Richmond Mutual Bancorporation, Inc. - FORM 10-Q

Attached files

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EX-32 - EXHIBIT 32 -- SECTION 1350 CERTIFICATIONS - Richmond Mutual Bancorporation, Inc.	ex32.htm
EX-31 - EXHIBIT 31.1 -- PRESIDENT AND CEO CERTIFICATION - Richmond Mutual Bancorporation, Inc.	ex31.htm
EX-31 - EXHIBIT 31.2 -- CHIEF FINANCIAL OFFICER CERTIFICATION - Richmond Mutual Bancorporation, Inc.	ex31-2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission file number: 001-38956

RICHMOND MUTUAL BANCORPORATION, INC.

(Exact name of registrant as specified in its charter)

Maryland		36-4926041
(State or other jurisdiction of incorporation of organization)		(I.R.S. Employer Identification No.)

31 North 9th Street, Richmond, Indiana 47374

(Address of principal executive offices; Zip Code)

(765) 962-2581

(Registrant's telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	RMBI	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]				Accelerated filer [ ]

Non-accelerated filer [X]				Smaller reporting company [X]

Emerging growth company [X]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

There were 13,526,625 shares of Registrant’s common stock, par value of $0.01 per share, issued and outstanding as of May 15, 2020.

RICHMOND MUTUAL BANCORPORATION, INC. AND SUBSIDIARY

10-Q

TABLE OF CONTENTS

			Page Number
PART I FINANCIAL INFORMATION			1

Item 1.	Financial Statements		1

		Condensed Consolidated Balance Sheets at March 31, 2020 (Unaudited) and December 31, 2019	1

		Condensed Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2020 and 2019	2

		Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2020 and 2019	3

		Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Three Months Ended March 31, 2020 and 2019	4

		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2020 and 2019	5

		Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		36

Item 4.	Controls and Procedures		36

PART II OTHER INFORMATION			38

Item 1.	Legal Proceedings		38

Item 1A.	Risk Factors		38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		39

Item 3.	Defaults Upon Senior Securities		39

Item 4.	Mine Safety Disclosures		39

Item 5	Other Information		39

Item 6.	Exhibits		39

SIGNATURES			40

PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

Richmond Mutual Bancorporation, Inc.

Condensed Consolidated Balance Sheets

		March 31, 2020			December 31, 2019
		(Unaudited)

Assets
Cash and due from banks	$	10,510,456		$	9,088,398
Interest-bearing demand deposits		16,945,289			31,508,479
Cash and cash equivalents		27,455,745			40,596,877
Investment securities - available for sale		238,891,137			201,783,851
Investment securities - held to maturity		13,770,210			15,917,394

Loans and leases, net of allowance for losses of $7,306,000 and $7,089,000, respectively		687,053,651			687,258,190
Premises and equipment, net		14,007,080			14,087,169
Federal Home Loan Bank stock		8,630,800			7,600,400
Interest receivable		3,248,041			3,052,380
Mortgage-servicing rights		911,402			1,033,217
Cash surrender value of life insurance		3,870,017			3,839,911
Other assets		9,777,676			10,872,682

Total assets	$	1,007,615,759		$	986,042,071

Liabilities
Non-interest bearing deposits	$	62,491,325		$	60,297,443
Interest bearing deposits		542,744,053			556,921,370
Total deposits		605,235,378			617,218,813
Federal Home Loan Bank advances		182,000,000			154,000,000
Advances by borrowers for taxes and insurance		613,571			545,498
Interest payable		350,466			296,774
Multi-employer pension plan liability		17,454,709			17,454,709
Other liabilities		8,765,381			8,738,831
Total liabilities		814,419,505			798,254,625

Commitments and Contingent Liabilities		-			-

Stockholders' Equity
Common stock, $.01 par value Authorized – 90,000,000 shares Issued and outstanding - 13,526,625 shares		135,266			135,266
Additional paid-in capital		132,604,734			132,601,876
Retained earnings		72,563,580			70,111,434
Unearned employee stock ownership plan (ESOP)		(14,216,557	)		(14,400,386	)
Accumulated other comprehensive income (loss)		2,109,231			(660,744	)
Total stockholders' equity		193,196,254			187,787,446

Total liabilities and stockholders' equity	$	1,007,615,759		$	986,042,071

See Notes to Condensed Consolidated Statements.

Richmond Mutual Bancorporation, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

		Three Months Ended March 31,
		2020			2019

Interest Income
Loans and leases	$	9,063,567		$	8,766,129
Investment securities		1,262,937			941,661
Other		125,030			49,107
Total interest income		10,451,534			9,756,897

Interest Expense
Deposits		1,824,698			1,886,700
Borrowings		739,341			750,262
Total interest expense		2,564,039			2,636,962

Net Interest Income		7,887,495			7,119,935
Provision for losses on loans and leases		210,000			525,000

Net Interest Income After Provision for Losses on Loans and Leases		7,677,495			6,594,935

Non-Interest Income
Service charges on deposit accounts		254,651			231,649
Card fee income		179,607			166,586
Loan and lease servicing fees		(65,692	)		113,272
Net gains on securities (includes $69,139 and $24,806 for the three months ended March 31, 2020 and 2019, respectively, related to accumulated other comprehensive loss reclassifications)		69,139			24,806
Net gains on loan and lease sales		228,208			87,225
Other loan fees		82,874			154,640
Other income		204,281			126,277
Total non-interest income		953,068			904,455

Non-Interest Expenses
Salaries and employee benefits		3,363,685			3,475,733
Net occupancy expenses		290,009			293,381
Equipment expenses		255,848			242,145
Data processing fees		476,803			414,192
Deposit insurance expense		56,000			135,000
Printing and office supplies		26,543			41,758
Legal and professional fees		241,366			296,779
Advertising expense		109,557			123,417
Bank service charges		37,355			31,676
Real estate owned expense		2,177			14,820
Other expenses		664,274			736,140
Total non-interest expenses		5,523,617			5,805,041

Income Before Income Tax Expense		3,106,946			1,694,349
Provision for income taxes (includes $17,522 and $6,483 for the three months ended March 31, 2020 and 2019 respectively, related to income tax expense from reclassification of items)		654,800			322,100
Net Income	$	2,452,146		$	1,372,249
Earnings Per Share
Basic	$	0.20		$	N/A
Diluted	$	0.20		$	N/A

See Notes to Condensed Consolidated Statements.

Richmond Mutual Bancorporation, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

		Three Months Ended March 31,
		2020		2019

Net Income	$	2,452,146	$	1,372,249

Other Comprehensive Income
Unrealized gain on available-for-sale securities, net of tax expense of $957,976 and $677,903 for the three months ended March 31, 2020 and 2019, respectively.		2,821,591		1,915,947
Less: reclassification adjustment for realized gains included in net income, net of tax expense of $17,523 and $6,483 for the three months ended March 31, 2020 and 2019, respectively.		51,616		18,323
		2,769,975		1,897,624

Comprehensive Income	$	5,222,121	$	3,269,873

See Notes to Condensed Consolidated Statements.

Richmond Mutual Bancorporation, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

												Accumulated
	Common Stock				Additional				Unearned			Other
	Shares				Paid-in		Retained		ESOP			Comprehensive
	Outstanding		Amount		Capital		Earnings		Shares			Loss			Total

Balances, December 31, 2019	13,526,625	$	135,266	$	132,601,876	$	70,111,434	$	(14,400,386	)	$	(660,744	)	$	187,787,446
Net income	—		—		—		2,452,146		—			—			2,452,146
Other comprehensive income	—		—		—		—		—			2,769,975			2,769,975
ESOP shares earned	—		—		2,858		—		183,829			—			186,687

Balances, March 31, 2020	13,526,625	$	135,266	$	132,604,734	$	72,563,580	$	(14,216,557	)	$	2,109,231		$	193,196,254


											Accumulated
	Common Stock				Additional				Unearned		Other
	Shares				Paid-in		Retained		ESOP		Comprehensive
	Outstanding		Amount		Capital		Earnings		Shares		Loss			Total

Balances, December 31, 2018	100	$	1	$	12,750,999	$	77,480,318	$	—	$	(4,378,286	)	$	85,853,032
Net income	—		—		—		1,372,249		—		—			1,372,249
Other comprehensive income	—		—		—		—		—		1,897,624			1,897,624

Balances, March 31, 2019	100	$	1	$	12,750,999	$	78,852,567	$	—	$	(2,480,662	)	$	89,122,905

See Notes to Condensed Consolidated Statements.

