What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-30 compared with 2021-03-22 · 74 added, 196 removed, 314 unchanged (46% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

General  

The Bancorp's earnings are dependent upon the earnings of the Bank.

6 unchanged sentences

Actual results could differ from those estimates.

Estimates associated with the allowance for loan losses, fair values of foreclosed real estate, loan servicing rights, investment securities, deferred tax assets, goodwill, and the status of contingencies are particularly susceptible to material change in the near term.

Estimates associated with the allowance for loan losses are particularly susceptible to material change in the near term.

At December 31, 2021, the Bancorp had total assets of $1.6 billion and total deposits of $1.4 billion.

5 unchanged sentences

Recent Developments

Acquisition of AJSB.

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

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

Simultaneous 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 the Bank, with the Bank as the surviving institution.

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 the Bancorp common stock, and (ii) $7.20 per share in cash for each outstanding share of AJSB 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 Bancorp 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.

As of December 31, 2020, acquisition costs related to the AJSB Merger equaled approximately $2.1 million.

Acquisition of Royal Financial, Inc.

On January 31, 2022, the Bancorp completed its acquisition of Royal Financial, Inc.

(“RYFL”) pursuant to an Agreement and Plan of Merger dated July 28, 2021 (the “Merger Agreement”) between the Bancorp and RYFL.

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

Simultaneous with the RYFL Merger, Royal Savings Bank, an Illinois state chartered savings bank and wholly-owned subsidiary of RYFL, merged with and into the Bank, with the Bank as the surviving institution.

Under the terms of the Merger Agreement, RYFL stockholders who owned 101 or more shares of RYFL common stock were permitted to elect to receive either 0.4609 shares of Finward common stock or $20.14 in cash, or a combination of both, for each share of RYFL common stock owned, subject to proration and allocation provisions such that 65% of the shares of RYFL common stock outstanding immediately prior to the closing of the merger were converted into the right to receive shares of Finward common stock and the remaining 35% of the outstanding RYFL shares were converted into the right to receive cash.

Stockholders holding less than 101 shares of RYFL common stock will have the right to receive fixed consideration of $20.14 in cash and no stock consideration for each share of RYFL common stock.

As a result of RYFL stockholder stock and cash elections and the related allocation and proration provisions of the Merger Agreement, Finward issued 795,423 shares of its common stock and paid cash consideration of approximately $18.7 million in the RYFL Merger.

Based on the January 28, 2022 closing price of $47.75 per share of Finward common stock, the transaction had an implied valuation of approximately $56.7 million.

The acquisition further expanded the Bank’s banking center network in Cook County, Illinois, expanding the Bank’s full-service retail banking network to 30 banking centers.

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Impacts of COVID-19

The COVID-19 pandemic began to affect the Bancorp’s operations during March 2020, and as of the date of this release, continues to influence operating decisions.

In response to the pandemic, the Bancorp’s management implemented the following policy actions:

Participating in the U.S.

Small Business Administration’s Paycheck Protection Program (“PPP”), a program initiated to help small businesses maintain their workforces during the pandemic.

As of December 31, 2020, the Bancorp approved 782 applications totaling $91.5 million, with an average loan size of approximately $117,000.

These loans will help local business owners retain 10,758 employees based on the borrowers’

applications.

The Bancorp’s SBA lender fee is averaging approximately 3.80% for this program, and fees will be earned over the life of the associated loans.

As of December 31, 2020, the Bancorp had remaining loan balances under the Paycheck Protection Program totaling $67.2 million.

On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, which included provisions for a second round of Paycheck Protection Funding in 2021.

The Bancorp is currently participating in the program.

Prudently helping borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19.

Consistent with regulatory guidance, the Bancorp will consider deferring or modifying a loan customer’s repayment obligation if the customer’s cash flow has been negatively impacted by the pandemic.

The Bancorp’s management anticipates that additional borrower deferral and modification requests will continue in 2021.

Loans modified to interest only payment or full payment deferral as part of the effects of COVID-19 as of December 31, 2020, are as follows:

(Dollars in thousands)

As of December 31, 2020

Mortgage loans

Commercial Loans

Manufactured Homes

Number of Loans

Recorded Investment

Number of Loans

Recorded Investment

Number of Loans

Recorded Investment

Interest only

Full payment deferral

As the Bancorp continues to monitor the borrowers that are in and outside of deferral status, some loan relationships may be deemed non-performing.

