Richmond Mutual Bancorporation, Inc. 10-Q

ITEM 1.FINANCIAL STATEMENTS Richmond Mutual Bancorporation, Inc. Condensed Consolidated Balance Sheets June 30, 2023 December 31, 2022 (Unaudited) Assets Cash and due from banks $ 9,488,299 $ 7,782,348 Interest-earning demand deposits 7,975,753 8,139,745 Cash and cash equivalents 17,464,052 15,922,093 Interest-earning time deposits 490,000 490,000 Investment securities - available for sale 281,345,560 284,899,665 Investment securities - held to maturity 5,750,937 6,672,233 Loans held for sale 339,900 473,700 Loans and leases, net of allowance for credit losses of $ 15,391,229 and $ 12,413,035 , respectively 1,043,024,130 961,690,677 Premises and equipment, net 13,538,701 13,668,496 Federal Home Loan Bank stock 10,802,200 9,947,300 Interest receivable 5,036,238 4,710,481 Mortgage-servicing rights 1,991,190 2,011,889 Cash surrender value of life insurance 3,719,355 3,674,499 Other assets 25,684,940 24,459,108 Total assets $ 1,409,187,203 $ 1,328,620,141 Liabilities Noninterest-bearing deposits 104,690,515 106,414,812 Interest-bearing deposits 934,882,164 898,845,958 Total deposits 1,039,572,679 1,005,260,770 Federal Home Loan Bank advances 226,000,000 180,000,000 Advances by borrowers for taxes and insurance 591,087 560,196 Interest payable 3,288,342 1,369,351 Other liabilities 8,906,048 8,451,521 Total liabilities 1,278,358,156 1,195,641,838 Commitments and Contingent Liabilities — — Stockholders' Equity Common stock, $ 0.01 par value Authorized - 90,000,000 shares Issued and outstanding - 11,448,621 shares and 11,784,246 shares at June 30, 2023 and December 31, 2022, respectively 114,486 117,842 Additional paid-in capital 103,216,869 106,088,897 Retained earnings 87,523,266 88,715,782 Unearned employee stock ownership plan (ESOP) ( 11,825,384 ) ( 12,193,043 ) Accumulated other comprehensive loss ( 48,200,190 ) ( 49,751,175 ) Total stockholders' equity 130,829,047 132,978,303 Total liabilities and stockholders' equity $ 1,409,187,203 $ 1,328,620,141 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, 2023 2022 2023 2022 Interest Income Loans and leases $ 14,098,236 $ 10,682,371 $ 27,291,409 $ 20,948,330 Investment securities 1,990,329 1,733,844 3,924,401 3,402,495 Other 134,023 31,630 199,576 39,108 Total interest income 16,222,588 12,447,845 31,415,386 24,389,933 Interest Expense Deposits 5,543,895 1,274,830 9,570,570 2,523,481 Borrowings 1,345,441 624,363 2,640,754 1,264,186 Total interest expense 6,889,336 1,899,193 12,211,324 3,787,667 Net Interest Income 9,333,252 10,548,652 19,204,062 20,602,266 Provision for credit losses 8,210 200,000 178,316 400,000 Net Interest Income After Provision for Credit Losses 9,325,042 10,348,652 19,025,746 20,202,266 Noninterest Income Service charges on deposit accounts 275,783 248,412 556,778 482,957 Card fee income 313,466 302,013 600,724 579,783 Loan and lease servicing fees 109,643 178,071 229,715 205,939 Net gains on loan and lease sales 154,038 221,778 309,601 464,764 Gain on sale of real estate owned — — 1,921 — Other income 325,192 226,202 576,107 558,395 Total noninterest income 1,178,122 1,176,476 2,274,846 2,291,838 Noninterest Expenses Salaries and employee benefits 4,272,189 4,514,862 8,514,217 8,966,159 Net occupancy expenses 316,972 347,779 667,794 711,312 Equipment expenses 266,211 323,412 597,534 633,967 Data processing fees 821,938 567,909 1,658,451 1,226,824 Deposit insurance expense 192,000 81,000 360,000 162,000 Printing and office supplies 36,308 54,783 72,579 95,067 Legal and professional fees 356,499 335,862 667,475 683,362 Advertising expense 78,281 103,803 166,472 195,995 Bank service charges 54,796 30,957 103,415 60,758 Real estate owned expense 23,876 5,785 23,823 8,286 Loss on sale of real estate owned — 847 — 847 Other expenses 916,937 790,669 1,865,435 1,746,910 Total noninterest expenses 7,336,007 7,157,668 14,697,195 14,491,487 Income Before Income Tax Expense 3,167,157 4,367,460 6,603,397 8,002,617 Provision for income taxes 475,030 882,118 1,007,224 1,499,683 Net Income $ 2,692,127 $ 3,485,342 $ 5,596,173 $ 6,502,934 Earnings Per Share Basic $ 0.26 $ 0.32 $ 0.53 $ 0.60 Diluted $ 0.26 $ 0.31 $ 0.53 $ 0.58 See Notes to Condensed Consolidated Statements. 2 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net Income $ 2,692,127 $ 3,485,342 $ 5,596,173 $ 6,502,934 Other Comprehensive (Loss) Income Unrealized (loss) gain on available-for-sale securities, net of tax of $( 1,227,830 ), $( 3,695,140 ), $ 412,287 , and $( 10,108,049 ), respectively. ( 4,618,979 ) ( 13,900,763 ) 1,550,985 ( 38,025,519 ) ( 4,618,979 ) ( 13,900,763 ) 1,550,985 ( 38,025,519 ) Comprehensive (Loss) Income $ ( 1,926,852 ) $ ( 10,415,421 ) $ 7,147,158 $ ( 31,522,585 ) See Notes to Condensed Consolidated Statements. 3 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) Three Months Ended June 30, 2023 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Loss Total Shares Outstanding Amount Balances, March 31, 2023 11,685,693 $ 116,857 $ 105,305,039 $ 86,314,805 $ ( 12,009,214 ) $ ( 43,581,211 ) $ 136,146,276 Net income — — — 2,692,127 — — 2,692,127 Other comprehensive loss — — — — — ( 4,618,979 ) ( 4,618,979 ) ESOP shares earned — — ( 42,880 ) — 183,830 — 140,950 Stock based compensation — — 383,612 — — — 383,612 Common stock dividends ($ 0.14 per share) — — — ( 1,483,666 ) — — ( 1,483,666 ) Repurchase of common stock ( 237,072 ) ( 2,371 ) ( 2,428,902 ) — — — ( 2,431,273 ) Balances, June 30, 2023 11,448,621 $ 114,486 $ 103,216,869 $ 87,523,266 $ ( 11,825,384 ) $ ( 48,200,190 ) $ 130,829,047 Six Months Ended June 30, 2023 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Loss Total Shares Outstanding Amount Balances, December 31, 2022 11,784,246 $ 117,842 $ 106,088,897 $ 88,715,782 $ ( 12,193,043 ) $ ( 49,751,175 ) $ 132,978,303 Net income — — — 5,596,173 — — 5,596,173 Other comprehensive income — — — — — 1,550,985 1,550,985 ESOP shares earned — — ( 56,198 ) — 367,659 — 311,461 Impact of ASU 2016-13 adoption — — ( 3,785,168 ) — — ( 3,785,168 ) Stock based compensation — — 763,021 — — — 763,021 Common stock dividends ($ 0.28 per share) — — — ( 3,003,521 ) — — ( 3,003,521 ) Repurchase of common stock ( 335,625 ) ( 3,356 ) ( 3,578,851 ) — — — ( 3,582,207 ) Balances, June 30, 2023 11,448,621 $ 114,486 $ 103,216,869 $ 87,523,266 $ ( 11,825,384 ) $ ( 48,200,190 ) $ 130,829,047 Three Months Ended June 30, 2022 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Loss Total Shares Outstanding Amount Balances, March 31, 2022 12,310,004 $ 123,100 $ 113,263,417 $ 82,037,495 $ ( 12,744,530 ) $ ( 25,336,767 ) $ 157,342,715 Net income — — — 