Richmond Mutual Bancorporation, Inc. 10-Q

ITEM 1.FINANCIAL STATEMENTS Richmond Mutual Bancorporation, Inc. Condensed Consolidated Balance Sheets September 30, 2023 December 31, 2022 (Unaudited) Assets Cash and due from banks $ 9,002,604 $ 7,782,348 Interest-earning demand deposits 11,649,837 8,139,745 Cash and cash equivalents 20,652,441 15,922,093 Interest-earning time deposits 245,000 490,000 Investment securities - available for sale 264,228,841 284,899,665 Investment securities - held to maturity 5,134,112 6,672,233 Loans held for sale 568,250 473,700 Loans and leases, net of allowance for credit losses of $ 15,495,975 and $ 12,413,035 , respectively 1,066,892,390 961,690,677 Premises and equipment, net 13,341,928 13,668,496 Federal Home Loan Bank stock 11,297,100 9,947,300 Interest receivable 5,315,687 4,710,481 Mortgage-servicing rights 1,965,479 2,011,889 Cash surrender value of life insurance 3,742,245 3,674,499 Other assets 29,529,562 24,459,108 Total assets $ 1,422,913,035 $ 1,328,620,141 Liabilities Noninterest-bearing deposits 115,632,216 106,414,812 Interest-bearing deposits 938,276,593 898,845,958 Total deposits 1,053,908,809 1,005,260,770 Federal Home Loan Bank advances 238,000,000 180,000,000 Advances by borrowers for taxes and insurance 668,318 560,196 Interest payable 3,672,897 1,369,351 Other liabilities 8,031,116 8,451,521 Total liabilities 1,304,281,140 1,195,641,838 Commitments and Contingent Liabilities — — Stockholders' Equity Common stock, $ 0.01 par value Authorized - 90,000,000 shares Issued and outstanding - 11,300,075 shares and 11,784,246 shares at September 30, 2023 and December 31, 2022, respectively 113,001 117,842 Additional paid-in capital 101,883,204 106,088,897 Retained earnings 88,001,390 88,715,782 Unearned employee stock ownership plan (ESOP) ( 11,641,555 ) ( 12,193,043 ) Accumulated other comprehensive loss ( 59,724,145 ) ( 49,751,175 ) Total stockholders' equity 118,631,895 132,978,303 Total liabilities and stockholders' equity $ 1,422,913,035 $ 1,328,620,141 See Notes to Condensed Consolidated Statements. 1 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Income (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Interest Income Loans and leases $ 15,270,405 $ 11,302,066 $ 42,561,814 $ 32,250,396 Investment securities 2,040,973 1,832,459 5,965,374 5,234,954 Other 102,152 35,588 301,728 74,696 Total interest income 17,413,530 13,170,113 48,828,916 37,560,046 Interest Expense Deposits 6,317,915 1,798,748 15,888,485 4,322,229 Borrowings 1,968,247 858,592 4,609,001 2,122,778 Total interest expense 8,286,162 2,657,340 20,497,486 6,445,007 Net Interest Income 9,127,368 10,512,773 28,331,430 31,115,039 Provision for credit losses 49,700 200,000 228,016 600,000 Net Interest Income After Provision for Credit Losses 9,077,668 10,312,773 28,103,414 30,515,039 Noninterest Income Service charges on deposit accounts 274,653 259,948 831,431 742,905 Card fee income 303,815 298,191 904,539 877,974 Loan and lease servicing fees 111,480 235,973 341,195 441,912 Net gains on loan and lease sales 89,510 116,155 399,111 580,919 Other income 377,660 273,376 955,688 830,924 Total noninterest income 1,157,118 1,183,643 3,431,964 3,474,634 Noninterest Expenses Salaries and employee benefits 4,377,159 4,710,284 12,891,376 13,676,443 Net occupancy expenses 337,348 336,270 1,005,142 1,047,582 Equipment expenses 275,318 317,814 872,852 951,781 Data processing fees 853,791 743,526 2,512,242 1,970,350 Deposit insurance expense 280,000 86,000 640,000 248,000 Printing and office supplies 49,825 45,155 122,404 140,222 Legal and professional fees 528,045 376,323 1,195,520 1,059,685 Advertising expense 94,707 85,050 261,179 281,045 Bank service charges 50,268 42,495 153,683 103,253 Real estate owned expense 12,112 14,248 35,935 22,534 Other expenses 1,153,819 965,508 3,019,254 2,712,418 Total noninterest expenses 8,012,392 7,722,673 22,709,587 22,213,313 Income Before Income Tax Expense 2,222,394 3,773,743 8,825,791 11,776,360 Provision for income taxes 273,637 615,515 1,280,861 2,115,198 Net Income $ 1,948,757 $ 3,158,228 $ 7,544,930 $ 9,661,162 Earnings Per Share Basic $ 0.19 $ 0.30 $ 0.72 $ 0.89 Diluted $ 0.19 $ 0.29 $ 0.72 $ 0.87 See Notes to Condensed Consolidated Statements. 