturing in years ending December 31: 2021 $ 102,741 2022 102,996 2023 8,380 2024 12,218 2025 15,662 Thereafter 472 $ 242,469 Note 9: Federal Home Loan Bank Advances First Bank has Federal Home Loan Bank advances, with interest rates ranging from 0.29 % to 3.28 %. The maturities of these borrowings at December 31, 2020 are as follows: FHLB Advances 2021 $ 7,000 2022 6,000 2023 2,000 2024 44,000 2025 16,000 Thereafter 95,000 $ 170,000 First mortgage loans and investment securities totaling $ 284,435,000 and $ 315,219,000 were pledged as collateral for FHLB advances at December 31, 2020 and 2019, respectively. Certain advances are subject to restrictions or penalties in the event of prepayment. FHLB advances totaling $ 131,000,000 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 LIBOR (London Interbank Offer Rate). 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. 95 Table of Contents The Bank has an available line of credit with the FHLB totaling $ 10,000,000 . The line of credit expires March 2021; however, it is renewed annually, and bears interest at a rate equal to the current variable advance rate. At December 31, 2020, the current interest rate was 0.46 %. There were no amounts outstanding on the line at December 31, 2020 or 2019. Note 10: Income Tax 2020 2019 Income tax expense (benefit) Currently payable Federal $ 2,443 $ 947 State 69 — Deferred Federal ( 253 ) ( 5,204 ) State 218 ( 1,035 ) Total income tax expense (benefit) $ 2,477 $ ( 5,292 ) Reconciliation of federal statutory to actual tax expense (benefit) Federal statutory income tax at 21% $ 2,624 $ ( 4,069 ) Tax-exempt interest ( 435 ) ( 336 ) Effect of state income taxes 227 ( 817 ) ESOP 135 108 Cash surrender value - life insurance ( 39 ) ( 26 ) Low Income Housing Tax Credit ( 111 ) ( 87 ) Other 76 ( 65 ) Actual tax expense (benefit) $ 2,477 $ ( 5,292 ) 96 Table of Contents A cumulative deferred tax asset is included in other assets. The components of the asset are as follows: 2020 2019 Assets Allowance for loan losses $ 2,503 $ 1,744 Net operating loss carryforward — 51 Nonaccrual interest 111 144 Investment basis 4 4 Defined Benefit Plan 4,045 4,294 Deferred Compensation 424 469 Unrealized loss on securities available for sale — 231 Charitable contributions 924 1,194 Other 823 638 Total assets 8,834 8,769 Liabilities FHLB stock dividend 169 176 Unrealized gain on securities available for sale 985 — State taxes 208 250 Mortgage-servicing rights 405 254 Other 212 52 Total liabilities 1,979 732 Net deferred tax asset $ 6,855 $ 8,037 As of December 31, 2020, the Company had approximately $ 4,400,000 of federal charitable contribution carryforwards, which will begin to expire in 2024. At December 31, 2020 and 2019, 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, 2020 and 2019. 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 11: Accumulated Other Comprehensive Income (Loss) The components of accumulated other comprehensive income (loss), included in stockholder’s equity, are as follows: 2020 2019 Net unrealized gain (loss) on available-for-sale securities $ 4,694 $ ( 892 ) Tax effect ( 985 ) 231 Net-of-tax amount $ 3,709 $ ( 661 ) 97 Table of Contents Note 12: 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, 2020 and 2019 were as follows: 2020 2019 Commitments to extend credit $ 179,297 $ 112,135 Standby letters of credit $ 558 $ 599 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. The Company is also subject to other claims and lawsuits which arise primarily in the ordinary course of business. None of these matters are expected to have a material adverse effect on the Company's financial position. Note 13: 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 $ 204,000 and $ 196,000 for the years ended December 31, 2020 and 2019, respectively. Pension Plan The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions ("Pentegra Plan"), an industry-wide, tax-qualified defined-benefit pension plan. The Pentegra Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra Plan operates as a multi-employer plan for accounting purposes and as a multi-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra Plan. The Pentegra Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. 98 Table of Contents The risks of participating in a multi-employer plan are different from a single-employer plan in the following aspects: 1. Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers. 2. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. 3. If the Company chooses to stop participating in some of its multi-employer plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. The Pentegra Plan has not required and does not require a financial improvement plan or a rehabilitation plan. Total contributions by all employer participants in the Pentegra Plan, as reported on Form 5500, totaled $ 237,376,000 and $ 137,617,000 , respectively, for the plan years ended June 30, 2020 and 2019. The Company’s contributions to the Pentegra Plan totaled $ 722,000 and $ 2,230,000 , respectively, for the years ended December 31, 2020 and 2019 and do not represent more than 5 % of the total contributions made by all employer participants in the Pentegra Plan. The Company is in process of terminating its participation in the Pentegra Plan and has accrued approximately $ 17,455,000 for this expense. This accrual is subject to change upon final termination. 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, $ 14,706,000 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity. Shares are released to participants proportionately as the loan is repaid. ESOP expense for the years ended December 31, 2020 and 2019 was $ 648,000 and $ 316,000 , respectively. December 31, 2020 December 31, 2019 Allocated ESOP shares 76,669 22,544 Unearned ESOP shares 1,005,461 1,059,586 Total ESOP shares 1,082,130 1,082,130 Quoted per share price $ 13.66 $ 15.96 Fair value of allocated shares $ 1,047 $ 360 Fair value of unearned shares $ 13,735 $ 16,911 99 Table of Contents Restricted Stock Awards On September 15, 2020 the Company established the Richmond Mutual Bancorporation, Inc. 2020 Equity Incentive Plan with 541,065 common shares authorized. From this plan, the Company awarded employees and outside directors 449,086 common shares with a grant date fair value of $ 10.53 per share (total fair value of $ 4.7 million at issuance) on October 1, 2020. These common shares vest over a five-year period with the first vesting occurring in 2021. Forfeited shares may be awarded to other eligible recipients in future grants until the plan termination date in 2030. Total compensation cost recognized in the income statement for restricted stock awards during 2020 was $ 488,000 and the related tax benefit recognized was $ 102,000 . Stock Option Plan The Richmond Mutual Bancorporation, Inc. 2020 Equity Incentive Plan also authorized the granting of up to 1,352,662 stock options. From this plan the Company granted employees and outside directors 1,095,657 stock options with an exercise price of $ 10.53 per share. These awarded stock options vest over a five-year period with the first vesting occurring in 2021. Forfeited shares may be awarded to other eligible recipients in future grants until the plan termination date in 2030. The following table summarizes the stock option activity in the 2020 Equity Incentive Plan during the year ended December 31, 2020. 2020 Number of Shares Weighted-Average Exercise Price Balance at beginning of year — $ — Granted 1,095,657 10.53 Exercised — — Forfeited/expired — — Balance at end of year 1,095,657 10.53 Exercisable at end of year (1) 40,580 $ 10.53 (1) As a result of the acceleration of option vesting upon the death of a recipient. The fair value of options granted is estimated on the date of grant using a Black Scholes model with the following assumptions: Year Ended December 31, 2020 Dividend yields 1.90 % Volatility factors of expected market price of common stock 26.98 % Risk-free interest rates 0.40 % Expected life of options 6.4 years 100 Table of Contents A summary of the status of the Company stock option shares as of December 31, 2020 are presented below. Shares Weighted Average Grant Date Fair Value Non-vested, beginning of year — $ — Vested ( 40,580 ) 2.91 Granted 1,095,657 2.91 Forfeited — — Non-vested, end of year 1,055,077 $ 2.91 Total compensation cost recognized in the income statement for option-based payment arrangements during 2020 was $ 323,000 and the related tax benefit recognized was $ 48,000 . Note 14: Earnings per Share Basic EPS is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted EPS includes the dilutive effect of additional