3,485,342 — — 3,485,342 Other comprehensive loss — — — — — ( 13,900,763 ) ( 13,900,763 ) ESOP shares earned — — 23,775 — 183,829 — 207,604 Stock based compensation — — 383,637 — — — 383,637 Common stock dividends ($ 0.10 per share) — — — ( 1,099,243 ) — — ( 1,099,243 ) Repurchase of common stock ( 461,891 ) ( 4,619 ) ( 7,469,917 ) — — — ( 7,474,536 ) Balances, June 30, 2022 11,848,113 $ 118,481 $ 106,200,912 $ 84,423,594 $ ( 12,560,701 ) $ ( 39,237,530 ) $ 138,944,756 4 Six Months Ended June 30, 2022 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Loss Total Shares Outstanding Amount Balances, December 31, 2021 12,400,195 $ 124,002 $ 114,339,810 $ 80,157,893 $ ( 12,928,359 ) $ ( 1,212,011 ) $ 180,481,335 Net income — — — 6,502,934 — — 6,502,934 Other comprehensive loss — — — — — ( 38,025,519 ) ( 38,025,519 ) ESOP shares earned — — 66,067 — 367,658 — 433,725 Stock based compensation — — 763,058 — — — 763,058 Common stock dividends ($ 0.20 per share) — — — ( 2,237,233 ) — — ( 2,237,233 ) Repurchase of common stock ( 552,082 ) ( 5,521 ) ( 8,968,023 ) — — — ( 8,973,544 ) Balances, June 30, 2022 11,848,113 $ 118,481 $ 106,200,912 $ 84,423,594 $ ( 12,560,701 ) $ ( 39,237,530 ) $ 138,944,756 See Notes to Condensed Consolidated Statements. 5 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2023 2022 Operating Activities Net income $ 5,596,173 $ 6,502,934 Items not requiring (providing) cash Provision for credit losses 178,316 400,000 Depreciation and amortization 508,202 531,617 Deferred income tax ( 62,485 ) ( 77,652 ) Stock based compensation 763,021 763,058 Investment securities amortization, net 580,032 848,253 Net gains on loan and lease sales ( 309,601 ) ( 464,764 ) (Gain) Loss on sale of real estate owned ( 1,921 ) 847 Gain on sale of premises and equipment ( 1,800 ) — Accretion of loan origination fees ( 549,408 ) ( 889,143 ) Amortization of mortgage-servicing rights 105,350 121,951 ESOP shares expense 311,461 433,725 Increase in cash surrender value of life insurance ( 44,856 ) ( 43,419 ) Loans originated for sale ( 11,691,998 ) ( 20,326,065 ) Proceeds on loans sold 11,558,198 20,888,815 Net change in Interest receivable ( 325,757 ) 62,188 Other assets ( 213,106 ) 832,105 Other liabilities ( 1,919,449 ) 385,338 Interest payable 1,918,991 9,766 Net cash provided by operating activities 6,399,363 9,979,554 Investing Activities Purchases of securities available for sale ( 7,097,933 ) ( 14,949,095 ) Proceeds from maturities and paydowns of securities available for sale 12,038,103 20,866,136 Proceeds from maturities and paydowns of securities held to maturity 918,473 891,488 Net change in loans ( 83,539,282 ) ( 59,439,801 ) Proceeds from sales of real estate owned 297,670 84,652 Purchases of premises and equipment ( 378,407 ) ( 194,127 ) Proceeds from sale of premises and equipment 1,800 — (Purchase) Proceeds from sale of FHLB stock ( 854,900 ) 211,500 Net cash used in investing activities ( 78,614,476 ) ( 52,529,247 ) Financing Activities Net change in Demand and savings deposits ( 22,425,614 ) 35,671,492 Certificates of deposit 56,737,523 9,485,940 Advances by borrowers for taxes and insurance 30,891 ( 15,971 ) Proceeds from FHLB advances 391,500,000 115,000,000 Repayment of FHLB advances ( 345,500,000 ) ( 115,000,000 ) Repurchase of common stock ( 3,582,207 ) ( 8,973,544 ) Dividends paid ( 3,003,521 ) ( 2,237,233 ) Net cash provided by financing activities 73,757,072 33,930,684 Net Change in Cash and Cash Equivalents 1,541,959 ( 8,619,009 ) Cash and Cash Equivalents, Beginning of Period 15,922,093 23,038,145 Cash and Cash Equivalents, End of Period $ 17,464,052 $ 14,419,136 Additional Cash Flows and Supplementary Information Interest paid $ 10,292,333 $ 3,777,901 Transfers from loans to other real estate owned 405,279 85,500 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 The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Richmond Mutual Bancorporation, Inc., and its wholly owned direct and indirect subsidiaries, First Bank Richmond, First Insurance Management, Inc., FB Richmond Holdings, Inc. and FB Richmond Properties, Inc. References in this document to Richmond Mutual Bancorporation refer to Richmond Mutual Bancorporation, Inc. References to “we,” “us,” and “our” or the “Company” refers to Richmond Mutual Bancorporation and its wholly-owned direct and indirect subsidiaries, First Bank Richmond, First Insurance Management, Inc., FB Richmond Holdings, Inc., and FB Richmond Properties, Inc. unless the context otherwise requires. First Bank Richmond is an Indiana state-chartered commercial bank headquartered in Richmond, Indiana and the wholly owned banking subsidiary of Richmond Mutual Bancorporation. First Bank Richmond provides full banking services through its seven full- and one limited-service offices located in Cambridge City (1), Centerville (1), Richmond (5) and Shelbyville (1), Indiana, its five full-service offices located in Piqua (2), Sidney (2) and Troy (1), Ohio, and its loan production office in Columbus, Ohio. Administrative, trust and wealth management services are conducted through First Bank Richmond's Corporate Office/Financial Center located in Richmond, Indiana. As an Indiana-chartered commercial bank, First Bank Richmond is subject to regulation by the Indiana Department of Financial Institutions ("IDFI") and the Federal Deposit Insurance Corporation ("FDIC"). First Insurance Management, Inc., a wholly-owned subsidiary of the Company which was formed and began operations in June 2022, is a Nevada-based captive insurance company that insures against certain risks unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. First Insurance Management, Inc. is subject to the regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. FB Richmond Holdings, Inc., a wholly-owned subsidiary of First Bank Richmond which was formed and began operations in April 2020, is a Nevada corporation that holds and manages substantially all of First Bank Richmond's investment portfolio. FB Richmond Holdings, Inc. has one active subsidiary, FB Richmond Properties, Inc., a Delaware corporation which holds loans on behalf of the Bank. 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, 2022 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023 (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. Use of Estimates in Preparation of Financial Statements Financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP") require the Company 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 income and expense during the reporting period. Actual results could differ from those estimates. 