As of December 31, 2020, a single large commercial real estate loan relationship, which operates a hotel, with a carrying balance of $5.3 million, remains in deferral and was deemed non-performing after COVID-19 pandemic stresses negatively impacted weak operating performance prior to the pandemic.

Through management’s review of the loan relationship, a specific reserve within the allowance for loan losses was allocated as of December 31, 2020.

As of December 31, 2020, the customer has opened a payment reserve account with the Bancorp to be used for future contractual payments and is currently in compliance with all modified loan terms.

No other material COVID-19 impacted loans that are in deferral status have been deemed non-performing at this time.

As of December 31, 2020, a total of 154 loans have come out of COVID-19 related deferral status with carrying balances of $72.8 million.

All of these loans continue to be performing, except 1 residential real estate loan with a carrying balances of $433 thousand which was deemed non-performing.

Commercial real estate loans are one of the Bancorp’s primary loan concentrations.

Key loan data, sourced from origination or last credit review, for commercial real estate loans secured by restaurants, hotels, and retail non-owner occupied properties indicate a strong weighted average loan-to-value and debt service coverage.

As of December 31, 2020, commercial real estate loans secured by restaurants totaled $20.5 million and represented 7% of the commercial real estate portfolio, and had a weighted average debt coverage ratio of 1.71 and loan to value of 49%.

The restaurant portfolio is comprised of 49% quick service and fast casual loan balances.

As of December 31, 2020, commercial real estate loans secured by hotels totaled $23.7 million and represented 8% of the commercial real estate portfolio, and had a weighted average debt coverage ratio of 1.31 and loan to value of 60%.

The hotel portfolio is comprised of 89% flagged hotel loan balances.

As of December 31, 2020, commercial real estate loans secured by retail non-owner occupied properties totaled $64.5 million and represented 22% of the commercial real estate portfolio and had a weighted average debt coverage of 1.63 and loan to value of 56%.

Maintaining a strong liquidity position to support funding demand.

The Bancorp has sufficient on balance sheet liquidity and contingent liquidity sources to meet funding demand.

Implementing remote working policies for the Bancorp’s workforce.

142 employees or 50% of the workforce have been provided remote work capabilities to support social distancing measures.

Keeping the Bancorp’s 22 banking centers open during the pandemic.

To ensure banking processes run efficiently, drive-ups are open and fully functional, and a wide range of digital banking options are available.

All banking centers lobbies are also available to serve customers, however we are requesting that they make appointments via the Bank’s website to help us adhere to social distancing guidelines.

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Small Business Administration Paycheck Protection Program

The Bank has participated in the U.S.

Small Business Administration’s (“SBA”) PPP, which was initiated on April 3, 2020 in order to help small businesses maintain their workforce during the COVID-19 pandemic.

The Bank began accepting applications from qualified business customers immediately upon the initiation of the PPP.

Under the PPP, borrowers who use the funds for payroll and certain other expenses are eligible to have the loan balances forgiven by the SBA.

Applications for forgiveness can be submitted to the Bank beginning eight weeks after loan disbursement.

The PPP loans carry a fixed interest rate of 1.0% and a term of two years (for loans made before June 5, 2020) or five years (for loans made on or after June 5, 2020), if not forgiven, in whole or in part, and are 100% guaranteed by the SBA.

Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the Bank or the date that is nine months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period.

As of December 31, 2020, the Bank approved 782 applications totaling $91.5 million in loan requests, with an average loan size of approximately $117,000.

The Bank began closing and funding PPP loans during the week of April 6, 2020.

These loans are expected to help local business owners retain 10,758 employees.

As of December 31, 2020, the Bancorp had remaining loan balances under the Paycheck Protection Program totaling $67.2 million.

We expect the majority of the PPP loans we have originated to qualify for and apply for forgiveness.

This expectation is subject to change due to borrower behavior, changing SBA requirements and processes related to loan forgiveness, and other relevant factors.

The Bank is a certified SBA lender and was one of the first local banks to fund loans under the PPP.

The first round of PPP expired on August 8, 2020.

On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, which included provisions for a second round of Paycheck Protection Funding in 2021.

The Bancorp is currently participating in the program.

SBA Loan Subsidy Program

Pursuant to the CARES Act, Section 1112, Congress has determined that all existing borrowers under the SBA Section 7(a) program are adversely affected by COVID-19, and are therefore entitled to a subsidy in the form of relief payments.

