What changed in this filing

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Item 1. Business

2022-03-30 compared with 2021-03-22 · 114 added, 150 removed, 807 unchanged (25% of the section changed)

General 

NorthWest Indiana Bancorp, an Indiana corporation (the “Bancorp”

or “NWIN”), was incorporated on January 31, 1994, and is the holding company for Peoples Bank, an Indiana-chartered commercial bank (the “Bank”).

Finward Bancorp, an Indiana corporation (the “Bancorp”

or “FNWD”), was incorporated on January 31, 1994, and is the holding company for Peoples Bank, an Indiana-chartered commercial bank (the “Bank”).

The Bank is a wholly owned subsidiary of the Bancorp.

6 unchanged sentences

The Bank is also a member of the Federal Home Loan Bank (“FHLB”) of Indianapolis, which is one of the eleven regional banks comprising the system of Federal Home Loan Banks.

On January 24, 2019, the Bancorp completed its previously announced acquisition of AJS Bancorp, Inc., a Maryland corporation (“AJSB”), pursuant to an Agreement and Plan of Merger dated July 30, 2018 between the Bancorp and AJSB (the “AJSB Merger Agreement”).

Pursuant to the terms of the AJSB Merger Agreement, AJSB merged with and into the Bancorp, with the Bancorp as the surviving corporation.

Simultaneously with the AJSB Merger, A.J.

Smith Federal Savings Bank, a federally chartered savings bank and wholly-owned subsidiary of AJSB, merged with and into Peoples Bank, with Peoples Bank as the surviving bank.

In connection with the AJSB Merger, each AJSB stockholder holding 100 or more shares of AJSB common stock received fixed consideration of (i) 0.2030 shares of NWIN common stock, and (ii) $7.20 per share in cash for each outstanding share of AJSB’s common stock.

Stockholders holding less than 100 shares of AJSB common stock received $16.00 in cash and no stock consideration for each outstanding share of AJSB common stock.

Any fractional shares of NWIN common stock that an AJSB stockholder would have otherwise received in the AJSB Merger were cashed out in the amount of such fraction multiplied by $43.01.

The Bancorp issued 416,478 shares of Bancorp common stock to the former AJSB stockholders, and paid cash consideration of approximately $15.7 million.

Based upon the closing price of NWIN’s common stock on January 23, 2019, the transaction had an implied valuation of approximately $33.2 million, which includes unallocated shares held by the AJSB Employee Stock Ownership Plan (“ESOP”), some of which were cancelled in connection with the closing to satisfy the ESOP’s outstanding loan balance.

On January 31, 2022, the Bancorp completed its previously announced acquisition of Royal Financial, Inc., a Delaware corporation (“RYFL”), pursuant to an Agreement and Plan of Merger dated July 28, 2021, between the Bancorp and RYFL (the “Merger Agreement”).

Pursuant to the terms of the RYFL Merger Agreement, RYFL merged with and into the Bancorp, with the Bancorp as the surviving corporation (the “RYFL Merger”).

Simultaneously with the RYFL Merger, Royal Savings Bank (“Royal Bank”), an Illinois state chartered savings bank and wholly-owned subsidiary of RYFL, merged with and into Peoples Bank, with Peoples Bank as the surviving bank.

In connection with the RYFL Merger, each RYFL stockholder holding 101 or more shares of RYFL common stock had the right to receive, at the stockholder’s election, 0.4609 shares of Finward common stock or $20.14 in cash, or a combination of both, for each share of RYFL’s common stock, subject to allocation provisions and adjustment.

Stockholders holding fewer than 101 shares of RYFL common stock received $20.14 in cash and no stock consideration for each outstanding share of RYFL common stock.

Any fractional shares of Finward common stock that an RYFL stockholder would have otherwise received in the merger were cashed out in the amount of such fraction multiplied by $47.65.

The Bancorp issued 795,423 shares of Bancorp common stock to the former RYFL stockholders, and paid cash consideration of approximately $18.7 million.

Based upon the closing price of FNWD’s common stock on January 28, 2022, the transaction had an implied valuation of approximately $56.7 million.

As a result of the acquisition, the Bank was able to further expand its retail banking network in the South Suburban Chicagoland market, bringing the total number of its full-service banking centers to 30.

The Bancorp maintains its corporate office at 9204 Columbia Avenue, Munster, Indiana, from which it oversees the operation of its twenty-two branch locations.