potential common shares from stock compensation awards, but excludes awards considered participating securities. ESOP shares are not considered outstanding for EPS until they are earned. The following table presents the computation of basic and diluted EPS for the periods indicated (in thousands, except for share and per share data): For the Period For the Year Ended July 2, 2019 to December 31, 2020 December 31, 2019 Net income (loss) $ 10,018 $ ( 15,806 ) Shares outstanding for Basic EPS: Average shares outstanding 13,414,367 13,526,625 Less: average RSA shares not vested 111,107 — Less: average unearned ESOP Shares 1,039,056 1,062,936 Shares outstanding for Basic EPS 12,264,204 12,463,689 Additional Dilutive Shares 22,233 — Shares outstanding for Diluted EPS 12,286,437 12,463,689 Basic Earnings (Loss) Per Share $ 0.82 $ ( 1.27 ) Diluted Earnings (Loss) Per Share $ 0.82 $ ( 1.27 ) Note 15: 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 16. 101 Table of Contents Note 16: 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, 2020, that First Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2020, 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. First Bank’s actual and required capital amounts and ratios are as follows: Actual Required for Adequate Capital To Be Well Capitalized Amount Ratio Amount Ratio Amount Ratio As of December 31, 2020 Total capital (to risk-weighted assets) $ 162,624 21.9 % $ 59,416 8.0 % $ 74,270 10.0 % Tier I capital (to risk-weighted assets) 153,325 20.6 44,562 6.0 59,416 8.0 Common Equity Tier I capital (to risk-weighted assets) 153,325 20.6 33,422 4.5 48,276 6.5 Tier I capital (to average assets) 153,325 14.3 42,939 4.0 53,673 5.0 As of December 31, 2019 Total capital (to risk-weighted assets) $ 149,137 19.5 % $ 61,304 8.0 % $ 76,629 1.0 % Tier I capital (to risk-weighted assets) 142,048 18.5 45,978 6.0 61,304 8.0 Common Equity Tier I capital (to risk-weighted assets) 142,048 18.5 34,483 4.5 49,809 6.5 Tier I capital (to average assets) 142,048 14.6 39,027 4.0 48,784 5.0 The above minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer was 2.50 % at both December 31, 2020 and December 31, 2019. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Note 17: Related Party Transactions 102 Table of Contents 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, 2020 and 2019 was approximately $ 9,111,000 and $ 9,818,000 , respectively. Annual activity consisted of the following: 2020 2019 Balance, beginning of the year $ 9,818 $ 7,723 New loans 28 3,473 Change in composition — ( 17 ) Repayments ( 735 ) ( 1,361 ) Balance, end of the year $ 9,111 $ 9,818 Deposits from related parties held by the Company at December 31, 2020 and 2019 totaled $ 3,616,000 and $ 2,773,000 , respectively. Note 18: 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, 2020 and 2019: 103 Table of Contents 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, 2020 Available-for-sale securities SBA Pools $ 16,300 $ — $ 16,300 $ — Federal agencies 5,757 — 5,757 — State and municipal obligations 96,285 — 96,285 — Mortgage-backed securities - GSE residential 126,150 — 126,150 — Equity securities 13 13 — — $ 244,505 $ 13 $ 244,492 $ — 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, 2019 Available-for-sale securities U.S. Treasury securities $ 2,991 $ — $ 2,991 $ — SBA Pools 14,383 — 14,383 — Federal agencies 21,646 — 21,646 — State and municipal obligations 45,840 — 45,840 — Mortgage-backed securities - GSE residential 116,911 — 116,911 — Equity securities 13 13 — — $ 201,784 $ 13 $ 201,771 $ — Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the year ended December 31, 2020. Available-for-Sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy, which includes equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include agency securities, obligations of state and political subdivisions, 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. 104 Table of Contents 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, 2020 and 2019: 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, 2020 Impaired loans, collateral dependent $ 532 $ — $ — $ 532 Mortgage-servicing rights 1,712 — — 1,712 December 31, 2019 Impaired loans, collateral dependent $ 57 $ — $ — $ 57 Mortgage-servicing rights 1,033 — — 1,033 Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Collateral-Dependent Impaired Loans, Net of ALLL The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results. Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans. Mortgage-Servicing Rights Mortgage-servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, mortgage-servicing rights are classified within Level 3 of the hierarchy. Mortgage-servicing rights are tested for impairment on a yearly basis by obtaining an independent valuation. The valuation is reviewed by management for accuracy and for potential impairment. 105 Table of Contents 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, 2020 and 2019: Fair Value at December 31, 2020 Valuation Technique Unobservable Inputs Range Collateral-dependent impaired loans $ 532 Appraisal Marketability discount 0 %- 12 % Mortgage-servicing rights $ 1,712 Discounted cash flow Discount rate 10 % Fair Value at December 31, 2019 Valuation Technique Unobservable Inputs Range Collateral-dependent impaired loans $ 57 Appraisal Marketability discount 0 % - 75 % Mortgage-servicing rights $ 1,033 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, 2020 and 2019. 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, 2020 Financial assets Cash and cash equivalents $ 48,768 $ 48,768 $ — $ — Available-for-sale securities 244,505 13 244,492 — Held-to-maturity securities 12,225 — 12,520 — Loans and leases receivable, net 736,400 — — 751,151 Federal Reserve and FHLB stock 9,050 — 9,050 — Interest receivable 4,704 — 4,704 — Financial liabilities Deposits 693,045 — 695,216 — FHLB advances 170,000 — 178,015 — Interest payable 222 — 222 — 106 Table of Contents 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, 2019 Financial assets Cash and cash equivalents $ 40,597 $ 40,597 $ — $ — Available-for-sale securities 201,784 13 201,771 — Held-to-maturity securities 15,917 — 16,156 — Loans and leases receivable, net 687,258 — — 687,789 Federal Reserve and FHLB stock 7,600 — 7,600 — Interest receivable 3,052 — 3,052 — Financial liabilities Deposits 617,219 — 619,635 — FHLB advances 154,000 — 155,304 — Interest payable 297 — 297 — 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, 2020 and 2019, 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, 2020 and 2019 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. 107 Table of Contents Note 19: 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 2020 2019 Assets Cash and cash equivalents $ 32,736 $ 43,835 Investment in subsidiaries 157,034 141,388 Other assets 4,810 4,395 Total assets $ 194,580 $ 189,618 Other Liabilities $ 1,867 $ 1,831 Stockholders' Equity 192,713 187,787 Total liabilities and stockholders' equity $ 194,580 $ 189,618 Condensed Statements of Income and Comprehensive Income 2020 2019 Other income $ 668 $ 272 Expenses - other expenses 2,140 9,352 Income (loss) before income taxes and equity in undistributed net income (loss) of subsidiaries ( 1,472 ) ( 9,080 ) Income tax benefit ( 372 ) ( 2,047 ) Income (loss) before equity in undistributed net income (loss) of subsidiary ( 1,100 ) ( 7,033 ) Equity in undistributed net income (loss) of subsidiaries 11,118 ( 7,051 ) Net Income (Loss) $ 10,018 $ ( 14,084 ) Comprehensive Income (Loss) $ 14,387 $ ( 10,367 ) Condensed Statements of Cash Flows 2020 2019 Operating Activities Net income (loss) $ 10,018 $ ( 14,084 ) Undistributed equity of subsidiaries ( 11,118 ) 7,051 Common Stock contributed to Foundation — 5,000 ESOP expense 648 316 Other changes ( 538 ) ( 5,140 ) Stock based Compensation 811 — Net cash used in operating activities ( 179 ) ( 6,857 ) Financing Activities Capital contribution to First Bank Richmond — ( 63,864 ) Proceeds from stock conversion — 113,021 Dividends paid ( 1,839 ) — Repurchase of Common Stock ( 9,081 ) — Net cash provided by (used in) financing activities ( 10,920 ) 49,157 Net Change in Cash and Cash Equivalents ( 11,099 ) 42,300 Cash and Cash Equivalents, Beginning of Period 43,835 1,535 Cash and Cash Equivalents, End of Period $ 32,736 $ 43,835 108 Table of Contents Note 20: 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 21: Subsequent Events Subsequent events have been evaluated through March 31, 2021, which is the date the consolidated financial statements were issued. 109 Table of Contents Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None.