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 7 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. On occasion, the Company will provide modifications to loans and leases to borrowers experiencing financial difficulty, by providing payment delays, term extensions, or interest-rate reductions. In some cases, combinations of modifications may be made to the same loan or lease. If determined that the value of the modified loan or lease is less than the recorded investment in the loan, a charge-off is recognized to the allowance for credit losses on loans and leases. Note 2: Accounting Pronouncements 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 . 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 No. 2019-04 clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments. In October 2019, the FASB voted to extend the implementation of ASU No. 2016-13 for certain financial institutions including smaller reporting companies. As a result, ASU 2016-13 became effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company adopted ASU No. 2016-13 on January 1, 2023. As a result of the change in methodology from the incurred loss methodology to the current expected credit loss methodology ("CECL"), the Company recorded a one-time cumulative-effect 8 adjustment of $ 2.0 million from retained earnings, net of tax, into the allowance for credit losses on loans and leases. The allowance increased $ 2.7 million, or 21.5 %, on January 1, 2023 from December 31, 2022 as a result of adoption. Additionally, as a part of the CECL adoption, the Company established an allowance for credit losses on unfunded commitments by recording a one-time adjustment of $ 1.8 million from retained earnings, net of tax, into the allowance for credit losses on unfunded commitments. As of January 1, 2023, this allowance totaled $ 2.4 million, as compared to no allowance at December 31, 2022. This allowance is reported in other liabilities on the Condensed Consolidated Balance Sheets. In March 2022 the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . The ASU eliminates the accounting guidance for troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. This ASU became effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, upon the Company’s adoption of the CECL amendments in ASU 2016-13. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference the London Interbank Offer Rate ("LIBOR") or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. In December of 2022, the FASB issued ASU No. 2022-06 which extended the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The guidance ensures the relief in Topic 848 covers the period of time during which a significant number of modifications may take place and the ASU defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The Company does not expect the adoption of ASU No. 2020-04 to have a material impact on its consolidated financial statements. Note 3: Investment Securities The amortized cost and approximate fair values, together with gross unrealized gains and losses, of investment securities are as follows: June 30, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. treasury securities $ 3,492 $ — $ 50 $ 3,442 SBA Pools 5,941 — 628 5,313 Federal agencies 15,000 — 2,187 12,813 State and municipal obligations 169,675 3 31,780 137,898 Mortgage-backed securities - government-sponsored enterprises (GSE) residential 136,751 — 23,695 113,056 Corporate obligations 11,500 — 2,676 8,824 342,359 3 61,016 281,346 Held to maturity State and municipal obligations 5,751 15 107 5,659 5,751 15 107 5,659 Total investment securities $ 348,110 $ 18 $ 61,123 $ 287,005 9 December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. treasury securities $ 3,487 $ — $ 27 $ 3,460 SBA Pools 6,768 1 634 6,135 Federal agencies 15,000 — 2,352 12,648 State and municipal obligations 171,495 4 34,457 137,042 Mortgage-backed securities - government-sponsored enterprises (GSE) residential 139,626 — 23,644 115,982 Corporate obligations 11,500 — 1,867 9,633 347,876 5 62,981 284,900 Held to maturity State and municipal obligations 6,672 17 112 6,577 6,672 17 112 6,577 Total investment securities $ 354,548 $ 22 $ 63,093 $ 291,477 The amortized cost and fair value of investment securities at June 30, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Available for Sale Held to Maturity Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ 2,250 $ 2,237 $ 485 $ 485 One to five years 19,367 18,013 3,460 3,400 Five to ten years 40,394 35,734 916 921 After ten years 143,597 112,306 890 853 205,608 168,290 5,751 5,659 Mortgage-backed securities –GSE residential 136,751 113,056 — — Totals $ 342,359 $ 281,346 $ 5,751 $ 5,659 Investment securities with a carrying value of $ 155,514,000 and $ 134,302,000 were pledged at June 30, 2023 and December 31, 2022, respectively, to secure certain deposits and for other purposes as permitted or required by law. There were no sales of securities available for sale for the three and six months ended June 30, 2023 and 2022. 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, 2023 and December 31, 2022 was $ 284,544,000 and $ 288,846,000 , respectively, which is approximately 99 % and 99 % 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. The Company does not consider available-for-sale securities with unrealized losses to be experiencing credit losses at June 30, 2023. Management considers it more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost basis, which may be the maturity dates of the securities. Held to maturity securities are financial assets measured at amortized cost. With the adoption of CECL, held to maturity securities are required to have an established allowance for credit losses that represents the portion of the amortized cost basis of a financial asset that is not expected to be collectable. The Company estimates expected credit losses on a collective basis by security type, with consideration given to historical information, credit ratings, and the statistical probability of future losses. 