The Bancorp maintains its corporate office at 9204 Columbia Avenue, Munster, Indiana, from which it oversees the operation of its thirty branch locations.

For further information, see “Properties.”

89 unchanged sentences

Loan Portfolio.

The following table sets forth selected data relating to the composition of the Bancorp’s loan portfolio by type of loan and type of collateral at the end of each of the last five years.

The following table sets forth selected data relating to the composition of the Bancorp’s loan portfolio by type of loan at the end of each of the last two years.

The amounts are stated in thousands (000’s).

Type of loan:

Conventional real estate loans:

Construction and development

Loans on existing properties (1)

Commercial business

Loans receivable (3)

Type of collateral:

1-to-4 family

Other dwelling units, land and commercial real estate

December 31, 2021

December 31, 2020

Loans secured by real estate:

Residential real estate

Commercial real estate

Construction and land development

Total loans secured by real estate

Commercial business

Manufactured homes

Loans receivable

Average loans outstanding during the period (3)

Includes residential and commercial construction loans converted to permanent term loans and commercial real estate loans.

Includes overdrafts to deposit accounts.

Net of unearned income and net deferred loan fees.

Does not include unsecured loans.

Net deferred loan origination costs

Undisbursed loan funds

Loans receivable, net of deferred fees and costs

Page 7 of 108

5 unchanged sentences

The amounts are stated in thousands (000’s).

Commercial business, and other

fifteen years

Residential real estate

Commercial real estate

Construction and land development

Manufactured Homes

Commercial business

Total loans receivable

3 unchanged sentences

adjustable rates

Commercial business, and other

Residential real estate

Commercial real estate

Construction and land development

Manufactured Homes

Commercial business

Total loans receivable

4 unchanged sentences

Loan Origination Fees.

All loan origination and commitment fees, as well as incremental direct loan origination costs, are deferred and amortized into income as yield adjustments over the contractual lives of the related loans.

All loan origination and commitment fees, as well as incremental direct loan origination costs, are deferred and amortized into income as yield adjustments.

Loan Origination Procedure.

26 unchanged sentences

This type of loan does not require private mortgage insurance because of the borrower’s level of equity investment.

Fixed rate loans currently originated generally conform to Freddie Mac guidelines for loans purchased under the one-to-four family program.

Fixed rate loans currently originated generally conform to Freddie Mac guidelines for loans purchased under the one‑to‑four family program.

Loan interest rates are determined based on secondary market yield requirements and local market conditions.

5 unchanged sentences

The Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice annually or are “Mini-Fixed.”

The “Mini-Fixed”

The “Mini‑Fixed”

mortgage reprices annually after a one, three, five, seven or ten year period.

20 unchanged sentences

Commercial real estate loans include loans secured by commercial rental units, apartments, condominium developments, small shopping centers, owner occupied commercial/industrial properties, hospitality units and other retail and commercial developments.

While commercial real estate lending is generally considered to involve a higher degree of risk than single-family residential lending due to the concentration of principal in a limited number of loans and the effects of general economic conditions on real estate developers and managers, the Bancorp has endeavored to reduce this risk in several ways.

While commercial real estate lending is generally considered to involve a higher degree of risk than single‑family residential lending due to the concentration of principal in a limited number of loans and the effects of general economic conditions on real estate developers and managers, the Bancorp has endeavored to reduce this risk in several ways.

In originating commercial real estate loans, the Bancorp considers the feasibility of the project, the financial strength of the borrowers and lessees, the managerial ability of the borrowers, the location of the project and the economic environment.

14 unchanged sentences

Loans are generally made up to a maximum of 89% of the appraised value of the property less any outstanding liens.

Home Improvement Loans and Equity Loans—Fixed Term.

Home Improvement Loans and Equity Loans —

Home improvement and equity loans are made up to a maximum of 85% of the appraised value of the improved property, less any outstanding liens.

4 unchanged sentences

The maturity date on these loans can range up to 25 years.

In addition, these loans have partial recourse secured by a reserve account held at the Bancorp, further detail regarding this reserve can be found in Note 4 –

In addition, these loans have a reserve account held at the Bancorp, further detail regarding this reserve can be found in Note 4 –

Loans Receivable.

3 unchanged sentences

Conservative lending policies based upon sound credit analysis governs the extension of commercial credit.

