Finward Bancorp 10-K

Item 8. Financial Statements   Report of Independent Registered Public Accounting Firm       To the Stockholders, Board of Directors and Audit Committee Finward Bancorp Munster, Indiana     Opinion on the Financial Statements   We have audited the accompanying consolidated balance sheet of Finward Bancorp (the “Company”) as of December 31, 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.   Basis for Opinion   These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit.   We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.   Critical Audit Matter   The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.   Page 58 of 108     Allowances for Loan Losses   Description of the Matter   As described in Note 4 to the financial statements, the Company’s loan portfolio totaled $966.7 million and associated allowance for loan losses (ALLL) was $13.3 million at December 31, 2021. The Company also describes in Note 1 of the financial statements the accounting policy around this estimate. The ALLL is an estimate of losses inherent in the loan and lease portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable loan losses. The estimate consists of several key elements, which include: specific reserves for impaired loans, general reserves for each business lending division portfolio including percentage allocations for special attention loans not deemed impaired, and reserves for pooled homogenous loans, among others. The Company’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and change.   We identified the valuation of the ALLL as a critical audit matter. Auditing the ALLL involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic conditions and other environmental factors used to adjust historical loss rates, evaluating the adequacy of specific reserves associated with impaired loans and assessing the appropriateness of loan grades.   How We Addressed the Matter in Our Audit   Our audit procedures related to the estimated allowance for loan losses included:     ● Testing the design of internal controls, including those related to technology, over the ALLL including data completeness and accuracy, classifications of loans by loan segment, historical loss data, the calculation of a loss rate, the establishment of qualitative adjustments, grading and risk classification of loans and establishment of specific reserves on impaired loans and management’s review controls over the ALLL balance.     ● Testing clerical and computational accuracy of the formulas within the ALLL model.     ● Testing the completeness and accuracy of the information and reports utilized in the ALLL, including reports used in management review controls over the ALLL.     ● Evaluating the qualitative adjustments to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions.     ● Testing of the loan review function and the accuracy of loan grades determined. Specifically, utilizing internal and external loan grading professionals to assist us in evaluating the appropriateness of loan grades and to assess the reasonableness of specific impairments on loans.     ● Evaluating the overall reasonableness of qualitative factors and the appropriateness of their direction and magnitude, compared to previous years and the Company’s support for the direction and magnitude of the change.     /s/ BKD, llp   We have served as the Company’s auditor since 2021.   Indianapolis, Indiana   March 30, 2022   Page 59 of 108     Report of Independent Registered Public Accounting Firm   To the Stockholders and Board of Directors Finward Bancorp and Subsidiaries   Opinion on the Consolidated Financial Statements   We have audited the accompanying consolidated balance sheet of Finward Bancorp (formerly known as NorthWest Indiana Bancorp) and Subsidiaries (the “Company”) as of December 31, 2020; the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the year ended December 31, 2020; and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.   Basis for Opinion   The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.   Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.   /s/ Plante Moran, PLLC   We served as the Company’s auditor from 2009 to 2021. Chicago, Illinois March 22, 2021   Page 60 of 108       Consolidated Balance Sheets       December 31,   (Dollars in thousands)   2021     2020                     ASSETS                                   Cash and non-interest bearing deposits in other financial institutions   $ 12,725     $ 14,014   Interest bearing deposits in other financial institutions     19,987       5,908   Federal funds sold     464       -                     Total cash and cash equivalents     33,176       19,922                     Certificates of deposit in other financial institutions     1,709       1,897                     Securities available-for-sale     526,889       410,669   Loans held-for-sale     4,987       11,329   Loans receivable, net of deferred fees and costs     966,720       965,146   Less: allowance for loan losses     ( 13,343 )     ( 12,458 ) Net loans receivable     953,377       952,688   Federal Home Loan Bank stock     3,247       3,918   Accrued interest receivable     5,444       4,713   Premises and equipment     31,385       30,785   Foreclosed real estate     -       538   Cash value of bank owned life insurance     31,440       30,725   Goodwill     11,109       11,109   Other intangible assets     3,126       4,119   Other assets     14,854       13,880                     Total assets   $ 1,620,743     $ 1,496,292                     LIABILITIES AND STOCKHOLDERS' EQUITY                                   Deposits:                 Non-interest bearing   $ 295,294     $ 241,620   Interest bearing     1,138,907       1,060,719   Total     1,434,201       1,302,339   Repurchase agreements     14,581       13,711   Borrowed funds     -       6,149   Accrued expenses and other liabilities     15,346       22,404                     Total liabilities     1,464,128       1,344,603                     Commitments and contingencies                                       Stockholders' Equity:                 Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding     -       -   Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: December 31, 2021 - 3,480,701 December 31, 2020 - 3,462,916                 Additional paid-in capital     30,430       29,987   Accumulated other comprehensive income     4,276       10,441   Retained earnings     121,909       111,261                     Total stockholders' equity     156,615       151,689                     Total liabilities and stockholders' equity   $ 1,620,743     $ 1,496,292     See accompanying notes to consolidated financial statements.   Page 61 of 108       Consolidated Statements of Income   (Dollars in thousands, except per share data)   Year Ended December 31,       2021     2020   Interest income:                 Loans receivable   $ 41,573     $ 44,867   Securities     9,021       6,512   Other interest earning assets     61       242                     Total interest income     50,655       51,621                     Interest expense:                 Deposits     2,002       5,321   Repurchase agreements     47       87   Borrowed funds     31       332                     Total interest expense     2,080       5,740                     Net interest income     48,575       45,881   Provision for loan losses     1,509       3,687                     Net interest income after provision for loan losses     47,066       42,194                     Noninterest income:                 Fees and service charges     5,388       5,161   Gain on sale of loans held-for-sale, net     5,296       7,588   Wealth management operations     2,375       2,138   Gain on sale of securities, net     1,987       2,348   Increase in cash value of bank owned life insurance     715       708   Gain on sale of foreclosed real estate     47       78   Other     139       127                     Total noninterest income     15,947       18,148                     Noninterest expense:                 Compensation and benefits     24,241       22,855   Occupancy and equipment     5,537       4,933   Data processing     3,648       2,267   Federal deposit insurance premiums     861       788   Professional services     1,205       640   Marketing     1,085       732   Other     10,059       9,421                     Total noninterest expense     46,636       41,636                     Income before income tax expenses     16,377       18,706   Income tax expenses     1,414       2,774                     Net income   $ 14,963     $ 15,932                     Earnings per common share:                 Basic   $ 4.30     $ 4.60   Diluted   $ 4.30     $ 4.60                     Dividends declared per common share   $ 1.24     $ 1.24     See accompanying notes to consolidated financial statements.   Page 62 of 108       Consolidated Statements of Comprehensive Income     (Dollars in thousands)   Year Ended December 31,       2021     2020                     Net income   $ 14,963     $ 15,932                     Net change in net unrealized gains and losses on securities available-for-sale:                 Unrealized (loss) gain arising during the period     ( 5,816 )     10,169   Less: reclassification adjustment for gains included in net income     ( 1,987 )     ( 2,348 ) Net securities gain during the period     ( 7,803 )     7,821   Tax effect     1,638       ( 1,641 ) Other comprehensive income (loss), net of tax     ( 6,165 )     6,180                     Comprehensive income, net of tax   $ 8,798     $ 22,112     See accompanying notes to consolidated financial statements.     Consolidated Statements of Changes in Stockholders ’ Equity                       Accumulated                               Additional     Other                       Common     Paid-in     Comprehensive     Retained     Total   (Dollars in thousands, except per share data)   Stock     Capital     (Loss)/Income     Earnings     Equity                                                                                       Balance at January 1, 2020   $ -     $ 29,657     $ 4,261     $ 99,624     $ 133,542                                             Net income     -       -       -       15,932       15,932   Other comprehensive income, net of tax     -       -       6,180       -       6,180   Net surrender value of 1,904 restricted stock awards     -       ( 85 )     -       -       ( 85 ) Stock-based compensation expense           415                   415   Cash dividends, $1.24 per share     -       -       -       ( 4,295 )     ( 4,295 )                                           Balance at December 31, 2020   $ -     $ 29,987     $ 10,441     $ 111,261     $ 151,689                                             Net income     -       -       -       14,963       14,963   Other comprehensive loss, net of tax     -       -       ( 6,165 )     -       ( 6,165 ) Net surrender value of 3,115 restricted stock awards           ( 131 )                 ( 131 ) Stock-based compensation expense     -       574       -       -       574   Cash dividends, $1.24 per share     -       -       -       ( 4,315 )     ( 4,315 )                                           Balance at December 31, 2021   $ -     $ 30,430     $ 4,276     $ 121,909     $ 156,615     See accompanying notes to consolidated financial statements.   Page 63 of 108       Consolidated Statements of Cash Flows   (Dollars in thousands)   Year ended December 31,       2021     2020   CASH FLOWS FROM OPERATING ACTIVITIES:                 Net income   $ 14,963     $ 15,932   Adjustments to reconcile net income to net cash provided by operating activities:                 Origination of loans for sale     ( 153,082 )     ( 224,945 ) Sale of loans originated for sale     164,203       226,447   Depreciation and amortization, net of accretion     4,559       3,201   Deferred tax expense     137       572   Stock based compensation expense     574       415   Gain on sale of securities, net     ( 1,987 )     ( 2,348 ) Gain on sale of loans held-for-sale, net     ( 5,529 )     ( 7,400 ) Gain on sale of foreclosed real estate     ( 47 )     ( 78 ) Gain on cash value of bank owned life insurance     ( 715 )     ( 708 ) Loss (gain) on derivatives     233       ( 188 ) Provision for loan losses     1,509       3,687   Net change in:                 Interest receivable     ( 731 )     ( 684 ) Other assets     1,784       ( 1,817 ) Accrued expenses and other liabilities     ( 8,828 )     7,650   Net cash provided by operating activities     17,043       19,736                     CASH FLOWS FROM INVESTING ACTIVITIES:                 Proceeds from maturities of certificates of deposit in other financial institutions     923       795   Purchase of certificates of deposit in other financial institutions     ( 735 )     ( 522 ) Proceeds from maturities and pay downs of securities available-for-sale     55,431       67,014   Proceeds from sales of securities available-for-sale     43,756       51,350   Purchase of securities available-for-sale     ( 221,236 )     ( 243,351 ) Loan participations purchased     -       ( 9,054 ) Net change in loans receivable     12,345       ( 48,406 ) Proceeds of Federal Home Loan Bank Stock     671       -   Purchase of Federal Home Loan Bank Stock     -       ( 6 ) Purchase of loans receivable     ( 14,543 )     -   Purchase of premises and equipment, net     ( 3,128 )     ( 3,735 ) Proceeds from sale of foreclosed real estate     585       809   Write down of foreclosed real estate     -       46   Net cash used in investing activities     ( 125,931 )     ( 185,060 )                   CASH FLOWS FROM FINANCING ACTIVITIES:                 Change in deposits     131,862       148,003   Repayment of FHLB advances     ( 6,000 )     ( 8,000 ) Net surrender value of restricted stock awards     ( 131 )     ( 85 ) Change in other borrowed funds     721       2,361   Dividends paid     ( 4,310 )     ( 4,291 ) Net cash provided by financing activities     122,142       137,988   Net change in cash and cash equivalents     13,254       ( 27,336 ) Cash and cash equivalents at beginning of period     19,922       47,258   Cash and cash equivalents at end of period   $ 33,176     $ 19,922                     SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                 Cash paid during the period for:                 Interest   $ 2,112     $ 5,865   Income taxes     2,185       1,025   Noncash activities:                 Transfers from loans to foreclosed real estate   $ -     $ 233   Dividends declared not paid     1,079       1,074   Securities purchased not settled     1,765       -     See accompanying notes to consolidated financial statements.   