Richmond Mutual Bancorporation, Inc. 10-Q

ITEM 1.FINANCIAL STATEMENTS Richmond Mutual Bancorporation, Inc. Condensed Consolidated Balance Sheets June 30, 2021 December 31, 2020 (Unaudited) Assets Cash and due from banks $ 11,454,348 $ 16,748,093 Interest-bearing demand deposits 5,632,959 32,020,364 Cash and cash equivalents 17,087,307 48,768,457 Investment securities - available for sale 329,777,143 244,505,189 Investment securities - held to maturity 9,852,918 12,225,275 Loans held for sale 602,910 1,986,650 Loans and leases, net of allowance for losses of $ 11,431,000 and $ 10,586,000 , respectively 785,339,191 734,413,448 Premises and equipment, net 14,440,960 14,892,110 Federal Home Loan Bank stock 9,049,600 9,049,600 Interest receivable 4,351,597 4,703,604 Mortgage-servicing rights 1,917,273 1,712,138 Cash surrender value of life insurance 3,572,047 3,525,736 Other assets 12,489,515 8,410,450 Total assets $ 1,188,480,461 $ 1,084,192,657 Liabilities Noninterest-bearing deposits 110,494,346 98,724,887 Interest-bearing deposits 682,575,629 594,320,508 Total deposits 793,069,975 693,045,395 Federal Home Loan Bank advances 189,000,000 170,000,000 Advances by borrowers for taxes and insurance 501,079 492,524 Interest payable 200,611 222,118 Multi-employer pension plan liability 17,454,709 17,454,709 Other liabilities 5,684,777 10,265,203 Total liabilities 1,005,911,151 891,479,949 Commitments and Contingent Liabilities — — Stockholders' Equity Common stock, $ 0.01 par value Authorized - 90,000,000 shares Issued and outstanding - 12,684,977 shares and 13,193,760 shares at June 30, 2021 and December 31, 2020, respectively 126,850 131,938 Additional paid-in capital 118,118,524 124,246,425 Retained earnings 75,957,135 78,290,113 Unearned employee stock ownership plan (ESOP) ( 13,296,017 ) ( 13,664,373 ) Accumulated other comprehensive income 1,662,818 3,708,605 Total stockholders' equity 182,569,310 192,712,708 Total liabilities and stockholders' equity $ 1,188,480,461 $ 1,084,192,657 See Notes to Condensed Consolidated Statements. 1 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Income (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Interest Income Loans and leases $ 9,592,444 $ 9,308,495 $ 19,220,749 $ 18,372,062 Investment securities 1,248,844 1,178,483 2,258,083 2,441,420 Other 6,074 11,447 12,978 136,477 Total interest income 10,847,362 10,498,425 21,491,810 20,949,959 Interest Expense Deposits 1,221,389 1,704,310 2,408,661 3,529,008 Borrowings 700,611 770,304 1,394,562 1,509,645 Total interest expense 1,922,000 2,474,614 3,803,223 5,038,653 Net Interest Income 8,925,362 8,023,811 17,688,587 15,911,306 Provision for losses on loans and leases 530,000 1,320,000 930,000 1,530,000 Net Interest Income After Provision for Losses on Loans and Leases 8,395,362 6,703,811 16,758,587 14,381,306 Noninterest Income Service charges on deposit accounts 198,782 105,618 393,221 360,269 Card fee income 274,688 201,748 517,203 381,355 Loan and lease servicing fees 248,738 301,230 143,288 235,538 Net gains on securities (includes $ 37,912 , $ 9,874 , $ 37,912 , and $ 79,013 , respectively, related to accumulated other comprehensive income reclassifications) 37,912 9,874 37,912 79,013 Net gains on loan and lease sales 569,411 1,030,668 1,534,228 1,258,876 Other loan fees 335,040 244,702 582,931 327,576 Other income 240,384 188,797 462,756 393,078 Total noninterest income 1,904,955 2,082,637 3,671,539 3,035,705 Noninterest Expenses Salaries and employee benefits 4,313,870 3,270,311 8,759,602 6,633,996 Net occupancy expenses 293,693 284,981 624,333 574,990 Equipment expenses 315,200 280,855 651,764 536,703 Data processing fees 562,614 472,071 1,088,787 948,874 Deposit insurance expense 64,000 60,000 135,000 116,000 Printing and office supplies 46,397 32,097 77,811 58,640 Legal and professional fees 288,523 326,815 635,041 568,181 Advertising expense 81,826 80,256 165,870 189,813 Bank service charges 28,996 28,465 59,747 65,820 Real estate owned expense 8,370 989 10,702 3,166 Loss on sale of real estate owned — — 1,278 — Other expenses 875,991 810,857 1,647,201 1,475,131 Total noninterest expenses 6,879,480 5,647,697 13,857,136 11,171,314 Income Before Income Tax Expense 3,420,837 3,138,751 6,572,990 6,245,697 Provision for income taxes (includes $ 7,962 , $ 2,503 , $ 7,962 , and $ 20,026 , respectively, related to income tax expense from reclassification of items) 639,490 632,574 1,229,157 1,287,374 Net Income $ 2,781,347 $ 2,506,177 $ 5,343,833 $ 4,958,323 Earnings Per Share Basic $ 0.24 $ 0.20 $ 0.46 $ 0.40 Diluted $ 0.24 $ 0.20 $ 0.45 $ 0.40 See Notes to Condensed Consolidated Statements. 2 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net Income $ 2,781,347 $ 2,506,177 $ 5,343,833 $ 4,958,323 Other Comprehensive Income (Loss) Unrealized gain (loss) on available-for-sale securities, net of tax expense (benefit) of $ 437,111 , $ 312,821 , $( 535,855 ), and $ 1,270,737 , respectively. 1,644,369 921,429 ( 2,015,837 ) 3,743,020 Less: reclassification adjustment for realized gains included in net income, net of tax expense of $ 7,962 , $ 2,503 , $ 7,962 , and $ 20,026 , respectively. 29,950 7,371 29,950 58,987 1,614,419 914,058 ( 2,045,787 ) 3,684,033 Comprehensive Income $ 4,395,766 $ 3,420,235 $ 3,298,046 $ 8,642,356 See Notes to Condensed Consolidated Statements. 