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Section 1: 10-Q (QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2019)


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, 2019

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

For the transition period from _______ to ________

Commission file number: 333-230184

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:   None
Title of each class
Trading Symbol(s)
Name of each exchange on which registered




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 [  ] No [X]

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 no shares of Registrant’s common stock, par value of $.01 per share, issued and outstanding as of June 18, 2019.





RICHMOND MUTUAL BANCORPORATION, INC. AND SUBSIDIARY
10-Q
TABLE OF CONTENTS
     
Page
Number
PART I     FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
       
   
Consolidated Balance Sheets at March 31, 2019 (Unaudited) and December 31, 2018
 1
       
   
Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2019 and 2018
 2
       
   
Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months
   Ended March 31, 2019 and 2018
 3
       
   
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Three Months
   Ended March 31, 2019 and 2018
 4
       5
   
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2019 and 2018
 
       
   
Notes to Consolidated Financial Statements
 6
       
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 24
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 34
       
Item 4.
Controls and Procedures
 34
       
PART II     OTHER INFORMATION
 35
       
Item 1.
Legal Proceedings
 35
       
Item 1A.
Risk Factors
 35
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 35
       
Item 3.
Defaults Upon Senior Securities
 35
       
Item 4.
Mine Safety Disclosures
 35
       
Item 5
Other Information
 35
       
Item 6.
Exhibits
 35
       
SIGNATURES
 36









EXPLANATORY NOTE
Richmond Mutual Bancorporation, Inc., a Maryland corporation, which is referred to in this document as “Richmond Mutual Bancorporation-Maryland,” was formed in February 2019 to serve as a new stock holding company for First Bank Richmond upon completion of the reorganization of First Bank Richmond from the mutual holding company form of organization.  As of March 31, 2019, the reorganization had not been completed. In addition, as of that date, Richmond Mutual Bancorporation-Maryland had no assets or liabilities and had not conducted any business activities other than organizational activities.  Richmond Mutual Bancorporation, Inc., a Delaware corporation, which is referred to in this document as “Richmond Mutual Bancorporation-Delaware,” currently owns 100% of the outstanding shares of common stock of First Bank Richmond.  Upon the completion of the reorganization Richmond Mutual Bancorporation-Delaware will cease to exist and First Bank Richmond will be a wholly owned subsidiary of Richmond Mutual Bancorporation-Maryland.  Accordingly, the unaudited consolidated financial statements and other financial information contained in this Quarterly Report on Form 10-Q relates solely to Richmond Mutual Bancorporation-Delaware and its consolidated subsidiary, First Bank Richmond.
The unaudited consolidated financial statements and other financial information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements, and related notes, of Richmond Mutual Bancorporation-Delaware at and for the year ended December 31, 2018 contained in Richmond Mutual Bancorporation-Maryland’s definitive prospectus dated May 6, 2019 (the “Prospectus”), as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on May 16, 2019.
In certain circumstances, where appropriate, the terms “we, “us” and “our” refer collectively to (i) Richmond Mutual Bancorporation-Delaware and First Bank Richmond with respect to discussions in this document involving matters occurring prior to completion of the reorganization and (ii) Richmond Mutual Bancorporation-Maryland and First Bank Richmond with respect to discussions in this document involving matters to occur post-reorganization, in each case unless the context indicates another meaning.













PART I.  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

Richmond Mutual Bancorporation, Inc.
Consolidated Balance Sheets

   
March 31,
   
December 31,
 
   
2019
   
2018
 
    (Unaudited)
       
Assets
           
Cash and due from banks
 
$
8,900,280
   
$
10,112,422
 
Interest-bearing demand deposits
   
22,042,707
     
4,858,748
 
     Cash and cash equivalents
   
30,942,987
     
14,971,170
 
Investment securities - available for sale
   
124,222,960
     
122,482,487
 
Investment securities - held to maturity
   
19,747,869
     
21,079,974
 
Loans and leases, net of allowance for losses of $5,836,000 and
     $5,600,000, respectively
   