Page 64 of 108     Notes to Consolidated Financial Statements Years ended December 31, 2021 and 2020     NOTE 1 - Summary of Significant Accounting Policies Principles of Consolidation – The consolidated financial statements include Finward Bancorp (the “Bancorp” or “Finward”), its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary) and Peoples Bank (the “Bank”), and the Bank’s wholly owned subsidiaries, Peoples Service Corporation, NWIN, LLC, NWIN Funding, Incorporated, and Columbia Development Company, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are dependent upon the earnings of the Bank. Peoples Service Corporation provides insurance and annuity investments to the Bank’s wealth management customers. NWIN, LLC is located in Las Vegas, Nevada and serves as the Bank’s investment subsidiary and parent of a real estate investment trust, NWIN Funding, Inc. NWIN Funding, Inc. was formed as an Indiana Real Estate Investment Trust. The formation of NWIN Funding, Inc. provides the Bancorp with a vehicle that may be used to raise capital utilizing portfolio mortgages as collateral, without diluting stock ownership. In addition, NWIN Funding, Inc. receives favorable state tax treatment for income generated by its operations. Columbia Development Company is a limited liability company that serves to hold certain real estate properties that are acquired through foreclosure. All significant inter-company accounts and transactions have been eliminated in consolidation.   Use of Estimates – Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses are particularly susceptible to material change in the near term.   Concentrations of Credit Risk – The Bancorp grants residential, commercial real estate, commercial business and installment loans to customers primarily in Lake County, in northwest Indiana, and Cook County, in northeast Illinois. The Bancorp is also an active lender in Porter County, and to a lesser extent, LaPorte, Newton and Jasper counties in Indiana; and DuPage, Lake, and Will counties in Illinois. Substantially all loans are secured by specific items of collateral including residences, commercial real estate, land development, business assets and consumer assets.   Cash Flow Reporting – For purposes of the statements of cash flows, the Bancorp considers cash on hand, noninterest bearing deposits in other financial institutions, all interest bearing deposits in other financial institutions with original maturities of 90 days or less, and federal funds sold to be cash and cash equivalents. The Bancorp reports net cash flows for customer loan and deposit transactions and short-term borrowings with maturities of 90 days or less.   Certificates of deposits in other financial institutions – Certificates of deposits in other financial institutions generally mature within 5 years and are carried at cost.   Securities – The Bancorp classifies securities into held-to-maturity, available-for-sale, or trading categories. Held-to-maturity securities are those which management has the positive intent and the Bancorp has the ability to hold to maturity, and are reported at amortized cost. Available-for-sale securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains and losses reported in other comprehensive income, net of tax. At December 31, 2021, and 2020, all of the Bancorp’s securities were classified as available-for-sale. The Bancorp does not have a held to maturity or trading portfolio. Realized gains and losses resulting from the sale of securities recorded on the trade date are computed by the specific identification method. Interest and dividend income, adjusted by amortization of premiums or discounts on a level yield method, are included in earnings. Securities are reviewed for other-than-temporary impairment on a quarterly basis.   Page 65 of 108     The Bancorp considers the following factors when determining an other-than-temporary impairment for a security: the length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; and an assessment of whether the Bancorp has ( 1 ) the intent to sell the debt security or ( 2 ) it is more likely than not that the Bancorp will be required to sell the debt security before its anticipated market recovery. If either of these conditions are met, management will recognize other-than-temporary impairment. If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized credit loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.   Loans Held-for-Sale – Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.   Mortgage loans held-for-sale can be sold with servicing rights retained or released. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing rights. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.   Loans and Loan Interest Income – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, and net deferred loan fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level‑yield method without anticipating prepayments. The accrual of interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged-off no later than when they reach 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off status at an earlier date if collection of principal or interest is considered doubtful.   Generally, interest accrued but not received for loans placed on non-accrual status is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost‑recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.   Allowance for Loan Losses – The allowance for loan losses (“allowance”) is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged‑off.   A loan is considered impaired when, based on current information and events, it is probable that the Bancorp will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are normally collectively evaluated for impairment, unless part of a larger relationship or a trouble debt restructuring.   Troubled Debt Restructures – A troubled debt restructuring of a loan is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loan should be reported as a troubled debt restructure (TDR). A loan is a TDR when the Bancorp, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower by modifying or renewing a loan under terms that the Bancorp would not otherwise consider. To make this determination, the Bancorp must determine whether (a) the borrower is experiencing financial difficulties and (b) the Bancorp granted the borrower a concession. This determination requires consideration of all of the facts and circumstances surrounding the modification. An overall general decline in the economy or some level of deterioration in a borrower's financial condition does not inherently mean the borrower is experiencing financial difficulties.   Page 66 of 108     On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides entities with optional temporary relief from certain accounting and financial reporting requirements under U.S. GAAP. Section 4013 of the CARES Act allows financial institutions to suspend application of certain TDR accounting guidance for loan and lease modifications related to the COVID- 19 pandemic made between March 1, 2020 and the earlier of December 31, 2021 or 60 days after the end of the COVID- 19 national emergency, provided certain criteria are met. Section 4013 of the CARES Act was amended on December 27, 2020 to extend this relief until January 1, 2022. The relief can be applied to loan and lease modifications for borrowers that were not more than 30 days past due as of December 31, 2020 and to loan and lease modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. The Company chose to apply this relief to eligible loan and lease modifications. At December 31, 2021, loan and lease modification balances related to the COVID- 19 pandemic were $ 927 thousand.   Some of the factors considered by management when determining whether a borrower is experiencing financial difficulties are: ( 1 ) is the borrower currently in default on any of its debts, ( 2 ) has the borrower declared or is the borrower in the process of declaring bankruptcy, and ( 3 ) absent the current modification, the borrower would likely default.   Federal Home Loan Bank Stock – The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.   Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when ( 1 ) the assets have been isolated from the Bancorp, ( 2 ) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and ( 3 ) the Bancorp does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.   Premises and Equipment – Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. Premises and related components are depreciated using the straight-line method with useful lives ranging from 15 to 39 years. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 2 to 10 years.   Foreclosed Real Estate – Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.   Long-term Assets – Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.   Bank Owned Life Insurance – The Bancorp has purchased life insurance policies on certain key executives. In accordance with accounting for split-dollar life insurance, Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.   Page 67 of 108     Goodwill and Intangibles – The Bancorp records the assets acquired, including identified intangible assets, and the liabilities assumed in acquisitions at their fair values. These fair values often involve estimates based on third -party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective. Under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, goodwill and indefinite-lived assets recorded are reviewed for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired. An impairment loss is recognized for any excess of carrying value over fair value of the goodwill or the indefinite-lived intangible asset.   Repurchase Agreements – Substantially, all repurchase agreement liabilities represent amounts advanced by various customers that are not covered by federal deposit insurance and are secured by securities owned by the Bancorp.            Income Taxes – Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.   At December 31, 2021 and 2020, the Bancorp evaluated tax positions taken for filing with the Internal Revenue Service and all state jurisdictions in which it operates. The Bancorp believes that income tax filing positions will be sustained under examination and does not anticipate any adjustments that would result in a material adverse effect on the Bancorp's financial condition, results of operations, or cash flows. Accordingly, the Bancorp has not recorded any reserves or related accruals for interest and penalties for uncertain tax positions at December 31, 2021 and 2020.   Loan Commitments and Related Financial Instruments – Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.   As part of mortgage banking operations, the Company enters into commitments to originate loans whereby the interest rate on these loans is determined prior to funding (“interest rate lock commitments”). Similar to loans held for sale, the fair value of rate lock commitments is subject to change primarily due to changes in interest rates. The interest rate lock commitments on mortgage loans intended to be sold are recorded at fair value with changes in fair value recorded in current earnings as part of gain on sale of loans held-for-sale, net.   Earnings Per Common Share – Basic earnings per common share is net income divided by the weighted-average number of common shares outstanding during the period. The restricted shares issued provide for dividend and voting rights and are therefore considered participating securities. Accordingly, all restricted stock is included in basic earnings per share.   Comprehensive Income – Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale.   Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe such matters currently exist that will have a material effect on the financial statements.   Restrictions on Cash –– As of March 26, 2020, the Federal Reserve Bank eliminated reserve requirements for certain depository institutions, including the Bank. As such, there was no reserve requirement at December 31, 2021. As part of derivative contracts entered into by the Bancorp, $ 3.9 million was pledged as collateral at December 31, 2021 and 2020. These balances are included in interest bearing deposits. At December 31, 2021, the Company’s correspondent cash accounts exceeded federally insured limits by $ 7.1 million. Additionally, the Company had approximately $ 13.0 million of cash held by the FRB and the FHLB, which is not federally insured.   Page 68 of 108     Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular instruments. Changes in assumptions or in market conditions could significantly affect the estimates.   Operating Segments – While the Bancorp's executive management monitors the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Bancorp's financial service operations are considered by management to be aggregated in one reportable operating segment.   Reclassification – Certain amounts appearing in the consolidated financial statements and notes thereto for the year ended December 31, 2020, may have been reclassified to conform to the December 31, 2021 presentation.   Trust Assets – Assets of the Bancorp’s wealth management department, other than cash on deposit at the Bancorp, are not included in these consolidated financial statements because they are not assets of the Bancorp.   Adoption of New Accounting Pronouncements – In January 2017, the FASB issued ASU 2017 - 04, Intangibles – Goodwill and Other (Topic 350 ): Simplifying the Test for Goodwill Impairment. This Standard simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU No. 2017 - 04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in this ASU, an entity should ( 1 ) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and ( 2 ) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU No. 2017 - 04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. Finally, this ASU amends the Overview and Background sections of the Accounting Standards Codification as part of the FASB’s initiative to unify and improve such sections across Topics and Subtopics. The new guidance was effective for the Bancorp’s year ending December 31, 2020, and was adopted on January 1, 2020. The adoption of this ASU has not had a material impact on the consolidated financial statements, and the Bancorp has not recorded goodwill impairment to date as part of their acquisition activity.   On January 1, 2020, the Bancorp adopted the provision of ASU 2018–13, which modifies the disclosure requirements on fair value measurements. The amendment removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The update also adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, the Bancorp may disclose other quantitative information in lieu of the weighted average if we determine that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The adoption of this new guidance did not have a material impact on our consolidated financial statements   In December 2019, the FASB issued ASU 2019 - 12 which remove specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences where there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. It also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacts changes in tax laws in interim periods. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Bancorp adopted ASU 2019 - 12 on January 1, 2021 and it did not have a material impact on its accounting and disclosures.   Page 69 of 108     Upcoming Accounting Pronouncements - In June 2016, FASB issued ASU No. 2016 - 13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU includes increased disclosures and various changes to the accounting and measurement of financial assets including the Bancorp’s loans and available-for-sale debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. In October 2019, the FASB voted and approved proposed changes to the effective date of this ASU for smaller reporting companies, such as the Bancorp, and other non-SEC reporting entities. The approval changed the effective date of the ASU to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. The new credit loss guidance will be effective for the Bancorp's as of January 1, 2023. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Early adoption for all institutions is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is in the process of evaluating the impact adoption of this update will have on the Bancorp’s consolidated financial statements. This process of evaluation has engaged multiple areas of the Bancorp’s management in discussing loss estimation methods and the application of these methods to specific segments of the loans receivable portfolio. Management has been actively monitoring developments and evaluating the use of different methods allowed. Due to continuing development of understanding of application, additional time is required to understand how this ASU will affect the Bancorp’s financial statements. Management plans on running parallel calculations and finalizing a method or methods of adoption in time for the effective date.   In March 2020, the FASB issued ASU No. 2020 - 04 “Reference Rate Reform (Topic 848 ): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021 - 01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020, through December 31, 2022. The Bancorp is implementing a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Bancorp believes the adoption of this guidance on activities after December 31, 2020, through December 31, 2022, will not have a material impact on the consolidated financial statements.   Revision of Previously Issued Financial Statements – .   We have revised amounts reported in previously issued financial statements for the periods presented in this Annual Report on Form 10 -K related to immaterial errors discovered during the second quarter of 2021. The errors relate to certain deferred costs recognized related to our manufactured home loan product, which resulted in increased assets and understatements of expense in prior periods.   We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures included in our Annual Report on Form 10 -K for the year ended December 31, 2020.   Page 70 of 108     The following tables present the revisions to the line items of our previously issued financial statements as of and for the year ended December 31, 2020, to reflect the correction of the errors:   Consolidated Balance Sheet                         (Dollar amounts in thousands except for per share amounts)                                                   As of December 31, 2020   As Reported     Adjustment     As Revised   Loans receivable   $ 966,578     $ ( 1,432 )   $ 965,146   Net loans receivable     954,120       ( 1,432 )     952,688   Other assets     13,681       199       13,880   Total assets     1,497,525       ( 1,233 )     1,496,292   Retained earnings     112,494       ( 1,233 )     111,261   Total shareholders' equity     152,922       ( 1,233 )     151,689   Total liabilities and stockholders' equity     1,497,525       ( 1,233 )     1,496,292     Consolidated Statement of Income                                                   For the year ending December 31, 2020   As Reported     Adjustment     As Revised   Compensation and benefits   $ 22,065     $ 790     $ 22,855   Total noninterest expense     40,846       790       41,636   Income before income tax expense     19,496       ( 790 )     18,706   Income tax expenses     2,892       ( 118 )     2,774   Net income     16,604       ( 672 )     15,932   Earnings per common share:                         Basic     4.80       ( 0.20 )     4.60   Diluted     4.80       ( 0.20 )     4.60     Consolidated Statements of Comprehensive Income                                             For the year ending December 31, 2020   As Reported     Adjustment     As Revised   Net income   $ 16,604     $ ( 672 )   $ 15,932   Comprehensive income, net of tax     22,784       ( 672 )     22,112     Consolidated Statements of Changes in Stockholders' Equity                                     Balance at January 1, 2020   As Reported     Adjustment     As Revised   Retained earnings   $ 100,185     $ ( 561 )   $ 99,624   Total equity     134,103       ( 561 )     133,542                             For the year ending December 31, 2020                         Net income     16,604       ( 672 )     15,932   Retained earnings     112,494       ( 1,233 )     111,261   Total equity     152,922       ( 1,233 )     151,689     Consolidated Statements of Cash Flows                                             Year ended December 31, 2020   As Reported     Adjustment     As Revised   Net income   $ 16,604     $ ( 672 )   $ 15,932   Deferred tax expense     690       ( 118 )     572   Net cash - operating activities     20,526       ( 790 )     19,736   Net change in loan     ( 49,196 )     790       ( 48,406 ) Net cash - investing activities     ( 185,850 )     790       ( 185,060 )   Page 71 of 108       NOTE 2 – Acquisition Activity On January 31, 2022, Finward Bancorp (“Finward”) 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 ( the “Merger Agreement”) between Finward and RYFL. The stockholders of both Finward and RYFL approved the Merger Agreement at the respective stockholder meetings of the companies held on December 13, 2021. Pursuant to the Merger Agreement, RYFL merged with and into Finward, with Finward as the surviving corporation (the “Merger”), and Royal Savings Bank, an Illinois state chartered savings bank and wholly-owned subsidiary of RYFL, merged with and into Peoples Bank, the wholly-owned Indiana state chartered commercial bank subsidiary of Finward, with Peoples Bank as the surviving bank.   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 received fixed consideration of $ 20.14 in cash per share and no stock consideration. 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 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.   In connection with the acquisition, Robert W. Youman, was appointed to the boards of directors of Finward and Peoples Bank effective as of the closing of the Merger.   RYFL had a home office and eight branch offices in Cook County, Illinois. As of December 31, 2021, RYFL reported total assets of $ 547.1 million, total loans of $ 464.8 million, and total deposits of $ 480.9 million. The Bancorp is in the process of determining the fair value of assets purchased and liabilities assumed. As a result of the acquisition, the combined company has approximately $ 2.2 billion in total assets, $ 1.4 billion in total loans, and $ 1.9 billion in deposits. The acquisition has further expanded the Bank’s banking center network in Cook County, Illinois.   Page 72 of 108       NOTE 3 – Securities The estimated fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:       (Dollars in thousands)               Gross     Gross     Estimated       Cost     Unrealized     Unrealized     Fair       Basis     Gains     Losses     Value   December 31, 2021                                 U.S. government sponsored entities   $ 8,883     $ -     $ ( 214 )   $ 8,669   U.S. treasury securities     400       -       -       400   Collateralized mortgage obligations and residential mortgage-backed securities     187,279       961       ( 3,539 )     184,701   Municipal securities     322,750       9,904       ( 527 )     332,127   Collateralized debt obligations     2,173       -       ( 1,181 )     992   Total securities available-for-sale   $ 521,485     $ 10,865     $ ( 5,461 )   $ 526,889         (Dollars in thousands)               Gross     Gross     Estimated       Cost     Unrealized     Unrealized     Fair       Basis     Gains     Losses     Value   December 31, 2020                                 Money market fund   $ 52,941     $ -     $ -     $ 52,941   U.S. government sponsored entities     7,881       3       ( 24 )     7,860   Collateralized mortgage obligations and residential mortgage-backed securities     151,355       3,417       ( 36 )     154,736   Municipal securities     183,103       11,102       ( 2 )     194,203   Collateralized debt obligations     2,182       -       ( 1,253 )     929   Total securities available-for-sale   $ 397,462     $ 14,522     $ ( 1,315 )   $ 410,669     The cost basis, estimated fair value of available-for-sale securities, and carrying amount, if different, at December 31, 2021, by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.       (Dollars in thousands)       Available-for-sale               Estimated       Cost     Fair   December 31, 2021   Basis     Value   Due in one year or less   $ 590     $ 592   Due from one to five years     1,759       1,765   Due from five to ten years     28,950       29,846   Due over ten years     302,907       309,985   Collateralized mortgage obligations and residential mortgage-backed securities     187,279       184,701   Total   $ 521,485     $ 526,889     Sales of available-for-sale securities were as follows:       (Dollars in thousands)       December 31,     December 31,       2021     2020                     Proceeds   $ 43,756     $ 51,350   Gross gains     2,010       2,407   Gross losses     ( 23 )     ( 59 )   Page 73 of 108     The tax provisions related to these net realized gains were approximately $ 417 thousand for 2021 and $ 493 thousand for 2020.   Accumulated other comprehensive income/(loss) balances, net of tax, related to available-for-sale securities, were as follows:       (Dollars in thousands)       Unrealized gain/(loss)   Ending balance, December 31, 2020   $ 10,441   Current period change     ( 6,165 ) Ending balance, December 31, 2021   $ 4,276     Securities with carrying values of approximately $ 39.5 million and $ 52.4 million were pledged as of December 31, 2021 and 2020, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.   Securities with unrealized losses at December 31, 2021, and 2020, not recognized in income are as follows:         (Dollars in thousands)               Less than 12 months     12 months or longer     Total               Estimated             Estimated             Estimated             Percentage of       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized     Total Portfolio       Value     Losses     Value     Losses     Value     Losses     in Loss Position   December 31, 2021                                                         U.S. government sponsored entities   $ 8,669     $ ( 214 )   $ -     $ -     $ 8,669     $ ( 214 )     100.0 % Collateralized mortgage obligations and residential mortgage-backed securities     126,373       ( 3,175 )     8,109       ( 364 )     134,482       ( 3,539 )     72.8 % Municipal securities     70,309       ( 527 )     -       -       70,309       ( 527 )     21.2 % Collateralized debt obligations     -       -       992       ( 1,181 )     992       ( 1,181 )     100.0 % Total temporarily impaired   $ 205,351     $ ( 3,916 )   $ 9,101     $ ( 1,545 )   $ 214,452     $ ( 5,461 )     40.7 % Number of securities             133               5               138                 (Dollars in thousands)               Less than 12 months     12 months or longer     Total               Estimated             Estimated             Estimated             Percentage of       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized     Total Portfolio       Value     Losses     Value     Losses     Value     Losses     in Loss Position   December 31, 2020                                                         U.S. government sponsored entities   $ 4,975     $ ( 24 )   $ -     $ -     $ 4,975     $ ( 24 )     63.3 % Collateralized mortgage obligations and                                                         residential mortgage-backed securities     11,953       ( 36 )     -       -       11,953       ( 36 )     7.7 % Municipal securities     1,864       ( 2 )     -       -       1,864       ( 2 )     1.0 % Collateralized debt obligations     -       -       929       ( 1,253 )     929       ( 1,253 )     100.0 % Total temporarily impaired   $ 18,792     $ ( 62 )   $ 929     $ ( 1,253 )   $ 19,721     $ ( 1,315 )     4.8 % Number of securities             8               2               10             Unrealized losses on securities have not been recognized into income because the securities are of high credit quality, have undisrupted cash flows, or have been independently evaluated for other-than-temporary impairment and appropriate write downs taken. Management has the intent and ability to hold the securities for the foreseeable future, and the decline in fair value is largely due to changes in interest rates and volatility in the securities markets. The fair values are expected to recover as the securities approach maturity.   Page 74 of 108         NOTE 4 – Loans Receivable Year end loans are summarized below:   Loans receivable are summarized below:   (Dollars in thousands)                     December 31, 2021     December 31, 2020   Loans secured by real estate:                 Residential real estate   $ 260,134     $ 286,048   Home equity     34,612       39,233   Commercial real estate     317,145       298,257   Construction and land development     123,822       93,562   Multifamily     61,194       50,571   Farmland     -       215   Total loans secured by real estate     796,907       767,886   Commercial business     115,772       158,140   Consumer     582       1,025   Manufactured homes     37,887       24,232   Government     8,991       10,142   Loans receivable     960,139       961,425   Less:                 Net deferred loan origination costs     6,810       3,871   Undisbursed loan funds     ( 229 )     ( 150 ) Loans receivable, net of deferred fees and costs   $ 966,720     $ 965,146     As of December 31, 2021, the Bancorp had remaining loan balances under the Paycheck Protection Program totaling $ 22.1 million and the balances are included in the commercial business segment.   