Richmond Mutual Bancorporation, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

		Three Months Ended March 31,
		2020			2019

Operating Activities
Net income	$	2,452,146		$	1,372,249
Items not requiring (providing) cash
Provision for loan losses		210,000			525,000
Depreciation and amortization		238,330			233,529
Deferred income tax		(84,000	)		(361,000	)
Investment securities (accretion) amortization, net		486,500			123,814
Investment securities gains		(69,139	)		(24,806	)
Gain on sale of loans and leases held for sale		(228,208	)		(87,225	)
Accretion of loan origination fees		(38,827	)		(40,049	)
Amortization of mortgage-servicing rights		67,132			32,833
ESOP shares expense		186,687			—
Increase in cash surrender value of life insurance		(30,106	)		(29,548	)
Loans originated for sale		(6,807,172	)		(3,468,463	)
Proceeds on loans sold		8,147,368			3,342,763
Net change in
Interest receivable		(195,661	)		(19,196	)
Other assets		354,702			1,265,581
Other liabilities		26,550			(1,309,293	)
Interest payable		53,692			105,898
Net cash provided by operating activities		4,769,994			1,662,087

Investing Activities
Purchases of securities available for sale		(70,744,743	)		(12,886,237	)
Proceeds from maturities and paydowns of securities available for sale		25,505,906			2,068,535
Proceeds from sales of securities available for sale		11,461,388			11,467,522
Proceeds from maturities and paydowns of securities held to maturity		2,140,036			1,320,000
Net change in loans		(1,169,710	)		(17,599,648	)
Purchases of premises and equipment		(158,241	)		(191,206	)
Purchase of FHLB stock		(1,030,400	)		(404,900	)
Net cash used in investing activities		(33,995,764	)		(16,225,934	)

Financing Activities
Net change in
Demand and savings deposits		(8,410,494	)		13,720,129
Certificates of deposit		(3,572,941	)		7,726,151
Advances by borrowers for taxes and insurance		68,073			89,384
Proceeds from FHLB advances		30,000,000			37,000,000
Repayment of FHLB advances		(2,000,000	)		(28,000,000	)
Net cash provided by financing activities		16,084,638			30,535,664

Net Change in Cash and Cash Equivalents		(13,141,132	)		15,971,817

Cash and Cash Equivalents, Beginning of Period		40,596,877			14,971,170

Cash and Cash Equivalents, End of Period	$	27,455,745		$	30,942,987

Additional Cash Flows and Supplementary Information
Interest paid	$	2,510,347		$	2,531,064
Transfers from loans to other real estate owned		31,548			—

See Notes to Condensed Consolidated Statements.

Richmond Mutual Bancorporation, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Table Dollar Amounts in Thousands)

Note 1: Basis of Presentation

On July 1, 2019, Richmond Mutual Bancorporation, Inc., a Delaware corporation (“RMB-Delaware”), completed its reorganization from a mutual holding company form of organization to a stock form of organization (“corporate reorganization”). RMB-Delaware, which owned 100% of First Bank Richmond (the “Bank”), was succeeded by Richmond Mutual Bancorporation, Inc., a new Maryland corporation (“the Company”). As part of the corporate reorganization, First Mutual of Richmond, Inc.’s (“MHC”) ownership interest in RMB-Delaware was sold in a public offering. Gross proceeds from the offering were $130.3 million. In conjunction with the corporate reorganization, the Company contributed 500,000 shares and $1.25 million of cash to a newly formed charitable foundation, First Bank Richmond, Inc. Community Foundation (the “Foundation”). Additionally, a “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to MHC’s ownership interest in the retained earnings of RMB-Delaware as of December 31, 2017 and March 31, 2019.

The costs of the corporate reorganization and the issuance of the common stock have been deducted from the sales proceeds of the offering.

The accompanying unaudited 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 year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on March 30, 2020 (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 interim consolidated financial statements at and for the three months ended March 31, 2020 and 2019 have not been audited by independent accountants, but in the opinion of management, reflect all adjustments necessary to present fairly the financial position, results of operations and cash flows for such periods. The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

In certain circumstances, where appropriate, the terms “we”, “us” and “our” refer collectively to (i) RMB-Delaware and First Bank Richmond with respect to discussions in this document involving matters occurring prior to completion of the corporate reorganization and (ii) the Company and First Bank Richmond with respect to discussions in this document involving matters occurring post-corporate reorganization, in each case unless the context indicates another meaning.

Loans

For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

The Company charges off residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance, which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value, less costs to sell when the loan is 120 days past due, charge-off of unsecured open-end loans when the loan is 90 days past due, and charge down to the net realizable value when other secured loans are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of

the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six months.

Note 2: Accounting Pronouncements

The JOBS Act, which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” The Company qualifies as and has elected to be an emerging growth company under the JOBS Act. An emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. The Company has elected to comply with new or amended accounting pronouncements in the same manner as a private company.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326). The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief” (ASU 2019-05). This ASU provides transition relief for entities adopting the FASB’s credit losses standard, ASU 2016-13 and allows companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for certain financial instruments. In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (ASU 2019-04). This ASU clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments. The amendments in these ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, assuming the adoption of an ASU implementing the FASB board decision in November 2019 extending the adoption date for certain registrants, including the Company, with early adoption permitted. The Company is evaluating its current expected loss methodology on the loan and investment portfolios to identify the necessary modifications in accordance with this standard. The Company has not quantified the impact of these ASUs. The Company is in the early stages of evaluating its historical data available for use in adoption of the new credit loss standards. Additionally, we are forming an implementation team that will meet on a regular basis to coordinate efforts of our accounting, credit and operations areas. We will continue to evaluate methodologies available to us under the new standard.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . ASU 2019-12 provides that state franchise or similar taxes that are based, at least in part on an entity’s income, be included in an entity’s income tax recognized as income-based taxes. The ASU further clarifies that the effect of any change in tax laws or rates used in the computation of the annual effective tax rate are required to be reflected in the first interim period that includes the enactment date of the legislation. Technical changes to eliminate exceptions to Topic 740 related to intra-period tax allocations for entities with losses from continuing operations, deferred tax liabilities related to change in ownership of foreign entities, and interim-period tax allocations for businesses with losses where the losses are expected to be realized. The

amendments in ASU 2019-12 are effective for public business entities with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect ASU 2019-12 to have a material impact on its consolidated financial statement.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU contains some technical adjustments related to the fair value disclosure requirements of public companies. Included in this ASU is the additional disclosure requirement of unrealized gains and losses for the period in recurring level 3 fair value disclosures and the range and weighted average of significant unobservable inputs, among other technical changes. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for costs for internal-use software. The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The Company adopted this ASU on January 1, 2020, with no material impact on its consolidated financial statements.

The FASB has issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. For the Company, the amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2020. Based on leases outstanding as of December 31, 2019, the new standard will not have a material impact on the Company’s balance sheet or income statement. We will begin evaluating the current leases and their respective lease term and conditions to quantify the potential impact to our financial statements upon adoption.

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provide entities with an additional (and optional) transition method to adopt the new lease standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with current GAAP (Topic 842, Leases). The amendments in ASU 2018-11 also provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met.

Note 3: Investment Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:

	March 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available for sale
SBA Pools	$	24,867	$	—	$	210	$	24,657
Federal agencies	11,519		35		11		11,543
State and municipal obligations	53,631		644		320		53,954
Mortgage-backed securities – government-sponsored enterprises (GSE) residential	146,013		2,789		79		148,724
Equity securities	13		—		—		13
	236,043		3,468		620		238,891
Held to maturity
State and municipal obligations	13,770		209		5		13,974
	13,770		209		5		13,974

Total investment securities	$	249,813	$	3,677	$	625	$	252,865

	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available for sale
U.S. Treasury securities	$	2,997	$	—	$	6	$	2,991
SBA Pools	14,497		—		114		14,383
Federal agencies	21,765		—		119		21,646
State and municipal obligations	45,635		357		152		45,840
Mortgage-backed securities – government-sponsored enterprises (GSE) residential	117,769		111		969		116,911
Equity securities	13		—		—		13
	202,676		468		1,360		201,784
Held to maturity
State and municipal obligations	15,917		244		5		16,156
	15,917		244		5		16,156

Total investment securities	$	218,593	$	712	$	1,365	$	217,940

The amortized cost and fair value of securities at March 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Within one year	$	483	$	484	$	2,629	$	2,485
One to five years	8,074		7,054		7,911		8,164
Five to ten years	35,085		35,145		2,170		2,246
After ten years	46,375		47,471		1,060		1,079
	90,017		90,154		13,770		13,974
Mortgage-backed securities – GSE residential	146,013		148,724		—		—
Equity securities	13		13		—		—

Totals	$	236,043	$	238,891	$	13,770	$	13,974

Securities with a carrying value of $149,743,000 and $114,907,000 were pledged at March 31, 2020 and December 31, 2019, respectively, to secure certain deposits and for other purposes as permitted or required by law.

Proceeds from sales of securities available for sale for the three months ended March 31, 2020 and 2019 were $11,461,388 and $11,467,522, respectively. Gross gains were recognized on the sale of securities available-for-sale for the three months ended March 31, 2020 and 2019 of $74,000 and $25,000, respectively. Gross losses were recognized on the sale of securities available for sale for the three months ended March 31, 2020 and 2019 of $5,000 and $0, respectively.