672,058,277
     
654,755,066
 
Premises and equipment, net
   
13,983,153
     
14,025,476
 
Federal Reserve and Federal Home Loan Bank stock
   
6,965,500
     
6,560,600
 
Interest receivable
   
2,705,206
     
2,686,010
 
Mortgage-servicing rights
   
1,218,934
     
1,227,356
 
Cash surrender value of life insurance
   
3,747,767
     
3,718,219
 
Other assets
   
7,207,424
     
8,112,005
 
                 
     Total assets
 
$
882,800,077
   
$
849,618,363
 
                 
Liabilities
               
Non-interest bearing deposits
 
$
63,144,179
   
$
58,044,369
 
Interest bearing deposits
   
578,938,921
     
562,592,451
 
     Total deposits
   
642,083,100
     
620,636,820
 
Federal Home Loan Bank advances
   
145,100,000
     
136,100,000
 
Advances by borrowers for taxes and insurance
   
632,911
     
543,527
 
Interest payable
   
656,647
     
550,749
 
Other liabilities
   
5,204,514
     
5,934,235
 
     Total liabilities
   
793,677,172
     
763,765,331
 
                 
Commitments and Contingent Liabilities
               
                 
Stockholders' Equity
               
  Common stock, $.01 par value; Authorized - 500 shares;
      Issued and outstanding - 100 shares
   
1
     
1
 
Additional paid-in capital
   
12,750,999
     
12,750,999
 
Retained earnings
   
78,852,567
     
77,480,318
 
Accumulated other comprehensive loss
   
(2,480,662
)
   
(4,378,286
)
     Total stockholders' equity
   
89,122,905
     
85,853,032
 
                 
     Total liabilities and stockholders' equity
 
$
882,800,077
   
$
849,618,363
 

See accompanying notes.

1





Richmond Mutual Bancorporation, Inc.
Consolidated Statements of Income
(Unaudited)

   
Three Months Ended March 31,
 
   
2019
   
2018
 
             
Interest Income
           
   Loans and leases
 
$
8,766,129
   
$
7,261,910
 
   Investment securities
   
941,661
     
866,315
 
   Other
   
49,107
     
34,537
 
      Total interest income
   
9,756,897
     
8,162,762
 
                 
Interest Expense
               
   Deposits
   
1,886,700
     
1,157,906
 
   Borrowings
   
750,262
     
454,022
 
      Total interest expense
   
2,636,962
     
1,611,928
 
                 
Net Interest Income
   
7,119,935
     
6,550,834
 
   Provision for losses on loans and leases
   
525,000
     
450,000
 
                 
Net Interest Income After Provision for Losses on Loans and Leases
   
6,594,935
     
6,100,834
 
                 
Other Income
               
   Service charges on deposit accounts
   
231,649
     
252,334
 
   Card fee income
   
166,586
     
159,516
 
   Loan and lease servicing fees
   
113,272
     
38,826
 
   Net gains on sale of securities (includes $24,806 and $0 for the
        three months ended March 31, 2019 and 2018, respectively,
        related to accumulated other comprehensive loss reclassifications)
   
24,806
     
-
 
   Net gains on loan and lease sales
   
87,225
     
98,739
 
   Other loan fees
   
154,640
     
149,957
 
   Other income
   
126,277
     
139,607
 
      Total other income
   
904,455
     
838,979
 
                 
Other Expenses
               
   Salaries and employee benefits
   
3,475,733
     
3,410,564
 
   Net occupancy expenses
   
293,381
     
292,448
 
   Equipment expenses
   
242,145
     
233,201
 
   Data processing fees
   
414,192
     
371,055
 
   Deposit insurance expense
   
135,000
     
106,000
 
   Printing and office supplies
   
41,758
     
35,721
 
   Legal and professional fees
   
296,779
     
141,751
 
   Advertising expense
   
123,417
     
118,642
 
   Bank service charges
   
31,676
     
23,544
 
   Real estate owned expense
   
14,820
     
8,454
 
   Loan tax and insurance expense (refund)
   
(23,052
)
   
52,435
 
   Other expenses
   
759,192
     
645,713
 
      Total other expenses
   
5,805,041
     
5,439,528
 
                 
Income Before Income Tax Expense
   
1,694,349
     
1,500,285
 
   Provision for income taxes (includes $6,483 and $0 for the
        three months ended March 31, 2019 and 2018, respectively,
        related to income tax expense from reclassification of items)
   
322,100
     
287,900
 
                 
Net Income
 
$
1,372,249
   
$
1,212,385
 

See accompanying notes.
2




Richmond Mutual Bancorporation, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)