Page 75 of 108     (Dollars in thousands)   Beginning Balance     Charge-offs     Recoveries     Provisions     Ending Balance                                             The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the twelve months ended December 31, 2021:                                             Allowance for loan losses:                                         Residential real estate   $ 2,211     $ ( 32 )   $ 81     $ 220     $ 2,480   Home equity     276       ( 1 )     1       81       357   Commercial real estate     5,406       ( 530 )     -       639       5,515   Construction and land development     1,405       -       -       714       2,119   Multifamily     626       -       -       222       848   Farmland     -       -       -       -       -   Commercial business     2,508       ( 158 )     36       ( 377 )     2,009   Consumer     26       ( 29 )     8       10       15   Manufactured homes     -       -       -       -       -   Government     -       -       -       -       -   Total   $ 12,458     $ ( 750 )   $ 126     $ 1,509     $ 13,343                                             The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the twelve months ended December 31, 2020:                                             Allowance for loan losses:                                         Residential real estate   $ 1,812     $ ( 2 )   $ 27     $ 374     $ 2,211   Home equity     223       -       -       53       276   Commercial real estate     3,773       ( 80 )     -       1,713       5,406   Construction and land development     1,098       ( 17 )     -       324       1,405   Multifamily     529       -       -       97       626   Farmland     -       -       -       -       -   Commercial business     1,504       ( 158 )     17       1,145       2,508   Consumer     43       ( 29 )     14       ( 2 )     26   Manufactured homes     -       -       -       -       -   Government     17       -       -       ( 17 )     -   Total   $ 8,999     $ ( 286 )   $ 58     $ 3,687     $ 12,458     A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased. This reserve is available for use for manufactured home loan nonperformance and costs associated with nonperformance. 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. The unamortized balance of the deferred cost reserve totaled $ 5.8 million and $ 3.8 million as of December 31, 2021 and December 31, 2020, respectively, and is included in net deferred loan origination fees and costs.   Page 76 of 108     The Bancorp's impairment analysis is summarized below:       Ending Balances                                                     (Dollars in thousands)   Allowance for individually evaluated for impairment reserves     Allowance for collectively evaluated for impairment reserves     Loan receivables     Loans individually evaluated for impairment     Purchased credit impaired loans individually evaluated for impairment     Loans collectively evaluated for impairment                                                     The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2021:                                                                     Residential real estate   $ 17     $ 2,463     $ 260,134     $ 755     $ 1,016     $ 258,363   Home equity     4       353       34,612       147       137       34,328   Commercial real estate     386       5,129       317,145       1,600       -       315,545   Construction and land development     -       2,119       123,822       -       -       123,822   Multifamily     -       848       61,194       -       556       60,638   Farmland     -       -       -       -       -       -   Commercial business     277       1,732       115,772       524       1,073       114,175   Consumer     -       15       582       -       -       582   Manufactured homes     -       -       37,887       -       -       37,887   Government     -       -       8,991       -       -       8,991   Total   $ 684     $ 12,659     $ 960,139     $ 3,026     $ 2,782     $ 954,331                                                                                                       The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2020:                                                                     Residential real estate   $ 173     $ 2,038     $ 286,048     $ 868     $ 1,297     $ 283,883   Home equity     1       275       39,233       216       137       38,880   Commercial real estate     1,089       4,317       298,257       6,190       151       291,916   Construction and land development     -       1,405       93,562       -       -       93,562   Multifamily     -       626       50,571       95       621       49,855   Farmland     -       -       215       -       -       215   Commercial business     512       1,996       158,140       1,086       1,160       155,894   Consumer     -       26       1,025       -       -       1,025   Manufactured homes     -       -       24,232       -       -       24,232   Government     -       -       10,142       -       -       10,142   Total   $ 1,775     $ 10,683     $ 961,425     $ 8,455     $ 3,366     $ 949,604     Page 77 of 108     The Bancorp's credit quality indicators are summarized below at December 31, 2021 and December 31, 2020:       Credit Exposure - Credit Risk Portfolio By Creditworthiness Category               December 31, 2021           (Dollars in thousands)   1 - 5     6     7     8                                                     Loan Segment   Pass     Pass/monitor     Special mention     Substandard     Total   Residential real estate   $ 222,057     $ 31,415     $ 2,940     $ 3,722     $ 260,134   Home equity     32,873       692       415       632       34,612   Commercial real estate     253,424       48,148       12,011       3,562       317,145   Construction and land development     103,365       16,827       3,630       -       123,822   Multifamily     54,719       5,938       153       384       61,194   Farmland     -       -       -       -       -   Commercial business     95,412       18,058       1,915       387       115,772   Consumer     582       -       -       -       582   Manufactured homes     37,103       725       59       -       37,887   Government     8,991       -       -       -       8,991   Total   $ 808,526     $ 121,803     $ 21,123     $ 8,687     $ 960,139         December 31, 2020           (Dollars in thousands)   1 - 5     6     7     8                                                     Loan Segment   Pass     Pass/monitor     Special mention     Substandard     Total   Residential real estate   $ 234,317     $ 41,805     $ 3,539     $ 6,387     $ 286,048   Home equity     37,044       933       761       495       39,233   Commercial real estate     222,892       55,202       11,983       8,180       298,257   Construction and land development     77,855       12,055       3,652       -       93,562   Multifamily     43,594       5,065       1,408       504       50,571   Farmland     -       215       -       -       215   Commercial business     135,671       20,067       1,341       1,061       158,140   Consumer     1,025       -       -       -       1,025   Manufactured homes     23,501       731       -       -       24,232   Government     10,142       -       -       -       10,142   Total   $ 786,041     $ 136,073     $ 22,684     $ 16,627     $ 961,425     Page 78 of 108     The Bancorp has established a standard loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio. The use and application of these grades by the Bancorp is uniform and conforms to regulatory definitions. During the year, the Bancorp updated its risk rating naming structure, however the underlying grading system has not changed. The loan grading system is as follows:   1 – Superior Quality Loans in this category are substantially risk free. Loans fully collateralized by a Bank certificate of deposit or Bank deposits with a hold are substantially risk free.   2 – Excellent Quality The borrower generates excellent and consistent cash flow for debt coverage, excellent average credit scores, excellent liquidity and net worth and are reputable operators with over 15 years experience. Current and debt to tangible net worth ratios are excellent. Loan to value is substantially below policy and collateral condition is excellent.   3 – Great Quality The borrower generates more than sufficient cash flow to fund debt service and cash flow is improving. Average credit scores are very strong. Operators are reputable with significant years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are very strong. Loan to value is significantly below policy and collateral condition is significantly above average.   4 – Above Average Quality The borrower generates more than sufficient cash flow to fund debt service but cash flow trends may be stable or slightly declining. Average credit scores are strong. The borrower is a reputable operator with many years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are strong. Loan to value is below policy and collateral condition is above average.   5 – Average Quality Borrowers are considered creditworthy and can repay the debt in the normal course of business, however, cash flow trends may be inconsistent or fluctuating. Average credit scores are satisfactory and years of experience is acceptable. Liquidity and net worth are satisfactory. Current and debt to tangible net worth ratios are average. Loan to value is slightly below policy and the collateral condition is slightly above average.   6 – Pass Borrowers are considered credit worthy but financial condition may show signs of weakness due to internal or external factors. Cash flow trends may be declining annually. Average credit scores may be low but remain acceptable. Borrower has limited years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are below average. Loan to value is nearing policy limits and collateral condition is average.   7 – Special Mention A special mention asset has identified weaknesses that deserve Management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. There is still adequate protection by the current sound worth and paying capacity of the obligor or of the collateral pledged. The Special Mention rating is viewed as transitional and will be monitored closely.   Loans in this category may exhibit some of the following risk factors. Cash flow trends may be consistently declining or may be questionable. Debt coverage ratios may be at or near 1:1. Average credit scores may be very weak or the borrower may have minimal years of experience. Liquidity, net worth, current and debt to tangible net worth ratios may be very weak. Loan to value may be at policy limits or may exceed policy limits. Collateral condition may be below average.   8 – Substandard This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit, some loss could be incurred in collection if the deficiencies are not corrected.   Page 79 of 108     9 – Doubtful Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.   10 – Loss Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.   Performing loans are loans that are paying as agreed and are approximately less than ninety days past due on payments of interest and principal.   During the twelve months ending December 31, 2021, three residential real estate loans to three customer totaling $ 203 thousand were modified to include deferral of principal or interest resulting in troubled debt restructuring classification. One commercial business loan totaling $ 601 thousand was provided a short-term renewal and a pending long term restructure resulting in troubled debt restructuring classification. One residential real estate trouble debt restructuring loan totaling $ 37 thousand had subsequently defaulted during the twelve months ending December 31, 2021. During the twelve months ending December 31, 2020, one residential real estate loan totaling $ 108 thousand was a new troubled debt restructuring loan. In addition, during 2020, one commercial real estate loan totaling $ 142 thousand, one residential loan totaling $ 50 thousand and one home equity loan totaling $ 22 thousand were renewed as a troubled debt restructuring. One residential real estate loan totaling $ 108 thousand and one commercial business trouble debt restructuring loan totaling $ 275 thousand, had subsequently defaulted during the periods presented. All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.   Page 80 of 108     The Bancorp's individually evaluated impaired loans are summarized below:                               For the twelve months ended       As of December 31, 2021     December 31, 2021   (Dollars in thousands)   Recorded Investment     Unpaid Principal Balance     Related Allowance     Average Recorded Investment     Interest Income Recognized   With no related allowance recorded:                                         Residential real estate   $ 1,683     $ 3,017     $ -     $ 1,689     $ 113   Home equity     262       275       -       298       12   Commercial real estate     765       765       -       1,167       43   Construction and land development.     -       -       -       -       -   Multifamily     556       647       -       629       31   Farmland     -       -       -       -       -   Commercial business     1,205       1,324       -       1,369       52   Consumer     -       -       -       -       -   Manufactured homes     -       -       -       -       -   Government     -       -       -       -       -                                             With an allowance recorded:                                         Residential real estate   $ 88     $ 88     $ 17     $ 145     $ 2   Home equity     22       22       4       18       1   Commercial real estate     835       835       386       4,727       225   Construction and land development.     -       -       -       -       -   Multifamily     -       -       -       -       -   Farmland     -       -       -       -       -   Commercial business     392       392       277       637       24   Consumer     -       -       -       -       -   Manufactured homes     -       -       -       -       -   Government     -       -       -       -       -                                             Total:                                         Residential real estate   $ 1,771     $ 3,105     $ 17     $ 1,834     $ 115   Home equity   $ 284     $ 297     $ 4     $ 316     $ 13   Commercial real estate   $ 1,600     $ 1,600     $ 386     $ 5,894     $ 268   Construction & land development   $ -     $ -     $ -     $ -     $ -   Multifamily   $ 556     $ 647     $ -     $ 629     $ 31   Farmland   $ -     $ -     $ -     $ -     $ -   Commercial business   $ 1,597     $ 1,716     $ 277     $ 2,006     $ 76   Consumer   $ -     $ -     $ -     $ -     $ -   Manufactured homes   $ -     $ -     $ -     $ -     $ -   Government   $ -     $ -     $ -     $ -     $ -     Page 81 of 108     The Bancorp's individually evaluated impaired loans are summarized below:                               For the twelve months ended       As of December 31, 2020     December 31, 2020   (Dollars in thousands)   Recorded Investment     Unpaid Principal Balance     Related Allowance     Average Recorded Investment     Interest Income Recognized   With no related allowance recorded:                                         Residential real estate   $ 1,895     $ 3,228     $ -     $ 2,028     $ 115   Home equity     352       363       -       373       16   Commercial real estate     1,177       1,761       -       1,305       80   Construction & land development.     -       -       -       -       -   Multifamily     716       798       -       763       42   Farmland     -       -       -       -       -   Commercial business     1,497       1,514       -       1,591       80   Consumer     -       -       -       -       -   Manufactured homes     -       -       -       -       -   Government     -       -       -       -       -                                             With an allowance recorded:                                         Residential real estate   $ 270     $ 314     $ 173     $ 174     $ 6   Home equity     1       9       1       5       -   Commercial real estate     5,164       5,164       1,089       2,109       16   Construction & land development     -       -       -       -       -   Multifamily     -       -       -       -       -   Farmland     -       -       -       -       -   Commercial business     749       749       512       739       30   Consumer     -       -       -       -       -   Manufactured homes     -       -       -       -       -   Government     -       -       -       -       -                                             Total:                                         Residential real estate   $ 2,165     $ 3,542     $ 173     $ 2,202     $ 121   Home equity   $ 353     $ 372     $ 1     $ 378     $ 16   Commercial real estate   $ 6,341     $ 6,925     $ 1,089     $ 3,414     $ 96   Construction & land development....   $ -     $ -     $ -     $ -     $ -   Multifamily   $ 716     $ 798     $ -     $ 763     $ 42   Farmland   $ -     $ -     $ -     $ -     $ -   Commercial business   $ 2,246     $ 2,263     $ 512     $ 2,330     $ 110   Consumer   $ -     $ -     $ -     $ -     $ -   Manufactured homes   $ -     $ -     $ -     $ -     $ -   Government   $ -     $ -     $ -     $ -     $ -     Page 82 of 108     The Bancorp's age analysis of past due loans is summarized below:   (Dollars in thousands)   30-59 Days Past Due     60-89 Days Past Due     Greater Than 90 Days Past Due     Total Past Due     Current     Total Loans     Recorded Investments Greater than 90 Days Past Due and Accruing   December 31, 2021                                                         Residential real estate   $ 2,507     $ 824     $ 2,142     $ 5,473     $ 254,661     $ 260,134     $ 31   Home equity     169       67       565       801       33,811       34,612       34   Commercial real estate     231       1,960       944       3,135       314,010       317,145       91   Construction and land development     5,148       283       -       5,431       118,391       123,822       -   Multifamily     -       -       109       109       61,085       61,194       -   Farmland     -       -       -       -       -       -       -   Commercial business     573       1,594       242       2,409       113,363       115,772       49   Consumer     -       3       -       3       579       582       -   Manufactured homes     633       171       -       804       37,083       37,887       -   Government     -       -       -       -       8,991       8,991       -   Total   $ 9,261     $ 4,902     $ 4,002     $ 18,165     $ 941,974     $ 960,139     $ 205                                                             December 31, 2020                                                         Residential real estate   $ 2,797     $ 1,119     $ 4,875     $ 8,791     $ 277,257     $ 286,048     $ 80   Home equity     616       323       416       1,355       37,878       39,233       29   Commercial real estate     1,172       237       680       2,089       296,168       298,257       437   Construction and land development     471       -       20       491       93,071       93,562       20   Multifamily     94       266       150       510       50,061       50,571       -   Farmland     -       -       -       -       215       215       -   Commercial business     845       96       269       1,210       156,930       158,140       -   Consumer     2       -       -       2       1,023       1,025       -   Manufactured homes     303       173       -       476       23,756       24,232       -   Government     380       -       -       380       9,762       10,142       -   Total   $ 6,680     $ 2,214     $ 6,410     $ 15,304     $ 946,121     $ 961,425     $ 566     The Bancorp's loans on nonaccrual status are summarized below:   (Dollars in thousands)                     December 31, 2021     December 31, 2020   Residential real estate   $ 4,651     $ 6,390   Home equity     623       476   Commercial real estate     940       5,390   Construction and land development.     -       -   Multifamily     455       504   Farmland     -       -   Commercial business     387       1,039   Consumer     -       -   Manufactured homes     -       -   Government     -       -   Total   $ 7,056     $ 13,799     As a result of acquisition activity, the Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At December 31, 2021, total purchased credit impaired loans with unpaid principal balances totaled $ 4.2 million with a recorded investment of $ 2.8 million. At December 31, 2020, purchased credit impaired loans with unpaid principal balances totaled $ 5.4 million with a recorded investment of $ 3.4 million.   Page 83 of 108     Accretable interest taken from the purchase credit impaired portfolio, or income recorded for the twelve months ended December 31, is as follows:   (dollars in thousands)   Total   2020   $ 99   2021     21     The accretable interest portion of the purchase credit impaired portfolio has fully amortized at December 31, 2021.   As part of the fair value of loans receivable, there was a net fair value discount for loans acquired of $ 1.1 million at December 31, 2021, compared to $ 2.0 million at December 31, 2020. Total unpaid principal balances of acquired non-impaired loans with remaining fair value discount totaled $ 72.5 million and $ 106.6 million as of December 31, 2021, and December 31, 2020, respectively.     Accretable yield, or income recorded for the nine months ended December 31, is as follows:   (dollars in thousands)   Total   2020   $ 1,820   2021     960     Accretable yield, or income expected to be recorded in the future is as follows:   (dollars in thousands)   Total   2022   $ 758   2023     300   Total   $ 1,058       Note 5 – Premises and Equipment, Net At year end, premises and equipment are summarized as follows:       (Dollars in thousands)       2021     2020   Cost:                 Land   $ 8,933     $ 8,933   Buildings and improvements     35,837       33,394   Furniture and equipment     18,724       18,066   Total cost     63,494       60,393   Less accumulated depreciation     ( 32,109 )     ( 29,608 ) Premises and equipment, net   $ 31,385     $ 30,785     Depreciation expense was approximately $ 2.5 million and $ 2.3 million for 2021 and 2020, respectively.     Note 6 – Foreclosed Real Estate At year end, foreclosed real estate is summarized below:       (Dollars in thousands)       2021     2020   Residential real estate   $ -     $ 328   Commercial business     -       210   Total   $ -     $ 538     Page 84 of 108         Note 7 – Goodwill and Other Intangible Assets The Bancorp established a goodwill balance totaling $ 11.1 million from past acquisitions. Goodwill is tested annually for impairment. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Bancorp’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Bancorp to provide quality, cost effective banking services in a competitive marketplace. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. There has not been any impairment of goodwill identified or recorded. Goodwill totaled $ 11.1 million as of December 31, 2021 and December 31, 2020, respectively.   In addition to goodwill, core deposit intangibles were established from past acquisitions and are subject to amortization. As of December 31, 2021, the Bancorp had core deposit intangible balances of $ 3.1 million. The table below summarizes the annual amortization:   The annual amortization for the twelve months ended December 31, is as follows:   (dollars in thousands)   Total   2020   $ 994   2021   $ 994     Amortization to be recorded in future periods, is as follows:   (dollars in thousands)   Total   2022     983   2023     962   2024     919   2025     262   Total   $ 3,126       Note 8 – Income Taxes At year-end, components of income tax expense consist of the following:       (Dollars in thousands)       2021     2020   Federal:                 Current   $ 1,021     $ 2,202   Deferred     154       ( 197 ) State:                 Current     256       -   Deferred, net of valuation allowance     ( 17 )     769   Income tax expense   $ 1,414     $ 2,774     Page 85 of 108     Effective tax rates differ from the federal statutory rate of 21 % for 2021 and 2020 applied to income before income taxes due to the following:       (Dollars in thousands)       2021     2020   Federal statutory rate     21 %     21 % Tax expense at statutory rate   $ 3,439     $ 3,928   State tax, net of federal effect     189       607   Tax exempt income     ( 1,297 )     ( 887 ) Bank owned life insurance     ( 150 )     ( 149 ) Captive insurance     ( 212 )     ( 188 ) Tax credit investments     ( 415 )     ( 415 ) Other     ( 140 )     ( 122 ) Total income tax expense   $ 1,414     $ 2,774     At December 31, the components of the net deferred tax asset recorded in other assets in the consolidated balance sheets are as follows:       (Dollars in thousands)       2021     2020   Deferred tax assets:                 Bad debts   $ 3,385     $ 3,090   Deferred compensation     352       343   Net operating loss     2,238       2,553   Tax credits     73       70   Nonaccrual loan interest income     244       206   Share based compensation     255       256   REO writedowns     -       23   Unqualified deferred compensation plan     61       60   Other-than-temporary impairment     39       39   Accrued vacation     56       75   Nondeductible transaction costs     74       -   Deferred loan costs, net of fees     288       75   Other     92       84   Total deferred tax assets     7,157       6,874                     Deferred tax liabilities:                 Depreciation     ( 1,134 )     ( 1,147 ) Prepaids     ( 510 )     ( 443 ) Mortgage servicing rights     ( 289 )     ( 163 ) Deferred stock dividends     ( 100 )     ( 100 ) Unrealized appreciation on securities available-for-sale, net     ( 1,129 )     ( 2,767 ) Purchase accounting     ( 708 )     ( 492 ) Partnership     ( 311 )     ( 280 ) Other     ( 119 )     ( 116 ) Total deferred tax liabilities     ( 4,300 )     ( 5,508 ) Valuation allowance     ( 12 )     ( 22 ) Net deferred tax asset   $ 2,845     $ 1,344     At December 31, 2021, the Bancorp has Indiana net operating loss carry forwards of approximately $ 186 which will begin to expire in 2026 if not used. The Bancorp also has a state tax credit carry forward of approximately $ 86 thousand which began to expire in 2017 and will continue to expire if not used. Management has concluded that the state net operating losses will be fully utilized and therefore no valuation allowance is necessary on the state net operating loss. A valuation allowance remains in place on the state tax credit carryforward that is not expected to be utilized before expiration. A valuation allowance of $ 12 thousand and $ 22 thousand was provided at December 31, 2021, and 2020, respectively, for the state tax credits net of federal benefit.   Page 86 of 108     The Bancorp acquired $ 3.3 million of federal net operating loss carryforwards and $ 7.2 million of Illinois net operating loss carryforwards with the acquisition of First Personal Financial Corp during 2018 of which $ 2.2 million of the federal losses expire in years ranging from 2028 to 2035, $ 1.1 million of the federal losses do not expire, and the Illinois losses expire in years ranging from 2019 to 2031. Under Section 382 of the Internal Revenue Code, the annual limitation on the use of the federal losses is $ 362 thousand for First Personal while there is no limitation on the use of the Illinois losses. Management has determined that all of the losses are more likely than not to be utilized before expiration.   The Bancorp acquired $ 7.2 million of federal net operating loss carryforwards and $ 11.4 million of Illinois net operating loss carryforwards with the acquisition of AJS Bancorp Inc. during 2019 of which $ 3.6 million of the federal losses expire in years ranging from 2030 to 2037, $ 3.6 million of the federal losses do not expire, and the Illinois losses expire in years ranging from 2020 to 2031. Under Section 382 of the Internal Revenue Code, the annual limitation on the use of the federal losses is $ 834 thousand for AJS, while there is no limitation on the use of the Illinois losses. Management has determined that all of the losses are more likely than not to be utilized before expiration.   At December 31, 2021 $ 6.9 million of the federal loss carryforwards and $ 10.4 million of the Illinois loss carryforward remain; the benefit of which is reflected in deferred tax assets.   The Bancorp qualified under provisions of the Internal Revenue Code, to deduct from taxable income a provision for bad debts in excess of the provision for such losses charged to income in the financial statements, if any. Accordingly, retained earnings at December 31, 2021, and 2020, includes, approximately $ 8.4 million for which no provision for federal income taxes has been made. If, in the future this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes would be imposed at the then applicable rate. The unrecorded deferred income tax liability on the above amounts was approximately $ 2.2 million at both December 31, 2021, and 2020.   The Bancorp had no unrecognized tax benefits at any time during 2021 or 2020 and does not anticipate any significant increase or decrease in unrecognized tax benefits during 2021. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Bancorp's policy to record such accruals through income tax accounts; no such accruals existed at any time during 2021 or 2020.   The Bancorp and its subsidiaries are subject to US Federal income tax as well as income tax of the states of Indiana and Illinois. The Bancorp is no longer subject to examination by taxing authorities for the years before 2018.     Note 9 – Deposits The aggregate amount of certificates of deposit with a balance of $250 thousand or more was approximately $ 36.9 million at December 31, 2021 and $ 46.7 million at December 31, 2020.   At December 31, 2021, scheduled maturities of certificates of deposit were as follows:       (Dollars in thousands)   2022   $ 198,727   2023     31,573   2024     7,772   2025     1,135   2026     10   Total   $ 239,217     Page 87 of 108     The Bancorp’s end-of-period deposit portfolio balances were as follows:       December 31,     December 31,   (Dollars in thousands)   2021     2020       Balance     Balance                     Checking   $ 629,038     $ 516,487   Savings     293,976       254,108   Money market     271,970       246,916   Certificates of deposit     239,217       284,828   Total deposits   $ 1,434,201     $ 1,302,339       Note 10 – Borrowed Funds At December 31, 2021, and December 31, 2020, borrowed funds are summarized below:       (Dollars in thousands)       2021     2020   Fixed rate advances from the FHLB   $ -     $ 6,000   Other     -       149   Total   $ -     $ 6,149     Repurchase agreements generally mature within one year and are secured by U.S. government and U.S. agency securities, under the Bancorp’s control. At December 31, information concerning these retail repurchase agreements is summarized below:       (Dollars in thousands)       2020     2019   Ending balance   $ 14,581     $ 13,711   Average balance during the year     17,789       16,975   Maximum month-end balance during the year     24,514       21,100   Securities underlying the agreements at year end:                 Carrying value     14,885       23,860   Fair value     14,885       23,860   Average interest rate during the year     0.26 %     0.58 % Average interest rate at year end     0.26 %     0.32 %   At December 31, advances from the Federal Home Loan Bank were as follows:                           (Dollars in thousands)       2020     2019   Fixed rate advances, none oustanding as of year ended 2021; average rate: 2021 – N/A; 2020 – 2.66%   $ -     $ 6,000     Fixed rate advances are payable at maturity, with a prepayment penalty. The advances were collateralized by mortgage loans with a carrying value totaling approximately $ 506.4 million at December 31, 2021. In addition to the fixed rate advances, the Bancorp maintains a $ 25.0 million line of credit with the Federal Home Loan Bank of Indianapolis. The Bancorp did not have a balance on the line of credit at December 31, 2021 or December 31, 2020. The Bancorp did not have other borrowings at December 31, 2021, as of December 31, 2020, the Bancorp had outstanding federal funds purchased of $ 149 thousand.   Page 88 of 108       Note 11 – Employees ’ Benefit Plans The Bancorp maintains an Employees’ Savings and Profit Sharing Plan and Trust for all employees who meet the plan qualifications. Employees are eligible to participate in the Employees’ Savings and Profit Sharing Plan and Trust on the next January 1 or July 1 following the completion of one year of employment, attaining age 18, and completion of 1,000 hours of service. The Employees’ Savings Plan feature allows employees to make pre-tax contributions to the Employees’ Savings Plan of 1 % to 50 % of Plan Salary, subject to limitations imposed by Internal Revenue Code section 401 (k). Employees are able to begin deferring effective the first of the month following 90 days of employment. The Profit Sharing Plan and Trust feature is non-contributory on the part of the employee. Contributions to the Employees’ Profit Sharing Plan and Trust are made at the discretion of the Bancorp’s Board of Directors. Contributions for the years ended December 31, 2021 and 2020 were based on 3 % and 6.5 % of the participants’ total compensation, excluding incentives, respectively. Profit sharing contributions made by the Bank and earnings credited to the employee’s account vest on the following schedule: two years of service, 40 % of contributions and earnings; three years of service, 60 % of contributions and earnings; four years of service, 80 % of contributions and earnings; and five years of service, 100 % of contributions and earnings. Participants also become 100% vested in the employer contributions and accrued earnings in their account upon their death, approved disability, or attainment of age 65 while employed at the Bank. The benefit plan expense amounted to approximately $ 439 thousand for 2021 and $ 948 thousand for 2020.   The Bancorp maintains an Unqualified Deferred Compensation Plan (the “UDC Plan”). The purpose of the UDC Plan is to provide deferred compensation to key senior management employees of the Bancorp in order to recognize their substantial contributions to the Bank and provide them with additional financial security as inducement to remain with the Bank. The Compensation Committee selects which persons shall be participants in the UDC Plan. Participants’ accounts are credited each year with an amount based on a formula involving the participant’s employer funded contributions under all qualified plans and the limitations imposed by Internal Revenue Code subsection 401 (a)( 17 ) and Code section 415. The unqualified deferred compensation plan liability at December 31, 2021 and 2020 was approximately $ 242 thousand and $ 235 thousand, respectively. The UDC Plan expense amounted to approximately $ 3 thousand for 2021 and $ 8 thousand for 2020.   Directors have deferred some of their fees in consideration of future payments. Fee deferrals, including interest, totaled approximately $ 74 thousand and $ 68 thousand for 2021 and 2020, respectively. The deferred fee liability at December 31, 2021 and 2020 was approximately $ 1.4 million.     Note 12 – Regulatory Capital The Bancorp and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet various capital requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2021 and 2020, the most recent regulatory notifications categorized the Bancorp and Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bancorp’s or the Bank’s category.   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” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.   Page 89 of 108     In addition, the following table shows that, at December 31, 2021, and 2020, the Bank’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       Actual     Capital Adequacy Purposes     Corrective Action Regulations   At December 31, 2021   Amount     Ratio     Amount     Ratio     Amount     Ratio   Common equity tier 1 capital to risk-weighted assets   $ 133.7       12.6 %   $ 47.8       4.5 %   $ 69.0       6.5 % Tier 1 capital to risk-weighted assets   $ 133.7       12.6 %   $ 63.7       6.0 %   $ 85.0       8.0 % Total capital to risk-weighted assets   $ 147.0       13.9 %   $ 85.0       8.0 %   $ 106.2       10.0 % Tier 1 capital to adjusted average assets   $ 133.7       8.4 %   $ 64.1       4.0 %   $ 80.1       5.0 %   (Dollars in millions)                                   Minimum Required To Be                       Minimum Required For     Well Capitalized Under Prompt       Actual     Capital Adequacy Purposes     Corrective Action Regulations   At December 31, 2020   Amount     Ratio     Amount     Ratio     Amount     Ratio   Common equity tier 1 capital to risk-weighted assets   $ 122.0       12.6 %   $ 43.8       4.5 %   $ 63.2       6.5 % Tier 1 capital to risk-weighted assets   $ 122.0       12.6 %   $ 58.4       6.0 %   $ 77.8       8.0 % Total capital to risk-weighted assets   $ 134.2       13.8 %   $ 77.8       8.0 %   $ 97.3       10.0 % Tier 1 capital to adjusted average assets   $ 122.0       8.3 %   $ 59.1       4.0 %   $ 73.9       5.0 %   The Bancorp’s ability to pay dividends to its shareholders is entirely dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. The aggregate amount of dividends that may be declared by the Bank in 2021, without the need for qualifying for an exemption or prior DFI approval, is its 2021 net profits plus $ 21.4 million. Moreover, the FDIC and the Federal Reserve Board may prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. On November 19, 2021 the Board of Directors of the Bancorp declared a fourth quarter dividend of $ 0.31 per share. The Bancorp’s fourth quarter dividend totaling $ 1.1 million was paid to shareholders on January 7, 2022.     Note 13 – Stock Based Compensation The Bancorp’s 2015 Stock Option and Incentive Plan (the “Incentive Plan”), which was adopted by the Bancorp’s Board of Directors on February 17, 2015 and approved by the Bancorp’s shareholders on April 24, 2015, permits the grant of equity awards for up to 250,000 shares of common stock. Awards granted under the Incentive Plan may be in the form of incentive stock options, non-qualified stock options, restricted stock, unrestricted stock, performance shares, or performance units. The purposes of the Plan are (i) to align the personal interests of plan participants with those of the shareholders of the Bancorp, (ii) to encourage key individuals to accept or continue employment or service with the Bancorp and its subsidiaries, and (iii) to furnish incentives to such key individuals to improve operations and increase profits by providing such key individuals the opportunity to acquire common stock of the Bancorp or to receive monetary payments based on the value of such common stock.   The fair value of each incentive stock option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. Expected volatilities are based on historical volatilities of the Company’s common stock. No incentive stock options were granted during 2021 or 2020. The Bancorp uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.   Page 90 of 108     At December 31, 2021 and 2020, there were no incentive stock options outstanding.   Restricted stock awards are generally granted with an award price equal to the market price of the Bancorp’s common stock on the award date. Restricted stock awards have been issued with a three to five year cliff-vesting period. Forfeiture provisions exist for personnel that separate employment before the vesting period expires. Compensation expense related to restricted stock awards is recognized over the vesting period. Total compensation cost that has been charged against income for those plans was approximately $ 574 thousand and $ 415 thousand for 2021 and 2020, respectively.   When awarded restricted shares vest, employees of the Bank can elect to surrender a portion of their vested shares back to the Bancorp to cover the tax liability of their awards. Shares were surrendered with a total value of $ 131 thousand and $ 85 thousand in 2021 and 2020, respectively.    A summary of changes in the Bancorp’s non-vested restricted stock for 2021 and 2020 follows:   Non-vested Shares   Shares     Weighted Average Grant Date Fair Value   Non-vested at January 1, 2020     30,205     $ 35.63   Granted     13,243       44.30   Vested     ( 6,400 )     27.50   Forfeited     ( 220 )     43.65   Non-vested at December 31, 2020     36,828     $ 40.11                     Non-vested at January 1, 2021     36,828     $ 40.11   Granted     21,255       41.42   Vested     ( 13,493 )     34.84   Forfeited     ( 355 )     41.50   Non-vested at December 31, 2021     44,235     $ 42.33     As of December 31, 2021, there was approximately $ 877 thousand of total unrecognized compensation cost related to non-vested restricted shares granted under the Incentive Plan. The cost is expected to be recognized over a weighted-average period of 1.5 years.   Page 91 of 108       Note 14 – Earnings per Common Share Earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding. A reconciliation of the numerators and denominators of the basic earnings per common share and diluted earnings per common share computations for 2021 and 2020 is presented below.   (dollars in thousands except per share data)                     2021     2020   Basic earnings per common share:                 Net income as reported   $ 14,963     $ 15,932   Weighted average common shares outstanding     3,477,309       3,461,948   Basic earnings per common share   $ 4.30     $ 4.60                     Diluted earnings per common share:                 Net income as reported   $ 14,963     $ 15,932   Weighted average common shares outstanding     3,477,309       3,461,948   Weighted average common and dilutive potential common shares outstanding     3,477,309       3,461,948   Diluted earnings per common share   $ 4.30     $ 4.60       Note 15 – Related Party Transactions The Bancorp had aggregate loans outstanding to directors and executive officers (with individual balances exceeding $ 120 thousand) of approximately $ 3.9 million at December 31, 2021, and approximately $ 4.4 million at December 31, 2020. For the year ended December 31, 2021, the following activity occurred on these loans       (Dollars in thousands)   Aggregate balance at the beginning of the year   $ 4,350   New loans     -   Repayments     ( 467 ) Aggregate balance at the end of the year   $ 3,883     Deposits from directors and executive officers totaled approximately $ 3.9 million and $ 5.3 million at December 31, 2021 and 2020, respectively.     Note 16 – Commitments and Contingencies The Bancorp is a party to financial instruments in the normal course of business to meet the financing needs of its customers. These financial instruments, which include commitments to make loans and standby letters of credit, are not reflected in the accompanying consolidated financial statements. Such financial instruments are recorded when they are funded.   The Bancorp’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to originate loans and standby letters of credit is represented by the contractual amount of those instruments. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Bancorp uses the same credit policy to make such commitments as it uses for on-balance sheet items. Since commitments to make loans may expire without being used, the amount does not necessarily represent future cash commitments.   