Certain investments in debt securities are reported in the consolidated financial statements and notes at an amount less than their historical cost. Total fair value of these investments at March 31, 2020 and December 31, 2019 and was $54,643,000 and $138,391,000, which is approximately 21% and 63%, respectively, of the Company’s available-for-sale and held-to-maturity investment portfolio. These declines primarily resulted from changes in market interest rates since their purchase.

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.

Should the impairment of any other securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

The following tables show the Company’s investments by gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2020 and December 31, 2019:

	March 31, 2020
	Less Than 12 Months				12 Months or More				Total
Description of	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Securities	Value		Losses		Value		Losses		Value		Losses

Available-for-sale
SBA Pools	$	21,562	$	210	$	—	$	—	$	21,562	$	210
Federal agencies	4,243		11		—		—		4,243		11
State and municipal obligations	14,684		316		821		4		15,505		320
Mortgage-backed securities – GSE residential	11,212		75		1,312		4		12,524		79
Total available-for-sale	51,701		612		2,133		8		53,834		620

Held-to-maturity
State and municipal obligations	171		—		638		5		809		5

Total temporarily impaired securities	$	51,872	$	612	$	2,771	$	13	$	54,643	$	625

	December 31, 2019
	Less Than 12 Months				12 Months or More				Total
Description of	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Securities	Value		Losses		Value		Losses		Value		Losses

Available-for-sale
U.S. Treasury securities	$	2,991	$	6	$	—	$	—	$	2,991	$	6
SBA Pools	14,262		114		—		—		14,262		114
Federal agencies	9,657		109		2,990		10		12,647		119
State and municipal obligations	12,606		130		2,948		22		15,554		152

Mortgage-backed securities – GSE residential	57,928		464		34,344		505		92,272		969
Total available-for-sale	97,444		823		40,282		537		137,726		1,360

Held-to-maturity
State and municipal obligations	665		5		—		—		665		5


Total temporarily impaired securities	$	98,109	$	828	$	40,282	$	537	$	138,391	$	1,365

Federal Agencies. The unrealized losses on the Company’s investments in direct obligations of U.S. federal agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2020.

Mortgage-Backed Securities – GSE Residential and SBA Pools. The unrealized losses on the Company’s investment in mortgage-backed securities and SBA Pools were caused by interest rate changes and illiquidity. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2020.

State and Municipal Obligations. The unrealized losses on the Company’s investments in securities of state and municipal obligations were caused by interest rate changes and illiquidity. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2020.

Note 4: Loans, Leases and Allowance

Categories of loans at March 31, 2020 and December 31, 2019 include:

		March 31,		December 31,
		2020		2019

Commercial mortgage	$	238,878	$	229,410
Commercial and industrial		76,002		84,549
Construction and development		58,051		53,426
Multi-family		58,101		66,002
Residential mortgage		132,662		131,294
Home equity		6,606		6,996
Direct financing leases		111,691		109,592
Consumer		12,828		13,534
		694,819		694,803
Less
Allowance for loan and lease losses		7,306		7,089
Deferred loan fees		459		456

	$	687,054	$	687,258

The following tables present the activity in the allowance for loan and lease losses for the three months ended March 31, 2020 and 2019.

			Commercial
	Commercial		and			Residential
	Mortgage		Industrial			Mortgage			Leases			Consumer			Total

Three Months Ended March 31, 2020:
Balance, beginning of period	$	4,564	$	1,852		$	109		$	426		$	138		$	7,089
Provision (credit) for losses	72		(87		)	38			190			(4		)	210
Charge-offs	—		—			(15		)	(55		)	(5		)	(75		)
Recoveries	32		7			16			22			6			82

Balance, end of period	$	4,668	$	1,772		$	148		$	583		$	135		$	7,306

Three Months Ended March 31, 2019:
Balance, beginning of period	$	3,147	$	1,817		$	139		$	389		$	108		$	5,600
Provision (credit) for losses	269		221			(37		)	38			34			525
Charge-offs	—		(250		)	(2		)	(82		)	(34		)	(368		)
Recoveries	4		2			17			47			9			79

Balance, end of period	$	3,420	$	1,790		$	117		$	392		$	117		$	5,836

The following tables present the balance in the allowance for loan and lease losses and the recorded investment in loans and leases based on portfolio segment and impairment method as of March 31, 2020 and December 31, 2019:

	March 31, 2020
			Commercial
	Commercial		and		Residential
	Mortgage		Industrial		Mortgage		Leases		Consumer		Total

Allowance for loan and lease losses:
Individually evaluated for impairment	$	—	$	202	$	—	$	—	$	—	$	202
Collectively evaluated for impairment	4,668		1,570		148		583		135		7,104

Balance, March 31	$	4,668	$	1,772	$	148	$	583	$	135	$	7,306

Loans and leases:

Individually evaluated for impairment	$	792	$	673	$	306	$	—	$	—	$	1,771
Collectively evaluated for impairment	378,709		72,378		112,860		111,691		17,410		693,048
Ending balance: March 31	$	379,501	$	73,051	$	113,166	$	111,691	$	17,410	$	694,819

	December 31, 2019
			Commercial
	Commercial		and		Residential
	Mortgage		Industrial		Mortgage		Leases		Consumer		Total

Allowance for loan and lease losses:
Individually evaluated for impairment	$	—	$	202	$	—	$	—	$	—	$	202
Collectively evaluated for impairment	4,564		1,650		109		426		138		6,887

Balance, December 31	$	4,564	$	1,852	$	109	$	426	$	138	$	7,089

Loans and leases:
Individually evaluated for impairment	$	803	$	694	$	347	$	—	$	—	$	1,844
Collectively evaluated for impairment	377,494		73,920		114,061		109,592		17,892		692,959
Ending balance: December 31	$	378,297	$	74,614	$	114,408	$	109,592	$	17,892	$	694,803

The Company rates all loans by credit quality using the following designations:

Grade 1 – Exceptional

Exceptional loans are top-quality loans to individuals whose financial credentials are well known to the Company. These loans have excellent sources of repayment, are well documented and/or virtually free of risk (i.e., CD secured loans).

Grade 2 – Quality Loans

These loans have excellent sources of repayment with no identifiable risk of collection, and they conform in all respects to Company policy and Indiana Department of Financial Institutions (“IDFI”) and Federal Deposit Insurance Corporation (“FDIC”) regulations. Documentation exceptions are minimal or are in the process of being corrected and are not of a type that could subsequently expose the Company to risk of loss.

Grade 3 – Acceptable Loans

This category is for “average” quality loans. These loans have adequate sources of repayment with little identifiable risk of collection and they conform to Company policy and IDFI/FDIC regulations.

Grade 4 – Acceptable but Monitored

Loans in this category may have a greater than average risk due to financial weakness or uncertainty but do not appear to require classification as special mention or substandard loans. Loans rated “4” need to be monitored on a regular basis to ascertain that the reasons for placing them in this category do not advance or worsen.

Grade 5 – Special Mention

Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. This special mention rating is designed to identify a specific level of risk and concern about an asset’s quality. Although a special mention loan has a higher probability of default than a pass rated loan, its default is not imminent.

Grade 6 – Substandard

Loans in this category are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Substandard loans have a high probability of payment default, or they have other well-defined weaknesses. Such loans have a distinct potential for loss; however, an individual loan’s potential for loss does not have to be distinct for the loan to be rated substandard.

The following are examples of situations that might cause a loan to be graded a “6”:

Cash flow deficiencies (losses) jeopardize future loan payments.

Sale of non-collateral assets has become a primary source of loan repayment.

The relationship has deteriorated to the point that sale of collateral is now the Company’s primary source of repayment, unless this was the original source of loan repayment.

The borrower is bankrupt or for any other reason future repayment is dependent on court action.

Grade 7 – Doubtful

A loan classified as doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. A doubtful loan has a high probability of total or substantial loss. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Because of high probability of loss, nonaccrual accounting treatment will be required for doubtful loans.

Grade 8 – Loss

Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be effected in the future.

The risk characteristics of each loan portfolio segment are as follows:

Commercial and Industrial

Commercial and industrial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other

business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Mortgage including Construction

Loans in this segment include commercial loans, commercial construction loans, and multi-family loans. This segment also includes loans secured by 1-4 family residences which were made for investment purposes. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus nonowner-occupied loans.

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Residential, Brokered and Consumer

Residential, brokered and consumer loans consist of three segments – residential mortgage loans, brokered mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Brokered mortgages are purchased residential mortgage loans meeting the Company’s criteria established for originating residential mortgage loans. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Leases

Lease financing consists of direct financing leases and are used by commercial customers to finance capital purchases of equipment. The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant. A determination is made as to the applicant’s financial condition and ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved.