   
Three Months Ended
 
   
March 31,
 
   
2019
   
2018
 
             
Net Income
 
$
1,372,249
   
$
1,212,385
 
                 
Other Comprehensive Income (Loss)
               
   Unrealized appreciation (depreciation) on available-for-sale
      securities, net of tax expense (benefit) of $677,903 and
      ($750,647) for the three months ended March 31, 2019 and 2018,
      respectively
   
1,915,947
     
(2,121,544
)
   Less:  reclassification adjustment for realized gains included in
      net income, net of tax expense of $6,483 and $0 for the
      three months ended March 31, 2019 and 2018, respectively
   
18,323
     
-
 
     
1,897,624
     
(2,121,544
)
                 
Comprehensive Income (Loss)
 
$
3,269,873
   
$
(909,159
)


See accompanying notes.
















3





Richmond Mutual Bancorporation, Inc.
Consolidated Statements of Stockholders’ Equity
(Unaudited)

                                       
Accumulated
       
   
Preferred Stock
         
Common Stock
         
Additional
         
Other
       
   
Shares
         
Shares
         
Paid-in
   
Retained
   
Comprehensive
       
   
Outstanding
   
Amount
   
Outstanding
   
Amount
   
Capital
   
Earnings
   
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
 

                                       
Accumulated
       
   
Preferred Stock
         
Common Stock
         
Additional
         
Other
       
   
Shares
         
Shares
         
Paid-in
   
Retained
   
Comprehensive
       
   
Outstanding
   
Amount
   
Outstanding
   
Amount
   
Capital
   
Earnings
   
Loss
   
Total
 
                                                 
Balances, December 31, 2017
   
80
   
$
1
     
100
   
$
1
   
$
12,757,998
   
$
71,765,677
   
$
(2,725,854
)
 
$
81,797,823
 
   Net income
                                           
1,212,385
             
1,212,385
 
   Dividend
                                           
(500,000
)
           
(500,000
)
   Other comprehensive loss
                                                   
(2,328,127
)
   
(2,328,127
)
                                                                 
Balances, March 31, 2018
   
80
   
$
1
     
100
   
$
1
   
$
12,757,998
   
$
72,478,062
   
$
(4,847,398
)
 
$
80,388,664
 



See accompanying notes.




4





Richmond Mutual Bancorporation, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

   
Three Months Ended March 31,
 
   
2019
   
2018
 
             
Operating Activities
           
   Net income
 
$
1,372,249
   
$
1,212,385
 
   Items not requiring (providing) cash
               
      Provision for loan losses
   
525,000
     
450,000
 
      Depreciation and amortization
   
233,529
     
228,109
 
      Deferred income tax
    (361,000
)
    (260,000
)
      Investment securities (accretion) amortization, net
   
123,814
     
185,949
 
      Investment securities gains
   
(24,806
)
   
-
 
      Gain on sale of loans and leases held for sale
   
(87,225
)
   
(98,739
)
      Accretion of loan origination fees
   
(40,049
)
   
(53,287
)
      Amortization of mortgage-servicing rights
   
32,833
     
83,576
 
      Increase in cash surrender value of life insurance
   
(29,548
)
   
(29,659
)
   Loans originated for sale
   
(3,468,463
)
   
(4,944,192
)
   Proceeds on loans sold
   
3,342,763
     
5,191,292
 
   Net change in
               
      Interest receivable
   
(19,196
)
   
(105,260
)
      Other assets
    1,265,581
      1,313,334
 
      Other liabilities
   
(1,309,293
)
   
1,381,826
 
      Interest payable
   
105,898
     
192,306
 
         Net cash provided by operating activities
   
1,662,087
     
4,747,640
 
                 
Investing Activities
               
   Net change in interest-bearing time deposits
   
-
     
200,000
 
   Purchases of securities available for sale
   
(12,886,237
)
   
(945,000
)
   Proceeds from maturities and paydowns of securities available for sale
   
2,068,535
     
2,827,437
 
   Proceeds from sales of securities available for sale
   
11,467,522
     
-
 
   Proceeds from maturities and paydowns of securities held to maturity
   
1,320,000
     
1,580,000
 
   Net change in loans
   
(17,599,648
)
   
(37,542,535
)
   Purchases of premises and equipment
   
(191,206
)
   