3 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income Total Shares Outstanding Amount Balances, March 31, 2021 13,050,996 $ 130,510 $ 122,814,920 $ 80,005,652 $ ( 13,479,847 ) $ 48,399 $ 189,519,634 Net income — — — 2,781,347 — — 2,781,347 Other comprehensive income — — — — — 1,614,419 1,614,419 ESOP shares earned — — 6,978 — 183,830 — 190,808 Granting of restricted stock awards 4,000 40 ( 40 ) — — — — Stock based compensation — — 527,759 — — — 527,759 Common stock dividends ($ 0.07 per share) — — — ( 828,417 ) — — ( 828,417 ) Common stock dividends ($ 0.50 per share) — — — ( 6,001,447 ) — — ( 6,001,447 ) Repurchase of common stock ( 370,019 ) ( 3,700 ) ( 5,231,093 ) — — — ( 5,234,793 ) Balances, June 30, 2021 12,684,977 $ 126,850 $ 118,118,524 $ 75,957,135 $ ( 13,296,017 ) $ 1,662,818 $ 182,569,310 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income/(Loss) Total Shares Outstanding Amount Balances, December 31, 2020 13,193,760 $ 131,938 $ 124,246,425 $ 78,290,113 $ ( 13,664,373 ) $ 3,708,605 $ 192,712,708 Net income — — — 5,343,833 — — 5,343,833 Other comprehensive loss — — — — — ( 2,045,787 ) ( 2,045,787 ) ESOP shares earned — — 5,158 — 368,356 — 373,514 Granting of restricted stock awards 4,000 40 ( 40 ) — — — — Stock based compensation — — 1,035,383 — — — 1,035,383 Common stock dividends ($ 0.14 per share) — — — ( 1,675,364 ) — — ( 1,675,364 ) Common stock dividends ($ 0.50 per share) — — — ( 6,001,447 ) — — ( 6,001,447 ) Repurchase of common stock ( 512,783 ) ( 5,128 ) ( 7,168,402 ) — — — ( 7,173,530 ) Balances, June 30, 2021 12,684,977 $ 126,850 $ 118,118,524 $ 75,957,135 $ ( 13,296,017 ) $ 1,662,818 $ 182,569,310 4 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income Total Shares Outstanding Amount Balances, March 31, 2020 13,526,625 $ 135,266 $ 132,604,734 $ 72,563,580 $ ( 14,216,557 ) $ 2,109,231 $ 193,196,254 Net income — — — 2,506,177 — — 2,506,177 Other comprehensive income — — — — — 914,058 914,058 ESOP shares earned — — ( 41,064 ) — 183,829 — 142,765 Common stock dividends ($ 0.05 per share) — — — ( 623,352 ) 0 — ( 623,352 ) Balances, June 30, 2020 13,526,625 $ 135,266 $ 132,563,670 $ 74,446,405 $ ( 14,032,728 ) $ 3,023,289 $ 196,135,902 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income/(Loss) Total Shares Outstanding Amount 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 — — — 4,958,323 — — 4,958,323 Other comprehensive income — — — — — 3,684,033 3,684,033 ESOP shares earned — — ( 38,206 ) — 367,658 — 329,452 Common stock dividends ($ 0.05 per share) — — — ( 623,352 ) 0 — ( 623,352 ) Balances, June 30, 2020 13,526,625 $ 135,266 $ 132,563,670 $ 74,446,405 $ ( 14,032,728 ) $ 3,023,289 $ 196,135,902 See Notes to Condensed Consolidated Statements. 5 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2021 2020 Operating Activities Net income $ 5,343,833 $ 4,958,323 Items not requiring (providing) cash Provision for loan losses 930,000 1,530,000 Depreciation and amortization 576,086 484,092 Deferred income tax ( 211,032 ) 357,938 Stock based compensation 1,035,383 — Investment securities amortization, net 1,373,219 1,133,521 Investment securities gains ( 37,912 ) ( 79,013 ) Net gains on loan and lease sales ( 1,534,228 ) ( 1,258,876 ) Loss on sale of real estate owned 1,278 — Accretion of loan origination fees ( 1,506,839 ) ( 447,817 ) Amortization of mortgage-servicing rights 217,561 167,578 ESOP shares expense 373,514 329,452 Increase in cash surrender value of life insurance ( 46,311 ) ( 59,921 ) Loans originated for sale ( 47,955,898 ) ( 45,705,608 ) Proceeds on loans sold 46,572,158 49,041,089 Net change in Interest receivable 352,007 ( 1,668,660 ) Other assets ( 3,375,994 ) 715,669 Other liabilities ( 4,580,426 ) ( 2,094,301 ) Interest payable ( 21,507 ) 51,526 Net cash (used in) provided by operating activities ( 2,495,108 ) 7,454,992 Investing Activities Purchases of securities available for sale ( 127,336,767 ) ( 82,597,349 ) Proceeds from maturities and paydowns of securities available for sale 34,166,612 44,676,712 Proceeds from sales of securities available for sale 3,980,632 22,177,542 Proceeds from maturities and paydowns of securities held to maturity 2,365,016 2,585,037 Net change in loans ( 46,449,663 ) ( 69,212,998 ) Proceeds from sales of real estate owned 30,270 — Purchases of premises and equipment ( 124,936 ) ( 836,686 ) Purchase of FHLB stock — ( 1,479,300 ) Net cash used in investing activities ( 133,368,836 ) ( 84,687,042 ) Financing Activities Net change in Demand and savings deposits 62,024,795 60,126,140 Certificates of deposit 37,999,785 61,786,177 Advances by borrowers for taxes and insurance 8,555 ( 47,328 ) Proceeds from FHLB advances 80,000,000 40,000,000 Repayment of FHLB advances ( 61,000,000 ) ( 14,000,000 ) Repurchase of common stock ( 7,173,530 ) — Dividends paid ( 7,676,811 ) ( 623,352 ) Net cash provided by financing activities 104,182,794 147,241,637 Net Change in Cash and Cash Equivalents ( 31,681,150 ) 70,009,587 Cash and Cash Equivalents, Beginning of Period 48,768,457 40,596,877 Cash and Cash Equivalents, End of Period $ 17,087,307 $ 110,606,464 Additional Cash Flows and Supplementary Information Interest paid $ 3,824,730 $ 4,987,127 Transfers from loans to other real estate owned — 31,548 See Notes to Condensed Consolidated Statements. 6 Richmond Mutual Bancorporation, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands except per share amounts) Note 1: Basis of Presentation On July 1, 2019, Richmond Mutual Bancorporation, Inc., a Delaware corporation (“RMB-Delaware”), completed its reorganization from a mutual holding company form of organization to a stock form of organization (“corporate reorganization”). RMB-Delaware, which owned 100% of First Bank Richmond (the “Bank”), was succeeded by Richmond Mutual Bancorporation, Inc., a new Maryland corporation (“RMB-Maryland”). As part of the corporate reorganization, First Mutual of Richmond, Inc.’s (“MHC”) ownership interest in RMB-Delaware was sold in a public offering. Gross proceeds from the offering were $ 130.3 million. In conjunction with the corporate reorganization, RMB-Maryland contributed 500,000 shares and $ 1.25 million of cash to a newly formed charitable foundation, First Bank Richmond, Inc. Community Foundation (the “Foundation”). Additionally, a “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to MHC’s ownership interest in the retained earnings of RMB-Delaware as of December 31, 2017 and March 31, 2019. In certain circumstances, where appropriate, the terms “Company”, “we”, “us” and “our” refer collectively to (i) RMB-Delaware and First Bank Richmond with respect