The following loans, although not inclusive, are considered preferable for the Bancorp’s commercial loan portfolio:

loans collateralized by liquid assets;

The following loans, although not inclusive, are considered preferable for the Bancorp’s commercial loan portfolio, loans collateralized by liquid assets;

loans secured by general use machinery and equipment;

secured short-term working capital loans to established businesses secured by business assets;

short-term loans with established sources of repayment and secured by sufficient equity and real estate;

secured short‑term working capital loans to established businesses secured by business assets;

short‑term loans with established sources of repayment and secured by sufficient equity and real estate;

and unsecured loans to customers whose character and capacity to repay are firmly established.

Page 10 of 108

Government Loans.

The Bancorp is permitted to purchase non-rated municipal securities, tax anticipation notes, and warrants within the local market area.

Page 10 of 117

Non-Performing Assets, Asset Classification and Provision for Loan Losses

Loans are reviewed on a regular basis and are generally placed on a non-accrual status when, in the opinion of management, serious doubt exists as to the collectability of a loan.

Loans are generally placed on non-accrual status when either principal or interest is 90 days or more past due.

Performing Assets, Asset Classification and Provision for Loan Losses

Loans are reviewed on a regular basis and are generally placed on a non‑accrual status when, in the opinion of management, serious doubt exists as to the collectability of a loan.

Loans are generally placed on non‑accrual status when either principal or interest is 90 days or more past due.

Consumer non-residential loans are generally charged off when the loan becomes over 120 days delinquent.

Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income.

Interest accrued and unpaid at the time a loan is placed on non‑accrual status is charged against interest income.

Subsequent payments are either applied to the outstanding principal balance, tax and insurance reserve or recorded as interest income, depending on the assessment of the ultimate collectability of the loan.

23 unchanged sentences

Accruing loans which are contractually past due 90 days or more:

Construction and land development

Commercial business

7 unchanged sentences

Ratio of foreclosed real estate to total assets

Trust preferred securities

Ratio of trust preferred securities to total assets

During 2021, gross interest income of $665 thousand would have been recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the period.

5 unchanged sentences

Amounts reported in the general loan loss reserve are included in the calculation of the Bancorp’s total risk-based capital requirement (to the extent that the amount does not exceed 1.25% of total risk-based assets), but are not included in Tier 1 leverage ratio calculations and Tier 1 risk-based capital requirements.

Page 12 of 108

Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms.

No loans were internally classified as doubtful or loss at December 31, 2021 or December 31, 2020.

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The Bancorp's substandard loans are summarized below:

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Typically, management does not individually classify smaller-balance homogeneous loans, such as residential mortgages or consumer loans, as impaired, unless they are troubled debt restructurings.

Page 13 of 117

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date.

5 unchanged sentences

Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.

The Bancorp’s impaired loans, including purchased credit impaired loans, are summarized below:

Page 13 of 108

The Bancorp's impaired loans, including purchased credit impaired loans, are summarized below:

(Dollars in thousands)

7 unchanged sentences

unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

The Bancorp’s troubled debt restructured loans are summarized below:

The Bancorp's troubled debt restructured loans are summarized below:

(Dollars in thousands)

2 unchanged sentences

Number of Loans

Recorded Investment

Number of Loans

Recorded Investment

Residential real estate

3 unchanged sentences

Manufactured homes

One commercial real estate customer with loans totaling $5.3 million and residential real estate loans totaling $3.0 million contributed to the December 31, 2020, increase in nonperforming loans.

One commercial real estate customer with loans totaling $5.3 million, residential real estate loans totaling $2.8 million and one commercial real estate customer with loans totaling $1.3 million contributed to the December 31, 2020, increase in substandard loans.

One commercial real estate relationship with loans totaling $8.6 million, one commercial real estate relationship with loans totaling $4.1 million, and one commercial real estate customer with loans totaling $1.1 million contributed to the December 31, 2020, increase in special mention loans, which was offset by the movement of one commercial real estate customer with loans totaling $1.3 million to substandard and a $2.1 million decline in residential real estate loans.

One commercial real estate customer with loans totaling $5.3 million, one commercial business relationship with loans totaling $360 thousand, and two commercial business customers with loans totaling $303 thousand contributed to the December 31, 2020, increase in impaired loans.

The decrease in nonperforming, impaired, and substandard loans as of December 31, 2021, is related to the strategic sale of a single large commercial real estate loan, that operates a hotel, totaling $5.1 million.