The following tables present the credit risk profile of the Company’s loan and lease portfolio based on rating category and payment activity as of March 31, 2020 and December 31, 2019:

	March 31, 2020
			Commercial		Construction
	Commercial		and		and		Multi-		Residential		Home
	Mortgage		Industrial		Development		Family		Mortgage		Equity		Leases		Consumer		Total

1-4 Pass	$	229,760	$	68,932	$	58,051	$	58,101	$	129,702	$	6,344	$	111,499	$	12,653	$	675,042
5 Special Mention	7,452		4,107		-—		—		183		64		—		—		11,806
6 Substandard	1,666		2,963		—		—		2,777		198		131		175		7,910
7 Doubtful	—		—		—		—		—		—		61		—		61
8 Loss	—		—		—		—		—		—		—		—		—

	$	238,878	$	76,002	$	58,051	$	58,101	$	132,662	$	6,606	$	111,691	$	12,828	$	694,819

	December 31, 2019
			Commercial		Construction
	Commercial		and		and		Multi-		Residential		Home
	Mortgage		Industrial		Development		Family		Mortgage		Equity		Leases		Consumer		Total

1-4 Pass	$	220,240	$	75,814	$	53,426	$	66,002	$	127,888	$	6,871	$	109,424	$	13,519	$	673,184
5 Special Mention	7,489		5,731		—		—		189		64		—		—		13,473
6 Substandard	1,681		3,004		—		—		3,217		61		94		15		8,072
7 Doubtful	—		—		—		—		—		—		74		—		74
8 Loss	—		—		—		—		—		—		—		—		—

	$	229,410	$	84,549	$	53,426	$	66,002	$	131,294	$	6,996	$	109,592	$	13,534	$	694,803

The following tables present the Company’s loan and lease portfolio aging analysis of the recorded investment in loans and leases as of March 31, 2020 and December 31, 2019:

	March 31, 2020
											Total		Total Loans
	Delinquent Loans										Portfolio		and Leases
	30-59 Days		60-89 Days		90 Days and		Total Past				Loans and		> 90 Days
	Past Due		Past Due		Over		Due		Current		Leases		Accruing

Commercial mortgage	$	78	$	462	$	401	$	941	$	237,937	$	238,878	$	217
Commercial and industrial	91		193		424		708		75,294		76,002		424
Construction and development	—		—		—		—		58,051		58,051		—
Multi-family	—		1,047		—		1,047		57,054		58,101		—
Residential mortgage	908		322		2,241		3,471		129,191		132,662		2,048
Home equity	57		—		154		211		6,395		6,606		154
Leases	276		—		73		349		111,342		111,691		73
Consumer	80		22		175		277		12,551		12,828		175

Totals	$	1,490	$	2,046	$	3,468	$	7,004	$	687,815	$	694,819	$	3,091

	December 31, 2019
											Total		Total Loans
	Delinquent Loans										Portfolio		and Leases
	30-59 Days		60-89 Days		90 Days and		Total Past				Loans and		> 90 Days
	Past Due		Past Due		Over		Due		Current		Leases		Accruing

Commercial mortgage	$	217	$	—	$	184	$	401	$	229,009	$	229,410	$	—
Commercial and industrial	220		1,092		438		1,750		82,799		84,549		3
Construction and development	—		257		249		506		52,920		53,426		249
Multi-family	—		—		—		—		66,002		66,002		—
Residential mortgage	762		240		2,452		3,454		127,840		131,294		2,256
Home equity	189		36		15		240		6,756		6,996		15
Leases	108		29		79		216		109,376		109,592		49
Consumer	271		35		15		321		13,213		13,534		15

Totals	$	1,767	$	1,689	$	3,432	$	6,888	$	687,915	$	694,803	$	2,587

The following tables present the Company’s impaired loans and specific valuation allowance at March 31, 2020 and December 31, 2019:

	March 31, 2020
			Unpaid
	Recorded		Principal		Specific
	Balance		Balance		Allowance

Loans without a specific
valuation allowance
Commercial mortgage	$	792	$	872	$	—
Commercial and industrial	422		791		—
Residential mortgage	306		559		—

	$	1,520	$	2,222	$	—

Loans with a specific
valuation allowance
Commercial and industrial	$	251	$	259	$	202

	$	251	$	259	$	202

Total impaired loans
Commercial mortgage	$	792	$	872	$	—
Commercial and industrial	673		1,050		202
Residential mortgage	306		559		—

Total impaired loans	$	1,771	$	2,481	$	202

	December 31, 2019
			Unpaid
	Recorded		Principal		Specific
	Balance		Balance		Allowance

Loans without a specific
valuation allowance
Commercial mortgage	$	803	$	1,256	$	—
Commercial and industrial	435		3,220		—
Residential mortgage	347		614		—

	$	1,585	$	5,090	$	—

Loans with a specific
valuation allowance
Commercial and industrial	$	259	$	266	$	202

	$	259	$	266	$	202

Total impaired loans
Commercial mortgage	$	803	$	1,256	$	—
Commercial and industrial	694		3,486		202
Residential mortgage	347		614		—

Total impaired loans	$	1,844	$	5,356	$	202

The following tables present the Company’s average investment in impaired loans and interest income recognized for the three months ended March 31, 2020 and 2019.

	Average
	Investment in		Interest
	Impaired		Income
	Loans		Recognized

Three Months Ended March 31, 2020:
Total impaired loans
Commercial mortgage	$	797	$	7
Commercial and industrial	684		14
Residential mortgage	326		5

Total impaired loans	$	1,807	$	26

	Average
	Investment in		Interest
	Impaired		Income
	Loans		Recognized

Three Months Ended March 31, 2019:
Total impaired loans
Commercial mortgage	$	728	$	15
Commercial and industrial	1,043		10
Residential mortgage	386		4

Total impaired loans	$	2,157	$	29

The following table presents the Company’s nonaccrual loans and leases at March 31, 2020 and December 31, 2019:

	March 31,		December 31,
	2020		2019

Commercial mortgage	$	330	$	342
Commercial and industrial	480		494
Residential mortgage	305		315
Leases	61		74

	$	1,176	$	1,225

During the three months ended March 31, 2020 and 2019, there were no newly classified troubled debt restructured loans or leases (“TDRs”). For the three months ended March 31, 2020 and 2019, the Company recorded no charge-offs related to TDRs. As of March 31, 2020 and December 31, 2019, TDRs had a related allowance of $52,000. During the three months ended March 31, 2020, there were no TDRs for which there was a payment default within the first 12 months of the modification.

The Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.

At March 31, 2020 and December 31, 2019, the balance of real estate owned includes $32,000 and $0, respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At March 31, 2020 and December 31, 2019, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds were in process was $159,000 and $190,000, respectively.

The following lists the components of the net investment in direct financing leases:

	March 31,			December 31,
	2020			2019

Total minimum lease payments to be received	$	123,152		$	120,570
Initial direct costs	5,804			5,720
	128,956			126,290
Less: Unearned income	(17,265		)	(16,698		)

Net investment in direct finance leases	$	111,691		$	109,592

The amount of leases serviced by First Bank Richmond for the benefit of others was approximately $507,000 and $715,000 at March 31, 2020 and December 31, 2019, respectively. Additionally, certain leases have been sold with partial recourse. First Bank Richmond estimates and records its obligation based upon historical loss percentages. At March 31, 2020 and December 31, 2019, First Bank Richmond has recorded a recourse obligation on leases sold with recourse of $0, and has a maximum exposure of $411,000 and $411,000, respectively, for these leases.

The following table summarizes the future minimum lease payments receivable subsequent to March 31, 2020:


2020	$	35,114
2021		39,360
2022		26,220
2023		14,987
2024		6,758
Thereafter		713

	$	123,152

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 1Quoted prices in active markets for identical assets or liabilities

Level 2Observable 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 3Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities

Recurring Measurements

The following tables present the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2020 and December 31, 2019:

			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)

March 31, 2020
Available-for-sale securities
SBA Pools	$	24,657	$	—	$	24,657	$	—
Federal agencies		11,543		—		11,543		—
State and municipal obligations		53,954		—		53,954		—
Mortgage-backed securities -
GSE residential		148,724		—		148,724		—
Equity securities		13		13		—		—

	$	238,891	$	13	$	238,878	$	—

			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)

December 31, 2019
Available-for-sale securities
U.S. Treasury securities	$	2,991	$	—	$	2,991	$	—
SBA Pools		14,383		—		14,383		—
Federal agencies		21,646		—		21,646		—
State and municipal obligations		45,840		—		45,840		—
Mortgage-backed securities -
GSE residential		116,911		—		116,911		—
Equity securities		13		13		—		—

	$	201,784	$	13	$	201,771	$	—

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the three months ended March 31, 2020.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy, which includes equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include agency securities, obligations of state and political subdivisions, and mortgage-backed securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Nonrecurring Measurements

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 March 31, 2020 and December 31, 2019:

			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)

March 31, 2020
Impaired loans, collateral dependent	$	49	$	—	$	—	$	49
Mortgage-servicing rights		911		—		—		911

December 31, 2019
Impaired loans, collateral dependent	$	57	$	—	$	—	$	57
Mortgage-servicing rights		1,033		—		—		1,033

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Collateral-Dependent Impaired Loans, Net of ALLL

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results.

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

Mortgage-Servicing Rights

Mortgage-servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, mortgage-servicing rights are classified within Level 3 of the hierarchy.

