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Section 1: 10-Q (QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 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 June 30, 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:
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 August 14, 2019.







RICHMOND MUTUAL BANCORPORATION, INC. AND SUBSIDIARY
10-Q
TABLE OF CONTENTS
     
Page
Number
PART I     FINANCIAL INFORMATION
 1
     
Item 1.
Financial Statements
 1
       
   
Consolidated Balance Sheets at June 30, 2019 (Unaudited) and December 31, 2018
 1
       
   
Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2019 and 2018
 2
       
   
Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months
   Ended June 30, 2019 and 2018
 3
       
   
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Three and Six Months
   Ended June 30, 2019 and 2018
 4
       
   
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2019 and 2018
 5
       
   
Notes to Consolidated Financial Statements
 6
       
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 25
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 38
       
Item 4.
Controls and Procedures
 38
       
PART II     OTHER INFORMATION
 39
       
Item 1.
Legal Proceedings
 39
       
Item 1A.
Risk Factors
 39
       
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







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.  On July 1, 2019, upon the completion of the reorganization, Richmond Mutual Bancorporation, Inc., a Delaware corporation, which is referred to in this document as “Richmond Mutual Bancorporation-Delaware” or the “Company”, ceased to exist and First Bank Richmond became a wholly owned subsidiary of Richmond Mutual Bancorporation-Maryland.
As of June 30, 2019, the reorganization had not been completed and Richmond Mutual Bancorporation-Delaware owned 100% of the outstanding shares of common stock of First Bank Richmond.  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.  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



   
June 30,
   
December 31,
 
Assets
 
2019
   
2018
 
 
 
(Unaudited)
       
 
           
Cash and due from banks
 
$
8,038,498
   
$
10,112,422
 
Interest-bearing demand deposits
   
194,381,806
     
4,858,748
 
Cash and cash equivalents
   
202,420,304
     
14,971,170
 
Investment securities - available for sale
   
134,428,198
     
122,482,487
 
Investment securities - held to maturity
   
19,611,087
     
21,079,974
 
Loans and leases, net of allowance for losses of $6,281,000 and
               
$5,600,000, respectively
   
691,124,194
     
654,755,066
 
Premises and equipment, net
   
13,940,120
     
14,025,476
 
Federal Home Loan Bank stock
   
7,510,400
     
6,560,600
 
Interest receivable
   
2,933,264
     
2,686,010
 
Mortgage-servicing rights
   
1,211,002
     
1,227,356
 
Cash surrender value of life insurance
   
3,778,430
     
3,718,219
 
Other assets
   
6,065,938
     
8,112,005
 
 
               
Total assets
 
$
1,083,022,937
   
$
849,618,363
 
 
               
Liabilities
               
Non-interest bearing deposits
 
$
237,401,830
   
$
58,044,369
 
Interest bearing deposits
   
590,227,032
     
562,592,451
 
Total deposits
   
827,628,862
     
620,636,820
 
Federal Home Loan Bank advances
   
157,100,000
     
136,100,000
 
Advances by borrowers for taxes and insurance
   
571,810
     
543,527
 
Interest payable
   
753,101
     
550,749
 
Other liabilities
   
5,955,570
     
5,934,235
 
Total liabilities
   
992,009,343
     
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
   
79,187,692
     
77,480,318
 
Accumulated other comprehensive loss
   
(925,098
)
   
(4,378,286
)
Total stockholders' equity
   
91,013,594
     
85,853,032
 
 
               
Total liabilities and stockholders' equity
 
$
1,083,022,937
   
$
849,618,363
 




See accompanying notes.

1





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

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Interest Income
                       
Loans and leases
 
$
9,163,223
   
$
7,718,149
   
$
17,929,352
   
$
14,980,059
 
Investment securities
   
956,816
     
829,424
     
1,898,477
     
1,695,739
 
Other
   
278,462
     
47,755
     
327,569
     
82,292
 
Total interest income
   
10,398,501
     
8,595,328
     
20,155,398
     
16,758,090
 
 
                               
Interest Expense
                               
Deposits
   
2,107,460
     
1,351,493
     
3,994,160
     
2,509,399
 
Borrowings
   
808,565
     
433,228
     
1,558,827
     
887,250
 
Total interest expense
   
2,916,025
     
1,784,721
     
5,552,987
     
3,396,649
 
 
                               
