What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-30 compared with 2022-03-30 · 378 added, 492 removed, 1797 unchanged (33% of the section changed)

Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered

Public Accounting Firm

To the Stockholders, Board of Directors and Audit Committee

1 unchanged sentence

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.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Finward Bancorp (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), changes in stockholders’

equity, and cash flows for the years then ended 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, 2022, and 2021, and the results of its operations and its cash flows for the years then ended, 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.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

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.

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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.

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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.

As described in Note 4 to the financial statements, the Company’s consolidated allowance for loan and lease losses (ALLL) was $12.9 million at December 31, 2022.

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 determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable loan and lease 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.

specific reserves for impaired loans, general reserves for each business lending division portfolio including percentage allocations for special attention loans and leases not deemed impaired, and reserves for pooled homogenous loans and leases, among others.

We identified the valuation of the ALLL as a critical audit matter.

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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 clerical/computational accuracy of the formulas within the ALLL model.

Testing of completeness and accuracy of the information and reports utilized in the ALLL, including reports used in management review controls over the ALLL.

Computing an independent calculation of an acceptable range and comparing it to the Company’s estimate.

Evaluating the qualitative adjustment 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.

Specifically, utilizing internal 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 and the Company’s support for the direction and magnitude compared to previous years.

As described in Note 2 to the consolidated financial statements, the Company completed the acquisition of Royal Financial, Inc.

during the year ended December 31, 2022, with an acquisition price of $56.7 million, including the recognition of $11.3 million of Goodwill.

Management determined that the acquisition qualified as a business and accordingly all identifiable assets and liabilities acquired were valued at fair value as part of the purchase price allocation as of the acquisition date.

The identification and valuation of such acquired assets and assumed liabilities required management to exercise significant judgment and consider the use of outside vendors to estimate the fair value allocations.

We identified the acquisition and the valuation of acquired assets and assumed liabilities a critical audit matter.

Auditing the acquisition transaction involved a high degree of subjectivity in evaluating management’s operational assumptions, fair value estimates, purchase price allocations and assessing the appropriateness of outside vendor valuation models.

How We Addressed the Matter in Our Audit

The primary procedures we performed to address this critical audit matter included:

Testing the design of internal controls over the acquisition

Obtaining and reviewing executed Plan and Agreement of Merger documents to gain an understanding of the underlying terms of the consummated acquisition

Obtaining and reviewing management’s reconciliation procedures of significant accounts and testing of existence and completeness procedures performed and asset/liability identification considerations made

Testing management’s computation of purchase price and determination of goodwill recognized focusing on the completeness and accuracy of the balance sheet acquired and related fair value purchase price allocations made to identified assets acquired and liabilities assumed

Obtaining and reviewing significant outside vendor valuation estimates and challenging management’s review of the appropriateness of the valuations assessed/allocated to assets acquired and liabilities assumed;

including but not limited to, testing critical inputs, including assumptions applied and valuation models utilized by the outside vendors

Utilization of our internal valuation professionals to assist with testing and challenging the related fair value purchase price allocations made to identified assets acquired and liabilities assumed

Reviewing and evaluating the adequacy of the disclosures made in the footnotes of the Company’s SEC filings

/s/ FORVIS, LLP (Formerly, BKD, LLP)

We have served as the Company’s auditor since 2021.

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March 30, 2023

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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.

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

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Consolidated Balance Sheets

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11,210  

19,987  

Federal funds sold

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Loans held-for-sale

11,329  

Loans receivable, net of deferred fees and costs

11 unchanged sentences

31,385  

Foreclosed real estate

Cash value of bank owned life insurance

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Borrowed funds

120,000  

Accrued expenses and other liabilities

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30,430  

Accumulated other comprehensive income

Accumulated other comprehensive (loss) income

( 64,300 )  

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See accompanying notes to consolidated financial statements.

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Consolidated Statements of Income

(Dollars in thousands, except per share data)

Year Ended December 31,

Twelve Months Ended December 31,

Interest income:

Loans receivable

$ 41,573  

$ 44,867  

Other interest earning assets

Total interest income

50,655  

51,621  

Interest expense:

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Net interest income

48,575  

45,881  

Provision for loan losses

Net interest income after provision for loan losses

47,066  

42,194  

Noninterest income:

Fees and service charges

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

Wealth management operations

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

Gain on sale of securities, net

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Total noninterest income

15,947  

18,148  

Noninterest expense:

Compensation and benefits

24,241  

22,855  

Occupancy and equipment

Data processing

Impairment charge on assets held for sale

Federal deposit insurance premiums

Professional services

10,059  

Net loss recognized on sale of premises and equipment

Total noninterest expense

46,636  

41,636  

Income before income tax expenses

16,377  

18,706  

Income tax expenses

$ 14,963  

$ 15,932  

Earnings per common share:

$ 4.30  

$ 4.60  

$ 4.30  

$ 4.60  

Dividends declared per common share

$ 1.24  

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Comprehensive Income

Consolidated Statements of Comprehensive (Loss) Income

(Dollars in thousands)

Year Ended December 31,

$ 14,963  

$ 15,932  

Twelve Months Ended December 31,

Net change in net unrealized gains and losses on securities available-for-sale:

Unrealized (loss) gain arising during the period

( 5,816 )  

10,169  

reclassification adjustment for gains included in net income

( 1,987 )  

Net securities gain during the period

( 7,803 )  

Other comprehensive income (loss), net of tax  

( 6,165 )  

Comprehensive income, net of tax

$ 8,798  

$ 22,112  

Net securities (loss) gain during the period

Other comprehensive loss, net of tax

Comprehensive (loss) gain, net of tax

See accompanying notes to consolidated financial statements.