Page 92 of 108     The Bancorp had outstanding commitments to originate loans as follows:       (Dollars in thousands)       Fixed     Variable               Rate     Rate     Total   December 31, 2021:                         Residential real estate   $ 34     $ 19,261     $ 19,295   Home equity     41,944       7,066       49,010   Commercial real estate     2,033       8,745       10,778   Construction and land development     34,817       24,491       59,308   Multifamily     229       958       1,187   Consumer     23,422       -       23,422   Commercial business     545       61,440       61,985   Lot     -       9,399       9,399   Total   $ 103,024     $ 131,360     $ 234,384                             December 31, 2020:                         Residential real estate   $ 749     $ 21,961     $ 22,710   Home equity     44,972       7,951       52,923   Commercial real estate     2,955       13,138       16,093   Construction and land development     20,667       30,959       51,626   Multifamily     158       579       737   Consumer     23,020       -       23,020   Commercial business     946       56,744       57,690   Lot     -       87       87   Total   $ 93,467     $ 131,419     $ 224,886     The approximately $ 103.0 million in fixed rate commitments outstanding at December 31, 2021, had interest rates ranging from 2.25 % to 10.00 %, for a period not to exceed forty-five days. At December 31, 2020, fixed rate commitments outstanding of approximately $ 93.5 million had interest rates ranging from 2.25 % to 10.00 %, for a period not to exceed forty-five days. Mortgage interest rate locks with borrowers which are included with real estate commitments, were treated as derivative transactions.   Standby letters of credit are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party. At December 31, 2021, and 2020, the Bancorp had standby letters of credit totaling approximately $ 12.3 and $ 11.5 million which are not included in the tables above, respectively. The Bancorp evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bancorp upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral obtained may include accounts receivable, inventory, property, land or other assets.     Note 17 – Derivative Financial Instruments   The Bancorp uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Bancorp has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Bancorp to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Bancorp enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Bancorp agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Bancorp agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Bancorp’s results of operations.   Page 93 of 108     The Bancorp enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (i.e., interest rate lock commitment). The interest rate lock commitments are considered derivatives and are recorded on the accompanying consolidated balance sheets at fair value in accordance with FASB ASC 815, Derivatives and Hedging.   The following table shows the amounts of non-hedging derivative financial instruments:   December 31, 2021               Notational or contractual   Asset derivatives     Liability derivatives   (Dollars in thousands)   amount   Statement of Financial Condition classification   Fair value     Statement of Financial Condition classification     Fair value   Interest rate swap contracts   $ 94,154   Other assets   $ 2,686     Other liabilties     $ 2,686   Interest rate lock commitments     7,837   Other assets     141      N/A       -   Total   $ 101,991       $ 2,827            $ 2,686     December 31, 2020               Notational or contractual   Asset derivatives     Liability derivatives   (Dollars in thousands)   amount   Statement of Financial Condition classification   Fair value     Statement of Financial Condition classification     Fair value   Interest rate swap contracts   $ 72,707   Other assets   $ 3,638     Other liabilties     $ 3,638   Interest rate lock commitments     26,443   Other assets     374     N/A       -   Total   $ 99,150       $ 4,012           $ 3,638     The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments:         Year-ended   (Dollars in thousands) Statement of Income Classification   2021     2020   Interest rate swap contracts Fees and service charges   $ 379     $ 800   Interest rate lock commitments Gain on sale of loans held-for-sale, net     ( 233 )     187   Total   $ 146     $ 987     Page 94 of 108     The following table shows the offsetting of financial assets and derivative assets:                               Gross Amounts not Offset in the                                       Statement of Financial Condition               Gross Amounts of     Gross Amounts Offset in the     Net Amounts of Assets Presented             Cash Collateral           (Dollars in thousands)   Recognized Assets     Statement of Financial Condition     in the Statement of Financial Condition     Financial Instruments     Received     Net Amount   December 31, 2021                                                 Interest rate swap contracts   $ 2,686     $ -     $ 2,686     $ -     $ -     $ 2,686   Interest rate lock commitments     141       -       141       -       -       141   Total   $ 2,827     $ -     $ 2,827     $ -     $ -     $ 2,827                                 Gross Amounts not Offset in the                                       Statement of Financial Condition               Gross Amounts of     Gross Amounts Offset in the     Net Amounts of Liabilities Presented             Cash Collateral           (Dollars in thousands)   Recognized Liabilities     Statement of Financial Condition     in the Statement of Financial Condition     Financial Instruments     Received     Net Amount   December 31, 2020                                                 Interest rate swap contracts   $ 3,638     $ -     $ 3,638     $ -     $ -     $ 3,638   Interest rate lock commitments     374       -       374       -       -       374   Total   $ 4,012     $ -     $ 4,012     $ -     $ -     $ 4,012     The following table shows the offsetting of financial liabilities and derivative liabilities:                               Gross Amounts not Offset in the                                       Statement of Financial Condition               Gross Amounts of     Gross Amounts Offset in the     Net Amounts of Liabilities Presented             Cash Collateral           (Dollars in thousands)   Recognized Liabilities     Statement of Financial Condition     in the Statement of Financial Condition     Financial Instruments     Pledged     Net Amount   December 31, 2021                                                 Interest rate swap contracts   $ 2,686     $ -     $ 2,686     $ -     $ 3,930     $ ( 1,244 ) Total   $ 2,686     $ -     $ 2,686     $ -     $ 3,930     $ ( 1,244 )                               Gross Amounts not Offset in the                                       Statement of Financial Condition               Gross Amounts of     Gross Amounts Offset in the     Net Amounts of Liabilities Presented             Cash Collateral           (Dollars in thousands)   Recognized Liabilities     Statement of Financial Condition     in the Statement of Financial Condition     Financial Instruments     Pledged     Net Amount   December 31, 2020                                                 Interest rate swap contracts   $ 3,638     $ -     $ 3,638     $ -     $ 3,930     $ ( 292 ) Total   $ 3,638     $ -     $ 3,638     $ -     $ 3,930     $ ( 292 )   Page 95 of 108       Note 18 – Fair Values of Financial Instruments The Fair Value Measurements Topic (the “Topic”) establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Topic describes three levels of inputs that may be used to measure fair value:   Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.   Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.   Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.   The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgments and assumptions used in pricing could result in different estimates of value. In certain cases where market data is not readily available because of lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy.   At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with the Investments – Debt and Equity Securities Topic. Impairment is other-than-temporary if the decline in the fair value of the security is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received. Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates. The Bancorp considers the following factors when determining other-than-temporary impairment for a security: the length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; an assessment of whether the Bancorp ( 1 ) has the intent to sell the debt securities or ( 2 ) more likely than not will be required to sell the debt securities before their anticipated market recovery. If either of these conditions are met, management will recognize other-than-temporary impairment. If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.   The Bancorp’s management utilizes a specialist to perform an other-than-temporary impairment analysis for each of its two pooled trust preferred securities. The analysis is performed annually on December 31 and utilizes analytical models used to project future cash flows for the pooled trust preferred securities based on current assumptions for prepayments, default and deferral rates, and recoveries. The projected cash flows are then tested for impairment consistent with the Investments – Other Topic and the Investments – Debt and Equity Securities Topic. The other-than-temporary impairment testing compares the present value of the cash flows from quarter to quarter to determine if there is a “favorable” or “adverse” change. Other-than-temporary impairment is recorded if the projected present value of cash flows is lower than the book value of the security. To perform the annual other-than-temporary impairment analysis, management utilizes current reports issued by the trustee, which contain principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled trust preferred security. In addition, a detailed review of the performing collateral (which consists of banks) was performed. The review of the collateral began with a review of financial information provided by SNL Financial, a comprehensive database, widely used in the industry, which gathers financial data on banks from U.S. GAAP financial statements for public companies (annual and quarterly reports on Forms 10 -K and 10 -Q), as well as regulatory reports for private companies, including consolidated financial statements for bank holding companies (FR Y- 9C reports) and parent company-only financial statements for bank holding companies (FR Y- 9SP reports) filed with the Federal Reserve and bank call reports filed with the FDIC and OCC. Using the information sources described above, for each bank and thrift examined, the following items were examined: nature of the issuer’s business, years of operating history, corporate structure, loan composition and loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. The issuers’ historical financial performance was reviewed and their financial ratios were compared to appropriate peer groups of regional banks or thrifts with similar asset sizes. The analysis focused on six broad categories: profitability (revenue streams and earnings quality, return on assets and shareholder’s equity, net interest margin and interest rate sensitivity), credit quality (charge-offs and recoveries, non-current loans and total non-performing assets as a percentage of total loans, loan loss reserve coverage and the adequacy of the loan loss provision), operating efficiency (noninterest expense compared to total revenue), capital adequacy (Tier- 1, total capital and leverage ratios and equity capital growth), leverage (tangible equity as a percentage of tangible assets, short-term and long-term borrowings and double leverage at the holding company) and liquidity (the nature and availability of funding sources, net non-core funding dependence and quality of deposits). In addition, for publicly traded companies, stock price movements were reviewed and the market price of publicly traded debt instruments was examined. The current other-than-temporary impairment analysis indicated that the Bancorp’s two pooled trust preferred securities had no additional other-than-temporary impairment for the years ending December 31, 2021 and 2020.   Page 96 of 108     The table below shows the credit loss roll forward for the Bancorp’s pooled trust preferred securities that have been classified with other-than-temporary impairment:       (Dollars in thousands)       Collateralized debt obligations       other-than-temporary impairment   Ending balance, December 31, 2020   $ 173   Additions not previously recognized     -   Ending balance, December 31, 2021   $ 173     The Bancorp’s subordination for each trust preferred security is calculated by taking the total performing collateral and subtracting the sum of the total collateral within the Bancorp’s class and the total collateral within all senior classes, and then stating this result as a percentage of the total performing collateral. This measure is an indicator of the level of collateral that can default before potential cash flow disruptions may occur. In addition, management calculates subordination assuming future collateral defaults by utilizing the default/deferral assumptions in the Bancorp’s other-than-temporary impairment analysis. Subordination assuming future default/deferral assumptions is calculated by deducting future defaults from the current performing collateral. At December 31, 2021 and 2020, management reviewed the subordination levels for each security in context of the level of current collateral defaults and deferrals within each security; the potential for additional defaults and deferrals within each security; the length of time that the security has been in “payment in kind” status; and the Bancorp’s class position within each security.   Management calculated the other-than-temporary impairment model assumptions based on the specific collateral underlying each individual security. The following assumption methodology was applied consistently to each of the two pooled trust preferred securities: For collateral that has already defaulted, no recovery was assumed; no cash flows were assumed from collateral currently in deferral, with the exception of the recovery assumptions. The default and recovery assumptions were calculated based on the detailed collateral review. The discount rate assumption used in the calculation of the present value of cash flows is based on the discount margin (i.e., credit spread) at the time each security was purchased using the original purchase price. The discount margin is then added to the appropriate 3 -month LIBOR forward rate obtained from the forward LIBOR curve.   