Net Interest Income
   
7,482,476
     
6,810,607
     
14,602,411
     
13,361,441
 
Provision for losses on loans and leases
   
485,000
     
450,000
     
1,010,000
     
900,000
 
 
                               
Net Interest Income After Provision for Losses on
                               
Loans and Leases
   
6,997,476
     
6,360,607
     
13,592,411
     
12,461,441
 
 
                               
Other Income
                               
Service charges on deposit accounts
   
251,795
     
273,640
     
483,444
     
525,974
 
Card fee income
   
185,903
     
176,526
     
352,489
     
336,042
 
Loan and lease servicing fees
   
98,931
     
105,340
     
212,203
     
144,166
 
Net gains on securities (includes $36,426 and $11,952, $61,232 and
   
36,426
     
11,952
     
61,232
     
11,952
 
$11,952, related to accumulated other comprehensive loss
                               
reclassifications)
                               
Net gains on loan and lease sales
   
123,573
     
101,677
     
210,798
     
200,416
 
Other loan fees
   
88,394
     
80,338
     
243,034
     
230,295
 
Other income
   
114,883
     
152,007
     
241,160
     
291,614
 
Total other income
   
899,905
     
901,480
     
1,804,360
     
1,740,459
 
 
                               
Other Expenses
                               
Salaries and employee benefits
   
5,316,221
     
3,441,461
     
8,791,954
     
6,852,025
 
Net occupancy expenses
   
256,564
     
263,196
     
549,945
     
555,644
 
Equipment expenses
   
233,500
     
223,421
     
475,645
     
456,622
 
Data processing fees
   
423,974
     
373,738
     
838,166
     
744,793
 
Deposit insurance expense
   
158,000
     
156,000
     
293,000
     
262,000
 
Printing and office supplies
   
27,262
     
42,758
     
69,020
     
78,479
 
Legal and professional fees
   
208,975
     
140,066
     
505,754
     
281,817
 
Advertising expense
   
173,259
     
116,926
     
296,676
     
235,568
 
Bank service charges
   
32,593
     
28,391
     
64,269
     
51,935
 
Real estate owned expense
   
22,573
     
10,264
     
37,393
     
18,718
 
Loss on sale of real estate owned
   
6,493
     
-
     
6,493
     
-
 
Loan tax and insurance expense
   
72,779
     
44,595
     
49,727
     
97,030
 
Other expenses
    671,763
     
707,641
      1,430,955
     
1,353,354
 
Total other expenses
   
7,603,956
     
5,548,457
     
13,408,997
     
10,987,985
 
 
                               
Income Before Income Tax Expense (Benefit)
    293,425
     
1,713,630
      1,987,774
     
3,213,915
 
Provision (benefit) for income taxes (includes $9,520 and $3,124, $16,003
                               
and $3,124, related to income tax expense from reclassification
                               
of items)
    (41,700
)
   
338,700
      280,400
     
626,600
 
 
                               
Net Income
 
$
335,125
   
$
1,374,930
   
$
1,707,374
   
$
2,587,315
 

See accompanying notes.

2





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




 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2019
   
2018
   
2019
   
2018
 
 
                       
Net Income
 
$
335,125
   
$
1,374,930
   
$
1,707,374
   
$
2,587,315
 
 
                               
Other Comprehensive Income (Loss)
                               
Unrealized gain (loss) on available-for-sale
                               
securities, net of tax expense (benefit) of $559,911 and
                               
($101,138), $1,237,814 and ($851,785).
   
1,582,470
     
(285,845
)
   
3,498,417
     
(2,407,389
)
Less:  reclassification adjustment for realized gains included in
                               
net income, net of tax expense of $9,520 and $3,124, $16,003
                               
and $3,124.
   
26,906
     
8,828
     
45,229
     
8,828
 
 
   
1,555,564
     
(294,673
)
   
3,453,188
     
(2,416,217
)
 
                               
Comprehensive Income
 
$
1,890,689
   
$
1,080,257
   
$
5,160,562
   
$
171,098
 




See accompanying notes.