Mortgage-servicing rights are tested for impairment on a 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 March 31, 2020 and December 31, 2019:

	Fair Value at
	March 31,	Valuation	Unobservable
	2020	Technique	Inputs	Range

Collateral-dependent	$49	Appraisal	Marketability	0% - 78%
impaired loans			discount

Mortgage-servicing rights	$911	Discounted cash flow	Discount rate	10%

	Fair Value at
	December 31,	Valuation	Unobservable
	2019	Technique	Inputs	Range

Collateral-dependent	$57	Appraisal	Marketability	0% - 75%
impaired loans			discount

Mortgage-servicing rights	$1,033	Discounted cash flow	Discount rate	10%

Fair Value of Financial Instruments

The following tables present estimated fair values of the Company’s financial instruments at March 31, 2020 and December 31, 2019.

			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2020
Financial assets
Cash and cash equivalents	$	27,456	$	12,456	$	-	$	-
Available-for-sale securities		238,891		13		238,878		-
Held-to-maturity securities		13,770		-		13,974		-
Loans and leases receivable, net		687,054		-		—		702,681
Federal Reserve and FHLB stock		8,631		-		8,631		-
Interest receivable		3,248		-		3,248		-

Financial liabilities
Deposits		605,235		-		609,100		-
FHLB advances		182,000		-		189,200		-
Interest payable		350		-		350		-

	Fair Value Measurements Using
	Quoted Prices
	in Active	Significant
	Markets for	Other	Significant
	Identical	Observable	Unobservable
Carrying	Assets	Inputs	Inputs

	Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2019
Financial assets
Cash and cash equivalents	$	40,597	$	40,597	$	-	$	-
Available-for-sale securities		201,784		13		201,771		-
Held-to-maturity securities		15,917		-		16,156		-
Loans and leases receivable, net		687,258		-		-		687,789
Federal Reserve and FHLB stock		7,600		-		7,600		-
Interest receivable		3,052		-		3,052		-

Financial liabilities
Deposits		617,219		-		619,635		-
FHLB advances		154,000		-		155,304		-
Interest payable		297		-		297		-

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
		March 31, 2020

Net income	$	2,452,146
Shares outstanding for Basic EPS:
Average shares outstanding		13,526,625
Less: average unearned ESOP Shares		1,059,419
Shares outstanding for Basic EPS		12,467,206

Additional Dilutive Shares		—

Shares outstanding for Diluted EPS		12,467,206


Basic Earnings Per Share	$	0.20
Diluted Earnings Per Share	$	0.20

Note 7: Employee Stock Ownership Plan

As part of the reorganization and related stock offering, the Company established an Employee Stock Ownership Plan (ESOP) covering substantially all employees. The ESOP acquired 1,082,130 shares of Company common stock at an average of $13.59 per share on the open market with funds provided by a loan from the Company. Accordingly, $14,706,000 of common stock

acquired by the ESOP was shown as a reduction of stockholders’ equity. Shares are released to participants proportionately as the loan is repaid.

ESOP expense for the three months ended March 31, 2020 was $187,000.

		March 31, 2020

Earned ESOP shares		22,545
Unearned ESOP shares		1,059,585
Total ESOP shares		1,082,130

Quoted per share price	$	10.22
Fair value of earned shares	$	230,410
Fair value of unearned shares	$	10,828,959

Note 8: Subsequent Event

The spread of COVID-19 and the ensuing pandemic has caused significant economic disruption throughout the global economy, including the states and municipalities which constitute the Company’s market area. The potential financial impact is unknown at this time. Prolonged economic disruption will likely affect the ability of the Company’s customers to make timely payments on their loans. It may also have an adverse effect on the collateral values securing customers’ loan obligations. This may negatively impact the Company’s operations, results of operations, and financial condition.

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Management’s discussion and analysis of financial condition and results of operations at March 31, 2020 and for the three months ended March 31, 2020 and 2019 is intended to assist in understanding our financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1, of this Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

Certain matters in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of words such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

statements regarding the quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These forward-looking statements are based on our current beliefs and expectations and, by their nature, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

Important factors that could cause our actual results to differ materially from the results anticipated or projected, include, but are not limited to, the following:

	·	the effect of the novel coronavirus disease of 2019 (“COVID-19”), including on the Company’ credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity;

	·	general economic conditions, either nationally or in our market areas, that are worse than expected;

changes in the level and direction of loan or lease delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan and lease losses;

our ability to access cost-effective funding;

fluctuations in real estate values and both residential and commercial real estate market conditions;

risks associated with the relatively unseasoned nature of a significant portion of our loan portfolio;

demand for loans and deposits in our market area;

our ability to implement and change our business strategies;

competition among depository and other financial institutions and equipment financing companies;

the impact of the proposed termination of our defined benefit plan;

the deductibility of our contribution to the charitable foundation for tax purposes;

inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans and leases we have made and make;

adverse changes in the securities or secondary mortgage markets;

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;

changes in the quality or composition of our loan, lease or investment portfolios;

technological changes that may be more difficult or expensive than expected;

the inability of third-party providers to perform as expected;

our ability to manage market risk, credit risk and operational risk in the current economic environment;

our ability to enter new markets successfully and capitalize on growth opportunities;

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

changes in consumer spending, borrowing and savings habits;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

our ability to retain key employees;

our compensation expense associated with equity allocated or awarded to our employees;

	·	changes in the financial condition, results of operations or future prospects of issuers of securities that we own;

	·	other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") ; and

	·	the other risks detailed in this report and from time to time in our other filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”).

We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.

Overview

On February 6, 2019, the Board of Directors of First Mutual of Richmond, Inc. (the “MHC”), the parent mutual holding company of Richmond Mutual Bancorporation-Delaware, adopted a Plan of Reorganization and Stock Offering (the “Plan”). The Plan was approved by the Board of Governors of the Federal Reserve System (the “FRB”) and by the Indiana Department of Financial Institutions (the “IDFI”), as well as the voting members of the MHC at a special meeting of members held on June 19, 2019. Pursuant to the Plan, upon completion of the transaction, the MHC would convert from a mutual holding company to the stock holding company corporate structure, the MHC and Richmond Mutual Bancorporation-Delaware would cease to exist, and First Bank Richmond would become a wholly owned subsidiary of Richmond Mutual Bancorporation-Maryland, a newly formed Maryland corporation. The transaction was completed on July 1, 2019. In connection with the related stock offering, which was also completed on July 1, 2019, Richmond Mutual Bancorporation-Maryland sold 13,026,625 shares of common stock at $10.00 per share, for gross offering proceeds of approximately $130.3 million in its subscription offering and contributed 500,000 shares and $1.25 million to a newly formed charitable foundation, First Bank Richmond, Inc. Community Foundation (the “Foundation”).

The Company is regulated by the FRB and the IDFI. Our corporate office is located at 31 North 9th Street, Richmond, Indiana, and our telephone number is (765) 962-2581.

First Bank Richmond is an Indiana state-chartered commercial bank headquartered in Richmond, Indiana. The bank was originally established in 1887 as an Indiana state-chartered mutual savings and loan association and in 1935 converted to a federal mutual savings and loan association, operating under the name First Federal Savings and Loan Association of Richmond. In 1993, the bank converted to a state-chartered mutual savings bank and changed its name to First Bank Richmond, S.B. In 1998, the bank, in connection with its non-stock mutual holding company reorganization, converted to a national bank charter operating as First Bank Richmond, National Association. In July 2007, Richmond Mutual Bancorporation-Delaware, the bank’s current holding company, acquired Mutual Federal Savings Bank headquartered in Sidney, Ohio. Mutual Federal Savings Bank was operated independently as a separately chartered, wholly owned subsidiary of Richmond Mutual Bancorporation-Delaware until 2016 when it was combined with the bank through an internal merger transaction that consolidated both banks into a single, more efficient commercial bank charter. In 2017, the bank converted to an Indiana state-chartered commercial bank and changed its name to First Bank Richmond. Mutual Federal Savings Bank continues to operate in Ohio under the name Mutual Federal, a division of First Bank Richmond.

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 IDFI and the Federal Deposit Insurance Corporation (“FDIC”).

Our principal business consists of attracting deposits from the general public, as well as brokered deposits, and investing those funds primarily in loans secured by commercial and multi-family real estate, first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, direct financing leases and commercial and industrial loans. We also obtain funds by utilizing Federal Home Loan Bank (“FHLB”) advances. Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and agency and municipal bonds.

First Bank Richmond generates commercial, mortgage and consumer loans and leases and receives deposits from customers located primarily in Wayne and Shelby Counties, in Indiana and Shelby, Miami and Franklin (no deposits) Counties, in Ohio. We sometimes refer to these counties as our primary market area. First Bank Richmond’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Our leasing operation consists of direct investments in equipment that we lease (referred to as direct finance leases) to small businesses located throughout the United States. Our lease portfolio consists of various kinds of equipment, generally technology-related, such as computer systems, medical equipment and general manufacturing, industrial, construction and transportation equipment. We seek leasing transactions where we believe the equipment leased is integral to the lessee's business. We also provide trust and wealth management services, including serving as executor and trustee under wills and deeds and as guardian and custodian of employee benefits, and manage private investment accounts for individuals and institutions. Total wealth management assets under management and administration were $143.5 million at March 31, 2020.