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14,963  

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

( 6,165 )  

Net surrender value of 3,115 restricted stock awards

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$ 156,615  

Balance at January 1, 2022

$ 30,430  

$ 4,276  

$ 121,909  

$ 156,615  

15,080  

Other comprehensive loss, net of tax

3 unchanged sentences

Stock-based compensation expense

Issuance of 795,423 shares at $ 47.75 per share, for acquisition of Royal Financial, Inc

37,981  

Cash dividends, $1.24 per share

6 unchanged sentences

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Cash Flows

(Dollars in thousands)

Year ended December 31,

Twelve months ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

$ 14,963  

$ 15,932  

Adjustments to reconcile net income to net cash provided by operating activities:

Origination of loans for sale

( 153,082 )  

Sale of loans originated for sale

164,203  

226,447  

Depreciation and amortization, net of accretion

2 unchanged sentences

Gain on sale of securities, net

( 1,987 )  

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

( 5,529 )  

Gain on sale of foreclosed real estate

( 47 )  

Loss on sale of premises and equipment, net

Impairment charge on assets held for sale

Gain (loss) on sale of foreclosed real estate

Gain on cash value of bank owned life insurance

( 715 )  

Loss (gain) on derivatives

Loss on derivatives

Provision for loan losses

1 unchanged sentence

Interest receivable

( 731 )  

Accrued expenses and other liabilities

( 8,828 )  

Net cash provided by operating activities

17,043  

19,736  

CASH FLOWS FROM INVESTING ACTIVITIES:

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Purchase of certificates of deposit in other financial institutions

( 735 )  

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 )  

Loan participations purchased

Proceeds from bank owned life insurance

Net change in loans receivable

12,345  

Proceeds of Federal Home Loan Bank Stock

1 unchanged sentence

Purchase of loans receivable

( 14,543 )  

Purchase of premises and equipment, net

( 3,128 )  

Proceeds from sale of premises and equipment

Proceeds from sale of foreclosed real estate

Write down of foreclosed real estate

Net cash used in investing activities

( 125,931 )  

Cash and cash equivalents from acquisition activity, net

Net cash provided by (used in) investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Change in deposits

131,862  

148,003  

Proceeds from FHLB advances

Repayment of FHLB advances

( 6,000 )  

Net surrender value of restricted stock awards

( 131 )  

Change in repurchase agreements

Change in other borrowed funds

Dividends paid

( 4,310 )  

Net cash provided by financing activities

122,142  

137,988  

Net cash (used in) provided by financing activities

Net change in cash and cash equivalents

13,254  

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:

$ 2,112  

$ 5,865  

Acquisition activity:

Fair value of assets acquired, including cash and cash equivalents

Value of goodwill and other intangible assets

Fair value of liabilities assumed

Cash paid for acquisition

Issuance of common stock for acquisition

Noncash activities:

Transfers from loans to foreclosed real estate

Dividends declared not paid

Transfer of premises and equipment to other real estate

Securities purchased not settled

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

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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.

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

Concentrations of Credit Risk –

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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.

Available-for-sale securities are reported at fair value, with unrealized gains and losses reported in other comprehensive (loss) income, net of tax.

At December 31, 2022, and 2021, all of the Bancorp’s securities were classified as available-for-sale.

46 unchanged sentences

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.

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.

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:

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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 –

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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.

Comprehensive (Loss) Income –

Comprehensive (loss) income consists of net income and other comprehensive (loss) income.

Other comprehensive (loss) income includes unrealized gains and losses on securities available-for-sale.

Loss Contingencies –

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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.

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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.

The new credit loss guidance will be effective for the Bancorp 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.

The Bancorp has completed data and model validation testing, determined qualitative adjustments, established additional supporting analytics, and developed related internal controls over model inputs (data and assumptions) and model operations.

While the model is operational, approval of certain governance related matters, procedures and policies are being finalized.

The final effective date estimate for our Current Expected Credit Loss (“CECL”) has not been determined and the required financial reporting disclosures are being completed for review.

Internal controls over financial reporting specifically related to CECL have been designed and are being evaluated, however, all internal controls related to CECL implementation are not operational.

The final step of completing the formal governance and approval process is in its final stages.

We expect the one -time cumulative effect adjustment to the ACL will be between $ 3.8 million and $ 6.8 million upon adoption as of January 1, 2023.