Nonperforming loans at December 31, 2021, also decreased due to the removal of various residential real estate loans from nonaccrual status totaling $2.9 million.

Substandard loans at December 31, 2021, also decreased due to the removal of various residential real estate loans totaling $2.7 million.

Impaired loans at December 31, 2021, also decreased due to the removal of eight commercial business or commercial real estate customers with loans totaling $623 thousand due to loan pay off or refinance.

The decrease in special mention loans as of December 31, 2021, is due to the removal of six commercial business, multifamily or commercial real estate customers with loans totaling $2.5 million because of loan risk rating change or loan pay off and the removal of various residential real estate and home equity loans totaling $945 thousand which was offset by the addition of seven commercial real estate or commercial business customers with loans totaling $2.9 million.

Page 14 of 108

17 unchanged sentences

Net charge-offs / recoveries to average loans outstanding during the period

Nonaccruing loans to total loans

The improvement in the ALL to nonperforming loan and nonaccruing loans to total loans ratios is the result of the strategic sale of one large commercial real estate loan, which operates a hotel, totaling an impact of $5.1 million.

The following table shows the allocation of the allowance for loan losses at December 31, for the dates indicated.

20 unchanged sentences

Money market fund

government agencies:

treasury securities:

Available-for-sale

Mortgage-backed securities (1):

government sponsored agencies:

Available-for-sale

Collateralized Mortgage Obligations (1):

and Mortgage-backed securities

Available-for-sale

1 unchanged sentence

Available-for-sale

Trust Preferred Securities:

Collateralized Debt Securities:

Available-for-sale

________________________

(1) Mortgage-backed securities and Collateralized Mortgage Obligations are U.S.

government agency and sponsored securities.

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The contractual maturities and weighted average yields for the U.S.

2 unchanged sentences

The carrying values are stated in thousands (000’s).

The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values.

Yields presented are not on a tax-equivalent basis.

1 unchanged sentence

After 10 Years

Money market fund:

government Agencies:

government sponsored entities:

treasury securities:

Municipal Securities:

5 unchanged sentences

At December 31, 2021, the cost basis of the two trust preferred securities on non-accrual status totaled $2.2 million.

Page 16 of 108

Sources of Funds

6 unchanged sentences

At December 31, 2021, the Bancorp had $14.6 million in repurchase agreements.

Other borrowings totaled $6.1 million, which consisted of $6.0 million in FHLB advances and $149 thousand of federal funds purchased.

The Bancorp had no other borrowed funds as of December 31, 2021.

Retail and commercial deposits are attracted principally from within the Bancorp’s primary market area.

4 unchanged sentences

The Bancorp does not obtain funds through brokers.

Page 17 of 117

The following table presents the average daily amount of deposits and average rates paid on such deposits for the years indicated.

6 unchanged sentences

Total deposits

Maturities of time certificates of deposit and other time deposits of $100 thousand or more at December 31, 2020, are summarized as follows.

The amounts are stated in thousands (000’s).

As of December 31, 2021, and 2020, approximately $452.0 million and $375.7 million, respectively, of our deposit portfolio was uninsured.

The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.

The following table sets forth the portion of the Bank's time deposits, by account, that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31, 2021 (dollars in thousands).

3 months or less

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Fixed rate long-term advances from the FHLB

Variable advances from the FHLB

Total borrowings

________________________  

(1) The weighted average rate for each period is calculated by weighting the principal balances outstanding for the various interest rates.

3 unchanged sentences

At December 31, 2021, the market value of the Wealth Management Group’s assets totaled $392.7 million, an increase of $41.7 million, compared to December 31, 2020.

Analysis of Profitability and Key Operating Ratios

Distribution of Assets, Liabilities and Shareholders’

Interest Rates and Interest Differential.

The net earnings of the Bancorp depend primarily upon the “spread”

(difference) between (a) the income it receives from its loan portfolio and other investments, and (b) its cost of money, consisting principally of the interest paid on deposit accounts and on other borrowings.

Page 18 of 108

The following table presents the weighted average yields on loans and securities, the weighted average cost of interest bearing deposits and other borrowings, and the interest rate spread for the year ended December 31, 2020.

Weighted average yield:

Loans receivable

Federal Home Loan Bank stock

Total interest-earning assets

Weighted average cost:

Deposit accounts

Borrowed funds

Total interest-bearing liabilities

Interest rate spread:

Weighted average yield on interest-earning assets minus the weighted average cost of interest-bearing funds

Analysis of Profitability and Key Operating Ratios

Financial Ratios and the Analysis of Changes in Net Interest Income.