Specifically, the CARES Act provides that the SBA will pay the principal and interest on any existing and current SBA 7(a) loan for a period of nine months.

These principal and interest payments will be made by the SBA directly to the SBA 7(a) lender and will begin with the next payment due.

The Bancorp is a qualified SBA Section 7(a) lender, and is participating in the Section 1112 program.

As of December 31, 2020, the Bancorp had 9 loans eligible for the program, with an aggregate principal amount of $3.7 million.

Payments under the program will not constitute new loans for the Bancorp, but simply payments of principal and interest on loans that already exist in the Bancorp’s SBA 7(a) loan portfolio and are current on borrower payments.

The Bancorp received its first tranche of payments under the program on April 30, 2020, and expects to receive subsequent payments from the SBA by the 25th of each month thereafter until the expiration of the six-month program period.

Financial Condition

During the year ended December 31, 2021, total assets increased by $124.5 million (8.3%), to $1.6 billion, with interest-earning assets increasing by $125.1 million (8.9%).

At December 31, 2020, interest-earning assets totaled $1.4 billion and represented 93.5% of total assets.

At December 31, 2021, interest‑earning assets totaled $1.5 billion and represented 94.0% of total assets.

Loans totaled $966.7 million and represented 63.4% of interest-earning assets, 59.6% of total assets and 67.4% of total deposits.

The loan portfolio, which is the Bancorp’s largest asset, is a significant source of both interest and fee income.

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(Dollars in thousands)

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Loans receivable

Adjustable rate loans / loans receivable

Net deferred loans origination costs

Undisbursed loan funds

Loans receivable, net of deferred fees and costs

Loans receivable to total assets

8 unchanged sentences

At December 31, 2021, the Bancorp had $5.0 million in loans that were classified as held for sale, compared to $11.3 million at December 31, 2020.

In addition, the Bancorp participates in the U.S.

Small Business Administration’s Paycheck Protection Program (“PPP”), a program initiated to help small businesses maintain their workforces during the pandemic.

As of December 31, 2021, the Bancorp approved 782 applications totaling $91.5 million for the first round, with an average loan size of approximately $117 thousand.

These loans helped local business owners retain 10,758 employees based on the borrowers’

applications.

The Bancorp’s SBA lender fee is averaging approximately 3.80% for the first round of the program, and fees will be earned over the life of the associated loans.

The first round of PPP closed in August of 2020.

On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, which included provisions for a second round of PPP funding in 2021.

As of December 31, 2021, the Bancorp approved 420 applications totaling $37.5 million for the second round, with an average loan size of approximately $89 thousand.

These loans will help local business owners retain 4,410 employees based on the borrowers’

applications.

The Bancorp’s SBA lender fee is averaging approximately 5.32% for this program, and fees will be earned over the life of the associated loans.

As of December 31, 2021, the Bancorp had remaining loan balances under the Paycheck Protection Program totaling $22.1 million.

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Non-performing loans include those loans that are 90 days or more past due and accruing and those loans that have been placed on non-accrual status.

At December 31, 2020, all non-performing loans are also accounted for on a non-accrual basis, except for one commercial real estate loan totaling $437 thousand, one residential real estate loan totaling $80 thousand, one home equity loan totaling $29 thousand, and one construction and land development loan totaling $20 thousand that remained accruing and more than 90 days past due.

At December 31, 2021, all non-performing loans are also accounted for on a non-accrual basis, except for one commercial real estate loan totaling $91 thousand, two commercial business loans totaling $49 thousand, one home equity loan totaling $34 thousand, and one residential real estate loan totaling $31 thousand that remained accruing and more than 90 days past due.

The Bancorp's nonperforming loans are summarized below:

7 unchanged sentences

Nonperforming loans to total assets

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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.

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Special mention loans represent loans management is closely monitoring due to one or more factors that may cause the loan to become classified as substandard.

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The Bancorp's special mention loans are summarized below:

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

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

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

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

3 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 due to the loan sale with charge off for a single large commercial real estate loan relationship, which operates a hotel, totaling $5,080 thousand.

Nonperforming loans at December 31, 2021, also decreased due to the removal of various residential real estate loans from nonaccrual totaling $2,856 thousand.

Substandard loans at December 31, 2021, also decreased due to the removal of various residential real estate loans totaling $2,665 thousand.

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 $2,513 thousand 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 $2,854 thousand.