The majority of the increase is related to including our acquired loan portfolios in the model and the addition of using economic forecasts in estimating future losses.

As we continue to evaluate and refine our CECL model during the first quarter of 2023, the estimated range of impact to the ACL as of January 1, 2023, could change.

In March 2020, the FASB issued ASU No.

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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.

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.

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

Loans receivable

$ 966,578  

$ ( 1,432 )  

$ 965,146  

Net loans receivable

954,120  

( 1,432 )  

In October 2021, the FASB issued ASU 2021 - 08 related to accounting for acquired revenue contracts with customers in a business combination.

The amendments in this update address diversity in practice and inconsistency related to recognition of an acquired contract liability and the effect of payment terms on subsequent revenue recognition for the acquirer.

This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

We plan to adopt this pronouncement for our fiscal year beginning January 1, 2023, and we do not expect it to have a material effect on our consolidated financial statements.

In March 2022, the FASB issued ASU 

2022 - 01 related to the portfolio layer method of hedge accounting.

The amendments in this update clarify the accounting and promote consistency in reporting for hedges where the portfolio layer method is applied.

This update is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.

As we currently do not have items accounted for under the portfolio layer method of hedge accounting, we do not expect the update to have an effect on our consolidated financial statements.

In March 2022, the FASB issued ASU 2022 - 02, Financial Instruments—Credit Losses (Topic 326 ):

Troubled Debt Restructurings and Vintage Disclosures, which addresses and amends areas identified by the FASB as part of its post-implementation review of the accounting standard that introduced the CECL model.

The amendments eliminate the accounting guidance for troubled debt restructurings by companies that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty.

In addition, the amendments require disclosure of current-period gross writeoffs for financing receivables and net investment in leases by year of origination in the vintage disclosures.

ASU 2022 - 02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for entities that have adopted the CECL accounting standard.

Early adoption, however, is permitted if an entity has adopted the CECL accounting standard.

The Bancorp is assessing ASU 2022 - 02 and its impact on its accounting and disclosures.

In June 2022, the FASB issued ASU No.

2022 - 03 “Fair Value Measurements (Topic 820 ):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.”

These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

This guidance is effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023.

Early adoption is permitted.

The Bancorp has assessed ASU 2022 - 03 and does not expect it to have a material impact on its accounting and disclosures.

In September 2022, the FASB issued ASU No.

2022 - 04 “Liabilities - Supplier Finance Programs (Subtopic 405 - 50 )”

enhancing the transparency of supplier finance programs and the related financial statement disclosures.

The amendments require that a buyer in a supplier finance program disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. ASU 

2022 - 04  is effective January 1, 2023, except for the disclosure of rollforward information, which is effective January 1, 2024, and is not expected to have an impact on the Bancorp’s consolidated financial statements.

In December 2022, the FASB issued ASU No.

2022 - 06 "Reference Rate Reform (Topic 848 ) - Deferral of the Sunset Date of Topic 848", which extends the optional transition relief to ease the potential burden in accounting for reference rate reform on financial reporting.

The transition relief is provided through December 30, 2024 based on the expectation that the London Interbank Offered Rate (LIBOR) will cease to be published as of June 30, 2023.

During the year, we applied the transition guidance to our interest rate swap portfolio transitioning from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

There was no material impact on our consolidated financial statements in the periods presented.

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 and DuPage County, Illinois.

The acquisition has further expanded the Bank’s banking center network in Cook County and DuPage County, Illinois.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition.

Based on the valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the RYFL acquisition is allocated as follows (in thousands):

Cash and due from banks

$ 52,524  

Investment securities, available for sale

Certificate of deposit in other financial institutions

450,757  

Premises and equipment, net

13,896  

11,286  

Core deposit intangible

Interest receivable

Total assets purchased

$ 543,045  

Common shares issued

37,981  

Retained earnings

18,725  

Total purchase price

$ 56,706  

Non-interest bearing

$ 32,095  

Total shareholders' equity

63,639  

Savings and money market

184,149  

Certificates of deposits

195,153  

Total liabilities and stockholders' equity

Total Deposits

475,036  

Interest payable

Other liabilities

11,228  

Total liabilities assumed

$ 486,339  

Consolidated Statement of Income

For the year ending December 31, 2020

Compensation and benefits

During the year-ended December 31, 2022, an adjustment was made to the carrying value of other assets of $ 409 thousand, due to the valuation of prepaids and deferred tax assets brought over in the acquisition, and premises and equipment, net, of $ 48 thousand, due to a correction in the valuation of buildings, in addition, a correction was made to the valuation of shares issued increasing the value by $ 79 thousand.

The resulting impact of these changes was a decrease to the goodwill balance related to the RYFL acquisition of $ 378 thousand.

Goodwill related to the RYFL transaction is not expected to be deductible for tax purposes.

Gross loans acquired during the RYFL transaction totaled $ 456.7 million.

As of December 31, 2022, the remaining outstanding principal of loans directly related to the RYFL acquisition total $ 363.0 million, of which $ 5.0 million are expected to be uncollectable.