2 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Comprehensive Loss (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net Income $ 1,948,757 $ 3,158,228 $ 7,544,930 $ 9,661,162 Other Comprehensive Loss Unrealized loss on available-for-sale securities, net of tax of $( 3,063,330 ), $( 4,245,908 ), $( 2,651,043 ), and $( 14,353,958 ), respectively. ( 11,523,955 ) ( 15,972,703 ) ( 9,972,970 ) ( 53,998,222 ) ( 11,523,955 ) ( 15,972,703 ) ( 9,972,970 ) ( 53,998,222 ) Comprehensive Loss $ ( 9,575,198 ) $ ( 12,814,475 ) $ ( 2,428,040 ) $ ( 44,337,060 ) See Notes to Condensed Consolidated Statements. 3 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) Three Months Ended September 30, 2023 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Loss Total Shares Outstanding Amount Balances, June 30, 2023 11,448,621 $ 114,486 $ 103,216,869 $ 87,523,266 $ ( 11,825,384 ) $ ( 48,200,190 ) $ 130,829,047 Net income — — — 1,948,757 — — 1,948,757 Other comprehensive loss — — — — — ( 11,523,955 ) ( 11,523,955 ) ESOP shares earned — — ( 29,955 ) — 183,829 — 153,874 Stock based compensation — — 386,768 — — — 386,768 Common stock dividends ($ 0.14 per share) — — — ( 1,470,633 ) — — ( 1,470,633 ) Repurchase of common stock ( 148,546 ) ( 1,485 ) ( 1,690,478 ) — — — ( 1,691,963 ) Balances, September 30, 2023 11,300,075 $ 113,001 $ 101,883,204 $ 88,001,390 $ ( 11,641,555 ) $ ( 59,724,145 ) $ 118,631,895 Nine Months Ended September 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 — — — 7,544,930 — — 7,544,930 Other comprehensive income — — — — — ( 9,972,970 ) ( 9,972,970 ) ESOP shares earned — — ( 86,153 ) — 551,488 — 465,335 Impact of ASU 2016-13 adoption — — — ( 3,785,168 ) — — ( 3,785,168 ) Stock based compensation — — 1,149,789 — — — 1,149,789 Common stock dividends ($ 0.42 per share) — — — ( 4,474,154 ) — — ( 4,474,154 ) Repurchase of common stock ( 484,171 ) ( 4,841 ) ( 5,269,329 ) — — — ( 5,274,170 ) Balances, September 30, 2023 11,300,075 $ 113,001 $ 101,883,204 $ 88,001,390 $ ( 11,641,555 ) $ ( 59,724,145 ) $ 118,631,895 Three Months Ended September 30, 2022 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Loss Total Shares Outstanding Amount Balances, June 30, 2022 11,848,113 $ 118,481 $ 106,200,912 $ 84,423,594 $ ( 12,560,701 ) $ ( 39,237,530 ) $ 138,944,756 Net income — — — 3,158,228 — — 3,158,228 Other comprehensive loss — — — — — ( 15,972,703 ) ( 15,972,703 ) ESOP shares earned — — 3,986 — 183,829 — 187,815 Stock based compensation — — 387,840 — — — 387,840 Common stock dividends ($ 0.10 per share) — — — ( 1,086,112 ) — — ( 1,086,112 ) Repurchase of common stock ( 45,689 ) ( 457 ) ( 647,012 ) — — — ( 647,469 ) Balances, September 30, 2022 11,802,424 $ 118,024 $ 105,945,726 $ 86,495,710 $ ( 12,376,872 ) $ ( 55,210,233 ) $ 124,972,355 4 Nine Months Ended September 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 — — — 9,661,162 — — 9,661,162 Other comprehensive loss — — — — — ( 53,998,222 ) ( 53,998,222 ) ESOP shares earned — — 70,053 — 551,487 — 621,540 Stock based compensation — — 1,150,898 — — — 1,150,898 Common stock dividends ($ 0.30 per share) — — — ( 3,323,345 ) — — ( 3,323,345 ) Repurchase of common stock ( 597,771 ) ( 5,978 ) ( 9,615,035 ) — — — ( 9,621,013 ) Balances, September 30, 2022 11,802,424 $ 118,024 $ 105,945,726 $ 86,495,710 $ ( 12,376,872 ) $ ( 55,210,233 ) $ 124,972,355 See Notes to Condensed Consolidated Statements. 