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 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 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. 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 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.   59 of 113     Allowances for Loan Losses   Description of the Matter   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 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 and leases not deemed impaired, and reserves for pooled homogenous loans and leases, 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 will 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/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 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.   Acquisition   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.   60 of 113     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.   Indianapolis, Indiana March 30, 2023   61 of 113     Consolidated Balance Sheets       December 31,   (Dollars in thousands)   2022     2021                     ASSETS                                   Cash and non-interest bearing deposits in other financial institutions   $ 19,965     $ 12,725   Interest bearing deposits in other financial institutions     11,210       19,987   Federal funds sold     107       464                     Total cash and cash equivalents     31,282       33,176                     Certificates of deposit in other financial institutions     2,456       1,709                     Securities available-for-sale     370,896       526,889   Loans held-for-sale     1,543       4,987   Loans receivable, net of deferred fees and costs     1,513,631       966,720   Less: allowance for loan losses     ( 12,897 )     ( 13,343 ) Net loans receivable     1,500,734       953,377   Federal Home Loan Bank stock     6,547       3,247   Accrued interest receivable     7,421       5,444   Premises and equipment     40,212       31,385   Cash value of bank owned life insurance     31,936       31,440   Goodwill     22,395       11,109   Other intangible assets     4,794       3,126   Other assets     50,123       14,854                     Total assets   $ 2,070,339     $ 1,620,743                     LIABILITIES AND STOCKHOLDERS' EQUITY                                   Deposits:                 Non-interest bearing   $ 359,092     $ 295,294   Interest bearing     1,415,925       1,138,907   Total     1,775,017       1,434,201   Repurchase agreements     15,503       14,581   Borrowed funds     120,000       -   Accrued expenses and other liabilities     23,426       15,346                     Total liabilities     1,933,946       1,464,128                     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, 2022 - 4,298,401 December 31, 2021 - 3,480,701     -       -   Additional paid-in capital     69,032       30,430   Accumulated other comprehensive (loss) income     ( 64,300 )     4,276   Retained earnings     131,661       121,909                     Total stockholders' equity     136,393       156,615                     Total liabilities and stockholders' equity   $ 2,070,339     $ 1,620,743     See accompanying notes to consolidated financial statements.   62 of 113     Consolidated Statements of Income   (Dollars in thousands, except per share data)   Twelve Months Ended December 31,       2022     2021   Interest income:                 Loans receivable   $ 62,133     $ 41,573   Securities     9,576       9,021   Other interest earning assets     326       61                     Total interest income     72,035       50,655                     Interest expense:                 Deposits     3,604       2,002   Repurchase agreements     195       47   Borrowed funds     1,087       31                     Total interest expense     4,886       2,080                     Net interest income     67,149       48,575   Provision for loan losses     -       1,509                     Net interest income after provision for loan losses     67,149       47,066                     Noninterest income:                 Fees and service charges     6,257       5,388   Wealth management operations     2,113       2,375   Gain on sale of loans held-for-sale, net     1,368       5,296   Gain on sale of securities, net     662       1,987   Increase in cash value of bank owned life insurance     810       715   Gain on sale of foreclosed real estate     16       47   Other     283       139                     Total noninterest income     11,509       15,947                     Noninterest expense:                 Compensation and benefits     28,990       24,241   Occupancy and equipment     6,785       5,537   Data processing     6,750       3,648   Marketing     1,907       1,085   Impairment charge on assets held for sale     1,232       -   Federal deposit insurance premiums     1,228       861   Professional services     1,211       1,205   Net loss recognized on sale of premises and equipment     303       -   Other     13,694       10,059                     Total noninterest expense     62,100       46,636                     Income before income tax expenses     16,558       16,377   Income tax expenses     1,478       1,414                     Net income   $ 15,080     $ 14,963                     Earnings per common share:                 Basic   $ 3.61     $ 4.30   Diluted   $ 3.60     $ 4.30                     Dividends declared per common share   $ 1.24     $ 1.24     See accompanying notes to consolidated financial statements.   63 of 113     Consolidated Statements of Comprehensive (Loss) Income   (Dollars in thousands)   Twelve Months Ended December 31,       2022     2021                     Net income   $ 15,080     $ 14,963                     Net change in net unrealized gains and losses on securities available-for-sale:                 Unrealized (loss) gain arising during the period     ( 89,323 )     ( 5,816 ) Less: reclassification adjustment for gains included in net income     ( 662 )     ( 1,987 ) Net securities (loss) gain during the period     ( 89,985 )     ( 7,803 ) Tax effect     21,409       1,638   Other comprehensive loss, net of tax     ( 68,576 )     ( 6,165 ) Comprehensive (loss) gain, net of tax     ( 53,496 )     8,798      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, 2021   $ -     $ 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                                             Balance at January 1, 2022   $ -     $ 30,430     $ 4,276     $ 121,909     $ 156,615                                             Net income     -       -       -       15,080       15,080   Other comprehensive loss, net of tax     -       -       ( 68,576 )     -       ( 68,576 ) Net surrender value of 2,479 restricted stock awards     -       ( 120 )     -       -       ( 120 ) Stock-based compensation expense     -       741       -       -       741   Issuance of 795,423 shares at $ 47.75 per share, for acquisition of Royal Financial, Inc     -       37,981       -       -       37,981   Cash dividends, $1.24 per share     -       -       -       ( 5,328 )     ( 5,328 )                                           Balance at December 31, 2022   $ -     $ 69,032     $ ( 64,300 )   $ 131,661     $ 136,393      See accompanying notes to consolidated financial statements.   