The following pro-forma and earnings (unaudited) of the combined company are presented as if the RYFL merger had occurred on January 1, 2022 and January 1, 2021:

For the twelve months ended

(in thousands)

December 31, 2022

December 31, 2021

Selected Financial Data

Interest income

$ 73,730  

$ 70,585  

Total noninterest expense

Interest expense

( 4,987 )  

Recovery of (provision for) loan losses

Non-interest income

11,648  

Income before income tax expense

16,607  

Non-interest expense (1)

( 60,228 )  

Income before provision for income taxes

20,163  

Income tax expenses

25,183  

Income tax expense

( 2,235 )  

4 unchanged sentences

$ 6.23  

Consolidated Statements of Comprehensive Income

For the year ending December 31, 2020

$ 4.28  

$ 6.23  

$ 15,932  

Comprehensive income, net of tax

22,784  

( 672 )  

22,112  

Consolidated Statements of Changes in Stockholders' Equity

Balance at January 1, 2020

Retained earnings

$ 100,185  

$ ( 561 )  

$ 99,624  

134,103  

( 561 )  

133,542  

For the year ending December 31, 2020

16,604  

( 672 )  

15,932  

Retained earnings

112,494  

( 1,233 )  

111,261  

152,922  

( 1,233 )  

151,689  

Consolidated Statements of Cash Flows

Year ended December 31, 2020

$ 16,604  

$ ( 672 )  

$ 15,932  

Deferred tax expense

( 118 )  

Net cash - operating activities

20,526  

( 790 )  

19,736  

Net change in loan

( 49,196 )  

Net cash - investing activities

Excludes $ 2.9 million in pre-tax merger expenses for the nine months ended September 30, 2022.

For the twelve months ended December 31, 2022, the Bancorp has recorded $2.9 million in pre-tax one -time merger expenses related to the RYFL acquisition, and these expenses have been allocated to the following non-interest expense line items within the income statement:

(in thousands)

Twelve months ended

Noninterest expense:

December 31, 2022

Compensation and benefits

Data processing

Period merger expense

$ 2,852  

NOTE 3 –

Acquisition Activity

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.

Stockholders holding less than 101 shares of RYFL common stock received fixed consideration of $ 20.14 in cash per share and no stock consideration.

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.

NOTE 3 –

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:

4 unchanged sentences

$ ( 1,258 )  

$ 8,669  

treasury securities

13 unchanged sentences

$ 370,896  

$ 526,889  

(Dollars in thousands)

December 31, 2021

Money market fund

government sponsored entities

$ 8,883  

$ ( 214 )  

government sponsored entities

$ 8,669  

treasury securities

Collateralized mortgage obligations and residential mortgage-backed securities

39 unchanged sentences

(Dollars in thousands)

Unrealized  

Ending balance, December 31, 2020

3 unchanged sentences

$ 4,276  

(Dollars in thousands)

Ending balance, December 31, 2021

$ 4,276  

Current period change

Ending balance, December 31, 2022

Securities with carrying values of approximately $ 223.7 million and $ 39.5 million were pledged as of December 31, 2022 and 2021, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.

18 unchanged sentences

134,116  

( 28,884 )  

Municipal securities

3 unchanged sentences

( 17,386 )  

224,542  

( 53,321 )  

Collateralized debt obligations

21 unchanged sentences

$ ( 214 )  

Collateralized mortgage obligations and

residential mortgage-backed securities

Collateralized mortgage obligations and residential mortgage-backed securities

126,373  

2 unchanged sentences

134,482  

( 3,539 )  

Municipal securities

70,309  

( 527 )  

70,309  

( 527 )  

Collateralized debt obligations

7 unchanged sentences

$ 214,452  

Number of securities  

$ ( 5,461 )  

Number of securities

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.

4 unchanged sentences

Year end loans are summarized below:

Loans receivable are summarized below:

(Dollars in thousands)

24 unchanged sentences

37,887  

10,142  

Loans receivable

7 unchanged sentences

$ 966,720  

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.

(Dollars in thousands)

10 unchanged sentences

Construction and land development...

Farmland  

( 866 )  

Commercial business

6 unchanged sentences

$ 12,897  

$ 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, 2021:

7 unchanged sentences

Construction and land development

( 17 )  

Commercial business

1 unchanged sentence

( 377 )  

Manufactured homes

( 29 )  

Manufactured homes

$ 12,458  

6 unchanged sentences

The unamortized balance of the deferred cost reserve totaled $ 4.6 million and $ 5.8 million as of December 31, 2022 and December 31, 2021, respectively, and is included in net deferred loan origination fees and costs.