to discussions in this document involving matters occurring prior to completion of the corporate reorganization and (ii) RMB-Maryland and First Bank Richmond with respect to discussions in this document involving matters occurring post-corporate reorganization, in each case unless the context indicates another meaning. The costs of the corporate reorganization and the issuance of the common stock have been deducted from the sales proceeds of the offering. The accompanying unaudited condensed consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or note disclosures necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2021 (SEC File No. 001-38956). However, in the opinion of management, all adjustments which are necessary for a fair presentation of the consolidated financial statements have been included. Those adjustments consist only of normal recurring adjustments. The results of operations for the period are not necessarily indicative of the results to be expected for the full year. Loans For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. The Company charges off residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance, which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value, less costs to sell when the loan is 120 days past due, charge-off of unsecured open-end loans when the loan is 90 days past due, and charge down to the net realizable value when other secured loans are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off. For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status. 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 7 principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six months. Note 2: Accounting Pronouncements In March 2020, the novel coronavirus disease of 2019 ("COVID-19") 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 the United States Congress ("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 June 30, 2021, the Company has six loans outstanding for $ 2.5 million that were modified 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 borrower. 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 has originated a total of approximately $ 103.1 million in PPP loans as of June 30, 2021, of which approximately $ 34.6 million were outstanding at June 30, 2021. The Jumpstart Our Business Startups Act (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 Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments-Credit Losses (Topic 326). The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief” (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 8 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 evaluating its historical data available for use in adoption of the new credit loss standards. Additionally, we have formed an implementation team that meets 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 adoption of ASU 2020-04 did not have a material impact on the Company's consolidated financial statements. In October 2020, the FASB issued 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 adoption of ASU 2020-08 did not have a material impact on the Company's 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 adoption of ASU 2019-12 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: Investment Securities The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows: 9 June 30, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale SBA Pools $ 11,130 $ 98 $ 45 $ 11,183 Federal agencies 14,753 9 105 14,657 State and municipal obligations 133,140 2,378 709 134,809 Mortgage-backed securities - government-sponsored enterprises (GSE) residential 167,386 1,458 999 167,845 Corporate obligations 1,250 20 — 1,270 Equity securities 13 — — 13 327,672 3,963 1,858 329,777 Held to maturity State and municipal obligations 9,853 216 — 10,069 9,853 216 — 10,069 Total investment securities $ 337,525 $ 4,179 $ 1,858 $ 339,846 December 31, 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 The amortized cost and fair value of securities at June 30, 2021, 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 $ 3,313 $ 3,314 $ 1,396 $ 1,404 One to five years 6,885 7,075 5,371 5,476 Five to ten years 34,987 35,394 2,026 2,121 After ten years 115,088 116,136 1,060 1,068 160,273 161,919 9,853 10,069 Mortgage-backed securities –GSE residential 167,386 167,845 — — Equity securities 13 13 — — Totals $ 327,672 $ 329,777 $ 9,853 $ 10,069 10 Securities with a carrying value of $ 159,483,000 and $ 88,370,000 were pledged at June 30, 2021 and December 31, 2020, respectively, to secure certain deposits and for other purposes as permitted or required by law. Proceeds from sales of securities available for sale for both the three and six months ended June 30, 2021 were $ 3,981,000 . For the three and six months ended June 30, 2020, proceeds from the sales of securities available for sale were $ 10,716,000 and $ 22,178,000 , respectively. Gross gains were recognized on the sale of securities available-for-sale for the three and six months ended June 30, 2021 and 2020 of $ 38,000 , $ 38,000 , $ 66,000 , and $ 136,000 , respectively. There were no gross losses recognized on the sale of securities available for sale for the three and six months ended June 30, 2021. Gross losses of $ 56,000 were recognized on the sale of securities available-for-sale for both the three and six months ended June 30, 2020. Certain investments in debt securities, as reflected in the table below, are reported in the condensed consolidated financial statements and notes at an amount less than their historical cost. Total fair value of these investments at June 30, 2021 and December 31, 2020 was $ 141,724,000 and $ 45,299,000 , respectively, which is approximately 42 % and 18 % of the Company’s aggregated available-for-sale and held-to-maturity investment portfolio at those dates, respectively. These declines primarily resulted from changes in market interest rates since their purchase. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any other securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. The following tables show the Company’s investments by gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2021 and December 31, 2020: Description of Securities June 30, 2021 Less Than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-sale SBA Pools $ 1,958 $ 12 $ 4,553 $ 33 $ 6,511 $ 45 Federal agencies 7,895 105 — — 7,895 105 State and municipal obligations 46,025 643 1,836 66 47,861 709 Mortgage-backed securities - GSE residential 79,126 999 331 — 79,457 999 Total temporarily impaired securities $ 135,004 $ 1,759 $ 6,720 $ 99 $ 141,724 $ 1,858 Description of Securities December 31, 2020 Less Than 12 Months 12 Months or More Total 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 11 Federal Agencies. The unrealized losses on the Company’s investments in direct obligations of U.S. federal agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2021. Mortgage-Backed Securities – GSE Residential and SBA Pools. The unrealized losses on the Company’s investment in mortgage-backed securities and SBA pools were caused by interest rate changes and illiquidity. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in fair 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 June 30, 2021. State and Municipal Obligations. The unrealized losses on the Company’s investments in securities of state and municipal obligations were caused by interest rate changes and illiquidity. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2021. Note 4: Loans, Leases and Allowance The following table shows the composition of the loan and lease portfolio at June 30, 2021 and December 31, 2020: June 30, 2021 December 31, 2020 Commercial mortgage $ 249,376 $ 247,564 Commercial and industrial 117,079 122,831 Construction and development 80,685 58,424 Multi-family 80,534 55,998 Residential mortgage 129,049 125,121 Home equity 6,325 5,982 Direct financing leases 121,006 117,171 Consumer 14,676 13,257 798,730 746,348 Less Allowance for loan and lease losses 11,431 10,586 Deferred loan fees 1,960 1,349 $ 785,339 $ 734,413 12 The following tables present the activity in the allowance for loan and lease losses for the three and six months ended June 30, 2021 and 2020: Commercial Mortgage (1) Commercial and Industrial Residential Mortgage (2) Leases Consumer Total Three Months Ended June 30, 2021: Balance, beginning of period $ 8,359 $ 1,138 $ 257 $ 1,029 $ 176 $ 10,959 Provision (credit) for losses 557 ( 189 ) ( 17 ) 70 109 530 Charge-offs — ( 3 ) — ( 171 ) ( 64 ) ( 238 ) Recoveries 1 36 51 85 7 180 Balance, end of period $ 8,917 $ 982 $ 291 $ 1,013 $ 228 $ 11,431 Six Months Ended June 30, 2021: Balance, beginning of period $ 7,797 $ 1,248 $ 270 $ 1,054 $ 217 $ 10,586 Provision (credit) for losses 1,118 ( 322 ) ( 36 ) 145 25 930 Charge-offs — ( 3 ) — ( 365 ) ( 75 ) ( 443 ) Recoveries 2 59 57 179 61 358 Balance, end of period $ 8,917 $ 982 $ 291 $ 1,013 $ 228 $ 11,431 (1) Commercial mortgage includes commercial and multifamily real estate loans and commercial construction and development loans. (2) Residential mortgage includes one- to four-family and home equity loans and residential construction and development loans. Commercial Mortgage (1) Commercial and Industrial Residential Mortgage (2) Leases Consumer Total Three Months Ended June 30, 2020: Balance, beginning of period $ 4,668 $ 1,772 $ 148 $ 583 $ 135 $ 7,306 Provision (credit) for losses 844 ( 94 ) 172 378 20 1,320 Charge-offs — — ( 20 ) ( 134 ) ( 16 ) ( 170 ) Recoveries 5 32 8 11 9 65 Balance, end of period $ 5,517 $ 1,710 $ 308 $ 838 $ 148 $ 8,521 Six Months Ended June 30, 2020: Balance, beginning of period $ 4,564 $ 1,852 $ 109 $ 426 $ 138 $ 7,089 Provision (credit) for losses 917 ( 182 ) 210 569 16 1,530 Charge-offs — — ( 35 ) ( 190 ) ( 21 ) ( 246 ) Recoveries 36 40 24 33 15 148 Balance, end of period $ 5,517 $ 1,710 $ 308 $ 838 $ 148 $ 8,521 (1) Commercial mortgage includes commercial and multifamily real estate loans and commercial construction and development loans. (2) Residential mortgage includes one- to four-family and home equity loans and residential construction and development loans. 13 The following tables present the balance in the allowance for loan and lease losses and the recorded investment in loans and leases based on portfolio segment and impairment method as of June 30, 2021 and December 31, 2020: June 30, 2021 Commercial Mortgage (1) Commercial and Industrial Residential Mortgage (2) Leases Consumer Total Allowance for loan and lease losses: Individually evaluated for impairment $ 900 $ 52 $ — $ — $ — $ 952 Collectively evaluated for impairment 8,017 930 291 1,013 228 10,479 Balance, June 30 $ 8,917 $ 982 $ 291 $ 1,013 $ 228 $ 11,431 Loans and leases: Individually evaluated for impairment $ 5,704 $ 424 $ 177 $ — $ — $ 6,305 Collectively evaluated for impairment 466,337 94,604 91,533 121,006 18,945 792,425 Ending Balance, June 30 $ 472,041 $ 95,028 $ 91,710 $ 121,006 $ 18,945 $ 798,730 (1) Commercial mortgage includes commercial and multifamily real estate loans and commercial construction and development loans. (2) Residential mortgage includes one- to four-family and home equity loans and residential construction and development loans. December 31, 2020 Commercial Mortgage (1) Commercial and Industrial Residential Mortgage (2) Leases Consumer Total Allowance for loan and lease losses: 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 and leases: Individually evaluated for impairment $ 701 $ 493 $ 269 $ — $ — $ 1,463 Collectively evaluated for impairment 404,278 106,794 99,393 117,171 17,249 744,885 Ending Balance, December 31 $ 404,979 $ 107,287 $ 99,662 $ 117,171 $ 17,249 $ 746,348 (1) Commercial mortgage includes commercial and multifamily real estate loans and commercial construction and development loans. (2) Residential mortgage includes one- to four-family and home equity loans and residential construction and development loans. The Company rates all loans and leases by