13 unchanged sentences

Year ended December 31, 2020

Year ended December 31, 2018

Interest bearing balances in financial institutions

8 unchanged sentences

Allowance for loan losses

Cash and due from banks

Premises and equipment

Demand deposit

Money market demand accounts

5 unchanged sentences

Total interest-bearing liabilities

Demand deposit accounts

Other liabilities

5 unchanged sentences

Net interest margin**

Ratio of interest-earning assets to interest-bearing liabilities

* Non-accruing loans have been included in the average balances.

1 unchanged sentence

Page 20 of 108

The table below sets forth certain information regarding changes in interest income and interest expense of the Bancorp for the periods indicated. 

For each category of interest-earning asset and interest-bearing liability, information is provided for the periods indicated. 

For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to:

(1) changes in volume (change in volume multiplied by old rate) and (2) changes in rate (change in rate multiplied by old volume). 

Changes attributable to both rate and volume which cannot be segregated have been  allocated proportionately to the change due to volume and the change due to rate. 

The amounts are stated in thousands (000's).

Year Ended December 31,

The table below sets forth certain information regarding changes in interest income and interest expense of the Bancorp for the periods indicated.  For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to:

(1) changes in volume (change in volume multiplied by old rate) and (2) changes in rate 

(change in rate multiplied by old volume).  Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.  The amounts are stated in thousands (000's).

Year Ended December 31,

Increase / (Decrease)

Interest income:

Loans receivable

Other interest-earning assets

Nontaxable securities

Taxable securities

Interest bearing balances in other financial institutions

Federal funds sold

Total interest-earning assets

Interest Expense:

Money market accounts

Savings accounts

Certificates of deposit

Repurchase agreements

Borrowed funds

Total interest-bearing liabilities

Total interest-bearing

Net change in net interest income/(expense)

4 unchanged sentences

The subsidiary provides captive insurance for the subsidiaries of the Bancorp.

At December 31, 2020, the Bancorp had an investment balance of $1.8 million in NWIN Risk Management, Inc.

Peoples Service Corporation, a wholly owned subsidiary of the Bank was incorporated under the laws of the State of Indiana.

The subsidiary currently provides insurance and annuity investments to the Bank’s wealth management customers.

At December 31, 2020, the Bank had an investment balance of $157 thousand in Peoples Service Corporation.

NWIN, LLC is a wholly owned subsidiary of the Bank.

2 unchanged sentences

In addition, the investment subsidiary is the parent of a real estate investment trust, NWIN Funding, Inc., that invests in real estate loans originated by the Bank.

At December 31, 2020, the Bank had an investment balance of $516.1 million in NWIN, LLC.

NWIN Funding, Inc.

4 unchanged sentences

will receive favorable state tax treatment for income generated by its operations.

At December 31, 2020, the REIT held assets of $102.5 million in real estate loans.

Columbia Development Company, LLC is a wholly owned subsidiary of the Bank and was incorporated under the laws of the State of Indiana.

The subsidiary holds real estate properties that the Bank has acquired through the foreclosure process.

At December 31, 2020, the Bank had an investment balance of $5.1 million in Columbia Development Company, LLC.

The consolidated financial statements include the Bancorp, its wholly owned subsidiaries, the Bank, NWIN Risk Management, Inc, and the Bank’s wholly owned subsidiaries, Peoples Service Corporation, NWIN, LLC and Columbia Development Company, LLC.

11 unchanged sentences

It competes for deposits by offering depositors a wide variety of savings accounts, checking accounts, competitive interest rates, convenient banking center locations, drive-up facilities, automatic teller machines, tax deferred retirement programs, digital banking, and other miscellaneous services.

Page 23 of 117

The activities of the Bancorp and the Bank in the geographic market served involve competition with other banks as well as with other financial institutions and enterprises, many of which have substantially greater resources than those available to the Bancorp.

In addition, non-bank financial services companies with which the Bancorp and Bank compete, while subject to regulation by the CFPB, are generally not subject to the same type of extensive regulation by the federal and state banking agencies applicable to the Bancorp and the Bank.

Page 22 of 108

Employees and Human Capital Resources

7 unchanged sentences

The Bancorp’s officers also are full-time employees of the Bank, and are compensated by the Bank.