3



Richmond Mutual Bancorporation, Inc.
Consolidated Statements of Changes in 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, March 31, 2019
   
-
   
$
-
     
100
   
$
1
   
$
12,750,999
   
$
78,852,567
   
$
(2,480,662
)
 
$
89,122,905
 
Net income
                                           
335,125
             
335,125
 
Other comprehensive income
                                                   
1,555,564
     
1,555,564
 
 
                                                               
Balances, June 30, 2019
   
-
   
$
-
     
100
   
$
1
   
$
12,750,999
   
$
79,187,692
   
$
(925,098
)
 
$
91,013,594
 

                           
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
                                           
1,707,374
             
1,707,374
 
Other comprehensive income
                                                   
3,453,188
     
3,453,188
 
 
                                                               
Balances, June 30, 2019
   
-
   
$
-
     
100
   
$
1
   
$
12,750,999
   
$
79,187,692
   
$
(925,098
)
 
$
91,013,594
 

                           
Accumulated
       
   
Preferred Stock
   
Common Stock
   
Additional
         
Other
       
   
Shares
         
Shares
         
Paid-in
   
Retained
   
Comprehensive
       
   
Outstanding
   
Amount
   
Outstanding
   
Amount
   
Capital
   
Earnings
   
Loss
   
Total
 
                                                 
Balances, March 31, 2018
   
80
   
$
1
     
100
   
$
1
   
$
12,757,998
   
$
72,478,062
   
$
(4,847,398
)
 
$
80,388,664
 
Net income
                                           
1,374,930
             
1,374,930
 
Other comprehensive loss
                                                   
(294,673
)
   
(294,673
)
 
                                                               
Balances, June 30, 2018
   
80
   
$
1
     
100
   
$
1
   
$
12,757,998
   
$
73,852,992
   
$
(5,142,071
)
 
$
81,468,921
 

                           
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
                                           
2,587,315
             
2,587,315
 
Dividend
                                           
(500,000
)
           
(500,000
)
Other comprehensive loss
                                                   
(2,416,217
)
   
(2,416,217
)
 
                                                               
Balances, June 30, 2018
   
80
   
$
1
     
100
   
$
1
   
$
12,757,998
   
$
73,852,992
   
$
(5,142,071
)
 
$
81,468,921
 


See accompanying notes.

4




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



   
Six Months Ended June 30,
 
   
2019
   
2018
 
Operating Activities
           
Net income
 
$
1,707,374
   
$
2,587,315
 
Items not requiring (providing) cash
               
Provision for loan losses
   
1,010,000
     
900,000
 
Depreciation and amortization
   
458,622
     
453,534
 
Deferred income tax
   
(779,000
)
   
(584,000
)
Investment securities (accretion) amortization, net
   
375,216
     
424,673
 
Investment securities gains
   
(61,232
)
   
(11,952
)
Gain on sale of loans and leases held for sale
   
(210,798
)
   
(200,416
)
Loss on sale of real estate owned
   
6,493
     
-
 
Accretion of loan origination fees
   
(88,088
)
   
(100,637
)
Amortization of mortgage-servicing rights
   
74,407
     
125,734
 
Increase in cash surrender value of life insurance
   
(60,211
)
   
(59,830
)
Loans originated for sale
   
(7,564,068
)
   
(9,913,151
)
Proceeds on loans sold
   
8,057,168
     
5,191,292
 
Net change in
               
Interest receivable
   
(247,254
)
   
(263,853
)
Other assets
   
1,616,150
     
815,527
 
Other liabilities
    21,335

   
(390,503
)
Interest payable
   
202,352
     
139,229
 
Net cash provided by (used in) operating activities
   
4,518,466
     
(887,038
)
 
               
Investing Activities
               
Net change in interest-bearing time deposits
   
-
     
200,000
 
Purchases of securities available for sale
   
(35,162,200
)
   
(8,515,450
)
Proceeds from maturities and paydowns of securities available for sale
   
5,041,948
     
5,177,160
 
Proceeds from sales of securities available for sale
   
22,456,675
     
1,507,529
 
Proceeds from maturities and paydowns of securities held to maturity
   
1,445,000
     
2,310,000
 
Net change in loans
   
(37,636,795
)
   
(47,077,985
)
Purchases of premises and equipment
   
(373,266
)
   
(768,093
)
Purchase of FHLB stock
   
(949,800
)
   
-
 
Net cash used in investing activities
   
(45,089,657
)
   
(47,166,839
)
 
               
Financing Activities
               
Net change in
               
Demand and savings deposits
   
202,452,437
     
13,564,849
 
Certificates of deposit
   
4,539,605
     
34,658,759
 
Advances by borrowers for taxes and insurance
   
28,283
     
45,515
 
Proceeds from FHLB advances
   
57,000,000
     
149,500,000
 
Repayment of FHLB advances
   
(36,000,000
)
   