credit quality using the following designations: Grade 1 – Exceptional Exceptional loans and leases are top-quality loans to individuals whose financial credentials are well known to the Company. These loans and leases have excellent sources of repayment, are well documented and/or virtually free of risk (i.e., CD secured loans). Grade 2 – Quality Loans and Leases These loans and leases have excellent sources of repayment with no identifiable risk of collection, and they conform in all respects to Company policy and Indiana Department of Financial Institutions (“IDFI”) and Federal Deposit Insurance Corporation (“FDIC”) regulations. Documentation exceptions are minimal or are in the process of being corrected and are not of a type that could subsequently expose the Company to risk of loss. 14 Grade 3 – Acceptable Loans This category is for “average” quality loans and leases. These loans and leases have adequate sources of repayment with little identifiable risk of collection and they conform to Company policy and IDFI/FDIC regulations. Grade 4 – Acceptable but Monitored Loans and leases in this category may have a greater than average risk due to financial weakness or uncertainty but do not appear to require classification as special mention or substandard loans. Loans and leases rated “4” need to be monitored on a regular basis to ascertain that the reasons for placing them in this category do not advance or worsen. Grade 5 – Special Mention Loans and leases in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company’s credit position at some future date. Special Mention loans and leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. This special mention rating is designed to identify a specific level of risk and concern about an asset’s quality. Although a special mention loan or leases has a higher probability of default than a pass rated loan or lease, its default is not imminent. Grade 6 – Substandard Loans and leases in this category are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans and leases so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans and leases have a high probability of payment default, or they have other well-defined weaknesses. Such loans and leases have a distinct potential for loss; however, an individual loan’s or lease’s potential for loss does not have to be distinct for the loan or lease to be rated substandard. The following are examples of situations that might cause a loan or lease to be graded a “6”: • Cash flow deficiencies (losses) jeopardize future loan or lease payments. • Sale of non-collateral assets has become a primary source of loan or lease repayment. • The relationship has deteriorated to the point that sale of collateral is now the Company’s primary source of repayment, unless this was the original source of loan or lease repayment. • The borrower is bankrupt or for any other reason future repayment is dependent on court action. Grade 7 – Doubtful A loan or lease classified as doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. A doubtful loan or lease has a high probability of total or substantial loss. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Because of high probability of loss, nonaccrual accounting treatment will be required for doubtful loans and leases. Grade 8 – Loss Loans and leases classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan or lease has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan or lease even though partial recovery may be effected in the future. The risk characteristics of each loan and lease portfolio segment are as follows: 15 Commercial and Industrial Commercial and industrial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial Mortgage including Construction Loans in this segment include commercial loans, commercial construction loans, and multi-family loans. This segment also includes loans secured by 1-4 family residences which were made for investment purposes. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus nonowner-occupied loans. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. Residential, Brokered and Consumer Residential, brokered and consumer loans consist of three segments – residential mortgage loans, brokered mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Brokered mortgages are purchased residential mortgage loans meeting the Company’s criteria established 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. 16 The following tables present the credit risk profile of the Company’s loan and lease portfolio based on rating category and payment activity as of June 30, 2021 and December 31, 2020: June 30, 2021 Commercial Mortgage Industrial Construction and Development Multi- Family Residential Mortgage Home Equity Leases Consumer Total 1-4 Pass $ 241,322 $ 110,773 $ 75,785 $ 80,534 $ 126,914 $ 6,273 $ 120,862 $ 14,665 $ 777,128 5 Special Mention 7,854 4,939 — — — — — — 12,793 6 Substandard 200 1,367 4,900 — 2,135 52 57 11 8,722 7 Doubtful — — — — — — 87 — 87 8 Loss — — — — — — — — — $ 249,376 $ 117,079 $ 80,685 $ 80,534 $ 129,049 $ 6,325 $ 121,006 $ 14,676 $ 798,730 December 31, 2020 Commercial Mortgage Industrial Construction and Development Multi- Family Residential Mortgage Home Equity Leases Consumer Total 1-4 Pass $ 239,055 $ 114,411 $ 53,524 $ 55,998 $ 121,976 $ 5,916 $ 117,136 $ 13,256 $ 721,272 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 $ 125,121 $ 5,982 $ 117,171 $ 13,257 $ 746,348 The following tables present the Company’s loan and lease portfolio aging analysis of the recorded investment in loans and leases as of June 30, 2021 and December 31, 2020: June 30, 2021 Delinquent Loans Current Total Portfolio Loans and Leases Total Loans and Leases > 90 Days Accruing 30-59 Days Past Due 60-89 Days Past Due 90 Days and Over Total Past Due Commercial mortgage $ 31 $ — $ 200 $ 231 $ 249,145 $ 249,376 $ — Commercial and industrial 87 604 372 1,063 116,016 117,079 — Construction and development — — 4,900 4,900 75,785 80,685 — Multi-family — — — — 80,534 80,534 — Residential mortgage 503 362 2,109 2,974 126,075 129,049 1,985 Home equity 101 20 13 134 6,191 6,325 13 Leases 84 120 — 204 120,802 121,006 — Consumer 91 1 11 103 14,573 14,676 11 Totals $ 897 $ 1,107 $ 7,605 $ 9,609 $ 789,121 $ 798,730 $ 2,009 17 December 31, 2020 Delinquent Loans Current Total Portfolio Loans and Leases Total Loans and Leases > 90 Days Accruing 30-59 Days Past Due 60-89 Days Past Due 90 Days and Over Total Past Due 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 4,836 120,285 125,121 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 $ 731,961 $ 746,348 $ 3,996 The following tables present the Company’s impaired loans and specific valuation allowance at June 30, 2021 and December 31, 2020: June 30, 2021 Recorded Balance Unpaid Principal Balance Specific Allowance Impaired loans without a specific valuation allowance Commercial mortgage $ 200 $ 219 $ — Commercial and industrial 372 571 — Residential mortgage 177 299 — $ 749 $ 1,089 $ — Impaired loans with a specific valuation allowance Commercial mortgage $ 5,504 $ 5,504 $ 900 Commercial and industrial 52 64 52 $ 5,556 $ 5,568 $ 952 Total impaired loans Commercial mortgage $ 5,704 $ 5,723 $ 900 Commercial and industrial 424 635 52 Residential mortgage 177 299 — Total impaired loans $ 6,305 $ 6,657 $ 952 18 December 31, 2020 Recorded Balance Unpaid Principal Balance Specific Allowance Impaired loans without a specific valuation allowance Commercial mortgage $ 76 $ 86 $ — Commercial and industrial 439 770 — Residential mortgage 269 491 — $ 784 $ 1,347 $ — Impaired loans with a specific valuation allowance Commercial mortgage $ 625 $ 625 $ 150 Commercial and industrial 54 64 52 $ 679 $ 689 $ 202 Total impaired loans Commercial mortgage $ 701 $ 711 $ 150 Commercial and industrial 493 834 52 Residential mortgage 269 491 — Total impaired loans $ 1,463 $ 2,036 $ 202 The following tables present the Company’s average investment in impaired loans and leases, and interest income recognized for the three and six months ended June 30, 2021 and 2020: Average Investment in Impaired Loans and Leases Interest Income Recognized Three Months Ended June 30, 2021: Total impaired loans Commercial mortgage $ 5,643 $ 10 Commercial and industrial 436 — Residential mortgage 178 2 Total impaired loans and leases $ 6,257 $ 12 Average Investment in Impaired Loans and Leases Interest Income Recognized Six Months Ended June 30, 2021: Total impaired loans Commercial mortgage $ 3,996 $ 17 Commercial and industrial 455 4 Residential mortgage 179 3 Total impaired loans and leases $ 4,630 $ 24 19 Average Investment in Impaired Loans and Leases Interest Income Recognized Three Months Ended June 30, 2020: Total impaired loans Commercial mortgage $ 745 $ 11 Commercial and industrial 645 14 Residential mortgage 265 1 Total impaired loans and leases $ 1,655 $ 26 Average Investment in Impaired Loans and Leases Interest Income Recognized Six Months Ended June 30, 2020: Total impaired loans Commercial mortgage $ 765 $ 18 Commercial and industrial 661 28 Residential mortgage 292 6 Total impaired loans and leases $ 1,718 $ 52 The following table presents the Company’s nonaccrual loans and leases at June 30, 2021 and December 31, 2020: June 30, 2021 December 31, 2020 Commercial mortgage $ 200 $ 76 Commercial and industrial 423 493 Construction 4,900 — Residential mortgage 124 214 Leases 87 20 $ 5,734 $ 803 During the three and six months ended June 30, 2021 and 2020, there were no newly classified troubled debt restructured loans or leases (“TDRs”). For the three and six months ended June 30, 2021 and 2020, the Company recorded no charge-offs related to TDRs. As of both June 30, 2021 and December 31, 2020, TDRs had a related allowance of $ 52,000 . During the three and six months ended June 30, 2021, there were no TDRs for which there was a payment default within the first 12 months of the modification. The CARES Act provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. As of June 30, 2021, the Company had six loan and lease modifications outstanding related to the COVID-19 pandemic with an 20 outstanding loan balance totaling $ 2.5 million in accordance with the CARES Act. Accordingly, the Company does not account for such loan modifications as TDRs. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. At June 30, 2021 and December 31, 2020, the balance of real estate owned included $ 0 and $ 32,000 , respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At June 30, 2021 and December 31, 2020, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds were in process was $ 442,000 and $ 283,000 , respectively. The following lists the components of the net investment in direct financing leases: June 30, 2021 December 31, 2020 Total minimum lease payments to be received $ 133,343 $ 129,114 Initial direct costs 6,947 6,353 140,290 135,467 Less: Unearned income ( 19,284 ) ( 18,296 ) Net investment in direct finance leases $ 121,006 $ 117,171 Leases serviced by First Bank Richmond for the benefit of others totaled approximately $ 0 and $ 86,000 at June 30, 2021 and December 31, 2020, respectively. Additionally, certain leases have been sold with partial recourse. First Bank Richmond estimates and records its obligation based upon historical loss percentages. At both June 30, 2021 and December 31, 2020, First Bank Richmond recorded a recourse obligation on leases sold of $ 0 , and had a maximum exposure of $ 0 and $ 86,000 , respectively, for these leases. The following table summarizes the future minimum lease payments receivable subsequent to June 30, 2021: 2021 $ 26,903 2022 44,102 2023 31,100 2024 19,797 2025 9,730 Thereafter 1,711 $ 133,343 Note 5: Fair Value of Financial Instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities 21 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 June 30, 2021 and December 31, 2020: 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) June 30, 2021 Available-for-sale securities