5 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2023 2022 Operating Activities Net income $ 7,544,930 $ 9,661,162 Items not requiring (providing) cash Provision for credit losses 228,016 600,000 Depreciation and amortization 752,056 798,950 Deferred income tax ( 26,656 ) ( 191,231 ) Stock based compensation 1,149,789 1,150,898 Investment securities amortization, net 854,478 1,209,698 Net gains on loan and lease sales ( 399,111 ) ( 580,919 ) (Gain) Loss on sale of real estate owned ( 698 ) 847 Gain on sale of premises and equipment ( 1,800 ) — Accretion of loan origination fees ( 771,833 ) ( 1,276,232 ) Amortization of mortgage-servicing rights 161,024 177,063 ESOP shares expense 465,335 621,540 Increase in cash surrender value of life insurance ( 67,746 ) ( 32,905 ) Loans originated for sale ( 15,524,749 ) ( 26,627,670 ) Proceeds on loans sold 15,619,299 26,148,170 Net change in Interest receivable ( 605,206 ) 232,231 Other assets ( 560,748 ) 1,762,400 Other liabilities ( 2,794,381 ) 523,197 Interest payable 2,303,546 418,152 Net cash provided by operating activities 8,325,545 14,595,351 Investing Activities Net change in interest-bearing time deposits 245,000 — Purchases of securities available for sale ( 9,555,258 ) ( 19,441,154 ) Proceeds from maturities and paydowns of securities available for sale 16,751,355 27,668,608 Proceeds from maturities and paydowns of securities held to maturity 1,534,358 1,672,451 Net change in loans ( 108,229,672 ) ( 80,718,636 ) Proceeds from sales of real estate owned 424,671 84,652 Purchases of premises and equipment ( 425,488 ) ( 227,506 ) Proceeds from sale of premises and equipment 1,800 — (Purchase) Proceeds from sale of FHLB stock ( 1,349,800 ) 90,100 Net cash used in investing activities ( 100,603,034 ) ( 70,871,485 ) Financing Activities Net change in Demand and savings deposits ( 33,185,130 ) 18,906,312 Certificates of deposit 81,833,169 39,558,641 Advances by borrowers for taxes and insurance 108,122 68,955 Proceeds from FHLB advances 481,500,000 207,000,000 Repayment of FHLB advances ( 423,500,000 ) ( 200,000,000 ) Repurchase of common stock ( 5,274,170 ) ( 9,621,013 ) Dividends paid ( 4,474,154 ) ( 3,323,345 ) Net cash provided by financing activities 97,007,837 52,589,550 Net Change in Cash and Cash Equivalents 4,730,348 ( 3,686,584 ) Cash and Cash Equivalents, Beginning of Period 15,922,093 23,038,145 Cash and Cash Equivalents, End of Period $ 20,652,441 $ 19,351,561 Additional Cash Flows and Supplementary Information Interest paid $ 18,193,940 $ 6,026,855 Transfers from loans to other real estate owned 1,002,981 126,000 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 ("2022 Form 10-K") 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: September 30, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale U.S. treasury securities $ 3,295 $ — $ 44 $ 3,251 SBA Pools 5,643 — 712 4,931 Federal agencies 15,000 — 2,501 12,499 State and municipal obligations 168,862 — 42,407 126,455 Mortgage-backed securities - government-sponsored enterprises (GSE) residential 135,531 — 27,173 108,358 Corporate obligations 11,500 — 2,765 8,735 339,831 — 75,602 264,229 Held to maturity State and municipal obligations 5,134 9 252 4,891 5,134 9 252 4,891 Total investment securities $ 344,965 $ 9 $ 75,854 $ 269,120 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 September 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 $ 5,087 $ 5,017 $ 631 $ 619 One to five years 20,113 18,017 2,997 2,884 Five to ten years 38,291 32,522 796 775 After ten years 140,809 100,315 710 613 204,300 155,871 5,134 4,891 Mortgage-backed securities –GSE residential 135,531 108,358 — — Totals $ 339,831 $ 264,229 $ 5,134 $ 4,891 Investment securities with a carrying value of $ 155,982,000 and $ 134,302,000 were pledged at September 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 nine months ended September 