Regulation and Supervision 

Bank Holding Company Regulation.

52 unchanged sentences

Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

Page 25 of 117

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, and residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset.

2 unchanged sentences

government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

Page 24 of 108

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions by the institution and certain discretionary bonus payments to management if an institution does not hold a “capital conservation buffer”

32 unchanged sentences

The Economic Growth Act provides that the CBLR will apply to a “qualifying community bank”

which the Economic Growth Act defines as a bank with consolidated assets of less than $10 billion and satisfying additional criteria designed to disqualify institutions with a higher risk profile. Under the Economic Growth Act, qualifying community banks that meet or exceed the CBLR and elect to follow the alternative regulatory capital structure will be deemed to have satisfied all generally applicable leverage capital and risk-based capital requirements and will be considered “well capitalized”

which the Economic Growth Act defines as a bank with consolidated assets of less than $10 billion and satisfying additional criteria designed to disqualify institutions with a higher risk profile.

Under the Economic Growth Act, qualifying community banks that meet or exceed the CBLR and elect to follow the alternative regulatory capital structure will be deemed to have satisfied all generally applicable leverage capital and risk-based capital requirements and will be considered “well capitalized”

under the FDIC prompt corrective action provisions.

6 unchanged sentences

and (iv) total trading assets plus trading liabilities of 5% or less of total consolidated assets.

A qualifying institution may opt in and out of the CBLR framework on its quarterly call report. An institution that ceases to meet any qualifying criteria is provided with a two-quarter grace period to either comply with the CBLR requirements or comply with the general capital regulations, including the risk-based capital requirements.

A qualifying institution may opt in and out of the CBLR framework on its quarterly call report.

An institution that ceases to meet any qualifying criteria is provided with a two-quarter grace period to either comply with the CBLR requirements or comply with the general capital regulations, including the risk-based capital requirements.

Section 4012 of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) required that the CBLR be temporarily lowered to 8%.

The federal regulators issued a rule implementing the lower ratio effective April 23, 2020. The rule also established a two-quarter grace period for a qualifying institution whose leverage ratio falls below the 8% CBLR requirement so long as the bank maintains a leverage ratio of 7% or greater.

Another rule was issued to transition back to the 9% CBLR by increasing the ratio to 8.5% for calendar year 2021 and 9% thereafter. At this time, the Bank has not elected to opt in to the CBLR framework, but the framework is currently available to the Bank if it elects to opt in at some point in the future.

The following table shows that, at December 31, 2020, and December 31, 2019, the Bancorp’s capital exceeded all applicable regulatory capital requirements.

The dollar amounts are in millions.

(Dollars in millions)

Minimum Required To Be

Minimum Required For

Well Capitalized Under Prompt

Capital Adequacy Purposes

Corrective Action Regulations

At December 31, 2020

Common equity tier 1 capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Total capital to risk-weighted assets

Tier 1 capital to adjusted average assets

(Dollars in millions)

Minimum Required To Be

Minimum Required For

Well Capitalized Under Prompt

Capital Adequacy Purposes

Corrective Action Regulations

At December 31, 2019

Common equity tier 1 capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Total capital to risk-weighted assets

Tier 1 capital to adjusted average assets

Page 27 of 117

In addition, the following table shows that, at December 31, 2020, and December 31, 2019, the Bank’s capital exceeded all applicable regulatory capital requirements.

The federal regulators issued a rule implementing the lower ratio effective April 23, 2020.

The rule also established a two-quarter grace period for a qualifying institution whose leverage ratio falls below the 8% CBLR requirement so long as the bank maintains a leverage ratio of 7% or greater.

Another rule was issued to transition back to the 9% CBLR by increasing the ratio to 8.5% for calendar year 2021 and 9% thereafter.

At this time, the Bank has not elected to opt in to the CBLR framework, but the framework is currently available to the Bank if it elects to opt in at some point in the future.

The following table shows that, at December 31, 2021, and December 31, 2020, the Bank’s capital exceeded all applicable regulatory capital requirements.

The dollar amounts are in millions.

30 unchanged sentences

The impact of Basel IV on the Bancorp will depend on the manner in which it is implemented by the federal banking regulators.

Page 26 of 108

Banking regulators may change these capital requirements from time to time, depending on the economic outlook generally and the outlook for the banking industry.

26 unchanged sentences

and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement.