SBA Pools $ 11,183 $ — $ 11,183 $ — Federal agencies 14,657 — 14,657 — State and municipal obligations 134,809 — 134,809 — Mortgage-backed securities - GSE residential 167,845 — 167,845 — Corporate obligations 1,270 — 1,270 — Equity securities 13 13 — — $ 329,777 $ 13 $ 329,764 $ — 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 $ — 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 six months ended June 30, 2021. Available-for-Sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy, which includes equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include agency securities, obligations of state and political subdivisions, and mortgage-backed securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Nonrecurring Measurements 22 The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2021 and December 31, 2020: 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) June 30, 2021 Impaired loans, collateral dependent $ 4,658 $ — $ — $ 4,658 Mortgage-servicing rights 1,917 — — 1,917 December 31, 2020 Impaired loans, collateral dependent $ 532 $ — $ — $ 532 Mortgage-servicing rights 1,712 — — 1,712 Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Collateral-Dependent Impaired Loans, Net of ALLL The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results. Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans. Mortgage-Servicing Rights Mortgage-servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, mortgage-servicing rights are classified within Level 3 of the hierarchy. Mortgage-servicing rights are tested for impairment on a quarterly basis based on an independent valuation. The valuation is reviewed by management for accuracy and for potential impairment. 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 June 30, 2021 and December 31, 2020: 23 Fair Value at June 30, 2021 Valuation Technique Unobservable Inputs Range Collateral-dependent impaired loans $ 4,658 Appraisal Marketability discount 0 - 16 % Mortgage-servicing rights $ 1,917 Discounted cash flow Discount rate 10 % 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 of Financial Instruments The following tables present estimated fair values of the Company’s financial instruments at June 30, 2021 and December 31, 2020: Fair Value Measurements Using Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) June 30, 2021 Financial assets Cash and cash equivalents $ 17,087 $ 17,087 $ — $ — Available-for-sale securities 329,777 13 329,764 — Held-to-maturity securities 9,853 — 10,069 — Loans held for sale 603 — — 608 Loans and leases receivable, net 785,339 — — 802,520 Federal Reserve and FHLB stock 9,050 — 9,050 — Interest receivable 4,352 — 4,352 — Financial liabilities Deposits 793,070 — 794,833 — FHLB advances 189,000 — 195,820 — Interest payable 201 — 201 — 24 Fair Value Measurements Using 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 held for sale 1,987 — — 2,021 Loans and leases receivable, net 734,413 — — 749,130 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 — Note 6: Earnings per Share Basic EPS is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted EPS includes the dilutive effect of additional potential common shares from stock compensation awards, but excludes awards considered participating securities. ESOP shares are not considered outstanding for EPS until they are earned. The following table presents the computation of basic and diluted EPS for the periods indicated: Three Months Ended June 30, 2021 Three Months Ended June 30, 2020 Net income $ 2,781 $ 2,506 Shares outstanding for Basic EPS: Average shares outstanding 12,896,773 13,526,625 Less: average restricted stock award shares not vested 434,544 — Less: average unearned ESOP Shares 991,785 1,045,892 Shares outstanding for Basic EPS 11,470,444 12,480,733 Additional Dilutive Shares 259,833 — Shares outstanding for Diluted EPS 11,730,277 12,480,733 Basic Earnings Per Share $ 0.24 $ 0.20 Diluted Earnings Per Share $ 0.24 $ 0.20 25 Six Months Ended June 30, 2021 Six Months Ended June 30, 2020 Net income $ 5,344 $ 4,958 Shares outstanding for Basic EPS: Average shares outstanding 13,009,766 13,526,625 Less: average restricted stock award shares not vested 433,031 — Less: average unearned ESOP Shares 998,511 1,052,656 Shares outstanding for Basic EPS 11,578,224 12,473,969 Additional Dilutive Shares 212,869 — Shares outstanding for Diluted EPS 11,791,093 12,473,969 Basic Earnings Per Share $ 0.46 $ 0.40 Diluted Earnings Per Share $ 0.45 $ 0.40 Note 7: 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 six percent of base salary contributed by participants. The Company’s expense for the plan was $ 64,000 , $ 116,000 , $ 57,000 , and $ 106,000 for the three and six months ended June 30, 2021 and 2020, respectively. Pension Plan The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (the “DB Plan”), an industry-wide, tax-qualified defined-benefit pension plan. The Company is in the process of terminating its participation in the Pentegra Defined Benefits Plan, which will require a payment of an amount based on the underfunded status of the plan, referred to as a withdrawal liability. In 2019, the Company estimated and accrued approximately $ 17.5 million for this withdrawal liability. This estimated withdrawal liability was calculated by plan administrators based on an interest rate of 2.35 %, Pri-2012 mortality tables with white collar adjustments, and an assumed December 31, 2019 withdrawal date. The Company’s actual termination expense will be based on the cost of purchasing annuities through an insurance company, and may be higher or lower depending on a number of factors, including the interest rate environment and the valuation of plan assets. Due to the current low interest rate environment, terminating the DB Plan at this time would require the Company to incur a substantial additional expense over and above the amount presently accrued, as interest rates are even lower now than they were in 2019. As a result, the Company’s Board of Directors will continue to monitor and evaluate the timing of, and costs associated with, termination of the DB Plan, and it is currently uncertain when the termination of the DB Plan will be completed or what the actual costs of such termination will be. Any additional expenses associated with the termination of the DB Plan will negatively impact our results of operations in the future. We recorded ongoing expenses of $ 173,000 for the quarter ended June 30, 2021, in connection with the freezing of the DB Plan. Employee Stock Ownership Plan As part of the reorganization and related stock offering, the Company established an Employee Stock Ownership Plan, or 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. 