(284,153
)
   Purchase of FHLB stock
   
(404,900
)
   
-
 
         Net cash used in investing activities
   
(16,225,934
)
   
(34,164,251
)
                 
Financing Activities
               
   Net change in
               
      Demand and savings deposits
   
13,720,129
     
4,222,107
 
      Certificates of deposit
   
7,726,151
     
23,863,059
 
      Advances by borrowers for taxes and insurance
   
89,384
     
93,106
 
   Proceeds from FHLB advances
   
37,000,000
     
79,000,000
 
   Repayment of FHLB advances
   
(28,000,000
)
   
(80,000,000
)
   Dividends paid
   
-
     
(500,000
)
         Net cash provided by financing activities
   
30,535,664
     
26,678,272
 
                 
Net Change in Cash and Cash Equivalents
   
15,971,817
     
(2,738,339
)
                 
Cash and Cash Equivalents, Beginning of Period
   
14,971,170
     
16,169,754
 
                 
Cash and Cash Equivalents, End of Period
 
$
30,942,987
   
$
13,431,415
 
                 
Additional Cash Flows and Supplementary Information
               
   Interest paid
 
$
2,531,064
   
$
1,419,622
 
   Transfers from loans to other real estate owned
   
-
     
84,958
 

See accompanying notes.

5





Richmond Mutual Bancorporation, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands)


Note 1:  Basis of Presentation

The consolidated financial statements include the accounts of Richmond Mutual Bancorporation, Inc. (the “Company”), which is a wholly owned subsidiary of First Mutual of Richmond, Inc., and its wholly owned subsidiary, First Bank Richmond (“First Bank”), and conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry.  The more significant of the policies are described below.

On February 6, 2019, the Board of Directors of First Mutual of Richmond, Inc. (the “MHC”), the parent mutual holding company of the Company, adopted a Plan of Reorganization and Stock Offering (the “Plan”).  The Plan has been approved by the Board of Governors of the Federal Reserve System (the “FRB”) and by the Indiana Department of Financial Institutions (the “IDFI”).  The Plan must also be approved by the affirmative vote of at least a majority of the total votes eligible to be cast by the voting members of the MHC at a special meeting of members to be held on June 19, 2019.   Pursuant to the Plan, the MHC will convert from a mutual holding company to the stock holding company corporate structure.  Upon completion of the transaction, the MHC and the Company will cease to exist, and First Bank will be a wholly owned subsidiary of a newly formed Maryland corporation also known as Richmond Mutual Bancorporation, Inc. (“Richmond Mutual Bancorporation-Maryland”). 

Pursuant to the Plan, Richmond Mutual Bancorporation-Maryland is in the process of offering stock for sale to the public, with the total offering value and number of shares of common stock based upon an independent appraiser’s valuation. The stock has been priced at $10.00 per share and is being offered in a subscription offering pursuant to non-transferable subscription rights granted on a priority basis to the eligible members of the MHC, First Bank’s employee stock ownership plan (the “ESOP”) and certain other persons.  To the extent that the ESOP’s subscription is not filled in the stock offering due to an oversubscription, the ESOP may purchase some or all of the shares subscribed for in the open market following the completion of the offering, subject to any required approvals of the FRB and the IDFI.  In addition, subject to approval by the MHC members, First Bank will establish the First Bank Richmond, Inc. Community Foundation and contribute $6.25 million to the foundation, consisting of $1.25 million in cash and $5.0 million (500,000 shares) of Richmond Mutual Bancorporation-Maryland common stock.

The costs of the reorganization and the issuance of the common stock will be deferred and deducted from the sales proceeds of the offering.  If the reorganization is unsuccessful, all deferred costs will be charged to operations. 

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 for the Company’s year ended December 31, 2018 included in the prospectus filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) of the Securities Act of 1933, as amended, on May 16, 2019 (SEC File No. 333-230184).  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, 2019 and 2018, 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.

The Consolidated Balance Sheet of the Company as of December 31, 2018 has been derived from the audited Consolidated Balance Sheet of the Company as of that date.


Note 2:  Accounting Pronouncements

Richmond Mutual Bancorporation - Maryland is an emerging growth company and as such will be subject to the effective dates noted for the pivate companies if they differ from the effective dates noted for public companies.