64 of 113     Consolidated Statements of Cash Flows   (Dollars in thousands)   Twelve months ended December 31,       2022     2021   CASH FLOWS FROM OPERATING ACTIVITIES:                 Net income   $ 15,080     $ 14,963   Adjustments to reconcile net income to net cash provided by operating activities:                 Origination of loans for sale     ( 44,856 )     ( 153,082 ) Sale of loans originated for sale     49,628       164,203   Depreciation and amortization, net of accretion     5,968       4,559   Deferred tax expense     1,187       137   Stock based compensation expense     741       574   Gain on sale of securities, net     ( 662 )     ( 1,987 ) Gain on sale of loans held-for-sale, net     ( 1,470 )     ( 5,529 ) Loss on sale of premises and equipment, net     303       -   Impairment charge on assets held for sale     1,232       -   Gain (loss) on sale of foreclosed real estate     16       ( 47 ) Gain on cash value of bank owned life insurance     ( 810 )     ( 715 ) Loss on derivatives     102       233   Provision for loan losses     -       1,509   Net change in:                 Interest receivable     ( 141 )     ( 731 ) Other assets     ( 5,080 )     1,784   Accrued expenses and other liabilities     ( 3,476 )     ( 8,828 ) Net cash provided by operating activities     17,762       17,043                     CASH FLOWS FROM INVESTING ACTIVITIES:                 Proceeds from maturities of certificates of deposit in other financial institutions     232       923   Purchase of certificates of deposit in other financial institutions     ( 734 )     ( 735 ) Proceeds from maturities and pay downs of securities available-for-sale     41,524       55,431   Proceeds from sales of securities available-for-sale     53,953       43,756   Purchase of securities available-for-sale     ( 30,421 )     ( 221,236 ) Proceeds from bank owned life insurance     314       -   Net change in loans receivable     ( 94,030 )     12,345   Proceeds of Federal Home Loan Bank Stock     -       671   Purchase of Federal Home Loan Bank Stock     ( 1,997 )     -   Purchase of loans receivable     ( 2,663 )     ( 14,543 ) Purchase of premises and equipment, net     ( 3,031 )     ( 3,128 ) Proceeds from sale of premises and equipment     1,798       -   Proceeds from sale of foreclosed real estate     93       585   Cash and cash equivalents from acquisition activity, net     33,799       -   Net cash provided by (used in) investing activities     ( 1,163 )     ( 125,931 )                   CASH FLOWS FROM FINANCING ACTIVITIES:                 Change in deposits     ( 134,220 )     131,862   Proceeds from FHLB advances     120,000       -   Repayment of FHLB advances     -       ( 6,000 ) Net surrender value of restricted stock awards     ( 120 )     ( 131 ) Change in repurchase agreements     922       870   Change in other borrowed funds     -       ( 149 ) Dividends paid     ( 5,075 )     ( 4,310 ) Net cash (used in) provided by financing activities     ( 18,493 )     122,142   Net change in cash and cash equivalents     ( 1,894 )     13,254   Cash and cash equivalents at beginning of period     33,176       19,922   Cash and cash equivalents at end of period   $ 31,282     $ 33,176                     SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                 Cash paid during the period for:                 Interest   $ 4,572     $ 2,112   Income taxes     1,347       2,185   Acquisition activity:                 Fair value of assets acquired, including cash and cash equivalents   $ 528,539     $ -   Value of goodwill and other intangible assets     14,506       -   Fair value of liabilities assumed     486,339       -   Cash paid for acquisition     18,725       -   Issuance of common stock for acquisition     37,981       -   Noncash activities:                 Dividends declared not paid     1,332       1,079   Transfer of premises and equipment to other real estate     1,815       -   Securities purchased not settled     -       1,765     See accompanying notes to consolidated financial statements.   65 of 113     Notes to Consolidated Financial Statements Years ended December 31, 2022 and 2021     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 (loss) income, net of tax. At December 31, 2022, and 2021, 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.   66 of 113     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.   67 of 113     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.   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.   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.             68 of 113     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, 2022 and 2021, 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, 2022 and 2021.   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 (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 – 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, 2021, the Federal Reserve Bank eliminated reserve requirements for certain depository institutions, including the Bank. As such, there was no reserve requirement at December 31, 2022. As part of derivative contracts entered into by the Bancorp, $ 3.9 million was pledged as collateral at December 31, 2022 and 2021. These balances are included in interest bearing deposits. At December 31, 2022, the Company’s correspondent cash accounts exceeded federally insured limits by $ 13.5 million. Additionally, the Company had approximately $ 3.2 million of cash held by the FRB and the FHLB, which is not federally insured.   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, 2021, may have been reclassified to conform to the December 31, 2022 presentation.   