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 have not yet been allocated to ESOP participants are excluded from the computation of average shares outstanding for earnings per share calculation. Accordingly, $ 13,296,017 and $ 13,664,373 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity at June 30, 2021 and December 31, 2020, respectively. Shares are released to participants proportionately as the loan is repaid. 26 ESOP expense for the three and six months ended June 30, 2021 and 2020 was $ 191,000 , $ 374,000 , $ 143,000 , and $ 329,000 , respectively. June 30, 2021 December 31, 2020 Earned ESOP shares 103,722 76,669 Unearned ESOP shares 978,408 1,005,461 Total ESOP shares 1,082,130 1,082,130 Quoted per share price $ 14.90 $ 13.66 Fair value of earned shares $ 1,545 $ 1,047 Fair value of unearned shares $ 14,578 $ 13,735 Richmond Mutual Bancorporation, Inc. 2020 Equity Incentive Plan On September 15, 2020, the Company's stockholders approved the Richmond Mutual Bancorporation, Inc. 2020 Equity Incentive Plan ("2020 EIP") which provides for the grant to eligible participants of up to (i) 1,352,662 shares of Company common stock to be issued upon the exercise of stock options and stock appreciation rights and (ii) 541,065 shares of Company common stock to participants as restricted stock awards (which may be in the form of shares of common stock or share units giving the participant the right to receive shares of common stock at a specified future date). Restricted Stock Awards . On October 1, 2020, the Company awarded 449,086 shares of common stock under the 2020 EIP with a grant date fair value of $ 10.53 per share (total fair value of $ 4.7 million at issuance) to eligible participants. On April 1, 2021, the Company awarded an additional 4,000 shares of common stock under the 2020 EIP with a grant date fair value of $ 13.86 (total fair value of $ 55,000 ) to eligible participants. These awards vest in five equal annual installments with the first vesting occurring on June 30, 2021. Forfeited shares may be awarded to other eligible recipients in future grants until the 2020 EIP terminates in September 2030. The following table summarizes the restricted stock awards activity in the 2020 EIP during the six months ended June 30, 2021. Six Months Ended June 30, 2021 Number of Restricted Shares Weighted Average Grant Date Fair Value Non-vested, beginning of period 431,501 $ 10.53 Granted 4,000 13.86 Vested ( 87,106 ) 10.56 Forfeited — — Non-vested, June 30 348,395 10.56 Total compensation cost recognized in the income statement for restricted stock awards during the three and six months ended June 30, 2021 was $ 317,000 and $ 619,000 , respectively, and the related tax benefit recognized was $ 66,000 and $ 130,000 , respectively. As of June 30, 2021, unrecognized compensation expense related to restricted stock awards was $ 3.7 million. Stock Option Plan. On October 1, 2020, the Company awarded options to purchase 1,095,657 of common stock under the 2020 EIP with an exercise price of $ 10.53 per share, the fair value of a share of the Company's common stock on the date of grant, to eligible participants. On April 1, 2021, the Company awarded options to purchase 8,000 shares of common stock under the 2020 EIP with an exercise price of $ 13.86 per share, the fair value of a share of the Company's common stock on the date of the grant, to eligible participants. These options awarded vest in five equal annual installments with the first vesting occurring on June 30, 2021. Forfeited options may be awarded to other eligible recipients in future grants until the 2020 EIP terminates in September 2030. 27 The following table summarizes the stock option activity in the 2020 EIP during the six months ended June 30, 2021. Six Months Ended June 30, 2021 Number of Shares Weighted-Average Exercise Price Balance at beginning of period 1,095,657 $ 10.53 Granted 8,000 13.86 Exercised — — Forfeited/expired — — Balance, June 30 1,103,657 10.55 Exercisable at end of period 253,199 $ 10.55 The fair value of options granted is estimated on the date of the grant using a Black Scholes model with the following assumptions: April 1, 2021 Dividend yields 1.90 % Volatility factors of expected market price of common stock 26.98 % Risk-free interest rates 1.16 % Expected life of options 6.1 years A summary of the status of the Company stock option shares as of June 30, 2021 is presented below. Shares Weighted Average Grant Date Fair Value Non-vested, beginning of year 1,055,077 $ 2.91 Vested ( 212,619 ) 2.91 Granted 8,000 3.02 Forfeited — — Non-vested, June 30 850,458 $ 2.91 Total compensation cost recognized in the income statement for option-based payment arrangements for the three and six months ended June 30, 2021 was $ 211,000 and $ 416,000 , respectively, and the related tax benefit recognized was $ 23,000 and $ 46,000 , respectively. As of June 30, 2021, unrecognized compensation expense related to the stock option awards was $ 2.5 million. Note 8: Subsequent Event Subsequent to June 30, 2021 through August 13, 2021 the Company purchased 214,096 shares of the Company's common stock pursuant to the existing stock repurchase program, leaving 1,096,311 shares available for future repurchase. 28