Our results of operations are primarily dependent on net interest income. Net interest income is the difference between interest income, which is the income that is earned on loans and investments, and interest expense, which is the interest that is paid on deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges

on deposit accounts and loan servicing fees), and fees from sale of residential mortgage loans originated for sale in the secondary market. We also recognize income from the sale of investment securities.

Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reduction in the targeted federal funds rate, until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in 2020 and possibly longer.

At March 31, 2020, on a consolidated basis, we had $1.0 billion in assets, $687.1 million in loans and leases, net of allowance, $605.2 million in deposits and $193.2 million in stockholders’ equity. At March 31, 2020, First Bank Richmond’s total risk-based capital ratio was 19.1%, exceeding the 10.0% requirement for a well-capitalized institution. For the three months ended March 31, 2020, net income was $2.5 million, compared with net income of $1.4 million for the three months ended March 31, 2019.

Critical Accounting Policies

Certain accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan and lease losses, the valuation of foreclosed assets, mortgage servicing rights, valuation of intangible assets and securities, deferred tax asset and income tax accounting.

Allowance for Loan and Lease Losses. We maintain an allowance for loan and lease losses to cover probable incurred credit losses at the balance sheet date. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. A provision for loan and lease losses is charged to operations based on our periodic evaluation of the necessary allowance balance.

We have an established process to determine the adequacy of the allowance for loan and lease losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors, all of which may be susceptible to significant change.

Foreclosed Assets. Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. Management estimates the fair value of the properties based on current appraisal information. Fair value estimates are particularly susceptible to significant changes in the economic environment, market conditions and real estate market. A worsening or protracted economic decline would increase the likelihood of a decline in property values and could create the need to write down the properties through current operations.

Mortgage Servicing Rights (“MSRs”). MSRs associated with loans originated and sold, where servicing is retained, are capitalized and included in the consolidated balance sheet. The value of the capitalized servicing rights represents the fair value of the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as a reduction in loan servicing fee income.

Securities. Under Financial Accounting Standards Board (“FASB”) Codification Topic 320 (ASC 320), Investments-Debt, investment securities must be classified as held to maturity, available for sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and we have the ability to hold the securities to maturity. Securities not classified as held to maturity are classified as available for sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and which do not affect earnings until realized.

The fair values of our securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of our fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.

We evaluate all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if any other-than-temporary-impairments (“OTTI”) exist pursuant to guidelines established in ASC 320. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our ability and intent to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

If management determines that an investment experienced an OTTI, we must then determine the amount of the OTTI to be recognized in earnings. If we do not intend to sell the security and it is more likely than not that we will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the value of these securities are recorded as an unrealized gain (as accumulated other comprehensive income (loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold.

From time to time we may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

Deferred Tax Asset. We have evaluated our deferred tax asset to determine if it is more likely than not that the asset will be utilized in the future. Our most recent evaluation has determined that we will more likely than not be able to utilize our remaining deferred tax asset.

Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

COVID 19 Response

In response to the COVID-19 pandemic, the Company is offering a number of options designed to support our customers and the communities that we serve.

Paycheck Protection Program ("PPP"). The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program called the Paycheck Protection Program, or PPP. The goal of the PPP is to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.

We began accepting applications on April 3, 2020, and as of April 30, 2020 have processed 438 PPP loans totaling $63.9 million. Many of the PPP applications have been from our existing clients but we are also serving those who have not had a banking relationship with us in the past. In addition to the 1% interest earned on these loans, the SBA pays us fees for processing PPP loans in the following amounts: (i) five (5) percent for loans of not more than $350,000; (ii) three (3) percent for loans of more than $350,000 and less than $2,000,000; and one (1) percent for loans of at least $2,000,000. We may not collect any fees from the loan applicants.

We may utilize the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”), pursuant to which the Company would pledge its PPP loans as collateral to obtain FRB non-recourse loans. The PPPLF will take the PPP loans as collateral at face value.

Loan Modifications. Beginning in March 2020 we started receiving requests from our borrowers for loan and lease deferrals related to the effects of COVID-19. As of the quarter ended March 31, 2020, 220 loans aggregating $42.7 million, or 6.1% of total loans and leases were modified. Modifications include payment deferrals interest only or principal and interest of up to primarily 90 days, fee waivers, extensions of repayment terms of up to six months, or other delays in payment that are considered insignificant. These modifications were not classified as TDRs at March 31, 2020 in accordance with the guidance of the CARES Act. The CARES Act provides that the short-term modification of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.

The following table summarizes information relating to forbearance requests received and granted since January 1, 2020 through April 30, 2020:

	Requests			Granted
	Number of Loans	Loan Amount		Number of Loans	Loan Amount
Commercial mortgage (excluding hotels)	42	$	43,174,658	42	$	43,174,658
Commercial and industrial	20	6,783,124		20	6,783,124
Construction and development (excluding hotels)	1	4,900,000		1	4,900,000
Multi-family	13	21,200,514		13	21,200,514
Residential mortgage	85	10,771,280		67	9,314,525
Home equity	7	215,215		7	215,215
Direct financing leases	440	18,327,783		440	18,327,783
Consumer	34	555,020		31	423,858
Hotels	18	38,159,177		18	38,159,177
Total	660	$	144,086,771	639	$	142,498,854

Branch Operations and Additional Client Support

We have taken various steps to ensure the safety of our clients and our personnel by limiting branch activities to appointment only and use of our drive-up facilities. We also encourage the use of our digital and electronic banking channels while adjusting for evolving State and Federal guidelines. Many of our employees are working remotely or have flexible work schedules, and we have established protective measures within our offices to help ensure the safety of those employees who must work on-site. To facilitate this approach, we allocated additional computer equipment to staff and enhanced our network capabilities with several upgrades. The Family First Coronavirus Response Act also provides additional flexibility to our employees to help navigate their individual challenges.

Comparison of Financial Condition at March 31, 2020 and December 31, 2019

General. Total assets increased $21.6 million, or 2.2%, to $1.0 billion at March 31, 2020 from $986 million at December 31, 2019. The increase was primarily a result of a $21.8 million, or 8.4% increase in cash and investments. The increase in cash and investments was funded by a $28.0 million, or 18.2% increase in FHLB advances and partially offset by a $12.0 million, or 1.9%, decrease in deposits.

Loans and Leases. Our loan and lease portfolio, net of allowance for loan and lease losses, decreased $205,000, to $687.1 million at March 31, 2020 from $687.3 million at December 31, 2019. While the amount of the total loan portfolio changed very little, there was some movement in the composition of the portfolio. Commercial mortgage loans increased $9.5 million, or 4.1%, from December 31, 2019 to at March 31, 2020; while construction and development loans grew $4.6 million, or 8.7% from year-end 2019 to March 31, 2020. Leases also grew $2.1 million, or 1.9%, from December 31, 2019 to March 31, 2020. Offsetting that growth, commercial and industrial loans decreased $8.5 million, or 10.1%, from year-end 2019 to March 31, 2020. Multi-family loans also decreased $7.9 million, or 12.0%, during the first quarter of 2020.

Allowance for Loan and Lease Losses. The allowance for loan and lease losses increased $217,000, or 3.1%, to $7.3 million at March 31, 2020 from $7.1 million at December 31, 2019. At March 31, 2020, the allowance for loan and lease losses totaled 1.05% of total loans and leases outstanding compared to 1.02% at December 31, 2019. Net recoveries during the first three months of 2020 were $7,000, compared to net charge-offs of $289,000, or 0.04% of average loans and leases outstanding during the first three months of 2019. The allowance for loan and lease losses to non-performing loans and leases was 0.61% at March 31, 2020, compared to 0.60% at December 31, 2019. As of March 31, 2020, the Company had evaluated its exposure to potential loan and lease losses related to the COVID-19 pandemic based on information currently available. At that time, the Company did not have verifiable documentation as to the full extent of the impact of the pandemic on the Company’s deposit and loan customers. As more information emerges, the Company will be better able to assess the longer-term impact of COVID-19 on particular loan segments.

Deposits. Total deposits decreased $12.0 million, or 1.9%, to $605.2 million at March 31, 2020 from $617.2 million at December 31, 2019. This decrease in deposits primarily was due to a decline in money market account balances and brokered deposits. Brokered deposits decreased $8.7 million during the first three months of 2020. At March 31, 2020, brokered deposits totaled $48.0 million, or 7.9% of total deposits, compared to $56.7 million, or 9.2% of total deposits at December 31, 2019.

Borrowings. Total borrowings, consisting solely of FHLB advances, increased $28 million, or 18.2%, to $182 million at March 31, 2020 from $154.0 million at December 31, 2019.