Revenue Recognition — Accounting Standards Codification 606, “Revenue from Contracts with Customers” (ASC 606) provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance enumerates five steps that entities should follow in achieving this core principle. Revenue generated from financial instruments, including loans and investment securities, are not included in the scope of ASC 606. The Company elected to early adopt ASC 606 in 2018.  The adoption of ASC 606 did not result in a change to the accounting of any of the Company’s revenue streams that are within the scope of the amendments. Revenue-gathering activities that are within the scope of ASC 606 and that are presented as non-interest income in the Company’s consolidated statements of income include:

- Service charges on deposit accounts – these include general service fees charged for deposit account maintenance and activity and transaction-based fees charged for certain services, such as debit card, wire transfer and overdraft activities. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services.

- Card fee income – this includes debit card fees charged based on the volume and number of debit card transactions.  Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services.

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  

6





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. The ASU is effective for SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.  For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. All entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. While the Company expects that the implementation of this ASU will increase the balance of the allowance for loan losses, it is continuing to evaluate the potential impact on the Company’s results of operations and financial position. The Company has established a workgroup to review and produce different methodologies to best estimate future loan losses.

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, 2019. Based on leases outstanding as of December 31, 2018, the new standard will not have a material impact on the Company’s balance sheet or income statement.

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provide entities with 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 leases 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 nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease 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, 2019
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Available for sale
                       
  Federal agencies
 
$
40,792
   
$
-
   
$
1,604
   
$
39,188
 
  State and municipal obligations
   
28,850
     
86
     
339
     
28,597
 
  Mortgage-backed securities -
                               
    government-sponsored enterprises
                               
    (GSE) residential
   
57,909
     
30
     
1,514
     
56,425
 
  Equity securities
   
13
     
-
     
-
     
13
 
     
127,564
     
116
     
3,457
     
124,223
 
                                 
Held to maturity
                               
  State and municipal obligations
   
17,248
     
143
     
42
     
17,349
 
  Corporate obligations
   
2,500
     
2,632
     
-
     
5,132
 
     
19,748
     
2,775
     
42
     
22,481
 
                                 
      Total investment securities
 
$
147,312
   
$
2,891
   
$
3,499
   
$
146,704
 


7






   
December 31, 2018
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Available for sale
                       
  Federal agencies
 
$
40,812
   
$
-
   
$
2,802
   
$
38,010
 
  State and municipal obligations
   
30,531
     
34
     
776
     
29,789
 
  Mortgage-backed securities -
                               
    government-sponsored enterprises
                               
    GSE residential
   
56,945
     
11
     
2,286
     
54,670
 
  Equity securities
   
13
     
-
     
-
     
13
 
     
128,301
     
45
     
5,864
     
122,482
 
                                 
Held to maturity
                               
  State and municipal obligations
   
18,580
     
70
     
107
     
18,543
 
  Corporate obligations
   
2,500
     
2,610
     
-
     
5,110
 
     
21,080
     
2,680
     
107
     
23,653
 
                                 
    Total investment securities
 
$
149,381
   
$
2,725
   
$
5,971
   
$
146,135
 


The amortized cost and fair value of securities at March 31, 2019, 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
 
$
80
   
$
80
   
$
2,693
   
$
2,687
 
One to five years
   
9,744
     
9,615
     
7,971
     
7,989
 
Five to ten years
   
51,298
     
49,620
     
5,086
     
5,140
 
After ten years
   
8,520
     
8,470
     
3,998
     
6,665
 
     
69,642
     
67,785
     
19,748
     
22,481
 
Mortgage-backed securities -
                               
  GSE residential
   
57,909
     
56,425
     
-
     
-
 
  Equity securities
   
13
     
13
     
-
     
-
 
                                 
     Totals
 
$
127,564
   
$
124,223
   
$
19,748
   
$
22,481
 


Securities with a carrying value of $88,282,000 and $86,267,000 were pledged at March 31, 2019 and December 31, 2018, respectively, to secure certain deposits and for other purposes as permitted or required by law.

Proceeds from sales of securities available for sale during the three months ended March 31, 2019 and 2018 were $11,467,522 and $0, respectively.  Gross gains of $25,000 and $0 resulting from sales of available-for-sale securities were realized for the three months ended March 31, 2019 and 2018, respectively.  There were no gross losses realized from sales of available-for-sale securities for both the three months ended March 31, 2019 and 2018, 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, 2019 and December 31, 2018 was $115,561,000 and $126,736,000, which is approximately 79% and 88%, respectively, of the Company’s available-for-sale and held-to-maturity investment portfolio.  These declines primarily resulted from recent changes in market interest rates.