(149,000,000
)
Dividends paid
   
-
     
(500,000
)
Net cash provided by financing activities
   
228,020,325
     
48,269,123
 
 
               
Net Change in Cash and Cash Equivalents
   
187,449,134
     
215,246
 
 
               
Cash and Cash Equivalents, Beginning of Period
   
14,971,170
     
16,169,754
 
 
               
Cash and Cash Equivalents, End of Period
 
$
202,420,304
   
$
16,385,000
 
 
               
Additional Cash Flows and Supplementary Information
               
Interest paid
 
$
5,350,635
   
$
3,257,420
 
Transfers from loans to other real estate owned
   
5,400
     
71,458
 


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., a Delaware corporation (the “Company”), which is a wholly owned subsidiary of First Mutual of Richmond, Inc. (the “MHC”), and the Company’s wholly owned subsidiary, First Bank Richmond, 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 the MHC, the parent mutual holding company of the Company, 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 the Company would cease to exist, and First Bank Richmond would become a wholly owned subsidiary of a newly formed Maryland corporation also known as Richmond Mutual Bancorporation, Inc. (“Richmond Mutual Bancorporation-Maryland”).  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 costs of the reorganization and the issuance of the common stock will be 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 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 for the three and six months ended June 30, 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 private 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 early adoption of 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.

6




- 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 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 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 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.







7




Note 3:  Investment Securities

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

   
June 30, 2019
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Available for sale
                       
Federal agencies
 
$
42,772
   
$
1
   
$
536
   
$
42,237
 
State and municipal obligations
   
30,886
     
205
     
117
     
30,974
 
Mortgage-backed securities -
                               
government-sponsored enterprises
                               
(GSE) residential
   
62,005
     
112
     
913
     
61,204
 
Equity securities
   
13
     
-
     
-
     
13
 
 
   
135,676
     
318
     
1,566
     
134,428
 
Held to maturity
                               
State and municipal obligations
   
17,111
     
222
     
13
     
17,320
 
Corporate obligations
   
2,500
     
2,632
     
-
     
5,132
 
 
   
19,611
     
2,854
     
13
     
22,452
 
 
                               
Total investment securities
 
$
155,287
   
$
3,172
   
$
1,579
   
$
156,880
 

   
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 June 30, 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.

8





 
 
Available for Sale
   
Held to Maturity
 
 
 
Amortized
   
Fair
   
Amortized
   
Fair
 
 
 
Cost
   
Value
   
Cost
   
Value
 
 
                       
Within one year
 
$
167
   
$
167
   
$
2,717
   
$
2,721
 
One to five years
   
13,937
     
13,912
     
8,071
     
8,132
 
Five to ten years
   
51,063
     
50,602
     
4,825
     
4,925
 
After ten years
   
8,491
     
8,530
     
3,998
     
6,674
 
 
   
73,658
     
73,211
     
19,611
     
22,452
 
Mortgage-backed securities -
                               
GSE residential
   
62,005
     
61,204
     
-
     
-
 
Equity securities
   
13
     
13
     
-
     
-
 
 
                               
Totals
 
$
135,676
   
$
134,428
   
$
19,611
   
$
22,452
 


Securities with a carrying value of $98,370,000 and $86,267,000 were pledged at June 30, 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 for the three and six months ended June 30, 2019 were $10,989,153 and $22,456,675, respectively.  For the three and six months ended June 30, 2018, proceeds from sales of securities available for sale were $1,507,529.  Gross gains were recognized on the sale of securities available for sale for the three and six months ended June 30, 2019 of $37,000 and $62,000, respectively.  Gross gains of $12,000 were recognized on the sale of securities available for sale for the three and six months ended June 30, 2018.  There were no gross losses realized from sales of securities available for sale for the three and six months ended June 30, 2019 and 2018.