69 of 113     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 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.   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 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.   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.   70 of 113     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.   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.   71 of 113     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):   ASSETS         Cash and due from banks   $ 52,524   Investment securities, available for sale     -   Certificate of deposit in other financial institutions     245             Total Loans     450,757             Premises and equipment, net     13,896   FHLB stock     1,303   Goodwill     11,286   Core deposit intangible     3,220   Interest receivable     1,836   Other assets     7,978   Total assets purchased   $ 543,045   Common shares issued     37,981   Cash paid     18,725   Total purchase price   $ 56,706       LIABILITIES         Deposits         Non-interest bearing   $ 32,095   NOW accounts     63,639   Savings and money market     184,149   Certificates of deposits     195,153   Total Deposits     475,036             Interest payable     75   Other liabilities     11,228             Total liabilities assumed   $ 486,339     72 of 113     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     For the twelve months ended   (in thousands)   December 31, 2022     December 31, 2021   Selected Financial Data                 Interest income   $ 73,730     $ 70,585   Interest expense     ( 4,987 )     ( 3,538 ) Recovery of (provision for) loan losses     -       ( 1,181 ) Non-interest income     11,648       16,607   Non-interest expense (1)     ( 60,228 )     ( 57,290 ) Income before provision for income taxes     20,163       25,183   Income tax expense     ( 2,235 )     ( 3,525 ) Net income   $ 17,928     $ 21,658                     Earnings per common share:                 Basic   $ 4.29     $ 6.23   Diluted   $ 4.28     $ 6.23         ( 1 ) 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   $ 132   Data processing     1,929   Marketing     135   Other     656             Period merger expense   $ 2,852     73 of 113        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, 2022                                 U.S. government sponsored entities   $ 8,883     $ -     $ ( 1,258 )     7,625   U.S. treasury securities     389       -       -       389   Collateralized mortgage obligations and residential mortgage-backed securities     163,000       -       ( 28,884 )     134,116   Municipal securities     281,032       7       ( 53,321 )     227,718   Collateralized debt obligations     2,173       -       ( 1,125 )     1,048   Total securities available-for-sale   $ 455,477     $ 7     $ ( 84,588 )   $ 370,896         (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     The cost basis, estimated fair value of available-for-sale securities, and carrying amount, if different, at December 31, 2022, 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, 2022   Basis     Value   Due in one year or less   $ 105     $ 105   Due from one to five years     4,868       4,493   Due from five to ten years     21,099       18,993   Due over ten years     266,405       213,189   Collateralized mortgage obligations and residential mortgage-backed securities     163,000       134,116   Total   $ 455,477     $ 370,896     Sales of available-for-sale securities were as follows:       (Dollars in thousands)       December 31,     December 31,       2022     2021                     Proceeds   $ 53,953     $ 43,756   Gross gains     733       2,010   Gross losses     ( 71 )     ( 23 )     The tax provisions related to these net realized gains were approximately $ 157 thousand for 2022 and $ 417 thousand for 2021.   74 of 113     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         (Dollars in thousands)       Unrealized gain/(loss)   Ending balance, December 31, 2021   $ 4,276   Current period change     ( 68,576 ) Ending balance, December 31, 2022   $ ( 64,300 )   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.   Securities with unrealized losses at December 31, 2022, and 2021, 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, 2022                                                         U.S. government sponsored entities   $ -     $ -     $ 7,625     $ ( 1,258 )   $ 7,625     $ ( 1,258 )     100.0 % Collateralized mortgage obligations and residential mortgage-backed securities     32,700       ( 4,955 )     101,416       ( 23,929 )     134,116       ( 28,884 )     100.0 % Municipal securities     171,581       ( 35,935 )     52,961       ( 17,386 )     224,542       ( 53,321 )     98.6 % Collateralized debt obligations     -       -       1,048       ( 1,125 )     1,048       ( 1,125 )     100.0 % Total temporarily impaired   $ 204,281     $ ( 40,890 )   $ 163,050     $ ( 43,698 )   $ 367,331     $ ( 84,588 )     99.0 % Number of securities             311               135               446                 (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             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.   75 of 113        NOTE 4 – Loans Receivable Year end loans are summarized below:   (Dollars in thousands)                     December 31, 2022     December 31, 2021   Loans secured by real estate:                 Residential real estate   $ 484,595     $ 260,134   Home equity     38,978       34,612   Commercial real estate     486,431       317,145   Construction and land development     108,926       123,822   Multifamily     251,014       61,194   Total loans secured by real estate     1,369,944       796,907   Commercial business     93,278       115,772   Consumer     918       582   Manufactured homes     34,882       37,887   Government     9,549       8,991   Loans receivable     1,508,571       960,139   Add (less):                 Net deferred loan origination costs     5,083       6,810   Undisbursed loan funds     ( 23 )     ( 229 ) Loans receivable, net of deferred fees and costs..   $ 1,513,631     $ 966,720     76 of 113     (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, 2022:                                             Allowance for loan losses:                                         Residential real estate   $ 2,480     $ ( 29 )   $ 53     $ 517     $ 3,021   Home equity     357       -       -       53       410   Commercial real estate     5,515       ( 431 )     -       700       5,784   Construction and land development...     