Stockholders’ Equity. Stockholders’ equity totaled $193.2 million at March 31, 2020, an increase of $5.4 million from December 31, 2019. The increase in stockholders’ equity primarily was the result of net income of $2.5 million in the first quarter of 2020 and a $2.8 million improvement in accumulated other comprehensive income. The company’s equity to asset ratio was 19.2% at March 31, 2020. At March 31, 2020, the Bank’s Tier 1 capital to total assets ratio was 14.3% and the bank’s capital was well in excess of all regulatory requirements.

Average Balances, Interest and Average Yields/Cost. The following tables set forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using quarterly balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Loan fees are included in interest income on loans and are not material.

	Three Months Ended March 31,
	2020							2019
		Average Balance Outstanding			Interest Earned/ Paid	Yield/ Rate			Average Balance Outstanding			Interest Earned/ Paid	Yield/ Rate
		(Dollars in thousands)
Interest-earning assets:
Loans and leases receivable	$	686,180		$	9,064	5.28	%	$	668,249		$	8,766	5.25	%
Securities		224,300			1,182	2.11	%		142,649			849	2.38	%
FHLB stock		7,922			81	4.09	%		6,687			93	5.56	%
Federal Reserve and Other		32,277			125	1.55	%		9,677			49	2.03	%
Total interest-earning assets		950,679			10,452	4.40	%		827,262			9,757	4.72	%

Interest-bearing liabilities:
Savings and money market accounts		163,948			292	0.71	%		162,209			282	0.70	%
Interest-bearing checking accounts		104,154			82	0.31	%		99,372			65	0.26	%
Certificate accounts		278,434			1,451	2.08	%		311,937			1,540	1.97	%
Borrowings		164,066			739	1.80	%		135,989			750	2.21	%
Total interest-bearing liabilities		710,602			2,564	1.44	%		709,507			2,637	1.49	%

Net interest income				$	7,888						$	7,120
Net earning assets	$	240,077						$	117,755

Net interest rate spread⁽¹⁾						2.96	%						3.23	%

Net interest margin⁽²⁾						3.32	%						3.44	%

Average interest-earning assets to average interest-bearing liabilities		133.79	%						116.60	%
		133.79	%						116.60	%

___________________

(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(2) Net interest margin represents net interest income divided by average total interest-earning assets.

Comparison of Results of Operations for the Three Months Ended March 31, 2020 and 2019.

General. Net income for the three months ended March 31, 2020 was $2.5 million, a $1.1 million increase from net income of $1.4 million for the three months ended March 31, 2019. The $2.5 million in earnings equaled $0.20 diluted earnings per share for the first quarter of 2020. There is no comparison of earnings per share to the first quarter of 2019, as the Company’s reorganization from the mutual to stock form of ownership and related stock offering was not completed until July 1, 2019.

Interest Income. Interest income increased $695,000, or 7.1%, to $10.5 million for the three months ended March 31, 2020 compared to $9.8 million for the same three month period in 2019. Interest income on loans increased $297,000, or 3.4%, to $9.1 million for the quarter ended March 31, 2020, compared to $8.8 million for the comparable quarter in 2019, primarily due to a higher average loan balance. The average outstanding loan balance was $686.2 million for the quarter ended March 31, 2020, compared to $668.2 million for the quarter ended March 31, 2019. The average yield on loans was 5.28% for the quarter ended March 31, 2020, compared to 5.25% for the quarter ended March 31, 2019. Interest income on investment securities increased $321,000, or 34.1%, to $1.3 million during the quarter ended March 31, 2020, compared to $942,000 during the comparable quarter in 2019. The increase in the interest income on investment securities was due to higher average balances, partially offset by a lower weighted average yield. The average balance of investment securities was $224.3 million for the quarter ended March 31, 2020, compared to $142.6 million for the quarter ended March 31, 2019. The average yield on investment securities was 2.11% for the quarter ended March 31, 2020, compared to 2.38% for the quarter ended March 31, 2019.

Interest Expense. Interest expense decreased $73,000, or 2.8%, to $2.6 million for the three months ended March 31, 2020, compared to the quarter ended March 31, 2019. Interest expense on deposits decreased $62,000, or 3.3%, to $1.8 million for the quarter ended March 31, 2020, compared to a year ago, primarily as a result of a decrease of $27.0 million, or 4.7%, in the average balance of interest-bearing deposits to $546.5 million. The weighted average rate paid on interest-bearing deposits was 1.34% for the quarter ended March 31, 2020, compared to 1.49% for the quarter ended March 31, 2019. Interest expense

on FHLB borrowings decreased $11,000, or 1.5%, to $739,000 for the quarter ended March 31, 2020, compared to the prior year, due to a decrease in the average rate paid on FHLB borrowings. The weighted rate paid on FHLB borrowings was 1.80% for the quarter ended March 31, 2020, a 41 basis point decline from 2.21% for the comparable quarter in 2019.

Net Interest Income. Net interest income before the provision for loan and lease losses increased $768,000, or 10.8%, to $7.9 million during the first quarter of 2020 compared to $7.1 million for the first quarter of 2019. This increase was due to an increase in average interest-earning assets during the first quarter of 2020 compared to the comparable period in 2019. The total benefit of this increase in average interest-earning assets was diminished by the significant reduction in the targeted Federal Funds Rate since July 2019, including the 150 basis point decrease in March 2020 in response to the COVID-19 pandemic.

Provision for Loan and Lease Losses. The provision for loan and lease losses for the three months ended March 31, 2020 totaled $210,000 compared to $525,000 for the three months ended March 31, 2019, a $315,000 or 60.0% decrease. The lower provision was due to the lack of growth in the loan portfolio, as well as a reflection of the Company’s asset quality. Net recoveries during the first three months of 2020 were $7,000, compared to net charge-offs of $289,000 in the first three months of 2019. As the COVID-19 pandemic continues, it may exert pressure on asset quality as 2020 unfolds. As management continues to monitor the loan portfolio, additional provisions may be required.

Non-Interest Income. Non-interest income increased $49,000, or 5.4%, to $953,000 for the three months ended March 31, 2020, compared to $904,000 for the same period in 2019. Gain on sale of loans and leases increased $141,000, or 161.6%, in the first three months of 2020 to $228,000 compared to $87,000 in the first three months of 2019 as a result of increased mortgage banking activity due to lower rates. Loan and lease servicing income declined $179,000 in the first quarter as the Company recorded impairment to its mortgage servicing rights of $114,000 compared to no impairment recorded in the first quarter of 2019. Other loan fees declined $72,000, or 46.4%, in the first quarter of 2020, primarily due to a $47,000 decrease in loan processing fees and a $24,000 decline in miscellaneous loan fees recorded in the first quarter as a result of lower commercial loan originations in the quarters. Other income increased $78,000, or 61.8% in the first quarter of 2020 compared to 2019, primarily due to a $33,000, or 33.9%, increase in trust fees earned in the first quarter of 2020 compared to the same period in 2019.

Non-Interest Expense. Non-interest expense decreased $281,000 to $5.5 million during the first quarter of 2020 compared to the same period in 2019. Salaries and employee benefits declined $112,000, or 3.2%, in the first quarter of 2020 compared to the first quarter of 2019. Salary expenses increased $73,000 while employee benefit expenses decreased $185,000. The decrease was due to the $19.3 million accrual of estimated expenses in connection with the freezing and proposed termination of our defined benefit plan in December 2019, which resulted in reduced expenses for the first quarter of 2020. The freezing of the plan is expected to reduce but not eliminate the ongoing expenses associated with the defined benefit plan until the plan is terminated. Data processing expenses increased $63,000, or 15.1%, in the first quarter of 2020 compared to the first quarter of 2019, due to normal price increases associated with information technology services and additional digital services offered by the Company. Deposit insurance expense decreased $79,000, or 58.5%, in the first quarter of 2020 compared to the first quarter of 2019, due to the Bank’s higher capital ratios resulting from the Company’s injection of capital into the Bank in connection with our reorganization to a stock holding company and related stock offering. We also experienced decreases of $55,000 in legal and professional fees and $72,000 in other expenses during the first three months of 2020, compared to the first three months of 2019. The decrease in other expenses was primarily the result of a $44,000 decrease in charitable contributions, which are now being made through the First Bank Richmond, Inc. Community Foundation formed in connection with our recently completed reorganization and stock offering, and a $20,000 decrease in commissions associated with brokered CDs.

Income Tax Expense. Income tax expense increased by $333,000 during the three months ended March 31, 2020, compared to the same period in 2019. This was due to pre-tax income increasing $1.4 million during the first quarter of 2020 compared to the first quarter of 2019, and the effective tax rate increasing from 19.0% in the first quarter of 2019 to 21.1% in the first quarter of 2020. The increase in the effective tax rate was due to tax-free income on municipal securities and leases representing a smaller percentage of the Company’s pre-tax income in the first quarter of 2020 versus the first quarter of 2019.

Liquidity

We are required to have enough cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, liquid assets have been maintained above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained.

Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and our ability to manage those requirements. We strive to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance in short-term investments at any given time will cover adequately any reasonably anticipated immediate need for funds. Additionally, First Bank Richmond maintains a relationship with the FHLB of Indianapolis which could provide funds on short-term notice if needed.

Liquidity management is both a daily and long-term function of the management of our business. It is overseen by the Asset and Liability Management Committee. Excess liquidity is generally invested in short-term investments, such as overnight deposits and holding excess funds at the Federal Reserve Bank. On a long term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed and municipal securities. First Bank Richmond uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits, fund deposit withdrawals and fund loan commitments.

First Bank Richmond can also generate funds from borrowings, primarily FHLB advances. In addition, we have historically sold eligible long-term, fixed-rate residential mortgage loans in the secondary market in order to reduce interest rate risk and to create another source of liquidity. First Bank Richmond’s liquidity may be supplemented in the second quarter of 2020 if it participates in the FRB’s PPPLF pursuant to which First Bank Richmond would pledge PPP loans as collateral to obtain FRB non-recourse loans.

Liquidity, represented by cash, cash equivalents, and investment securities, is a product of our operating, investing and financing activities. Primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, excess funds are invested in short-term interest-earning assets, which provide liquidity to meet lending requirements. Cash is also generated through borrowings. FHLB advances are utilized to leverage our capital base and provide funds for lending and investment activities, as well as to enhance interest rate risk management.

Funds are used primarily to meet ongoing commitments, pay maturing deposits, fund withdrawals, and to fund loan commitments. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with us.

Management believes that its primary liquidity sources of loan repayments, maturing investment securities, available FHLB borrowing, possible utilization of the PPPLF facility, and access to the brokered CD market is sufficient in the economic environment created by the COVID-19 pandemic.

Except as set forth above, management is not aware of any trends, events, or uncertainties that will have, or that are reasonably likely to have a material impact on liquidity, capital resources or operations. Further, management is not aware of any current recommendations by regulatory agencies, which, if they were to be implemented, would have this effect.

Off-Balance Sheet Activities

In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements, including commitments to extend credit and unused lines of credit. These transactions involve varying degrees of off-balance sheet risks. While these commitments are contractual obligations and represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At March 31, 2020, we had $136.8 million in loan commitments and unused lines of credit.

Capital Resources

First Bank Richmond is subject to minimum capital requirements imposed by the FDIC. The FDIC may require us to have additional capital above the specific regulatory levels if it believes we are subject to increased risk due to asset problems, high interest rate risk and other risks. At March 31, 2020, First Bank Richmond’s regulatory capital exceeded the FDIC regulatory requirements, and First Bank Richmond was well-capitalized under regulatory prompt corrective action standards. Consistent with our goals to operate a sound and profitable organization, our policy is for First Bank Richmond to maintain well-capitalized status.

						Required for					To Be Well
	Actual					Adequate Capital					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of March 31, 2020	(Dollars in thousands)
Total risk-based capital (to risk weighted assets)	$	147,646		19.1	%	$	61,700		8.0	%	$	77,125		10.0	%
Tier 1 risk-based capital (to risk weighted assets)		140,340		18.2			46,275		6.0			61,700		8.0
Common equity tier 1 capital (to risk weighted assets)		140,340		18.2			34,706		4.5			50,131		6.5
Tier 1 leverage (core) capital (to adjusted tangible assets)		140,340		14.3			39,241		4.0			49,052		5.0

As of December 31, 2019

Total risk-based capital (to risk weighted assets)	$	149,137		19.5	%	$	61,304		8.0	%	$	76,629		10.0	%
Tier 1 risk-based capital (to risk weighted assets)		142,048		18.5			45,978		6.0			61,304		8.0
Common equity tier 1 capital (to risk weighted assets)		142,048		18.5			34,483		4.5			49,809		6.5
Tier 1 leverage (core) capital (to adjusted tangible assets)		142,048		14.6			39,027		4.0			48,784		5.0

Pursuant to the capital regulations of the FDIC and the other federal banking agencies, First Bank Richmond must maintain a capital conservation buffer consisting of additional common equity tier 1 (“CET1”) capital greater than 2.5% of risk-weighted assets above the required minimum levels of risk-based CET1 capital, tier 1 capital and total capital in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At March 31, 2020, the Bank’s CET1 capital exceeded the required capital conservation buffer.

For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the FRB expects the holding company’s subsidiary banks to be well capitalized under the prompt corrective action regulations. If Richmond Mutual Bancorporation was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2020, it would have exceeded all regulatory capital requirements.

Impact of Inflation

The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the economic value of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of inflationary changes in the economy coincides with changes in interest rates. Since virtually all of our assets and liabilities are monetary in nature, interest rates generally have a more significant impact on our performance than does inflation.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There has not been any material change in the market risk disclosures contained in our Prospectus.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Act”)) as of March 31, 2020, was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures in effect as of March 31, 2020, were effective. In addition, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We do not expect that our disclosure controls and procedures and internal control over financial reporting will prevent all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not involved in any pending legal proceedings as a plaintiff or defendant other than routine legal proceedings occurring in the ordinary course of business, and at March 31, 2020, we were not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.

ITEM 1A. RISK FACTORS

In light of recent developments relating to COVID-19, the Company is supplementing its risk factors contained in Item 1A of its 2019 Form 10-K. The following risk factor should be read in conjunction with the risk factors described in the 2019 Form 10-K.

The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has significantly adversely affected our operations and the way we provide banking services to businesses and individuals, most of whom are currently under government issued stay-at-home orders. As an essential business, we continue to provide banking and financial services to our customers through our drive-up facilities and in-person services available by appointment. In addition, we continue to provide access to banking and financial services through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens it could limit or disrupt our ability to provide banking and financial services to our customers.

In response to the stay-at-home orders, some of our employees currently are working remotely to enable us to continue to provide banking services to our customers. Heightened cybersecurity, information security and operational risks may result from these remote work-from-home arrangements. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic. We also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-19 pandemic has resulted in declines in loan demand and loan originations, other than through government sponsored programs such as the Payroll Protection Program, deposit availability, market interest rates and negatively impacted many of our business and consumer borrower’s ability to make their loan payments. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including recent reductions in the targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will be adversely affected in the near term, if not longer. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services. Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.

The impact of the pandemic is expected to continue to adversely affect us during 2020 and possibly longer as the ability of many of our customers to make loan payments has been significantly affected. Although the Company makes estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio. It is likely that increased loan delinquencies, adversely classified loans and loan charge-offs will increase in the future as a result of the pandemic. Consistent with guidance provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is resolved. Any increases in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

The PPP loans made by the Bank are guaranteed by the SBA and, if used by the borrower for authorized purposes, may be fully forgiven. However, in the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from the Bank. In addition, since the commencement of the PPP, several larger banks have been subject to litigation regarding their processing of PPP loan applications. The Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank seeking PPP loans. PPP lenders, including the Bank, may also be subject to the risk of litigation in connection with other aspects of the PPP, including but not limited to borrowers seeking forgiveness of their loans. If any such litigation is filed against the Bank, it may result in significant financial or reputational harm to us.

Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown. and during which we may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery. To the extent the effects of the COVID-19 pandemic adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled "Risk Factors" in our 2019 Form 10-K and any subsequent Quarterly Reports on Form 10-Q.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)Not applicable

(b)Not applicable

(c)The Company did not make any stock repurchases during the quarter ended March 31, 2020, and as of that date did not have any publicly announced stock repurchase programs.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Nothing to report.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Nothing to report.

ITEM 6. EXHIBITS

2.0	Plan of Reorganization and Stock Offering of First Mutual of Richmond, Inc. (incorporated by reference to Exhibit 2.0 of the Company’s Registration Statement on Form S-1 (Commission File No. 333-230184))

3.1	Charter of Richmond Mutual Bancorporation, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (Commission File No. 333-230184))

3.2	Bylaws of Richmond Mutual Bancorporation, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1 (Commission File No. 333-230184))

4	Form of Common Stock Certificate of Richmond Mutual Bancorporation, Inc. (incorporated by reference to Exhibit 4.0 of the Company’s Registration Statement on Form S-1 (Commission File No. 333-230184))


31.1	Rule 13a-14(a) Certifications (Chief Executive Officer)

31.2	Rule 13a-14(a) Certifications (Chief Financial Officer)

32.0	Section 1350 Certifications

101.0	The following materials for the quarter ended March 31, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	RICHMOND MUTUAL BANCORPORATION, INC.


Date: May 15, 2020	By:	/s/ Garry D. Kleer
		Garry D. Kleer
		Chairman, President and CEO
		(Duly Authorized Officer)

Date: May 15, 2020	By:	/s/ Donald A. Benziger
		Donald A. Benziger
		Executive Vice President and CFO
		(Principal Financial and Accounting Officer)

Richmond Mutual Bancorporation, Inc. - FORM 10-Q - May 15, 2020

Attached files

Richmond Mutual Bancorporation, Inc. Reports