Page 28 of 117

The FDIC has the authority to prohibit the Bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank.

13 unchanged sentences

No institution may pay a dividend if it is in default of the federal deposit insurance assessment.

The Bank was also subject to assessment for the Financing Corporation (FICO) to service the interest on the FICO’s bond obligations.

The amount assessed on individual institutions, including the Bank, by FICO is in addition to the amount paid for deposit insurance according to the risk-related assessment rate schedule.

These assessments will continued until the FICO bonds matured in 2019.

During 2020, the Bancorp did not have any outstanding FICO bond obligations.

Page 27 of 108

Under the Dodd-Frank Act, the FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund at no less than 1.35% of estimated insured deposits, which is increased from the previous ratio of 1.15%.

7 unchanged sentences

The rate schedules set forth in the rule governing the assessment base are scaled to the increase in the assessment base, including schedules that go into effect as the reserve ratio reaches 1.15%, 2%, and 2.5%.

Page 29 of 117

The schedules reduce the initial base assessment rate in each of the four risk-based pricing categories.

16 unchanged sentences

At December 31, 2021, the Bank was in compliance with this requirement.

At December 31, 2020, the Bancorp owned $3.9 million of stock of the Federal Home Loan Bank of Indianapolis (“FHLBI”) and had outstanding borrowings of $6.0 million from the FHLBI.

Page 28 of 108

At December 31, 2021, the Bancorp owned $3.2 million of stock of the Federal Home Loan Bank of Indianapolis (“FHLBI”).

The FHLBI stock entitles the Bancorp to dividends from the FHLBI.

13 unchanged sentences

with respect to its CRA compliance.

Page 30 of 117

Gramm-Leach-Bliley Act.

14 unchanged sentences

However, similar standards and/or regulations may be adopted or implemented by federal and state banking agencies in the future which may be applicable to community banking organizations such as the Bancorp.

Page 29 of 108

Recent cyberattacks against banks and other financial institutions that resulted in unauthorized access to confidential customer information have prompted the federal banking regulators to issue extensive guidance on cybersecurity.

10 unchanged sentences

Additionally, this bureau is authorized to collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to underserved consumers and communities.

Page 31 of 117

Moreover, the Dodd-Frank Act authorized the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay.

13 unchanged sentences

under the Truth In Lending Act, and imposes new requirements on high-cost mortgages and new disclosure, reporting and notice requirements for residential mortgage loans, as well as new requirements with respect to escrows and appraisal practices.

Page 30 of 108

Interchange Fees for Debit Cards.

7 unchanged sentences

If the Bancorp meets the current public information requirements under Rule 144, each affiliate of the Bancorp who complies with the other conditions of Rule 144 (including those that require the affiliate’s sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Bancorp or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks.

Page 32 of 117

Under the Dodd-Frank Act, the Bancorp is required to provide its shareholders an opportunity to vote on the executive compensation payable to its named executive officers and on golden parachute payments in connection with mergers and acquisitions.

14 unchanged sentences

The Bancorp cannot accurately predict whether any of this potential legislation will ultimately be enacted, and, if enacted, the ultimate effect that it, or implementing regulations, would have upon the financial condition or results of operations of the Bancorp or the Bank.

Page 31 of 108

Federal Taxation

4 unchanged sentences

This rate is scheduled to decrease over the succeeding years as follows:

to 6.0% for 2020, to 5.5% for 2021, to 5.0% for 2022, and to 4.9% for 2023 and thereafter.

to 5.5% for 2021, to 5.0% for 2022, and to 4.9% for 2023 and thereafter.

Additionally, the Bank is subject to Illinois state tax which is imposed at a flat rate of 9.5%.

4 unchanged sentences

Accounting for Income Taxes

At December 31, 2020, the Bancorp has consolidated total deferred tax assets of $6.8 million and consolidated total deferred tax liabilities of $5.8 million, resulting in a consolidated net deferred tax asset of $981 thousand, net of a $22 thousand valuation allowance.

At December 31, 2021, the Bancorp has consolidated total deferred tax assets of $7.2 million and consolidated total deferred tax liabilities of $4.3 million, resulting in a consolidated net deferred tax asset of $2.8 million, net of a $12 thousand valuation allowance.

The valuation allowance of $12 thousand was provided for the state tax credit, as management does not believe these amounts will be fully utilized before statutory expiration.

Page 33 of 117

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business