2,119       -       -       ( 866 )     1,253   Multifamily     848       -       -       159       1,007   Commercial business     2,009       ( 57 )     89       ( 676 )     1,365   Consumer     15       ( 91 )     20       113       57   Manufactured homes     -       -       -       -       -   Government     -       -       -       -       -   Total   $ 13,343     $ ( 608 )   $ 162     $ -     $ 12,897     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   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     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 $ 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.   77 of 113     (Dollars in thousands)   Individually evaluated for impairment reserves     Collectively evaluated for impairment reserves     Loan receivables     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:                                                                     Residential real estate   $ 24     $ 2,997     $ 484,595     $ 1,518     $ 988     $ 482,089   Home equity     3       407       38,978       294       125       38,559   Commercial real estate     13       5,771       486,431       2,392       2,935       481,104   Construction and land development...     -       1,253       108,926       -       -       108,926   Multifamily     -       1,007       251,014       6,739       382       243,893   Commercial business     297       1,068       93,278       1,758       953       90,567   Consumer     -       57       918       -       17       901   Manufactured homes     -       -       34,882       -       -       34,882   Government     -       -       9,549       -       -       9,549   Total   $ 337     $ 12,560     $ 1,508,571     $ 12,701     $ 5,400     $ 1,490,470     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   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     78 of 113     The Bancorp's credit quality indicators are summarized below at December 31, 2022 and December 31, 2021:       Credit Exposure - Credit Risk Portfolio By Creditworthiness Category       December 31, 2022   (Dollars in thousands)     1 - 6       7       8                                             Loan Segment   Pass     Special mention     Substandard     Total   Residential real estate   $ 477,222     $ 1,338     $ 6,035     $ 484,595   Home equity     37,981       385       612       38,978   Commercial real estate     474,055       4,955       7,421       486,431   Construction and land development     106,580       2,346       -       108,926   Multifamily     242,091       1,859       7,064       251,014   Commercial business     90,694       703       1,881       93,278   Consumer     918       -       -       918   Manufactured homes     34,882       -       -       34,882   Government     9,549       -       -       9,549   Total   $ 1,473,972     $ 11,586     $ 23,013     $ 1,508,571           December 31, 2021   (Dollars in thousands)     1 - 6       7       8                                             Loan Segment   Pass     Special mention     Substandard     Total   Residential real estate   $ 253,472     $ 2,940     $ 3,722     $ 260,134   Home equity     33,565       415       632       34,612   Commercial real estate     301,572       12,011       3,562       317,145   Construction and land development     120,192       3,630       -       123,822   Multifamily     60,657       153       384       61,194   Commercial business     113,470       1,915       387       115,772   Consumer     582       -       -       582   Manufactured homes     37,828       59       -       37,887   Government     8,991       -       -       8,991   Total   $ 930,329     $ 21,123     $ 8,687     $ 960,139     79 of 113     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 reassessed its risk ratings, and while the credit quality indicators have not change the naming conventions have. 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.   80 of 113     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.   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, 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.   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. 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.   81 of 113     The Bancorp's individually evaluated impaired loans are summarized below:   (Dollars in thousands)                           For the twelve months ended   (unaudited)   As of December 31, 2022     December 31, 2022       Recorded Investment     Unpaid Principal Balance     Related Allowance     Average Recorded Investment     Interest Income Recognized   With no related allowance recorded:                                         Residential real estate   $ 2,255     $ 3,711     $ -     $ 2,528     $ 202   Home equity     399       416       -       253       12   Commercial real estate     5,314       5,406       -       3,409       205   Construction and land development.     -       -       -       344       -   Multifamily     7,121       7,163       -       3,387       16   Commercial business     2,278       2,392       -       1,365       76   Consumer     17       17       -       15       -   Manufactured homes     -       -       -       -       -   Government     -       -       -       -       -                                             With an allowance recorded:                                         Residential real estate   $ 251     $ 276     $ 24     $ 194     $ 5   Home equity     20       20       3       21       1   Commercial real estate     13       14       13       678       -   Construction and land development.     -       -       -       -       -   Multifamily     -       -       -       -       -   Commercial business     433       561       297       352       13   Consumer     -       -       -       -       -   Manufactured homes     -       -       -       -       -   Government     -       -       -       -       -                                             Total:                                         Residential real estate   $ 2,506     $ 3,987     $ 24     $ 2,722     $ 207   Home equity   $ 419     $ 436     $ 3     $ 274     $ 13   Commercial real estate   $ 5,327     $ 5,420     $ 13     $ 4,087     $ 205   Construction & land development   $ -     $ -     $ -     $ 344     $ -   Multifamily   $ 7,121     $ 7,163     $ -     $ 3,387     $ 16   Commercial business   $ 2,711     $ 2,953     $ 297     $ 1,717     $ 89   Consumer   $ 17     $ 17     $ -     $ 15     $ -   Manufactured homes   $ -     $ -     $ -     $ -     $ -   Government   $ -     $ -     $ -     $ -     $ -     82 of 113                                 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 & land development     -       -       -       -       -   Multifamily     556       647       -       629       31   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 & land development     -       -       -       -       -   Multifamily     -       -       -       -       -   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   Commercial business   $ 1,597     $ 1,716     $ 277     $ 2,006     $ 76   Consumer   $ -     $ -     $ -     $ -     $ -   Manufactured homes   $ -     $ -     $ -     $ -     $ -   Government   $ -     $ -     $ -     $ -     $ -     83 of 113     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, 2022                                                         Residential real estate   $ 3,758     $ 2,520     $ 2,309     $ 8,587     $ 476,008     $ 484,595     $ 166   Home equity     315       42       162       519       38,459       38,978       -   Commercial real estate     1,399       150       1,817       3,366       483,065       486,431       -   Construction and land development.     2,673       -       -       2,673       106,253       108,926       -   Multifamily     1,724       616       1,004       3,344       247,670       251,014       -   Commercial business     1,775       -       529       2,304       90,974       93,278       -   Consumer     3       -       -       3       915       918       -   Manufactured homes     601       256       82       939       33,943       34,882       82   Government     -       -       -       -       9,549       9,549       -   Total   $ 12,248     $ 3,584     $ 5,903     $ 21,735     $ 1,486,836     $ 1,508,571     $ 248                                                             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       -   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       The Bancorp's loans on nonaccrual status are summarized below:   (Dollars in thousands)                     December 31, 2022     December 31, 2021   Residential real estate   $ 5,347     $ 4,651   Home equity     594       623   Commercial real estate     3,242       940   Construction and land development.     -       -   Multifamily     7,064       455   Commercial business     1,881       387   Consumer     -       -   Manufactured homes     -       -   Government     -       -   Total   $ 18,128     $ 7,056     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, 2022, total purchased credit impaired loans with unpaid principal balances totaled $ 6.9 million with a recorded investment of $ 5.4 million. At December 31, 2021, purchased credit impaired loans with unpaid principal balances totaled $ 4.2 million with a recorded investment of $ 2.8 million.   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.   84 of 113     Accretable yield, or income recorded for the three months ended September 30, is as follows:   (dollars in thousands)   Total   2021   $ 960   2022     1,010     Accretable yield, or income expected to be recorded in the future is as follows:    (dollars in thousands)     Total   2023       541   2024       605   2025       511   2026       342   2027 and thereafter       3,494   Total     $ 5,493       Note 5 – Premises and Equipment, Net At year end, premises and equipment are summarized as follows:       (Dollars in thousands)       2022     2021   Cost:                 Land   $ 11,773     $ 8,933   Buildings and improvements     40,753       35,837   Furniture and equipment     19,434       18,724   Total cost     71,960       63,494   Less accumulated depreciation     ( 31,748 )     ( 32,109 ) Premises and equipment, net   $ 40,212     $ 31,385     Depreciation expense was approximately $ 3.0 million and $ 2.5 million for 2022 and 2021, respectively.   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   (Dollars in thousands)   2022     2021   Goodwill balance January 1,   $ 11,109     $ 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. 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.   85 of 113     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 amortization recorded for the twelve months ended December 31, is as follows:               (dollars in thousands)     Total   2021     $ 994   2022     $ 1,552       Amortization to be recorded in future periods, is as follows:                       (dollars in thousands     Total   2023     $ 1,522   2024       1,411   2025       688   2026       360   2027       294   Thereafter       519   Total     $ 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 – Income Taxes At year-end, components of income tax expense consist of the following:       (Dollars in thousands)       2022     2021   Federal:                 Current   $ ( 169 )   $ 1,021   Deferred     1,074       154   State:                 Current     460       256   Deferred, net of valuation allowance     113       ( 17 ) Income tax expense   $ 1,478     $ 1,414     Effective tax rates differ from the federal statutory rate of 21 % for 2022 and 2021 applied to income before income taxes due to the following:       (Dollars in thousands)       2022     2021   Federal statutory rate     21 %     21 % Tax expense at statutory rate   $ 3,477     $ 3,439   State tax, net of federal effect     453       189   Tax exempt income     ( 1,419 )     ( 1,297 ) Bank owned life insurance     ( 153 )     ( 150 ) Captive insurance     ( 282 )     ( 212 ) Tax credit investments     ( 494 )     ( 415 ) Non-deductible transaction costs     98       -   Other     ( 202 )     ( 140 ) Total income tax expense   $ 1,478     $ 1,414     86 of 113     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)       2022     2021   Deferred tax assets:                 Bad debts   $ 3,346     $ 3,385   Deferred compensation     361       352   Unrealized depreciation on securities available-for-sale, net     20,280       -   Net operating loss     7,010       2,238   Tax credits     52       73   Nonaccrual loan interest income     288       244   Share based compensation     339       255   Unqualified deferred compensation plan     65       61   Other-than-temporary impairment     42       39   Accrued vacation     55       56   Purchase accounting     364       -   Nondeductible transaction costs     -       74   Deferred loan costs, net of fees     339       288   Other     190       92   Total deferred tax assets     32,731       7,157                     Deferred tax liabilities:                 Depreciation     ( 1,322 )     ( 1,134 ) Prepaids     ( 637 )     ( 510 ) Mortgage servicing rights     ( 295 )     ( 289 ) Deferred stock dividends     ( 121 )     ( 100 ) Goodwill     ( 533 )     ( 317 ) Unrealized appreciation on securities available-for-sale, net     -       ( 1,129 ) Purchase accounting     -       ( 391 ) Partnership     ( 366 )     ( 311 ) Other     ( 213 )     ( 119 ) Total deferred tax liabilities     ( 3,487 )     ( 4,300 ) Valuation allowance     -       ( 12 ) Net deferred tax asset   $ 29,244     $ 2,845     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. 