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 September 30, 2023 and December 31, 2022 was $ 268,401,000 and $ 288,846,000 , respectively, which is approximately 100 % 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 September 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 September 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 September 30, 2023: State and municipal obligations AA+ $ 734 AA 690 AA- 585 A+ 814 BBB+ 81 Not rated 2,230 $ 5,134 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 September 30, 2023 and December 31, 2022: Description of Securities September 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 $ 3,251 $ 44 $ — $ — $ 3,251 $ 44 SBA Pools — — 4,506 712 4,506 712 Federal agencies — — 12,499 2,501 12,499 2,501 State and municipal obligations 3,456 145 122,999 42,262 126,455 42,407 Mortgage-backed securities - GSE residential 5,811 240 102,547 26,933 108,358 27,173 Corporate obligations — — 8,735 2,765 8,735 2,765 Total available-for-sale 12,518 429 251,286 75,173 263,804 75,602 Held-to-maturity State and municipal obligations 2,178 78 2,419 174 4,597 252 Total impaired securities $ 14,696 $ 507 $ 253,705 $ 75,347 $ 268,401 $ 75,854 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 September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 Commercial mortgage $ 345,714 $ 298,087 Commercial and industrial 111,450 100,420 Construction and development 140,651 139,923 Multi-family 135,409 124,914 Residential mortgage 160,488 146,129 Home equity lines of credit 10,776 11,010 Direct financing leases 154,520 133,469 Consumer 24,176 21,048 1,083,184 975,000 Less Allowance for credit losses on loans and leases 15,496 12,413 Deferred loan fees 796 896 $ 1,066,892 $ 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 September 30, 2023 and rating category as of December 31, 2022: 2023 2022 2021 2020 2019 Prior Revolving loans amortized cost basis Total As of September 30, 2023: Commercial mortgage Pass $ 29,817 $ 82,657 $ 70,570 $ 38,397 $ 46,265 $ 64,276 $ 12,326 $ 344,308 Substandard — — — — — 1,406 — 1,406 Total Commercial mortgage 29,817 82,657 70,570 38,397 46,265 65,682 12,326 345,714 Current period gross charge-offs — — — — — — — — Commercial and industrial Pass 31,311 12,682 13,998 5,493 1,856 10,586 29,706 105,632 Substandard — 26 109 20 — 873 4,790 5,818 Total Commercial and industrial 31,311 12,708 14,107 5,513 1,856 11,459 34,496 111,450 Current period gross charge-offs — 58 — — — — — 58 Construction and development Pass 19,024 49,700 26,536 70 116 920 39,385 135,751 Substandard — — — — 4,900 — — 4,900 Total Construction and development 19,024 49,700 26,536 70 5,016 920 39,385 140,651 Current period gross charge-offs — — — — — — — — Multi-family Pass 3,853 38,772 34,357 6,429 7,356 18,547 26,095 135,409 Total Multi-family 3,853 38,772 34,357 6,429 7,356 18,547 26,095 135,409 Current period gross charge-offs — — — — — — — — Residential mortgage Pass 26,491 32,380 35,722 17,940 9,284 37,092 83 158,992 Substandard — — — — 149 1,347 — 1,496 Total Residential mortgage 26,491 32,380 35,722 17,940 9,433 38,439 83 160,488 Current period gross charge-offs — — — — — — — — Home equity Pass — — 287 — — — 10,451 10,738 Substandard — — — — — — 38 38 Total Home equity lines of credit — — 287 — — — 10,489 10,776 Current period gross charge-offs — — — — — — — — Direct financing leases Pass 61,984 46,337 28,566 12,392 4,178 818 — 154,275 Substandard — 127 26 89 — — — 242 Doubtful — — — — 3 — — 3 Total Direct financing leases 61,984 46,464 28,592 12,481 4,181 818 — 154,520 Current period gross charge-offs 16 113 386 66 — 1 — 582 Consumer Pass 9,194 9,039 4,197 952 458 313 — 24,153 Substandard — — 5 2 6 10 — 23 Total Consumer 9,194 9,039 4,202 954 464 323 — 24,176 Current period gross charge-offs 25 45 53 22 2 — — 147 Total Loans and Leases $ 181,674 $ 271,720 $ 214,373 $ 81,784 $ 74,571 $ 136,188 $ 122,874 $ 1,083,184 Total current period gross charge-offs $ 41 $ 216 $ 439 $ 88 $ 2 $ 1 $ — $ 787 For the three months ended September 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 September 30, 2023 and December 31, 2022: September 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 $ 179 $ — $ — $ 179 $ 345,535 $ 345,714 $ — Commercial and industrial — — — — 111,450 111,450 — Construction and development — — 4,900 4,900 135,751 140,651 — Multi-family — — — — 135,409 135,409 — Residential mortgage 167 206 1,496 1,869 158,619 160,488 1,388 Home equity 2 — 25 27 10,749 10,776 25 Direct financing leases 633 190 209 1,032 153,488 154,520 209 Consumer 259 134 22 415 23,761 24,176 22 Totals $ 1,240 $ 530 $ 6,652 $ 8,422 $ 1,074,762 $ 1,083,184 $ 1,644 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 September 30, 2023, and at December 31, 2022: September 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 $ 1,305 $ 1,263 $ 961 Construction 4,900 — 4,900 Residential mortgage 107 107 113 Direct financing leases 3 3 29 Total nonaccrual loans and leases $ 6,315 $ 1,373 $ 6,003 During the three and nine months ended September 30, 2023, the Company recognized $ 12,000 and $ 15,000 , 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: September 30, 2023 Amortized Cost Basis Allowance on Collateral Dependent Loans Commercial mortgage $ 2,239 $ — Commercial and industrial 4,919 — Construction 4,900 750 Residential mortgage 158 — Total $ 12,216 $ 750 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 September 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 nine months ended September 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 nine months ended September 30, 2022, there were no newly classified TDRs. For the three and nine months ended September 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 nine months ended September 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 September 30, 2023 and December 31, 2022, the balance of real estate owned included $ 636,000 and $ 57,000 , respectively, of foreclosed real estate properties recorded as a result of obtaining physical possession of the property. At September 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 $ 383,000 and $ 1,071,000 , respectively. Direct Financing Leases The following lists the components of the net investment in direct financing leases: September 30, 2023 December 31, 2022 Total minimum lease payments to be received $ 174,318 $ 147,520 Initial direct costs 9,790 8,058 184,108 155,578 Less: Unearned income ( 29,588 ) ( 22,109 ) Net investment in direct finance leases $ 154,520 $ 133,469 The following table summarizes the future minimum lease payments receivable subsequent to September 30, 2023: Remainder of 2023 $ 17,006 2024 59,545 2025 45,447 2026 30,731 2027 16,849 Thereafter 4,740 $ 174,318 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. 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. 18 The following tables summarize changes in the allowance for credit losses by segment for the three and nine months ended September 30, 2023: Balances, June 30, 2023 Provision (reversal) for credit losses Charge-offs Recoveries Balances, September 30, 2023 Commercial mortgage $ 4,963 $ 215 $ — $ — $ 5,178 Commercial and industrial 1,623 ( 307 ) ( 58 ) 18 1,276 Construction and development 2,966 278 — — 3,244 Multi-family 1,981 ( 37 ) — — 1,944 Residential mortgage 1,623 ( 11 ) — 11 1,623 Home equity 102 ( 2 ) — — 100 Direct financing leases 1,814 184 ( 216 ) 10 1,792 Consumer 319 84 ( 79 ) 15 339 Total $ 15,391 $ 404 $ ( 353 ) $ 54 $ 15,496 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, September 30, 2023 Commercial mortgage $ 4,776 $ ( 395 ) $ 4,381 $ 784 $ — $ 13 $ 5,178 Commercial and industrial 1,291 360 1,651 ( 358 ) ( 58 ) 41 1,276 