10 The Company monitors the credit quality of securities held to maturity through the use of credit ratings quarterly. As of June 30, 2023, there was no allowance for credit losses recognized on the Company's securities held to maturity portfolio. The following table summarizes the amortized cost of held to maturity securities by credit quality indicator, as of June 30, 2023: State and municipal obligations AA+ $ 1,175 AA 690 AA- 585 A+ 854 BBB+ 122 Not rated 2,325 $ 5,751 The Company has elected to exclude accrued interest receivable from the calculation of the allowance for credit losses. The following tables show the Company’s investment securities 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, 2023 and December 31, 2022: Description of Securities June 30, 2023 Less Than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-sale U.S. Treasury Securities $ 3,443 $ 50 $ — $ — $ 3,443 $ 50 SBA Pools — — 4,796 628 4,796 628 Federal agencies — — 12,813 2,187 12,813 2,187 State and municipal obligations 7,943 273 129,069 31,507 137,012 31,780 Mortgage-backed securities - GSE residential 5,019 224 108,037 23,471 113,056 23,695 Corporate obligations 2,252 498 6,573 2,178 8,825 2,676 Total available-for-sale 18,657 1,045 261,288 59,971 279,945 61,016 Held-to-maturity State and municipal obligations 4,148 86 451 21 4,599 107 Total impaired securities $ 22,805 $ 1,131 $ 261,739 $ 59,992 $ 284,544 $ 61,123 11 Description of Securities December 31, 2022 Less Than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-sale U.S. Treasury securities $ 3,460 $ 27 $ — $ — $ 3,460 $ 27 SBA Pools 1,237 145 4,234 489 5,471 634 Federal agencies — — 12,648 2,352 12,648 2,352 State and municipal obligations 76,986 11,825 59,257 22,632 136,243 34,457 Mortgage-backed securities - GSE residential 32,446 3,440 83,537 20,204 115,983 23,644 Corporate obligations 7,044 1,456 2,589 411 9,633 1,867 Total available-for-sale 121,173 16,893 162,265 46,088 283,438 62,981 Held-to-maturity State and municipal obligations 4,995 108 413 4 5,408 112 Total impaired securities $ 126,168 $ 17,001 $ 162,678 $ 46,092 $ 288,846 $ 63,093 Federal Agency Obligations. 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. 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. SBA Pools and Mortgage-Backed Securities - GSE Residential. The unrealized losses on the Company’s investment in mortgage-backed securities and SBA pools were caused by interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. The decline in fair value is attributable to changes in interest rates and not credit quality, and the Company does not intend to sell the securities. It is not more likely than not the Company will be required to sell the securities before recovery of their amortized cost basis, which may be maturity. State, Municipal, and Corporate Obligations. The unrealized losses on the Company’s investments in securities of state, municipal, and corporate obligations were caused by interest rate changes. The contractual terms of those securities do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company does not intend to sell the securities and it is not more likely than not the Company will be required to sell the securities before recovery of their amortized cost basis, which may be maturity. The Company expects the fair value of the securities as described above to recover as the securities approach their maturity or reset date. 12 Note 4: Loans, Leases and Allowance The following table shows the composition of the loan and lease portfolio at June 30, 2023 and December 31, 2022: June 30, 2023 December 31, 2022 Commercial mortgage $ 341,475 $ 298,087 Commercial and industrial 114,162 100,420 Construction and development 117,029 139,923 Multi-family 141,545 124,914 Residential mortgage 159,753 146,129 Home equity lines of credit 10,492 11,010 Direct financing leases 152,181 133,469 Consumer 22,657 21,048 1,059,294 975,000 Less Allowance for credit losses on loans and leases 15,391 12,413 Deferred loan fees 879 896 $ 1,043,024 $ 961,691 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 IDFI and FDIC regulations. Documentation exceptions are minimal or are in the process of being corrected and are not of a type that could subsequently expose the Company to risk of loss. Grade 3 – Acceptable Loans This category is for “average” quality loans and leases. These loans and leases have adequate sources of repayment with little identifiable risk of collection and they conform to Company policy and IDFI/FDIC regulations. Grade 4 – Acceptable but Monitored Loans and leases in this category may have a greater than average risk due to financial weakness or uncertainty but do not appear to require classification as special mention or substandard loans. Loans and leases rated “4” need to be monitored on a regular basis to ascertain that the reasons for placing them in this category do not advance or worsen. Grade 5 – Special Mention Loans and leases in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company’s credit position at some future date. Special Mention loans and leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. This special mention rating is designed to identify a specific level of risk and concern about an asset’s quality. Although a special mention loan or lease has a higher probability of default than a pass rated loan or lease, its default is not imminent. Grade 6 – Substandard 13 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. No material changes have been made to the risk characteristics discussed above contained in the Company's 2022 Form 10-K. 14 The following tables present the credit risk profile of the Company’s loan and lease portfolio based on rating category, payment activity, and origination year as of June 30, 2023 and rating category as of December 31, 2022: 2023 2022 2021 2020 2019 Prior Revolving loans amortized cost basis Total As of June 30, 2023: Commercial mortgage Pass $ 21,787 $ 84,026 $ 70,984 $ 39,301 $ 46,903 $ 68,686 $ 8,365 $ 340,052 Substandard — — — — — 1,423 — 1,423 Total Commercial mortgage 21,787 84,026 70,984 39,301 46,903 70,109 8,365 341,475 Current period gross charge-offs — — — — — — — — Commercial and industrial Pass 29,491 13,701 14,761 5,816 1,794 10,877 31,006 107,446 Special Mention — — — — — 600 — 600 Substandard — 28 — 580 — 1,576 3,932 6,116 Total Commercial and industrial 29,491 13,729 14,761 6,396 1,794 13,053 34,938 114,162 Current period gross charge-offs — — — — — — — — Construction and development Pass 15,253 39,762 25,989 1,100 120 974 28,931 112,129 Substandard — — — — 4,900 — — 4,900 Total Construction and development 15,253 39,762 25,989 1,100 5,020 974 28,931 117,029 Current period gross charge-offs — — — — — — — — Multi-family Pass 6,111 38,103 34,576 6,473 7,419 18,691 30,172 141,545 Total Multi-family 6,111 38,103 34,576 6,473 7,419 18,691 30,172 141,545 Current period gross charge-offs — — — — — — — — Residential mortgage Pass 20,045 34,347 37,226 18,114 9,411 38,938 77 158,158 Substandard — — — — 150 1,445 — 1,595 Total Residential mortgage 20,045 34,347 37,226 18,114 9,561 40,383 77 159,753 Current period gross charge-offs — — — — — — — — Home equity Pass 48 — 289 — — — 10,130 10,467 Substandard — — — — — — 25 25 Total Home equity lines of credit 48 — 289 — — — 10,155 10,492 Current period gross charge-offs — — — — — — — — Direct financing leases Pass 47,203 50,381 32,616 14,949 5,552 1,386 — 152,087 Substandard — — 78 12 — — — 90 Doubtful — — — — 4 — — 4 Total Direct financing leases 47,203 50,381 32,694 14,961 5,556 1,386 — 152,181 Current period gross charge-offs 16 57 265 27 — 1 — 366 Consumer Pass 5,915 10,002 4,610 1,078 586 393 — 22,584 Substandard — 21 23 22 7 — — 73 Total Consumer 5,915 10,023 4,633 1,100 593 393 — 22,657 Current period gross charge-offs 10 23 33 — 2 — — 68 Total Loans and Leases $ 145,853 $ 270,371 $ 221,152 $ 87,445 $ 76,846 $ 144,989 $ 112,638 $ 1,059,294 Total current period gross charge-offs $ 26 $ 80 $ 298 $ 27 $ 2 $ 1 $ — $ 434 For the three months ended June 30, 2023, the Company did not have any revolving loans convert to term loans. 