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.   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 2029 to 2034, $ 3.6 million of the federal losses do not expire, and the Illinois losses expire in years ranging from 2028 to 2037. 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.   87 of 113     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, 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 $ 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. 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 2022 or 2021.   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 2019.     Note 8 – Deposits 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)         Retail     Brokered     Total   2023     $ 258,266     $ 10,000     $ 268,266   2024       48,013       10,000       58,013   2025       10,815       20,000       30,815   2026       2,558       -       2,558   2027       3,151       -       3,151   Thereafter       315       -       315   Total     $ 323,118     $ 40,000     $ 363,118     88 of 113     The Bancorp’s end-of-period deposit portfolio balances were as follows:       December 31,     December 31,   (Dollars in thousands)   2022     2021       Balance     Balance                     Checking   $ 755,377     $ 629,038   Savings     402,365       293,976   Money market     254,157       271,970   Certificates of deposit     363,118       239,217   Total deposits   $ 1,775,017     $ 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, 2022, and December 31, 2021, borrowed funds and their outstanding rates are summarized below:       (Dollars in thousands)       December 31,     December 31,       2022     2021   Fixed rate advances from the FHLB with outstanding rates of 4.30% as of December 31, 2022   $ 120,000     $ -   Total   $ 120,000     $ -     At December 31, 2022, scheduled maturities of borrowed funds were as follows:         (Dollars in thousands)   2023       120,000   Total     $ 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.   89 of 113     Repurchase agreements generally mature within one year and are secured by U.S. government and U.S. agency securities, under the Bank’s control. At December 31, information concerning these retail repurchase agreements is summarized below:       (Dollars in thousands)       2022     2021                     Ending balance   $ 15,503     $ 14,581   Average balance during the year     20,649       17,789   Maximum month-end balance during the year     28,328       24,514   Securities underlying the agreements at year end:                 Carrying value     32,660       14,885   Fair value     32,660       14,885   Average interest rate during the year     0.94 %     0.26 % Average interest rate at year end     2.43 %     0.26 %      Note 10 – 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, 2022, and 2021, were based on 3 % 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 $ 519 thousand for 2022 and $ 439 thousand for 2021.   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, 2022 and 2021 was approximately $ 251 thousand and $ 242 thousand, respectively. The UDC Plan expense amounted to approximately $ 4 thousand for 2022 and $ 3 thousand for 2021.   Directors have deferred some of their fees in consideration of future payments. Fee deferrals, including interest, totaled approximately $ 53 thousand and $ 74 thousand for 2022 and 2021, respectively. The deferred fee liability at December 31, 2022 and 2021 was approximately $ 1.4 million.     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.   90 of 113     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   Shares     Weighted Average Grant Date Fair Value   Non-vested at January 1, 2022     44,235     $ 42.33   Granted     24,555       45.64   Vested     ( 11,158 )     41.63   Forfeited     ( 1,799 )     44.20   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 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. 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, 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” 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.   91 of 113     In addition, the following table shows that, at December 31, 2022, and 2021, 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   December 31, 2022   Amount     Ratio     Amount     Ratio     Amount     Ratio   Common equity tier 1 capital to risk-weighted assets   $ 161.3       10.1 %   $ 71.6       4.5 %   $ 103.4       6.5 % Tier 1 capital to risk-weighted assets   $ 161.3       10.1 %   $ 95.5       6.0 %   $ 127.3       8.0 % Total capital to risk-weighted assets   $ 174.2       10.9 %   $ 127.3       8.0 %   $ 159.1       10.0 % Tier 1 capital to adjusted average assets   $ 161.3       7.7 %   $ 84.3       4.0 %   $ 105.4       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, 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 %   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 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. On November 29, 2022, the Board of Directors of the Bancorp declared a fourth quarter dividend of $ 0.31 per share. The Bancorp’s fourth quarter dividend totaling $ 1.3 million was paid to shareholders on January 6, 2023.     Note 13 – 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 2022 and 2021 is presented below.   (dollars in thousands except per share data)                     2022     2021   Basic earnings per common share:                 Net income as reported   $ 15,080     $ 14,963   Weighted average common shares outstanding     4,176,125       3,477,309   Basic earnings per common share   $ 3.61     $ 4.30                     Diluted earnings per common share:                 Net income as reported   $ 15,080     $ 14,963   Weighted average common shares outstanding     4,176,125       3,477,309   Add: Dilutive effect of unvested restricted stock awards     17,357       -   Weighted average common and dilutive potential common shares outstanding     4,193,482       3,477,309   Diluted earnings per common share   $ 3.60     $ 4.30     92 of 113        Note 14 – Related Party Transactions The Bancorp had aggregate loans outstanding to directors and executive officers (with individual balances exceeding $ 120 thousand) of approximately $ 3.5 million at December 31, 2022, and approximately $ 3.9 million at December 31, 2021. For the year ended December 31, 2022, the following activity occurred on these loans:       (Dollars in thousands)   Aggregate balance at the beginning of the year   $ 3,883   New loans     -   Repayments     ( 354 ) Aggregate balance at the end of the year   $ 3,529     Deposits from directors and executive officers totaled approximately $ 3.7 million and $ 3.9 million at December 31, 2022, and 2021, respectively.     Note 15 – 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.   The Bancorp had outstanding commitments to originate loans as follows:     (Dollars in thousands)         December 31, 2022:         Residential real estate   $ 21,983   Home equity     54,432   Commercial real estate     14,776   Construction and land development     46,723   Multifamily     2,222   Consumer     29,586   Commercial business     76,446   Lot     6,143   Total   $ 252,311     December 31, 2021:         Residential real estate   $ 19,295   Home equity     49,010   Commercial real estate     10,778   Construction and land development     59,308   Multifamily     1,187   Consumer     23,422   Commercial business     61,985   Lot     9,399   Total   $ 234,384     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, 2022, and 2021, the Bancorp had standby letters of credit totaling approximately $ 13.7 and $ 12.3 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.   93 of 113        Note 16 – 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.   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, 2022             Asset derivatives     Liability derivatives   (Dollars in thousands) Statement of Financial Condition classification   Fair value     Statement of Financial Condition classification     Fair value   Interest rate swap contracts Other assets   $ 8,972     Other liabilties     $ 8,972   Interest rate lock commitments Other assets     38       N/A       -   Total   $ 9,010             $ 8,972     December 31, 2021             Asset derivatives     Liability derivatives   (Dollars in thousands) Statement of Financial Condition classification   Fair value     Statement of Financial Condition classification     Fair value   Interest rate swap contracts Other assets   $ 2,686     Other liabilties     $ 2,686   Interest rate lock commitments Other assets     141       N/A       -   Total   $ 2,827             $ 2,686     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   2022     2021   Interest rate swap contracts Fees and service charges   $ 267     $ 379   Interest rate lock commitments Gain on sale of loans held-for-sale, net     ( 103 )     ( 233 ) Total   $ 164     $ 146     94 of 113     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, 2022                                     Interest rate swap contracts $ 8,972   $ - $ 8,972 $ -   $ -   $ 8,972   Interest rate lock commitments   38     -   38   -     -     38   Total $ 9,010   $ - $ 9,010 $ -   $ -   $ 9,010                         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, 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     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, 2022                                     Interest rate swap contracts $ 8,972   $ -   $ 8,972   $ -   $ 3,930   $ 5,042   Total $ 8,972   $ -   $ 8,972   $ -   $ 3,930   $ 5,042                         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 )      Note 17 – 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.   95 of 113     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, 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. 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 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. 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, 2022 and 2021.   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, 2021   $ 173   Additions not previously recognized     -   Ending balance, December 31, 2022   $ 173     96 of 113     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, 2022 and 2021, 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 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” 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.   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.   97 of 113     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, 2022 and 2021. 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 2022 and 2021. Assets measured at fair value on a recurring basis are summarized below:               (Dollars in thousands)               Fair Value Measurements at December 31, 2022 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   $ 8,972     $ -     $ 8,972     $ -   Interest rate lock commitments     38       -       38       -   Available-for-sale debt securities:                                 U.S. government sponsored entities     7,625       -       7,625       -   U.S. treasury securities     389       -       389       -   Collateralized mortgage obligations and residential mortgage-backed securities     134,116       -       134,116       -   Municipal securities     227,718       -       227,718       -   Collateralized debt obligations     1,048       -       -       1,048   Total securities available-for-sale   $ 370,896     $ -     $ 369,848     $ 1,048                                     Liabilities:                                 Interest rate swap contracts   $ 8,972     $ -     $ 8,972     $ -                 (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     $ -     98 of 113     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, 2021   $ 929   Principal payments     ( 9 ) Total unrealized gains, included in other comprehensive income     72   Ending balance, December 31, 2021   $ 992             Beginning balance, January 1, 2022   $ 992   Principal payments     -   Total unrealized gains, included in other comprehensive loss     56   Ending balance, December 31, 2022   $ 1,048     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, 2022 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   $ 2,620     $ -     $ -     $ 2,620                 (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     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.   