The Bancorp's impairment analysis is summarized below:

Ending Balances

(Dollars in thousands)

Allowance for

evaluated for

Allowance for

evaluated for

Individually evaluated for impairment reserves

Collectively evaluated for impairment reserves

Loan receivables

Loans individually

evaluated for

Purchased credit

impaired loans

evaluated for

Loans collectively

evaluated for

Individually evaluated for impairment

Purchased credit impaired individually evaluated for impairment

Collectively evaluated for impairment

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2022:

52 unchanged sentences

$ 954,331  

$ 8,455  

$ 3,366  

$ 949,604  

The Bancorp's credit quality indicators are summarized below at December 31, 2022 and December 31, 2021:

10 unchanged sentences

38,978  

34,612  

Commercial real estate

1 unchanged sentence

486,431  

12,011  

317,145  

Construction and land development

3 unchanged sentences

251,014  

61,194  

Commercial business

1 unchanged sentence

93,278  

115,772  

Manufactured homes

5 unchanged sentences

$ 1,508,571  

$ 960,139  

December 31, 2021

8 unchanged sentences

34,612  

39,233  

Commercial real estate

2 unchanged sentences

317,145  

298,257  

Construction and land development

3 unchanged sentences

61,194  

50,571  

Commercial business

1 unchanged sentence

115,772  

158,140  

Manufactured homes

5 unchanged sentences

$ 960,139  

$ 22,684  

$ 16,627  

$ 961,425  

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.

During the year, the Bancorp reassessed its risk ratings, and while the credit quality indicators have not change the naming conventions have.

The loan grading system is as follows:

52 unchanged sentences

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.

During the twelve months ending December 31, 2022, nine residential real estate loans to nine customers totaling $ 743 thousand were modified to include deferral of principal or interest resulting in troubled debt restructuring classification.

Two home equity loans to two customers totaling $ 189 thousand were modified to include deferral of principal or interest resulting in troubled debt restructuring classification.

One commercial real estate loan totaling $ 1.4 million was provided a short-term renewal resulting in troubled debt restructuring classification.

No trouble debt restructuring loans had subsequently defaulted during the twelve months ending December 31, 2022.

During the twelve months ending December 31, 2021, three residential real estate loans to three customers 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, 2022.

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.

As of December 31, 

2022, one residential real estate loan in the process of foreclosure totaling $ 32 thousand.

The Bancorp was not in the process of foreclosing on any residential real estate loan as of December 31, 2021.

All of the loans classified as troubled debt restructurings are also considered impaired.

1 unchanged sentence

The Bancorp's individually evaluated impaired loans are summarized below:

(Dollars in thousands)

For the twelve months ended

1 unchanged sentence

December 31, 2022

(Dollars in thousands)

Unpaid Principal

Related Allowance

Average Recorded Investment

Average Recorded

Interest Income

23 unchanged sentences

Construction & land development

$ 7,121  

$ 7,163  

$ 3,387  

Commercial business

3 unchanged sentences

Manufactured homes

The Bancorp's individually evaluated impaired loans are summarized below:

For the twelve months ended

4 unchanged sentences

Related Allowance

Average Recorded Investment

Average Recorded

Interest Income

22 unchanged sentences

$ 5,894  

$ 3,414  

Construction & land development

6 unchanged sentences

(Dollars in thousands)

30-59 Days Past

60-89 Days Past

Greater Than 90

30-59 Days Past Due

Total Past Due

Greater than 90

60-89 Days Past Due

Greater Than 90 Days Past Due

Total Past Due

Recorded Investments Greater than 90 Days Past Due and Accruing

December 31, 2022

7 unchanged sentences

38,459  

38,978  

Commercial real estate

27 unchanged sentences

34,612  

39,233  

Commercial real estate

18 unchanged sentences

$ 960,139  

$ 961,425  

The Bancorp's loans on nonaccrual status are summarized below:

12 unchanged sentences

At December 31, 2021, purchased credit impaired loans with unpaid principal balances totaled $ 4.2 million with a recorded investment of $ 2.8 million.

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)

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 $ 5.5 million at December 31, 2022, compared to $ 1.1 million at December 31, 2021.

Total unpaid principal balances of acquired non-impaired loans with remaining fair value discount totaled $ 347.7 million and $ 72.5 million as of December 31, 2022, and December 31, 2021, respectively.

Accretable yield, or income recorded for the nine months ended December 31, is as follows:

Accretable yield, or income recorded for the three months ended September 30, is as follows:

(dollars in thousands)

$ 1,820  

Accretable yield, or income expected to be recorded in the future is as follows:

(dollars in thousands)

2027 and thereafter

$ 5,493  

19 unchanged sentences

Depreciation expense was approximately $ 3.0 million and $ 2.5 million for 2022 and 2021, respectively.

Note 6 –

Foreclosed Real Estate

At year end, foreclosed real estate is summarized below:

(Dollars in thousands)

Residential real estate

Commercial business

During 2022, three branches were closed and transferred to assets held for sale with a carrying balance of $ 1.8 million as of December 31, 2022, there were no assets held for sale as of December 31, 2021.

During the year ended December 31, 2022, impairment losses of $ 1.2 million were recognized on premises and are reflected in other non-interest expense.

Branches owned by the Company and actively marketed for sale are transferred to assets held for sale based on the lower of carrying value or fair value, less estimated costs to sell.