Construction and development 2,855 784 3,639 ( 395 ) — — 3,244 Multi-family 1,955 ( 99 ) 1,856 88 — — 1,944 Residential mortgage 76 1,439 1,515 75 — 33 1,623 Home equity 23 89 112 ( 12 ) — — 100 Direct financing leases 1,196 422 1,618 537 ( 582 ) 219 1,792 Consumer 241 64 305 136 ( 147 ) 45 339 Total $ 12,413 $ 2,664 $ 15,077 $ 855 $ ( 787 ) $ 351 $ 15,496 During the third quarter of 2023, the allowance for credit losses on loans and leases increased from $ 15.4 million at June 30, 2023, to $ 15.5 million at September 30, 2023. The increase was attributable to additional provisions totaling $ 404,000 during the third quarter of 2023, partially offset by net charge-offs of $ 299,000 . 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. The construction and development category increased as loans under construction were funded during the construction process, increasing the total balance in this segment. Consumer loans increased in both outstanding balance and allowance. Commercial and industrial loans and multi-family loans decreased in outstanding balances, contributing to a decrease in the allowance of those respective portfolios. • Commercial Mortgage – allowance increased due to loan balances increasing $ 4.2 million, owner-occupied and nonowner-occupied. • Commercial & Industrial – allowance decreased due to loan balances decreasing $ 2.7 million, with net charge-offs totaling $ 40,000 . • Construction & Development – allowance increased due to loan balances increasing $ 23.6 million. • Multi-Family – allowance decreased due to loan balances decreasing $ 6.1 million. • Residential Mortgage – no change to allowance. • Home Equity – allowance decreased slightly, while balances increased $ 284,000 . • Direct Financing Leases – allowance decreased while balances increased $ 2.3 million, due to a lower calculated reserve percentage. Net charge-offs totaled $ 206,000 . 19 • Consumer – allowance increased slightly due to loan balances increasing $ 1.5 million with net charge-offs totaling $ 64,000 . 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 September 30, 2023, the most significant economic factors continuing to affect the Company's loan portfolio are persistent inflation, higher interest rates, a weakened economic growth and unemployment outlook, increased geopolitical risk, and stock market volatility. 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 continue to add unpredictability into the economic environment and the potential for tighter credit conditions could impact economic conditions in the future. The Company remains committed to three growth market regions: Columbus, Ohio, Dayton/Springfield, Ohio, and Indianapolis, Indiana. As high-growth areas, these market regions specialize in commercial real estate loans Their respective forecasts are described below: • Columbus, Ohio – This 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. Although the forecasted unemployment rate for the region has slightly increased, the region still remains slightly below the national unemployment rate estimate. • Dayton/Springfield, Ohio – The economic outlook for this market region remains positive, however flatter than the prior quarter. Although concerns about a potential recession are still present, the region continues to reflect one of the lowest unemployment rates in the state, just above the Columbus market region. • Indianapolis, Indiana – This market region forecasts minimal economic growth for the remainder of 2023. The forecast estimates have been lowered primarily due to inflation, rising interest rates, and unemployment forecasts which 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 nine months ended September 30, 2022: 20 Balance, beginning of period Provision (reversal) for losses Charge-offs Recoveries Balance, end of period Three Months Ended September 30, 2022: Commercial mortgage $ 4,804 $ ( 36 ) $ — $ 7 $ 4,775 Commercial and industrial 1,504 ( 105 ) — 26 1,425 Construction and development 2,423 565 — — 2,988 Multi-family 2,046 ( 254 ) — — 1,792 Residential mortgage 196 5 ( 17 ) 6 190 Home equity 34 — — — 34 Leases 1,139 ( 59 ) ( 105 ) 112 1,087 Consumer 235 84 ( 60 ) 6 265 Total $ 12,381 $ 200 $ ( 182 ) $ 157 $ 12,556 Balance, beginning of period Provision (reversal) for losses Charge-offs Recoveries Balance, end of period Nine Months Ended September 30, 2022: Commercial mortgage $ 4,742 $ ( 15 ) $ — $ 48 $ 4,775 Commercial and industrial 1,639 ( 277 ) — 63 1,425 Construction and development 2,286 702 — — 2,988 Multi-family 1,875 ( 83 ) — — 1,792 Residential mortgage 263 ( 81 ) ( 17 ) 25 190 Home equity 29 5 — — 34 Leases 1,079 182 ( 304 ) 130 1,087 Consumer 195 167 ( 114 ) 17 265 Total $ 12,108 $ 600 $ ( 435 ) $ 283 $ 12,556 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 nine months ended September 30, 2022 under the incurred loss method: Average Investment in Impaired Loans and Leases Interest Income Recognized Three Months Ended September 30, 2022: Total impaired loans Commercial and industrial $ 967 $ 6 Construction and development 4,900 — Residential mortgage 115 1 Total impaired loans and leases $ 5,982 $ 7 Average Investment in Impaired Loans and Leases Interest Income Recognized Nine Months Ended September 30, 2022: Total impaired loans Commercial mortgage $ 61 $ 12 Commercial and industrial 976 18 Construction and development 4,900 — Residential mortgage 117 3 Total impaired loans and leases $ 6,054 $ 33 22 Allowance for Credit Losses on Unfunded Commitments 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 nine months ended September 30, 2023: Three Months Ended September 30, 2023 Balance, June 30, 2023 $ 2,101 Recovery of provision for credit losses ( 354 ) Balance, September 30, 2023 $ 1,747 Nine Months Ended September 30, 2023 Balance, December 31, 2022 $ — Impact of adopting ASC 326 2,374 Recovery of provision for credit losses ( 627 ) Balance, September 30, 2023 $ 1,747 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 September 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) September 30, 2023 Available-for-sale securities U.S. Treasury securities $ 3,251 $ 3,251 $ — $ — SBA Pools 4,931 — 4,931 — Federal agencies 12,499 — 12,499 — State and municipal obligations 126,455 — 126,455 — Mortgage-backed securities - GSE residential 108,358 — 108,358 — Corporate obligations 8,735 — 8,735 — $ 264,229 $ 3,251 $ 260,978 $ — 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 nine months ended September 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 December 31, 2022. As of September 30, 2023, there were no assets or liabilities measured at fair value on a nonrecurring basis. Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2022 Impaired loans, collateral-dependent $ 314 $ — $ — $ 314 Mortgage-servicing rights 2,012 — — 2,012 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 table presents the fair value measurement of assets recognized in the accompanying consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2022. As of September 30, 2023, there were no assets measured at fair value on a nonrecurring basis. 25 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 September 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) September 30, 2023 Financial assets Cash and cash equivalents $ 20,652 $ 20,652 $ — $ — Interest-earning time deposits 245 — 244 — Available-for-sale securities 264,229 3,251 260,978 — Held-to-maturity securities 5,134 — 4,891 — Loans held for sale 568 — — 528 Loans and leases receivable, net 1,066,892 — — 954,857 FHLB stock 11,297 — 11,297 — Interest receivable 5,316 — 5,316 — Financial liabilities Deposits 1,053,909 — 1,047,892 — FHLB advances 238,000 — 231,871 — Interest payable 