At December 31, 2021, management is of the opinion that there are no loans, except certain of those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure.

Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources.

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The allowance for loan losses (ALL) is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses, and decreased by charge-offs net of recoveries.

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The appropriateness of the current period provision and the overall adequacy of the ALL are determined through a disciplined and consistently applied quarterly process that reviews the Bancorp’s current credit risk within the loan portfolio and identifies the required allowance for loan losses given the current risk estimates.

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The Bancorp's provision for loan losses for the twelve months ended are summarized below:

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Details on these fair value marks and the additional reserves created can be found in Note 4, Loans Receivable.

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A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased.

1 unchanged sentence

If the segment performs in line with expectation, the deferred cost reserve is paid as an origination cost to the third party originator of the loan.

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The Bancorp's allowance to total loans and non-performing loans are summarized below:

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Management has allocated reserves to both performing and non-performing loans based on current information available.

At December 31, 2020, foreclosed real estate totaled $538 thousand, which was comprised of ten properties, compared to $1.1 million and seventeen properties at December 31, 2019.

During 2020, loans totaling $233 thousand were transferred into foreclosed real estate, while net sales of foreclosed real estate totaled $855 thousand.

Net gains from the 2020 sales totaled $78 thousand.

Market value adjustments in 2020 of $46 thousand were also made.

At the end of December 2020, all of the Bancorp’s foreclosed real estate is located within its primary market area.

At December 31, 2021, the Bank held no balances in foreclosed real estate, compared to $538 thousand and ten properties at December 31, 2020.

During 2021, net sales of foreclosed real estate totaled $585 thousand and net gains from the 2021 sales totaled $47 thousand.

The primary objective of the Bancorp’s investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings.

13 unchanged sentences

government sponsored entities

treasury securities

Collateralized mortgage obligations and residential mortgage-backed securities

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Federal Home Loan Bank stock

The net decrease in interest bearing deposits in other financial institutions and fed funds sold is primarily the result of the Bancorp funding investments in securities and loan growth.

The net increase in interest bearing deposits in other financial institutions is primarily the result of the increase in customer deposits.

Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes.

2 unchanged sentences

(Dollars in thousands)

Certificates of deposit

4 unchanged sentences

(Dollars in thousands)

Repurchase agreements

13 unchanged sentences

In addition, the Bancorp utilizes borrowings (i.e., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds.

During 2020, cash and cash equivalents decreased $27.3 million compared to an increase of $30.1 million for 2019.

During 2020, the primary sources of cash and cash equivalents were from the change in deposits, maturities and sales of securities, and loan sales and repayments.

The primary uses of cash and cash equivalents were for loan originations, purchases of securities, FHLB advance repayments, and the payment of common stock dividends.

During 2021, cash and cash equivalents increased $13.3 million compared to a decrease of $27.3 million for 2020.

During 2021, he primary sources of cash and cash equivalents were the sale loans originated for sale, proceeds from the maturity and paydown of securities, proceeds from the sale of securities, growth of deposits, and proceeds from the maturity and paydown of loans receivable.

The primary uses of cash and cash equivalents were origination of loans for sale and purchase of securities.

During 2021, net cash from operating activities totaled $17.0 million, compared to $19.7 million for 2020.

The increase in cash in-flow from operating activities was primarily due to higher net income year over year, sale of loans originated for sale, and net change in accrued expenses and other liabilities.

The decrease in cash in-flow from operating activities was primarily due to lower net income year over year, lower sale of loans originated for sale, and net change in accrued expenses and other liabilities.

Net cash outflows from investing activities totaled $125.9 million during 2021, compared to outflows of $185.0 million during 2020.

The changes for the current year were primarily related to the increased purchases of securities.

The changes for the current year were primarily related to the decreased purchases of securities and net change in loans receivable.

Net cash inflows from financing activities totaled $122.1 million in 2021, compared to net cash inflows of $138.0 million in 2020.

The increase during 2020 was primarily due to the increase in deposits, and less repayments of FHLB advances.

On a cash basis, the Bancorp paid dividends on common stock of $4.3 million and $4.1 million during 2020 and 2019, respectively.

The increase during 2021 was primarily due to the change in deposits.

On a cash basis, the Bancorp paid dividends on common stock of $4.3 million during 2021 and 2020.

During 2021, the Bancorp’s Board of Directors maintained dividends as earnings and capital continued to be sufficient to warrant the current dividend.