Note 6 –

Goodwill and Other Intangible Assets

The Bancorp established a goodwill balance totaling $ 11.1 million from past acquisitions.

(Dollars in thousands)

Goodwill balance January 1,

$ 11,109  

Goodwill acquired - Royal Financial

11,286  

Goodwill balance December 31,

$ 22,395  

$ 11,109  

During the year ended December 31, 2022, there was remeasurement of goodwill related to the RYFL acquisition reducing the balance by $ 378 thousand, see Note 2 –

Acquisition Activity for more detail on the remeasurement.

Goodwill is tested annually for impairment.

3 unchanged sentences

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.

In addition to goodwill, a core deposit intangible was established with the acquisition of RYFL and from previous acquisitions.

The Bancorp had core deposit intangible balances of $ 4.8 million and $ 3.1 million as of December 31, 2022, and December 31, 2021, respectively.

The table below summarizes the annual amortization:

The annual amortization for the twelve months ended December 31, is as follows:

The amortization recorded for the twelve months ended December 31, is as follows:

(dollars in thousands)

$ 1,552  

Amortization to be recorded in future periods, is as follows:

1 unchanged sentence

$ 1,522  

$ 4,794  

For the RYFL acquisition, as part of the fair value of certificates of deposit, a fair value premium was established of $ 1.0 million.

Approximately $ 541 thousand of amortization was taken as income during the year ended December 31, 2022.

It is estimated amortization to be recorded in future periods is as follows;

$ 217 thousand in 2023, $ 124 thousand in 2024, $ 72 thousand in 2025, and $ 55 thousand thereafter.

Note 7 –

4 unchanged sentences

Deferred, net of valuation allowance

( 17 )  

Income tax expense

16 unchanged sentences

( 494 )  

Non-deductible transaction costs

( 202 )  

8 unchanged sentences

Deferred compensation

Unrealized depreciation on securities available-for-sale, net

20,280  

Net operating loss

1 unchanged sentence

Share based compensation

REO writedowns

Unqualified deferred compensation plan

1 unchanged sentence

Accrued vacation

Purchase accounting

Nondeductible transaction costs

1 unchanged sentence

Total deferred tax assets

32,731  

Deferred tax liabilities:

5 unchanged sentences

( 121 )  

Unrealized appreciation on securities available-for-sale, net

( 533 )  

Unrealized appreciation on securities available-for-sale, net

Purchase accounting

1 unchanged sentence

( 213 )  

( 119 )  

Total deferred tax liabilities

1 unchanged sentence

Valuation allowance

( 12 )  

Net deferred tax asset

1 unchanged sentence

$ 2,845  

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.

At December 31, 2022, the Bancorp has Indiana net operating loss carry forwards of approximately $ 222 thousand which will begin to expire in 2037 if not used.

The Bancorp also has a state tax credit carry forward of approximately $ 66 thousand which expire from 2023 to 2032.

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.

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 also believes that the state tax credit carryforward is expected to be utilized before expiration.

No valuation allowance remains on any state tax credit carryforward which expire after 2022.

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 2029 to 2035, $ 1.1 million of the federal losses do not expire, and the Illinois losses expire in years ranging from 2028 to 2036 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.

3 unchanged sentences

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 Bancorp acquired $ 2.5 million of federal net operating loss carryforwards and $ 57.4 million of Illinois net operating loss carryforwards with the acquisition of Royal Financial, Inc.

during 2022 of which $ 1.9 million of the federal losses expire in years ranging from 2030 to 2036, $ 623 thousand of the federal losses do not expire, and the Illinois losses expire in 2035.

Under Section 382 of the Internal Revenue Code, the annual limitation on the use of the federal losses is $ 822 thousand for Royal, 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, 2022 $ 8.2 million of the federal loss carryforwards, $ 68.2 million of the Illinois loss carryforward remain and $ 222 thousand of Indiana loss carryforwards 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.

Accordingly, retained earnings at December 31, 2022, and 2021, includes, approximately $ 14.5 million and $ 8.4 million, respectively, 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 unrecorded deferred income tax liability on the above amounts was approximately $ 3.0 million and $ 1.8 million at both December 31, 2022, and 2021, respectively.

The Bancorp had no unrecognized tax benefits at any time during 2022 or 2021 and does not anticipate any significant increase or decrease in unrecognized tax benefits during 2022.

4 unchanged sentences

Note 8 –

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:

The aggregate amount of retail and brokered certificates of deposit with a balance of $250 thousand or more was approximately $ 93.6 million at December 31, 2022 and $ 36.9 million at December 31, 2021.

At December 31, 2022, scheduled maturities of retail and brokered certificates of deposit were as follows:

(Dollars in thousands)

2 unchanged sentences

$ 268,266  

48,013  

10,000  

58,013  

10,815  

20,000  

30,815  

$ 323,118  

$ 40,000  

$ 363,118  

The Bancorp’s end-of-period deposit portfolio balances were as follows:

12 unchanged sentences

$ 1,434,201  

As of December 31, 2022, and 2021, approximately $ 516.1 million and $ 452.0 million, respectively, of our deposit portfolio was uninsured.