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 June 30, 2019 and December 31, 2018 was $103,597,000 and $126,736,000, which is approximately 66% 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.
Should the impairment of any other securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

The following tables show the Company’s investments by gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2019 and December 31, 2018:

   
June 30, 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
  $
-
    $
-
    $
37,736
    $
536
    $
37,736
    $
536
 
State and municipal obligations
 
1,290
   
4
     
13,864
     
113
     
15,154
     
117
 
Mortgage-backed securities -
                                               
GSE residential
   
5,368
     
24
     
42,404
     
889
     
47,772
     
913
 
Total available-for-sale
   
6,658
     
28
     
94,004
     
1,538
     
100,662
     
1,566
 
 
                                               
Held-to-maturity
                                               
State and municipal obligations
   
-
     
-
     
2,935
     
13
     
2,935
     
13
 
 
                                               
Total temporarily
                                               
impaired securities
 
$
6,658
   
$
28
   
$
96,939
   
$
1,551
   
$
103,597
   
$
1,579
 


9




   
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 and U.S. Treasury Securities.  The unrealized losses on the Company’s investments in direct obligations of U.S. federal agencies and treasury securities were caused by interest rate changes.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.  Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2019.

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 June 30, 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 June 30, 2019.








10





Note 4:  Loans, Leases and Allowance

Categories of loans at June 30, 2019 and December 31, 2018 include:


   
June 30,
   
December 31,
 
   
2019
   
2018
 
             
Commercial mortgage
 
$
222,789
   
$
211,237
 
Commercial and industrial
   
74,913
     
71,854
 
Construction and development
   
80,122
     
72,955
 
Multi-family
   
57,435
     
43,816
 
Residential mortgage
   
134,083
     
132,492
 
Home equity
   
7,781
     
7,214
 
Direct financing leases
   
107,340
     
107,735
 
Consumer
   
13,405
     
13,520
 
 
   
697,868
     
660,823
 
Less
               
Allowance for loan and lease losses
   
6,281
     
5,600
 
Deferred loan fees
   
463
     
468
 
                 
   
$
691,124
   
$
654,755
 










11





The following tables present the activity in the allowance for loan losses for three and six months ended June 30, 2019 and 2018.

         
Commercial
                         
   
Commercial
   
and
   
Residential
                   
   
Mortgage
   
Industrial
   
Mortgage
   
Leases
   
Consumer
   
Total
 
                                     
Three Months Ended June 30, 2019:
                                   
Balance, beginning of period
 
$
3,420
   
$
1,790
   
$
117
   
$
392
   
$
117
   
$
5,836
 
Provision for losses
   
466
     
(26
)
   
30
     
12
     
3
     
485
 
Charge-offs
   
-
     
-
     
(34
)
   
(95
)
   
(15
)
   
(144
)
Recoveries
   
6
     
4
     
9
     
76
     
9
     
104
 
 
                                               
Balance, end of period
 
$
3,892
   
$
1,768
   
$
122
   
$
385
   
$
114
   
$
6,281
 
 
                                               
Six Months Ended June 30, 2019:
                                               
Balance, beginning of period
 
$
3,147
   
$
1,817
   
$
139
   
$
389
   
$
108
   
$
5,600
 
Provision for losses
   
735
     
195
     
(7
)
   
50
     
37
     
1,010
 
Charge-offs
   
-
     
(250
)
   
(36
)
   
(177
)
   
(49
)
   
(512
)
Recoveries
   
10
     
6
     
26
     
123
     
18
     
183
 
 
                                               
Balance, end of period
 
$
3,892
   
$
1,768
   
$
122
   
$
385
   
$
114
   
$
6,281
 

 
       
Commercial
                         
 
 
Commercial
   
and
   
Residential
                   
 
 
Mortgage
   
Industrial
   
Mortgage
   
Leases
   
Consumer
   
Total
 
 
                                   
Three Months Ended June 30, 2018:
                                   
Balance, beginning of period
 
$
2,975
   
$
1,634
   
$
224
   
$
319
   
$
99
   
$
5,251
 
Provision for losses
   
177
     
255
     
(96
)
   
93
     
21
     
450
 
Charge-offs
   
-
     
(47
)
   
(10
)
   
(158
)
   
(20
)
   
(235
)
Recoveries
   
5
     
12
     
55
     
90
     
5
     
167
 
 
                                               
Balance, end of period
 
$
3,157
   
$
1,854
   
$
173
   
$
344
   
$
105
   
$
5,633
 
 
                                               
Six Months Ended June 30, 2018:
                                               
Balance, beginning of period
 
$
2,424
   
$
1,663
   
$
257
   
$
337
   
$
119
   
$
4,800
 
Provision for losses
   
727
     
221
     
(119
)
   
75
     
(4
)
   
900
 
Charge-offs
   
(7
)
   
(47
)
   
(49
)
   
(194
)
   
(30
)
   
(327
)
Recoveries
   
13
     
17
     
84
     
126
     
20
     
260