At December 31, 2021 and 2020, the trust preferred securities with a cost basis of $ 2.2 million have been placed in “payment in kind” status. The Bancorp’s securities that are classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For the securities in “payment in kind” status, management anticipates to receive the unpaid contractual interest payments from the issuer, because of the self-correcting cash flow waterfall provisions within the structure of the securities. When a tranche senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest cash flows are paid to the senior tranche and recorded as a reduction of principal. The coverage test represents an over collateralization target by stating the balance of the performing collateral as a percentage of the balance of the Bancorp’s tranche, plus the balance of all senior tranches. The principal reduction in the senior tranche continues until the appropriate coverage test is passed. As a result of the principal reduction in the senior tranche, more cash is available for future payments to the Bancorp’s tranche. Consistent with the Investments – Debt and Equity Securities Topic, management considered the failure of the issuer of the security to make scheduled interest payments in determining whether a credit loss existed. Management will not capitalize the “payment in kind” interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume.   Assets and Liabilities Measured at Fair Values on a Recurring Basis   There were no transfers to or from Levels 1 and 2 during the years ended December 31, 2021 and 2020. Changes in Level 3 assets relate to the result of changes in estimated fair values, payments received, and sales of securities that have been classified as Level 3 during all of 2021 and 2020. Assets measured at fair value on a recurring basis are summarized below:               (Dollars in thousands)               Fair Value Measurements at December 31, 2021 Using   (Dollars in thousands)   Estimated Fair Value     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Assets:                                 Interest rate swap contracts   $ 2,686     $ -     $ 2,686     $ -   Interest rate lock commitments     141       -       141       -   Available-for-sale debt securities:                                 U.S. government sponsored entities     8,669       -       8,669       -   U.S. treasury securities     400       -       400       -   Collateralized mortgage obligations and residential mortgage-backed securities     184,701       -       184,701       -   Municipal securities     332,127       -       332,127       -   Collateralized debt obligations     992       -       -       992   Total securities available-for-sale   $ 526,889     $ -     $ 525,897     $ 992                                     Liabilities:                                 Interest rate swap contracts   $ 2,686     $ -     $ 2,686     $ -     Page 97 of 108                 (Dollars in thousands)               Fair Value Measurements at December 31, 2020 Using   (Dollars in thousands)   Estimated Fair Value     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Assets:                                 Interest rate swap contracts   $ 3,638     $ -     $ 3,638     $ -   Interest rate lock commitments     374       -       374       -   Available-for-sale debt securities:                                 Money market fund     52,941       52,941       -       -   U.S. government sponsored entities     7,860       -       7,860       -   Collateralized mortgage obligations and residential mortgage-backed securities     154,736       -       154,736       -   Municipal securities     194,203       -       194,203       -   Collateralized debt obligations     929       -       -       929   Total securities available-for-sale   $ 410,669     $ 52,941     $ 356,799     $ 929                                     Liabilities:                                 Interest rate swap contracts   $ 3,638     $ -     $ 3,638     $ -     A reconciliation of available-for-sale securities, which require significant adjustment based on unobservable data, is presented below:       (Dollars in thousands)       Estimated Fair Value Measurements Using Significant Unobservable Inputs (Level 3)       Available-for- sale securities   Beginning balance, January 1, 2020   $ 1,076   Principal payments     ( 20 ) Total unrealized losses, included in other comprehensive income..     ( 127 ) Ending balance, December 31, 2020   $ 929             Beginning balance, January 1, 2021   $ 929   Principal payments     ( 9 ) Total unrealized gains, included in other comprehensive income     72   Ending balance, December 31, 2021   $ 992     Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis   Assets and liabilities measured at fair value on a non-recurring basis are summarized below:               (Dollars in thousands)               Fair Value Measurements at December 31, 2021 Using   (Dollars in thousands)   Estimated Fair Value     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Impaired loans   $ 896     $ -     $ -     $ 896   Foreclosed real estate     -       -       -       -     Page 98 of 108                 (Dollars in thousands)               Fair Value Measurements at December 31, 2020 Using   (Dollars in thousands)   Estimated Fair Value     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Impaired loans   $ 10,046     $ -     $ -     $ 10,046   Foreclosed real estate     538       -       -       1,083     Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. The fair value of foreclosed real estate is similarly determined by using the results of recent real estate appraisals. The numerical range of unobservable inputs for these valuation assumptions is not meaningful to this presentation.   The following table shows carrying values and related estimated fair values of financial instruments as of the dates indicated. Estimated fair values are further categorized by the inputs used to measure fair value. Items that are not financial instruments are not included.       December 31, 2021     Estimated Fair Value Measurements at December 31, 2021 Using   (Dollars in thousands)   Carrying Value     Estimated Fair Value     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Financial assets:                                         Cash and cash equivalents   $ 33,176     $ 33,176     $ 33,176     $ -     $ -   Certificates of deposit in other financial institutions     1,709       1,737       -       1,737       -   Loans held-for-sale     4,987       5,065       -       5,065       -   Loans receivable, net     953,377       951,744       -       -       951,744   Federal Home Loan Bank stock     3,247       3,247       -       3,247       -   Accrued interest receivable     5,444       5,444       -       5,444       -                                             Financial liabilities:                                         Non-interest bearing deposits     295,294       295,294       295,294       -       -   Interest bearing deposits     1,138,907       1,139,126       899,690       239,436       -   Repurchase agreements     14,581       14,579       12,842       1,737       -   Borrowed funds     -       -       -       -       -   Accrued interest payable     22       22       -       22       -         December 31, 2020     Estimated Fair Value Measurements at December 31, 2020 Using   (Dollars in thousands)   Carrying Value     Estimated Fair Value     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Financial assets:                                         Cash and cash equivalents   $ 19,922     $ 19,922     $ 19,922     $ -     $ -   Certificates of deposit in other financial institutions     1,897       1,868       -       1,868       -   Loans held-for-sale     11,329       11,660       11,660       -       -   Loans receivable, net     952,688       982,793       -       -       982,793   Federal Home Loan Bank stock     3,918       3,918       -       3,918       -   Accrued interest receivable     4,713       4,713       -       4,713       -                                             Financial liabilities:                                         Non-interest bearing deposits     241,620       241,620       241,620       -       -   Interest bearing deposits     1,060,719       1,061,294       775,891       285,403       -   Repurchase agreements     13,711       13,713       11,976       1,737       -   Borrowed funds     6,149       6,018       -       6,018       -   Accrued interest payable     54       54       -       54       -     Page 99 of 108     The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended December 31, 2021 and 2020:   Cash and cash equivalent carrying amounts approximate fair value. Certificates of deposits in other financial institutions carrying amounts approximate fair value (Level 2 ). The fair values of securities available-for-sale are obtained from broker pricing (Level 2 ), with the exception of collateralized debt obligations, which are valued by a third -party specialist (Level 3 ). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 1 ). The estimated fair value for net loans receivable is based on the exit price notion which is the exchange price that would be received to transfer the loans at the most advantageous market price in an orderly transaction between market participants on the measurement date (Level 3 ). Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer of the security. Interest rate swap agreements, both assets and liabilities, are valued by a third -party pricing agent using an income approach (Level 2 ). Fair values of accrued interest receivable and payable approximate book value, as the carrying values are determined using the observable interest rate, balance, and last payment date.   Non-interest and interest bearing deposits, which include checking, savings, and money market deposits, are estimated to have fair values based on the amount payable as of the reporting date (Level 1 ). The fair value of fixed-maturity certificates of deposit (included in interest bearing deposits) are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2 ). Estimated fair values for short-term repurchase agreements, which represent sweeps from demand deposits to accounts secured by pledged securities, are estimated based on the amount payable as of the reporting date (Level 1 ). Longer-term repurchase agreements, with contractual maturity dates of three months or more, are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2 ). Short-term borrowings are generally only held overnight, therefore, their carrying amount is a reasonable estimate of fair value (Level 1 ). The fair value of FHLB Advances are estimated by discounting the future cash flows using quoted rates from the FHLB for similar advances with similar maturities (Level 2 ). The estimated fair value of other financial instruments, and off-balance sheet loan commitments, approximate cost and are not considered significant to this presentation.     Note 19 – Parent Company Only Statements       (Dollars in thousands)       Finward Bancorp       Condensed Balance Sheets       December 31,     December 31,       2021     2020   Assets                 Cash on deposit with Peoples Bank   $ 1,183     $ 805   Investment in Peoples Bank     153,772       149,695   Investment in NWIN Risk Management, Inc     1,970       1,775   Dividends receivable from Peoples Bank     1,070       1,070   Other assets     581       420   Total assets   $ 158,576     $ 153,765                     Liabilities and stockholders’ equity                 Dividends payable   $ 1,079     $ 1,074   Other liabilities     882       1,002   Total liabilities     1,961       2,076                     Additional paid in capital     30,430       29,987   Accumulated other comprehensive (loss) income     4,276       10,441   Retained earnings     121,909       111,261   Total stockholders’ equity     156,615       151,689   Total liabilities and stockholders’ equity   $ 158,576     $ 153,765             (Dollars in thousands)       Finward Bancorp       Condensed Statements of Income       Year Ended December 31,       2021     2020                     Dividends from Peoples Bank   $ 4,880     $ 3,395   Operating expenses     448       413   Income before income taxes and equity in undistributed income of Peoples Bank     4,432       2,982   Income tax benefit     ( 94 )     ( 86 ) Income before equity in undistributed income of Peoples Bank     4,526       3,068   Equity in undistributed (distributions in excess of income) income of Peoples Bank     9,413       11,941   income of NWIN Risk Management, Inc     1,024       923   Net income   $ 14,963     $ 15,932     Page 100 of 108         (Dollars in thousands)       Finward Bancorp       Condensed Statements of Comprehensive Income       Year Ended December 31,       2021     2020                     Net Income   $ 14,963     $ 15,932   Net change in net unrealized gains and losses on securities available-for-sale:                 Unrealized (loss) gain arising during the period     ( 5,816 )     10,169   Less: reclassification adjustment for gains included in net income     ( 1,987 )     ( 2,348 ) Net securities gain during the period     ( 7,803 )     7,821   Tax effect     1,638       ( 1,641 ) Net of tax amount     ( 6,165 )     6,180                     Comprehensive income, net of tax   $ 8,798     $ 22,112           (Dollars in thousands)       Finward Bancorp       Condensed Statements of Cash Flows       Year Ended December 31,       2021     2020                     Cash flows from operating activities:                 Net income   $ 14,963     $ 15,932   Adjustments to reconcile net income to net cash provided by operating activities                 Distributions in excess of income (equity in undistributed income):                 Peoples Bank     ( 9,413 )     ( 11,941 ) NWIN Risk Management, Inc     ( 1,024 )     ( 923 )                   Distribution from NWIN Risk Management, Inc     830       884   Stock based compensation expense     574       415   Change in other assets     ( 161 )     190   Change in other liabilities     ( 120 )     433   Net cash - operating activities     5,649       4,990                     Cash flows from investing activities:                 Investment in Peoples Bank     ( 830 )     -   Net cash - investing activities     ( 830 )     -                     Cash flows from financing activities:                 Dividends paid     ( 4,310 )     ( 4,291 ) Net surrender value of restricted stock awards     ( 131 )     ( 85 ) Net cash - financing activities     ( 4,441 )     ( 4,376 ) Net change in cash     378       614   Cash at beginning of year     805       191   Cash at end of year   $ 1,183     $ 805                     SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                 Cash paid during the period for:                 Income taxes     2,185       1,025   Noncash activities:                 Dividends declared not paid     1,079       1,074     Page 101 of 108     Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no items reportable under this item.