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.

8





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’ 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, 2019 and December 31, 2018:

   
March 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
                                   
  Federal agencies
   
-
     
-
     
39,188
     
1,604
     
39,188
     
1,604
 
  State and municipal obligations
   
883
     
2
     
20,173
     
337
     
21,056
     
339
 
  Mortgage-backed securities -
                                               
    GSE residential
   
4,103
     
25
     
44,851
     
1,489
     
48,954
     
1,514
 
      Total available-for-sale
   
4,986
     
27
     
104,212
     
3,430
     
109,198
     
3,457
 
                                                 
Held-to-maturity
                                               
  State and municipal obligations
   
30
     
-
     
6,333
     
42
     
6,363
     
42
 
                                                 
      Total temporarily
                                               
        impaired securities
 
$
5,016
   
$
27
   
$
110,545
   
$
3,472
   
$
115,561
   
$
3,499
 

   
December 31, 2018
 
   
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
                                   
  Federal agencies
 
$
-
   
$
-
   
$
38,010
   
$
2,802
   
$
38,010
   
$
2,802
 
  State and municipal obligations
   
4,516
     
26
     
21,529
     
750
     
26,045
     
776
 
  Mortgage-backed securities -
                                               
    GSE residential
   
5,872
     
30
     
45,676
     
2,256
     
51,548
     
2,286
 
      Total available-for-sale
   
10,388
     
56
     
105,215
     
5,808
     
115,603
     
5,864
 
                                                 
Held-to-maturity
                                               
  State and municipal obligations
   
3,271
     
11
     
7,862
     
96
     
11,133
     
107
 
                                                 
      Total temporarily
                                               
        impaired securities
 
$
13,659
   
$
67
   
$
113,077
   
$
5,904
   
$
126,736
   
$
5,971
 


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, 2019.


9




Mortgage-Backed Securities - GSE Residential.  The unrealized losses on the Company’s investment in mortgage-backed securities were caused by interest rate changes and illiquidity.  The Company expects to recover the amortized cost basis over the term of the securities.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2019.

State and Municipal Obligations.  The unrealized losses on the Company’s investments in securities of state and municipal obligations were caused by interest rate changes and illiquidity.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments.  Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2019.


Note 4:  Loans, Leases and Allowance

Categories of loans at March 31, 2019 and December 31, 2018 include:

   
March 31,
   
December 31,
 
   
2019
   
2018
 
             
Commercial mortgage
 
$
214,467
   
$
211,237
 
Commercial and industrial
   
64,090
     
71,854
 
Construction and development
   
93,399
     
72,955
 
Multi-family
   
43,193
     
43,816
 
Residential mortgage
   
134,988
     
132,492
 
Home equity
   
6,904
     
7,214
 
Direct financing leases
   
107,665
     
107,735
 
Consumer
   
13,657
     
13,520
 
     
678,363
     
660,823
 
Less
               
  Allowance for loan and lease losses
   
5,836
     
5,600
 
  Deferred loan fees
   
469
     
468
 
                 
   
$
672,058
   
$
654,755
 












10





The following tables present the activity in the allowance for loan losses for the three months ended March 31, 2019 and 2018.

   
Three months ended March 31, 2019
 
         
Commercial
                         
   
Commercial
   
and
   
Residential
                   
   
Mortgage
   
Industrial
   
Mortgage
   
Leases
   
Consumer
   
Total
 
                                     
Allowance for loan losses:
                                   
  Balance, January 1
 
$
3,147
   
$
1,817
   
$
139
   
$
389
   
$
108
   
$
5,600
 
    Provision charged to
     expense
   
269
     
221
     
(37
)
   
38
     
34
     
525
 
    Charge-offs
   
-
     
(250
)
   
(2
)
   
(82
)
   
(34
)
   
(368
)
    Recoveries
   
4
     
2
     
17
     
47
     
9
     
79
 
                                                 
  Balance, March 31
 
$
3,420
   
$
1,790
   
$
117
   
$
392
   
$
117
   
$
5,836
 

   
Three months ended March 31, 2018
 
         
Commercial
                         
   
Commercial
   
and
   
Residential
                   
   
Mortgage
   
Industrial
   
Mortgage
   
Leases
   
Consumer
   
Total
 
                                     
Allowance for loan losses:
                                   