15 Pass Special Mention Substandard Doubtful Loss Total As of December 31, 2022: Commercial mortgage $ 296,253 $ 1,277 $ 557 $ — $ — $ 298,087 Commercial and industrial 92,620 2,605 5,195 — — 100,420 Construction and development 135,023 — 4,900 — — 139,923 Multi-family 124,914 — — — — 124,914 Residential mortgage 144,190 — 1,939 — — 146,129 Home equity 10,958 — 52 — — 11,010 Direct financing leases 133,254 152 34 29 — 133,469 Consumer 21,015 — 33 — — 21,048 Total $ 958,227 $ 4,034 $ 12,710 $ 29 $ — $ 975,000 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, 2023 and December 31, 2022: June 30, 2023 Delinquent Loans and Leases 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 $ — $ — $ — $ — $ 341,475 $ 341,475 $ — Commercial and industrial — 446 1,835 2,281 111,881 114,162 1,285 Construction and development — 17 4,900 4,917 112,112 117,029 — Multi-family — — — — 141,545 141,545 — Residential mortgage 317 201 1,594 2,112 157,641 159,753 1,484 Home equity 137 139 9 285 10,207 10,492 9 Direct financing leases 424 117 71 612 151,569 152,181 71 Consumer 213 64 74 351 22,306 22,657 74 Totals $ 1,091 $ 984 $ 8,483 $ 10,558 $ 1,048,736 $ 1,059,294 $ 2,923 December 31, 2022 Delinquent Loans and Leases 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 $ 26 $ — $ — $ 26 $ 298,061 $ 298,087 $ — Commercial and industrial — — 2,202 2,202 98,218 100,420 1,285 Construction and development — — 4,900 4,900 135,023 139,923 — Multi-family — — — — 124,914 124,914 — Residential mortgage 272 129 1,938 2,339 143,790 146,129 1,825 Home equity — — 30 30 10,980 11,010 30 Direct financing leases 204 25 — 229 133,240 133,469 — Consumer 171 59 33 263 20,785 21,048 33 Totals $ 673 $ 213 $ 9,103 $ 9,989 $ 965,011 $ 975,000 $ 3,173 16 The following table presents information on the Company’s nonaccrual loans and leases at June 30, 2023, and at December 31, 2022: June 30, 2023 December 31, 2022 Nonaccrual loans and leases Nonaccrual loans and leases without an allowance for credit losses Nonaccrual loans and leases Commercial and industrial $ 593 $ — $ 961 Construction 4,900 — 4,900 Residential mortgage 110 110 113 Direct financing leases 4 4 29 Total nonaccrual loans and leases $ 5,607 $ 114 $ 6,003 During the three and six months ended June 30, 2023, the Company recognized $ 2,000 and $ 3,000 , respectively, of interest income on nonaccrual loans and leases. The following table presents the Company's amortized cost basis of collateral dependent loans, which are individually analyzed to determine expected credit losses: June 30, 2023 Amortized Cost Basis Allowance on Collateral Dependent Loans Commercial and industrial $ 1,973 $ 329 Construction 4,900 750 Residential mortgage 109 — Total $ 6,982 $ 1,079 Loan Modification Disclosures under ASU 2022-02 In certain situations, the Company may modify the terms of a loan to a borrower experiencing financial difficulty. These modifications may include payment delays, term extensions, or interest-rate reductions. In some cases, combinations of modifications may be made to the same loan. If a determination is made that a modified loan has been deemed uncollectible, the loan (or portion of the loan) is charged-off, reducing the amortized cost basis of the loan and adjusting the allowance for credit losses. During the three months ended June 30, 2023, the Company had no new modifications to borrowers experiencing financial difficulty. There were no modified loans and leases that had a payment default during the three and six months ended June 30, 2023 and that were modified in the twelve months prior to that default to borrowers experiencing financial difficulty. Troubled Debt Restructuring (TDR) Disclosures Prior to the Adoption of ASU 2022-02 During the three and six months ended June 30, 2022, there were no newly classified TDRs. For the three and six months ended June 30, 2022, the Company recorded no charge-offs related to TDRs. As of December 31, 2022, TDRs had a related allowance of $ 0 . During the three and six months ended June 30, 2022, there were no TDRs for which there was a payment default within the first 12 months of the modification. Other Real Estate Owned 17 At June 30, 2023 and December 31, 2022, the balance of real estate owned included $ 167,000 and $ 57,000 , respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At June 30, 2023 and December 31, 2022, the recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $ 431,000 and $ 1,071,000 , respectively. Direct Financing Leases The following lists the components of the net investment in direct financing leases: June 30, 2023 December 31, 2022 Total minimum lease payments to be received $ 171,066 $ 147,520 Initial direct costs 9,706 8,058 180,772 155,578 Less: Unearned income ( 28,591 ) ( 22,109 ) Net investment in direct finance leases $ 152,181 $ 133,469 There were no leases serviced by the Company for the benefit of others at June 30, 2023 and December 31, 2022. Certain leases have been sold from time to time by the Company with partial recourse. The Company estimates and records its obligation based upon historical loss percentages. At both June 30, 2023 and December 31, 2022, the Company did not have any recorded recourse obligations on leases sold. The following table summarizes the future minimum lease payments receivable subsequent to June 30, 2023: Remainder of 2023 $ 31,761 2024 54,820 2025 40,964 2026 26,653 2027 13,793 Thereafter 3,075 $ 171,066 Allowance for Credit Losses on Loans and Leases The allowance for credit losses on loans and leases is established for current expected credit losses on the Company's loan and lease portfolios in accordance with ASC Topic 326. This requires significant judgement to estimate credit losses