1 unchanged sentence

Stockholders' equity totaled $156.6 million at December 31, 2021, compared to $151.7 million at December 31, 2020, an increase of $4.9 million (3.2%).

The increase was primarily the result of net income of $16.6 million, and net unrealized gains of available for sale securities of $6.2 million less $4.3 million in dividends.

The increase was primarily the result of net income of $15.0 million, offset against change in net unrealized gains of available for sale securities of $6.2 million and dividends of $4.3 million.

At December 31, 2021, book value per share was $45.00 compared to $43.80 for 2020.

The Bancorp is subject to risk-based capital guidelines adopted by the FRB, and the Bank is subject to risk-based capital guidelines adopted by the FDIC.

As applied to the Bancorp and the Bank, the FRB and FDIC capital requirements are substantially the same.

These regulations divide capital into various tiers, as described in “Recent Developments –

Regulatory Capital Rules”

The following table shows that, at December 31, 2020, the Bancorp’s capital exceeded all 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

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

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The Bancorp’s fourth quarter dividend was paid to shareholders on January 7, 2022.

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Results of Operations –

Comparison of 2021 to 2020

Net income for 2020 was $16.6 million, compared to $12.1 million for 2019, an increase of $4.5 million (37.3%).

The twelve-month earnings increase is primarily related to lower interest expense and higher noninterest income.

Net income for 2021 was $15.0 million, compared to $15.9 million for 2020, a decrease of $969 thousand (6.1%).

The twelve-month earnings decrease is primarily related to higher noninterest expense and lower noninterest income.

The earnings represent a return on average assets of 0.95% for 2021, compared to 1.12% for 2020.

9 unchanged sentences

Comparing the net interest margin on a tax equivalent basis more accurately compares the returns on tax-exempt loans and securities to those on taxable interest-earning assets.

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Information relating to the average consolidated balance sheet and the yield on average earning assets and cost of average liabilities for the periods indicated are in the following table.

Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities drives the disclosed rates.

Average balances are derived from daily balances.

(Dollars in thousands)

Average Balances, Interest, and Rates

December 31, 2020

December 31, 2019

Interest bearing deposits in other financial institutions

Federal funds sold

Certificates of deposit in other financial institutions

Securities available-for-sale

Loans receivable

Federal Home Loan Bank stock

Total interest earning assets

Cash and non-interest bearing deposits in other financial institutions

Allowance for loan losses

Other noninterest bearing assets

LIABILITIES AND STOCKHOLDERS' EQUITY

Total deposits

Repurchase agreements

Borrowed funds

Total interest bearing liabilities

Other noninterest bearing liabilities

Total liabilities

Total stockholders' equity

Total liabilities and stockholders' equity

The decrease in interest income for interest bearing deposits in other financial institutions was the result of lower average rate for the year ended December 31, 2020, compared to the year ended December 31, 2019.

The decrease in interest income for federal funds sold was result of lower average balances and rates for the year ended December 31, 2020, compared to the year ended December 31, 2019.

The decrease in interest income for certificates of deposits in other financial institutions was the result of lower average balances and rates for the year ended December 31, 2020, compared to the year ended December 31, 2019.The decrease in interest income for securities available-for-sale was the result of lower average rates for the year ended December 31, 2020, compared to the year ended December 31, 2019.

The increase in interest income for loans receivable was the result of higher average balances for the year ended December 31, 2020, compared to the year ended December 31, 2019.

The decrease in interest income in Federal Home Loan Bank stock is the result of lower average rates for the year ended December 31, 2020, compared to the year ended December 31, 2019.

The decrease in the interest expense of total deposits was the result of lower weighted average rates for the year ended December 31, 2020, compared to the year ended December 31, 2019.

The decrease in interest expense of repurchase agreements was the result of lower weighted average rates for the year ended December 31, 2020, compared to the year ended December 31, 2019.

The decrease in the interest expense of borrowed was the result of lower average balances for the year ended December 31, 2020, compared to the year ended December 31, 2019.

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The decrease in interest earning asset income for the year ended December 31, 2021, compared to the year ended December 31, 2020, is primarily related to continued decreased reinvestment rates in 2021 for loans, securities, and excess cash balances, as a result of the Federal Reserve cuts occurring in March 2020.

The decrease in interest bearing liability expense is primarily the result of the Bancorp adjusting deposit and repurchase agreement pricing to align with the current interest rate cycle.