  Balance, January 1
 
$
2,424
   
$
1,663
   
$
257
   
$
337
   
$
119
   
$
4,800
 
   Provision charged to
     expense
   
550
     
(34
)
   
(23
)
    (18
)
   
(25
)
   
450
 
    Charge-offs
   
(7
)
    -

   
(39
)
   
(36
)
   
(10
)
   
(92
)
    Recoveries
   
8
     
5
     
29
     
36
      15      
93
 
                                                 
  Balance, March 31
 
$
2,975
   
$
1,634
   
$
224
   
$
319
   
$
99
   
$
5,251
 







11





The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2019 and December 31, 2018:

   
March 31, 2019
 
         
Commercial
                         
   
Commercial
   
and
   
Residential
                   
   
Mortgage
   
Industrial
   
Mortgage
   
Leases
   
Consumer
   
Total
 
                                     
Allowance for loan losses:
                                   
  Individually evaluated
   for impairment
 
$
300
   
$
143
   
$
-
   
$
-
   
$
-
   
$
443
 
  Collectively evaluated
   for impairment
   
3,120
     
1,647
     
117
     
392
     
117
     
5,393
 
                                                 
  Balance, March 31
 
$
3,420
   
$
1,790
   
$
117
   
$
392
   
$
117
   
$
5,836
 
                                                 
Loans:
                                               
  Individually evaluated
   for impairment
 
$
713
   
$
908
   
$
383
   
$
-
   
$
-
   
$
2,004
 
  Collectively evaluated
  for impairment
   
368,959
     
64,488
     
118,337
     
107,665
     
16,910
     
676,359
 
  Ending balance, March 31
 
$
369,672
   
$
65,396
   
$
118,720
   
$
107,665
   
$
16,910
   
$
678,363
 

   
December 31, 2018
 
         
Commercial
                         
   
Commercial
   
and
   
Residential
                   
   
Mortgage
   
Industrial
   
Mortgage
   
Leases
   
Consumer
   
Total
 
                                     
Allowance for loan losses:
                                   
  Individually evaluated
   for impairment
 
$
300
   
$
394
   
$
-
   
$
-
   
$
-
   
$
694
 
  Collectively evaluated
   for impairment
   
2,847
     
1,423
     
139
     
389
     
108
     
4,906
 
                                                 
  Balance, December 31
 
$
3,147
   
$
1,817
   
$
139
   
$
389
   
$
108
   
$
5,600
 
                                                 
Loans:
                                               
  Individually evaluated
  for impairment
 
$
743
   
$
1,177
   
$
389
   
$
-
   
$
-
   
$
2,309
 
  Collectively evaluated
   for impairment
   
358,593
     
58,203
     
117,258
     
107,735
     
16,725
     
658,514
 
   Ending balance, December 31
 
$
359,336
   
$
59,380
   
$
117,647
   
$
107,735
   
$
16,725
   
$
660,823
 


First Bank rates all loans by credit quality using the following designations:

Grade 1 - Exceptional

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

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 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.


12





Grade 3 - Acceptable Loans

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

Grade 4 - Acceptable but Monitored

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

Grade 5 - Special Mention

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

Grade 6 - Substandard

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

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

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

Cash flow deficiencies (losses) jeopardize future loan payments.

Sale of noncollateral assets has become a primary source of loan repayment.

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

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

Grade 7 - Doubtful

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

Grade 8 - Loss

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

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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.

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The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2019 and December 31, 2018:

      
March 31, 2019
 
           
Commercial
   
Construction
                                     
      
Commercial
   
and
   
and
   
Multi-
   
Residential
   
Home
                   
      
Mortgage
   
Industrial
   
Development
   
Family
   
Mortgage
   
Equity
   
Leases
   
Consumer
   
Total
 
                                                         
1-4
Pass
 
$
212,400
   
$
59,709
   
$
93,399
   
$
43,193
   
$
132,262
   
$
6,779
   
$
107,408
   
$
13,053
   
$
668,203
 
5
Special Mention
   
1,499
     
1,457
     
-
     
-
     
208
     
60
     
-