measured on a collective pool basis when similar risk characteristics exist, and for loans evaluated individually. The company estimates expected future losses for the loan's entire contractual term, taking into account expected payments when appropriate. The allowance is an estimation based on management's evaluation of expected losses related to the Company's financial assets measured at amortized cost. It considers relevant available information from internal and external sources relating to the historical loss experience, current conditions and reasonable and supportable forecasts for the Company's outstanding loan and lease balances. The Company utilizes a cash flow analysis method of estimating expected losses, which relies on key inputs and assumptions. Significant factors affecting the calculation are the segmenting of loans and leases based upon similar risk characteristics, applied loss rates based upon reasonable and supportable forecasts, and contractual term adjustments, including prepayment and curtailment adjustments. To ensure the allowance is maintained at an adequate level, a detailed analysis is performed on a quarterly basis, with an appropriate provision made to adjust the allowance. The Company has elected to exclude accrued interest receivable from the calculation of the allowance for credit losses, as it is the Company's policy to write off accrued interest in a timely manner as it is deemed uncollectible by reversing interest income. 18 The Company categorizes its loan portfolios into eight segments based on similar risk characteristics. Loans within each segment are collectively evaluated using either a loss-rate methodology or remaining life methodology. The following table summarizes changes in the allowance for credit losses by segment for the three and six months ended June 30, 2023: Balances, March 31, 2023 Provision (reversal) for credit losses Charge-offs Recoveries Balances, June 30, 2023 Commercial mortgage $ 4,728 $ 232 $ — $ 3 $ 4,963 Commercial and industrial 1,538 74 — 11 1,623 Construction and development 3,475 ( 509 ) — — 2,966 Multi-family 1,967 14 — — 1,981 Residential mortgage 1,596 15 — 12 1,623 Home equity 112 ( 10 ) — — 102 Direct financing leases 1,765 285 ( 281 ) 45 1,814 Consumer 314 10 ( 24 ) 19 319 Total $ 15,495 $ 111 $ ( 305 ) $ 90 $ 15,391 Balances, December 31, 2022 Impact of adopting ASC 326 Balances, January 1, 2023 Post-ASC 326 adoption Provision (reversal) for credit losses Charge-offs Recoveries Balances, June 30, 2023 Commercial mortgage $ 4,776 $ ( 395 ) $ 4,381 $ 569 $ — $ 13 $ 4,963 Commercial and industrial 1,291 360 1,651 ( 51 ) — 23 1,623 Construction and development 2,855 784 3,639 ( 673 ) — — 2,966 Multi-family 1,955 ( 99 ) 1,856 125 — — 1,981 Residential mortgage 76 1,439 1,515 86 — 22 1,623 Home equity 23 89 112 ( 10 ) — — 102 Direct financing leases 1,196 422 1,618 353 ( 366 ) 209 1,814 Consumer 241 64 305 52 ( 68 ) 30 319 Total $ 12,413 $ 2,664 $ 15,077 $ 451 $ ( 434 ) $ 297 $ 15,391 During the second quarter of 2023, the allowance for credit losses on loans and leases decreased from $ 15.5 million at March 31, 2023, to $ 15.4 million at June 30, 2023. The decrease was attributable to net charge-offs totaling $ 215,000 , while adding a net total of $ 111,000 to the provision over the course of the second quarter. Multiple loan categories experienced loan growth, while a few declined slightly. The commercial mortgage portfolio increased due to commercial construction loans being completed and termed out to permanent financing. Since there were more commercial construction loans completed, the total balance in this segment decreased. The balance in commercial and industrial loans increased contributing to an overall increase in the allowance within this segment. The remaining portfolio segments saw an increase in their respective allowances due to loan growth, with the exception of home equity loans. • Commercial Mortgage – allowance increased due to loan balances increasing $ 20.2 million. • Commercial & Industrial – allowance increased due to loan balances increasing $ 16.3 million. • Construction & Development – allowance decreased due to loan balances decreasing $ 8.5 million. • Multi-Family – allowance increased due to loan balances increasing $ 9.1 million. • Residential Mortgage – allowance increased due to loan balances increasing $ 7.4 million. • Home Equity – allowance decreased due to loan balances decreasing $ 431,000 . 19 • Leases – allowance increased due to lease balances increasing $ 8.9 million with net charge-offs totaling $ 236,000 . • Consumer – allowance increased slightly due to loan balances increasing $ 1.1 million with net charge-offs totaling $ 5,000 . Economic Outlook Due to the future-focused nature of the calculation for the allowance for credit losses, management must make significant assumptions. Estimating an appropriate allowance requires management to use relevant forward-looking information drawn from reasonable and supportable forecasts. Economic factors are a consequential part of these forecasts, and as such are evaluated periodically for developments that may impact the Company's allowance for credit losses and loan and lease portfolio. As of June 30, 2023, the most significant economic factors affecting the Company's loan portfolio are persistent inflation, higher interest rates, a weakened economic growth and unemployment outlook, and increased geopolitical risk. These key factors are impacting and will continue to adversely impact the Company’s loan and lease portfolio for the remainder of 2023 and potentially into 2024. Also, recent market liquidity events have added additional unpredictability into the economic environment and the potential for tighter credit conditions could impact economic conditions in the future. For several years, the Company has targeted loan opportunities in three growth market regions: Columbus, Ohio, Dayton/Springfield, Ohio, and Indianapolis, Indiana. These market regions specialize in commercial real estate loans, and their respective forecasts are described below: • Columbus, Ohio – The market region is forecasting estimated job growth to be lower for the remainder of 2023, however job growth is expected to exceed the national average and most other market region averages. Furthermore, the forecasted unemployment rate for the region is slightly below the national unemployment rate estimate. • Dayton/Springfield, Ohio – The economic outlook for this region remains positive, although concerns about a potential recession occurring in the last half of 2023 remain a factor. The