3,673 — 3,673 — 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 — 26 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 September 30, 2023 Three Months Ended September 30, 2022 Net income $ 1,949 $ 3,158 Shares outstanding for Basic EPS: Average shares outstanding 11,403,229 11,823,889 Less: average restricted stock award shares not vested 174,192 261,291 Less: average unearned ESOP Shares 870,048 924,154 Shares outstanding for Basic EPS 10,358,989 10,638,444 Additional Dilutive Shares 23,170 197,173 Shares outstanding for Diluted EPS 10,382,159 10,835,617 Basic Earnings Per Share $ 0.19 $ 0.30 Diluted Earnings Per Share $ 0.19 $ 0.29 Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 Net income $ 7,545 $ 9,661 Shares outstanding for Basic EPS: Average shares outstanding 11,568,149 12,071,247 Less: average restricted stock award shares not vested 231,620 318,722 Less: average unearned ESOP Shares 883,474 937,580 Shares outstanding for Basic EPS 10,453,055 10,814,945 Additional Dilutive Shares 61,018 331,684 Shares outstanding for Diluted EPS 10,514,073 11,146,629 Basic Earnings Per Share $ 0.72 $ 0.89 Diluted Earnings Per Share $ 0.72 $ 0.87 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 $ 93,000 , $ 196,000 , $ 62,000 and $ 170,000 for the three and nine months ended September 30, 2023 and 2022, respectively. Employee Stock Ownership Plan 27 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, $ 11,641,555 and $ 12,193,043 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity at September 30, 2023 and December 31, 2022, respectively. Shares are released to participants proportionately as the loan is repaid. ESOP expense for the three and nine months ended September 30, 2023 and 2022 was approximately $ 154,000 , $ 465,000 , $ 188,000 , and $ 622,000 , respectively. September 30, 2023 December 31, 2022 Earned ESOP shares 225,462 184,882 Unearned ESOP shares 856,668 897,248 Total ESOP shares 1,082,130 1,082,130 Quoted per share price $ 11.15 $ 13.01 Fair value of earned shares (in thousands) $ 2,514 $ 2,405 Fair value of unearned shares (in thousands) $ 9,552 $ 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 nine months ended September 30, 2023. Nine Months Ended September 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, September 30, 2023 174,192 10.56 Total compensation cost recognized in the income statement for restricted stock awards during the three and nine months ended September 30, 2023 was $ 231,000 and $ 687,000 , and the related tax benefit recognized was $ 49,000 and $ 144,000 , 28 respectively. As of September 30, 2023, unrecognized compensation expense related to restricted stock awards was $ 1.6 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. The following table summarizes the stock option activity in the 2020 EIP during the nine months ended September 30, 2023. Nine Months Ended September 30, 2023 Number of Shares Weighted-Average Exercise Price Balance at beginning of period 1,050,961 $ 10.56 Granted — — Exercised — — Forfeited/expired — — Balance, September 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 September 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, September 30, 2023 425,224 $ 2.91 Total compensation cost recognized in the income statement for option-based payment arrangements for the three and nine months ended September 30, 2023 was $ 156,000 and $ 462,000 , and the related tax benefit recognized was $ 17,000 and 29 $ 51,000 , respectively. As of September 30, 2023, unrecognized compensation expense related to the stock option awards was $ 1.1 million. Note 8: Subsequent Event Subsequent to September 30, 2023 through November 13, 2023, the Company purchased 55,406 shares of the Company's common stock pursuant to the existing stock repurchase program, leaving 904,205 shares available for future repurchase. 30