Note 9 –

Borrowed Funds

At December 31, 2021, and December 31, 2020, borrowed funds are summarized below:

At December 31, 2022, and December 31, 2021, borrowed funds and their outstanding rates are summarized below:

(Dollars in thousands)

Fixed rate advances from the FHLB

Fixed rate advances from the FHLB with outstanding rates of 4.30% as of December 31, 2022

$ 120,000  

At December 31, 2022, scheduled maturities of borrowed funds were as follows:

(Dollars in thousands)

120,000  

$ 120,000  

Fixed rate advances are payable at maturity, with a prepayment penalty.

The advances were collateralized by mortgage loans with a carrying value totaling approximately $ 842.0 million at December 31, 2022.

In addition to the fixed rate advances, the Bank maintains a $ 25.0 million line of credit with the Federal Home Loan Bank of Indianapolis.

The Bank did not have a balance on the line of credit at December 31, 2022 or December 31, 2021.

The Bank did not have other borrowings at December 31, 2022, or December 31, 2021.

At December 31, 2022, the Bank had available approximately $ 658.0 million in credit lines with various money center banks, including the FHLB and Federal Reserve.

Repurchase agreements generally mature within one year and are secured by U.S.

government and U.S.

agency securities, under the Bancorp’s control.

agency securities, under the Bank’s control.

At December 31, information concerning these retail repurchase agreements is summarized below:

19 unchanged sentences

2.43 %  

At December 31, advances from the Federal Home Loan Bank were as follows:

(Dollars in thousands)

Fixed rate advances, none oustanding as of year ended 2021;

average rate:

2021 –

2020 –

$ 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.

Note 10 –

12 unchanged sentences

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’

Contributions for the years ended December 31, 2022, and 2021, were based on 3 % of the participants’

total compensation, excluding incentives, respectively.

17 unchanged sentences

Note 11 –

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.

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 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 $ 741 thousand and $ 574 thousand for 2022 and 2021, 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 $ 120 thousand and $ 131 thousand in 2022 and 2021, respectively.

A summary of changes in the Bancorp’s non-vested restricted stock for the year ended December 31, 2022, follows:

Non-vested Shares

Non-vested at January 1, 2022

44,235  

$ 42.33  

24,555  

( 11,158 )  

( 1,799 )  

Non-vested at December 31, 2022

55,833  

$ 43.87  

As of December 31, 2022, there was approximately $ 1.2 million 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 1.3 years.

Note 12 –

Regulatory Capital

The Bancorp and Bank are subject to regulatory capital requirements administered by federal banking agencies.

The Bank is subject to regulatory capital guidelines adopted by the FDIC.

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.

4 unchanged sentences

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.

At December 31, 2022, and 2021, the most recent regulatory notifications categorized the Bank is 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 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”

8 unchanged sentences

Corrective Action Regulations

At December 31, 2021

December 31, 2022

Common equity tier 1 capital to risk-weighted assets

51 unchanged sentences

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.

The aggregate amount of dividends that may be declared by the Bank in 2022, without the need for qualifying for an exemption or prior DFI approval, is its 2023 net profit.

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.

2 unchanged sentences

Note 13 –

Stock Based Compensation

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 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.

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

Non-vested at January 1, 2020

30,205  

$ 35.63  

13,243  

( 6,400 )  

( 220 )  

Non-vested at December 31, 2020

36,828  

$ 40.11  

Non-vested at January 1, 2021

36,828  

$ 40.11  

21,255  

( 13,493 )  

( 355 )  

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.

Note 14 –

Earnings per Common Share

19 unchanged sentences

3,477,309  

Dilutive effect of unvested restricted stock awards

17,357  

Weighted average common and dilutive potential common shares outstanding

29 unchanged sentences

54,432  

41,944  

49,010  

Commercial real estate

3 unchanged sentences

29,586  

59,308  

23,422  

Commercial business

1 unchanged sentence

$ 252,311  

$ 103,024  

$ 131,360  

$ 234,384  

December 31, 2021:

2 unchanged sentences

49,010  

44,972  

52,923  

Commercial real estate

10,778  

16,093  

Construction and land development

1 unchanged sentence

23,422  

51,626  

23,020  

Commercial business

1 unchanged sentence

$ 234,384  

$ 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.

18 unchanged sentences

December 31, 2022

Notational or contractual

Asset derivatives

5 unchanged sentences

$ 8,972  

$ 2,686  

Other liabilties

1 unchanged sentence

Interest rate lock commitments

 N/A  

$ 9,010  

$ 8,972  

$ 2,686  

December 31, 2021

Notational or contractual

Asset derivatives

5 unchanged sentences

$ 2,686  

$ 3,638  

Other liabilties

3 unchanged sentences

$ 2,686  

$ 4,012  

$ 3,638  

The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments:

67 unchanged sentences

$ 8,972  

$ 3,930  

$ 5,042  

Gross Amounts not Offset in the

41 unchanged sentences

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 Bancorp’s management utilizes a specialist to perform an other-than-temporary impairment analysis for each of its two pooled trust preferred securities, with a cost basis of $ 2.2 million and fair value of $ 1.0 million as of December 31, 2022.