The following table shows the change in noninterest income for the year ending December 31, 2021, and December 31, 2020.

2 unchanged sentences

12/31/2021 vs.

12/31/2020   

Noninterest income:

Gain on sale of loans held-for-sale, net

Fees and service charges

Gain on sale of securities, net

Gain on sale of loans held-for-sale, net

Wealth management operations

Gain on sale of securities, net

Increase in cash value of bank owned life insurance

Gain on sale of foreclosed real estate

Benefit from bank owned life insurance

Total noninterest income

The increase in gain on sale of loans held-for-sale, net, is the result of the current economic and rate environment, and our ability to close loans in a timely fashion during record demand.

We anticipate the demand for mortgage loans will return to more normal levels as the current low rate environment persists or rates return to higher levels.

The increase in fees and service charges is primarily the result of increased lending fees earned as part of opportunities resulting from the current economic and rate environment.

The increase in gains on the sale of securities is a result of current market conditions and actively managing the portfolio.

The increase in fees and service charges is primarily the result of the Bancorp’s efforts to provide products and services to help customers be more successful, including debit card and ATM services.

The decrease in gain on sale of loans is the result of significant refinance activity in the prior year due to the economic and rate environment, which resulted in more loans originated and sold.

The increase in wealth management income is the result of the Bancorp’s continued focus on expanding its wealth management line of business.

In the prior year, a death benefit from bank owned life insurance was recorded;

no events of this nature have occurred in the twelve months of 2020.

The decrease in other noninterest income is the result of a one-time fixed asset sale for a gain in the prior year.

The decrease in gains on the sale of securities is a result of current market conditions and actively managing the portfolio.

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The following table shows the change in noninterest expense for the year ending December 31, 2021, and December 31, 2020.

2 unchanged sentences

12/31/2021 vs.

12/31/2020   

Noninterest expense:

6 unchanged sentences

The increase in compensation and benefits is primarily the result of management’s continued focus on talent management and retention.

The increase in occupancy and equipment is primarily related to facilities improvement efforts aimed at enhancing technology and to accommodate recent growth.

The decrease in data processing expense is primarily the result of prior year data conversion expenses incurred in the first quarter of 2019 related to the acquisition of AJS Bancorp Inc.

The increase in federal deposit insurance premiums is a result of one-time credits received in prior year.

The decrease in marketing is a result of the timing of the Bancorp’s marketing initiatives.

The increase in other operating expenses is primarily the result of investments in strategic initiatives.

The Bancorp’s efficiency ratio was 63.8% for the year ended December 31, 2020, compared to 69.5% for the year ended December 31, 2019.

The improved ratio is related primarily to the increase in noninterest income and lower interest expense.

The acquisition of AJSB is discussed in Note 2 of the financial statements.

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Income tax expenses for the year ended December 31, 2020, totaled $2.9 million, compared to income tax expense of $1.8 for the year ended December 31, 2019, an increase of $1.1 million (64.4%).

The increase in occupancy and equipment is primarily related to facilities improvement efforts aimed at enhancing technology and efficiency.

The increase in data processing expense is primarily the result of increased system utilization and investment in technological advancements such as Salesforce and nCino.

The increase in marketing expense is the result of increased marketing and rebranding initiatives.

The increase in professional services is primarily the result of the Royal Financial acquisition.

The increase in other operating expenses is primarily the result of investments in strategic initiatives focusing on growth of the organization, such as the acquisition of Royal Financial.

The acquisition of RYFL is discussed in Note 2 of the financial statements.

Income tax expenses for the year ended December 31, 2021, totaled $1.4 million, compared to income tax expense of $2.8 for the year ended December 31, 2020, a decrease of $1.4 million (49.0%).

The combined effective federal and state tax rates for the Bancorp was 8.6% for the year ended December 31, 2021, compared to 14.8% for the year ended December 31, 2020.

The Bancorp’s higher current period effective tax rate is a result of a smaller increase to tax preferred income relative to earnings.

The Bancorp’s lower current period effective tax rate is a result of a greater increase to tax preferred income relative to earnings.

Critical Accounting Policies

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Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates.

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We consider the following factors when determining an other-than-temporary impairment for a security:

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Changes in the provision are directionally consistent with changes in observable data.

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Commercial and industrial, and commercial real estate loans that exhibit credit weaknesses and loans that have been classified as impaired are subject to an individual review.

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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 7. Management’s Discussion and Analysis