99 of 113     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, 2022     Estimated Fair Value Measurements at December 31, 2022 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   $ 31,282     $ 31,282     $ 31,282     $ -     $ -   Certificates of deposit in other financial institutions     2,456       2,404       -       2,404       -   Loans held-for-sale     1,543       1,555       -       1,555       -   Loans receivable, net     1,500,734       1,437,496       -       -       1,437,496   Federal Home Loan Bank stock     6,547       6,547       -       6,547       -   Accrued interest receivable     7,421       7,421       -       7,421       -                                             Financial liabilities:                                         Non-interest bearing deposits     359,092       359,092       359,092       -       -   Interest bearing deposits     1,415,925       1,414,738       1,052,807       361,931       -   Repurchase agreements     15,503       15,361       7,975       7,386       -   Borrowed funds     120,000       119,689       -       119,689       -   Accrued interest payable     336       336       -       336       -         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       -   Accrued interest payable     22       22       -       22       -     100 of 113     The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended December 31, 2022 and 2021:   Cash and cash equivalent carrying amounts approximate fair value. 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 ). 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. 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 ). 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.   101 of 113        Note 18 – Parent Company Only Statements         (Dollars in thousands)       Finward Bancorp       Condensed Balance Sheets       December 31,     December 31,       2022     2021   Assets                 Cash on deposit with Peoples Bank   $ 2,061     $ 1,183   Investment in Peoples Bank     131,431       153,772   Investment in NWIN Risk Management, Inc     2,401       1,970   Dividends receivable from Peoples Bank     1,331       1,070   Other assets     538       581   Total assets   $ 137,762     $ 158,576                     Liabilities and stockholders’ equity                 Dividends payable   $ 1,333     $ 1,079   Other liabilities     36       882   Total liabilities     1,369       1,961                     Additional paid in capital     69,032       30,430   Accumulated other comprehensive (loss) income     ( 64,300 )     4,276   Retained earnings     131,661       121,909   Total stockholders’ equity     136,393       156,615   Total liabilities and stockholders’ equity   $ 137,762     $ 158,576         (Dollars in thousands)       Finward Bancorp       Condensed Statements of Income       Year Ended December 31,       2022     2021                     Dividends from Peoples Bank   $ 24,263     $ 4,880   Dividends from NWIN Risk     925       830   Operating expenses     ( 117 )     ( 448 ) Income before income taxes and equity in undistributed income of Peoples Bank     25,071       5,262   Income tax benefit     ( 50 )     ( 94 ) Income before equity in undistributed income of Peoples Bank     25,121       5,356   Equity in undistributed                 (distributions in excess of income) income of Peoples Bank     ( 10,472 )     9,413   income of NWIN Risk Management, Inc     431       194   Net income   $ 15,080     $ 14,963     102 of 113         (Dollars in thousands)       Finward Bancorp       Condensed Statements of Comprehensive Income       Year Ended December 31,       2022     2021                     Net Income   $ 15,080     $ 14,963   Net change in net unrealized gains and losses on securities available-for-sale:                 Unrealized loss arising during the period     ( 89,323 )     ( 5,816 ) Less: reclassification adjustment for gains included in net income     ( 662 )     ( 1,987 ) Net securities loss during the period     ( 89,985 )     ( 7,803 ) Tax effect     21,409       1,638   Other comprehensive loss, net of tax     ( 68,576 )     ( 6,165 ) Comprehensive (loss) income, net of tax   $ ( 53,496 )   $ 8,798         (Dollars in thousands)       Finward Bancorp       Condensed Statements of Cash Flows       Year Ended December 31,       2022     2021                     Cash flows from operating activities:                 Net income   $ 15,080     $ 14,963   Adjustments to reconcile net income to net cash provided by operating activities                 Distributions in excess of income (equity in undistributed income):                 Peoples Bank     10,472       ( 9,413 ) NWIN Risk Management, Inc     ( 431 )     ( 1,024 ) Stock based compensation expense     741       574   Change in other assets     ( 218 )     ( 161 ) Change in other liabilities     ( 846 )     ( 120 ) Net cash provided by operating activities     24,798       4,819                     Cash flows from investing activities:                 Cash and cash equivalents from acquisition activity, net     ( 18,725 )     -   Investment in Peoples Bank     -       ( 830 ) Net cash used by investing activities     ( 18,725 )     ( 830 )                   Cash flows from financing activities:                 Dividends paid     ( 5,075 )     ( 4,310 ) Net surrender value of restricted stock awards     ( 120 )     ( 131 ) Net cash used by financing activities     ( 5,195 )     ( 3,867 ) Net change in cash     878       378   Cash at beginning of year     1,183       805   Cash at end of year   $ 2,061     $ 1,183                     SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                 Cash paid during the period for:                 Income taxes     1,347       2,185   Noncash activities:                 Dividends declared not paid     1,332       1,079     103 of 113      Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no items reportable under this item.