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.

7 unchanged sentences

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.

The review of the collateral began with a review of financial information provided by S&P Global Capital IQ, 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.

28 unchanged sentences

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.

The discount margin is then added to the appropriate 3 -month Secured Overnight Financing Rate (SOFR) forward rate obtained from the forward SOFR curve.

At December 31, 2022 and 2021, the trust preferred securities with a cost basis of $ 2.2 million have been placed in “payment in kind”

11 unchanged sentences

interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume.

The fair value of the Bancorp’s interest rate swap contracts, both assets and liabilities, are valued by a third -party pricing agent using an income approach and are classified within Level 2 of the valuation hierarchy.

The fair value of the Bancorp’s is based on the price of the underlying loans to are expected to be sold to an investor while taking into consideration the probability the rate lock commitments will close and are classified within Level 2 of the valuation hierarchy.

Assets and Liabilities Measured at Fair Values on a Recurring Basis

5 unchanged sentences

(Dollars in thousands)

Quoted Prices in

Active Markets for

Identical Assets

Significant Other

Observable Inputs

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable

Interest rate swap contracts

15 unchanged sentences

$ 369,848  

$ 1,048  

Interest rate swap contracts

6 unchanged sentences

Significant Other Observable Inputs

Significant Unobservable Inputs

Significant Unobservable

Interest rate swap contracts

3 unchanged sentences

Available-for-sale debt securities:

Money market fund

52,941  

government sponsored entities

treasury securities

Collateralized mortgage obligations and residential mortgage-backed securities

8 unchanged sentences

$ 525,897  

$ 356,799  

Interest rate swap contracts

9 unchanged sentences

Beginning balance, January 1, 2021

$ 1,076  

Principal payments

Total unrealized losses, included in other comprehensive income..

Total unrealized gains, included in other comprehensive income

Ending balance, December 31, 2021

1 unchanged sentence

Principal payments

Total unrealized gains, included in other comprehensive income

Total unrealized gains, included in other comprehensive loss

Ending balance, December 31, 2022

$ 1,048  

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

5 unchanged sentences

Significant Other Observable Inputs

Significant Unobservable Inputs

Significant Unobservable

Impaired loans

Foreclosed real estate

$ 2,620  

(Dollars in thousands)

3 unchanged sentences

Significant Other Observable Inputs

Significant Unobservable Inputs

Significant Unobservable

Impaired loans

$ 10,046  

Foreclosed real estate

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.

33 unchanged sentences

15,361  

12,842  

Borrowed funds

120,000  

119,689  

Accrued interest payable

12 unchanged sentences

Loans held-for-sale

11,329  

11,660  

Loans receivable, net

18 unchanged sentences

12,842  

Borrowed funds

Accrued interest payable

1 unchanged sentence

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 ).

Certificates of deposits in other financial institutions fair value amounts are based on estimates of the rate the Bancorp would receive on similar deposits (Level 2 ).

Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 2 ).

1 unchanged sentence

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.

3 unchanged sentences

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 ).

7 unchanged sentences

$ 2,061  

$ 1,183  

Investment in Peoples Bank

32 unchanged sentences

$ 4,880  

Dividends from NWIN Risk

Operating expenses

( 117 )  

Income before income taxes and equity in undistributed income of Peoples Bank

25,071  

Income tax benefit

1 unchanged sentence

Income before equity in undistributed income of Peoples Bank

Equity in undistributed (distributions in excess of income) income of Peoples Bank

25,121  

Equity in undistributed

(distributions in excess of income) income of Peoples Bank

( 10,472 )  

income of NWIN Risk Management, Inc

8 unchanged sentences

Net change in net unrealized gains and losses on securities available-for-sale:

Unrealized (loss) gain arising during the period

( 5,816 )  

Unrealized loss arising during the period

( 89,323 )  

1 unchanged sentence

( 662 )  

Net securities gain during the period

Net securities loss during the period

( 89,985 )  

Net of tax amount

21,409  

Comprehensive income, net of tax

Other comprehensive loss, net of tax

( 68,576 )  

Comprehensive (loss) income, net of tax

$ ( 53,496 )  

$ 8,798  

(Dollars in thousands)

10 unchanged sentences

( 431 )  

Distribution from NWIN Risk Management, Inc

Stock based compensation expense  

Change in other assets

2 unchanged sentences

( 846 )  

Net cash - operating activities

Net cash provided by operating activities

24,798  

Cash flows from investing activities:

Investment in Peoples Bank

Cash and cash equivalents from acquisition activity, net

( 18,725 )  

Net cash - investing activities

Investment in Peoples Bank

Net cash used by investing activities

( 18,725 )  

4 unchanged sentences

( 120 )  

Net cash - financing activities

Net cash used by financing activities

( 5,195 )  

3 unchanged sentences

$ 2,061  

$ 1,183  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

5 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data