region has one of the lowest unemployment rates in the state, just above the Columbus market region. • Indianapolis, Indiana – The market region is forecasting a material economic growth rate decrease in 2023. The forecast estimates have been lowered primarily due to inflation and rising interest rates, which have dampened demand and are impacting economic growth. The Company’s assumption of future economic slowdown could potentially have an adverse impact on the loan and lease portfolio and the allowance for credit losses in the near future; however, there are numerous potential outcomes, and the variances could be significant and volatile. As a result, the Company’s future estimates may vary for the remainder of 2023 and beyond. Allowance for Loan Losses under prior GAAP ("Incurred Loss Method") Prior to the adoption of ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) on January 1, 2023, the Company maintained an allowance for loan and lease losses in accordance with the Incurred Loss Method. The following table summarizes changes in the allowance for loan and lease losses under the Incurred Loss Method by segment for the three and six months ended June 30, 2022: 20 Balance, beginning of period Provision (reversal) for losses Charge-offs Recoveries Balance, end of period Three Months Ended June 30, 2022: Commercial mortgage $ 4,730 $ 40 $ — $ 34 $ 4,804 Commercial and industrial 1,557 ( 75 ) — 22 1,504 Construction and development 2,434 ( 11 ) — — 2,423 Multi-family 2,032 14 — — 2,046 Residential mortgage 263 ( 80 ) — 13 196 Home equity 35 ( 1 ) — — 34 Leases 1,064 256 ( 189 ) 8 1,139 Consumer 202 57 ( 30 ) 6 235 Total $ 12,317 $ 200 $ ( 219 ) $ 83 $ 12,381 Balance, beginning of period Provision (reversal) for losses Charge-offs Recoveries Balance, end of period Six Months Ended June 30, 2022: Commercial mortgage $ 4,742 $ 21 $ — $ 41 $ 4,804 Commercial and industrial 1,639 ( 172 ) — 37 1,504 Construction and development 2,286 137 — — 2,423 Multi-family 1,875 171 — — 2,046 Residential mortgage 263 ( 86 ) — 19 196 Home equity 29 5 — — 34 Leases 1,079 241 ( 199 ) 18 1,139 Consumer 195 83 ( 54 ) 11 235 Total $ 12,108 $ 400 $ ( 253 ) $ 126 $ 12,381 The following table presents 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 under the incurred loss method as of December 31, 2022: Allowance for loan and lease losses: Loans and leases: Individually evaluated for impairment Collectively evaluated for impairment Balance, December 31 Individually evaluated for impairment Collectively evaluated for impairment Balance, December 31 As of December 31, 2022: Commercial mortgage $ — $ 4,776 $ 4,776 $ — $ 298,087 $ 298,087 Commercial and industrial 281 1,010 1,291 961 99,459 100,420 Construction and development 750 2,105 2,855 4,900 135,023 139,923 Multi-family — 1,955 1,955 — 124,914 124,914 Residential mortgage — 76 76 113 146,016 146,129 Home equity — 23 23 — 11,010 11,010 Leases — 1,196 1,196 — 133,469 133,469 Consumer — 241 241 — 21,048 21,048 Total $ 1,031 $ 11,382 $ 12,413 $ 5,974 $ 969,026 $ 975,000 The following table presents the Company’s impaired loans and specific valuation allowance at December 31, 2022 under the Incurred Loss Method: 21 December 31, 2022 Recorded Balance Unpaid Principal Balance Specific Allowance Impaired loans without a specific valuation allowance Commercial mortgage $ — $ 59 $ — Commercial and industrial 366 567 — Residential mortgage 113 241 — $ 479 $ 867 $ — Impaired loans with a specific valuation allowance Commercial and industrial $ 595 $ 643 $ 281 Construction and development 4,900 4,900 750 $ 5,495 $ 5,543 $ 1,031 Total impaired loans Commercial mortgage $ — $ 59 $ — Commercial and industrial 961 1,210 281 Construction and development 4,900 4,900 750 Residential mortgage 113 241 — Total impaired loans $ 5,974 $ 6,410 $ 1,031 The following table presents the Company’s average investment in impaired loans and leases, and interest income recognized for the three and six months ended June 30, 2022 under the incurred loss method: Average Investment in Impaired Loans and Leases Interest Income Recognized Three Months Ended June 30, 2022: Total impaired loans Commercial mortgage $ 58 $ — Commercial and industrial 975 5 Construction and development 4,900 — Residential mortgage 116 1 Total impaired loans and leases $ 6,049 $ 6 Average Investment in Impaired Loans and Leases Interest Income Recognized Six Months Ended June 30, 2022: Total impaired loans Commercial mortgage $ 81 $ 12 Commercial and industrial 982 12 Construction and development 4,900 — Residential mortgage 117 2 Total impaired loans and leases $ 6,080 $ 26 Allowance for Credit Losses on Unfunded Commitments 22 The allowance for credit losses on unfunded commitments is included in other liabilities on the Condensed Consolidated Balance Sheets. The estimate of expected losses on unfunded commitments is calculated based on the loss rate for the loan or lease segment in which the loan or lease commitments would be classified if funded, adjusted for the estimate of funding probability. Additional provisions applied to the allowance are recognized in the provision for credit losses on the Condensed Consolidated Statements of Income. The following table details activity in the allowance for credit losses on unfunded commitments during the three and six months ended June 30, 2023: Three Months Ended June 30, 2023 Balance, March 31, 2023 $ 2,204 Recovery of provision for credit losses ( 103 ) Balance, June 30, 2023 $ 2,101 Six Months Ended June 30, 2023 Balance, December 31, 2022 $ — Impact of adopting ASC 326 2,374 Recovery of provision for credit losses ( 273 ) Balance, June 30, 2023 $ 2,101 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 23 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, 2023 and December 31, 2022: 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, 2023 Available-for-sale securities U.S. Treasury securities $ 3,442 $ 3,442 $ — $ — SBA Pools 5,313 — 5,313 — Federal agencies 12,813 — 12,813 — State and municipal obligations 137,898 — 137,898 — Mortgage-backed securities - GSE residential 113,056 — 113,056 — Corporate obligations 8,824 — 8,824 — $ 281,346 $ 3,442 $ 277,904 $ — Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2022 Available-for-sale securities U.S. Treasury securities $ 3,460 $ 3,460 $ — $ — SBA Pools 6,135 — 6,135 — Federal agencies 12,648 — 12,648 — State and municipal obligations 137,042 — 137,042 — Mortgage-backed securities - GSE residential 115,982 — 115,982 — Corporate obligations 9,633 — 9,633 — $ 284,900 $ 3,460 $ 281,440 $ — 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, 2023. 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. 24 Nonrecurring Measurements The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2023 and December 31, 2022: 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, 2023 Collateral-dependent loans $ 1,645 $ — $ — $ 1,645 December 31, 2022 Impaired loans, collateral-dependent $ 314 $ — $ — $ 314 Mortgage-servicing rights 2,012 — — 2,012 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 Loans, Net of Allowance for Credit Losses The estimated fair value of collateral-dependent loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent 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. 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, 2023 and December 31, 2022: 25 Fair Value at June 30, 2023 Valuation Technique Unobservable Inputs Range Collateral-dependent loans $ 1,645 Appraisal Marketability discount 0 - 46 % Fair Value at December 31, 2022 Valuation Technique Unobservable Inputs Range Impaired loans, collateral-dependent $ 314 Appraisal Marketability discount 0 - 42 % Mortgage-servicing rights $ 2,012 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, 2023 and December 31, 2022: 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, 2023 Financial assets Cash and cash equivalents $ 17,464 $ 17,464 $ — $ — Interest-earning time deposits 490 — 488 — Available-for-sale securities 281,346 — 281,346 — Held-to-maturity securities 5,751 — 5,659 — Loans held for sale 340 — — 314 Loans and leases receivable, net 1,043,024 — — 943,604 Federal Reserve and FHLB stock 10,802 — 10,802 — Interest receivable 5,036 — 5,036 — Financial liabilities Deposits 1,039,573 — 1,031,629 — FHLB advances 226,000 — 219,235 — Interest payable 3,288 — 3,288 — 26 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, 2022 Financial assets Cash and cash equivalents $ 15,922 $ 15,922 $ — $ — Interest-earning time deposits 490 — 490 — Available-for-sale securities 284,900 3,460 281,440 — Held-to-maturity securities 6,672 — 6,577 — Loans held for sale 474 — — 433 Loans and leases receivable, net 961,691 — — 883,169 Federal Reserve and FHLB stock 9,947 — 9,947 — Interest receivable 4,710 — 4,710 — Financial liabilities Deposits 1,005,261 — 996,375 — FHLB advances 180,000 — 174,426 — Interest payable 1,369 — 1,369 — 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, 2023 Three Months Ended June 30, 2022 Net income $ 2,692 $ 3,485 Shares outstanding for Basic EPS: Average shares outstanding 11,546,999 12,048,477 Less: average restricted stock award shares not vested 260,334 347,438 Less: average unearned ESOP Shares 883,573 937,679 Shares outstanding for Basic EPS 10,403,092 10,763,360 Additional Dilutive Shares 72,452 361,612 Shares outstanding for Diluted EPS 10,475,544 11,124,972 Basic Earnings Per Share $ 0.26 $ 0.32 Diluted Earnings Per Share $ 0.26 $ 0.31 27 Six Months Ended June 30, 2023 Six Months Ended June 30, 2022 Net income $ 5,596 $ 6,503 Shares outstanding for Basic EPS: Average shares outstanding 11,651,976 12,196,976 Less: average restricted stock award shares not vested 260,810 347,914 Less: average unearned ESOP Shares 890,298 944,405 Shares outstanding for Basic EPS 10,500,868 10,904,657 Additional Dilutive Shares 80,455 395,650 Shares outstanding for Diluted EPS 10,581,323 11,300,307 Basic Earnings Per Share $ 0.53 $ 0.60 Diluted Earnings Per Share $ 0.53 $ 0.58 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 $ 66,000 , $ 104,000 , $ 55,000 and $ 108,000 for the three and six months ended June 30, 2023 and 2022, respectively. 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, $ 11,825,384 and $ 12,193,043 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity at June 30, 2023 and December 31, 2022, respectively. Shares are released to participants proportionately as the loan is repaid. 28 ESOP expense for the three and six months ended June 30, 2023 and 2022 was approximately $ 141,000 , $ 311,000 , $ 208,000 , and $ 434,000 , respectively. June 30, 2023 December 31, 2022 Earned ESOP shares 211,935 184,882 Unearned ESOP shares 870,195 897,248 Total ESOP shares 1,082,130 1,082,130 Quoted per share price $ 11.04 $ 13.01 Fair value of earned shares (in thousands) $ 2,340 $ 2,405 Fair value of unearned shares (in thousands) $ 9,607 $ 11,673 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 at issuance) to eligible participants. These awards vest in five equal annual installments with the first vesting occurring on June 30, 2021. Forfeited shares may be awarded to other eligible recipients in future grants until the 2020 EIP terminates in September 2030. The following table summarizes the restricted stock activity in the 2020 EIP during the six months ended June 30, 2023. Six Months Ended June 30, 2023 Number of Restricted Shares Weighted Average Grant Date Fair Value Non-vested, beginning of period 261,291 $ 10.56 Granted — — Vested ( 87,099 ) 10.56 Forfeited — — Non-vested, June 30, 2023 174,192 10.56 Total compensation cost recognized in the income statement for restricted stock awards during the three and six months ended June 30, 2023 was $ 229,000 and $ 456,000 , and the related tax benefit recognized was $ 48,000 and $ 96,000 , respectively. As of June 30, 2023, unrecognized compensation expense related to restricted stock awards was $ 1.8 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. 29 The following table summarizes the stock option activity in the 2020 EIP during the six months ended June 30, 2023. Six Months Ended June 30, 2023 Number of Shares Weighted-Average Exercise Price Balance at beginning of period 1,050,961 $ 10.56 Granted — — Exercised — — Forfeited/expired — — Balance, June 30, 2023 1,050,961 10.56 Exercisable at end of period 625,737 $ 10.56 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, 2023 is presented below. Shares Weighted Average Grant Date Fair Value Non-vested, beginning of year 637,841 $ 2.91 Vested ( 212,617 ) 2.91 Granted — — Forfeited — — Non-vested, June 30, 2023 425,224 $ 2.91 Total compensation cost recognized in the income statement for option-based payment arrangements for the three and six months ended June 30, 2023 was $ 154,000 and $ 307,000 , and the related tax benefit recognized was $ 17,000 and $ 34,000 , respectively. As of June 30, 2023, unrecognized compensation expense related to the stock option awards was $ 1.2 million. Note 8: Subsequent Event Subsequent to June 30, 2023 through August 10, 2023, the Company purchased 25,546 shares of the Company's common stock pursuant to the existing stock repurchase program, leaving 1,082,611 shares available for future repurchase. 30