What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-28 compared with 2023-03-30 · 245 added, 168 removed, 200 unchanged (67% of the section changed)

4 unchanged sentences

The net interest margin is perhaps the clearest indicator of a financial institution's ability to generate core earnings.

Fees and service charges, wealth management operations income, gains and losses from the sale of assets, provisions for loan losses, income taxes and operating expenses also affect the Bancorp's profitability.

A summary of the Bancorp’s significant accounting policies are detailed in Note 1 to the Bancorp’s consolidated financial statements included in this report.

Fees and service charges, wealth management operations income, gains and losses from the sale of assets, provisions for credit losses, income taxes and operating expenses also affect the Bancorp's profitability.

A summary of the Bancorp’s significant accounting policies are detailed in Note 1 to the Bancorp’s consolidated financial statements included in this report.

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.

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

At December 31, 2023, the Bancorp had total assets of $2.1 billion and total deposits of $1.8 billion.

2 unchanged sentences

Net income for 2023 was $8.4 million, or $1.96 diluted earnings per common share.

The return on average assets was 0.74%, while the return on average stockholders’

equity was 10.47%.

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

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

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

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

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

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

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

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

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

The return on average assets was 0.40%, while the return on average stockholders’ equity was 6.28%.

Recent Developments within the Banking Industry

During the first half of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, uninsured deposit concentrations, unrealized securities losses, and eroding consumer confidence in the banking system.

In this regard, in March 2023, Silicon Valley Bank and Signature Bank were closed and taken over by the Federal Deposit Insurance Corporation (FDIC).

In addition, on May 1, 2023, the FDIC was appointed as receiver for First Republic Bank, and on that same date JPMorgan Chase acquired the substantial majority of the assets and assumed the deposits and certain other liabilities of First Republic Bank from the FDIC receivership.

These bank failures were driven principally by rapid withdrawals by depositors with large uninsured balances held at these institutions and losses incurred by these banks in liquidating their bond portfolios to provide liquidity to fund these deposit outflows.

The FDIC determined that Silicon Valley Bank and Signature Bank were systemically important and fully guaranteed their depositor balances above the $250,000 FDIC insurance limit.

Given the sharp increase in market interest rates during 2022 and 2023, most financial institutions’ bond portfolios continue to have significant unrealized loss positions even though some of these unrealized losses were recovered during the latter part of 2023 as the interest rate environment stabilized.

In response to these bank failures and the volatility in the banking industry, on March 12, 2023, the Federal Reserve Board announced the creation of a new Bank Term Funding Program (the “BTFP”).

The BTFP offers loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S.

Treasury securities, agency debt and mortgage-backed securities, and other qualifying assets as collateral.

These assets are valued at par for purposes of the collateral pledge under the BTFP.

The BTFP expired on March 11, 2024, with a one year extension option at the discretion of each participant.

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In connection with these negative industry developments, the Bancorp has proactively managed its liquidity position and balance sheet in order to remain flexible and respond to further economic, industry, and regulatory conditions.

The Bancorp’s total deposits as of December 31, 2023 increased by 2.2% as compared to December 31, 2022, while core deposits as of December 31, 2023 decreased by 9.2% as compared to December 31, 2022.

The increase in deposit balances and decrease in core deposits is related to customer preferences for the Bancorp's higher yielding certificate of deposit products.

The Bancorp’s uninsured deposits represented 29% of total deposits at December 31, 2023 and 2022.

The Bancorp’s funding base also includes public funds in the state of Indiana that are insured by the Indiana Public Deposit Insurance Fund (PDIF).

The funds covered by the PDIF at December 31, 2023 were $217.6 million, compared with $188.6 million at December 31, 2022.

This would further increase the total level of insured deposits at the Bancorp above those funds covered by the FDIC.

The Bancorp also took a number of preemptive actions, which included proactive outreach to clients and actions to maximize its funding sources in response to these recent developments.

In this regard, during 2023 the Bancorp participated in the Federal Reserve BTFP by accessing $100 million of low-cost capital under the program, which was reduced to $80 million by the end of 2023.

Furthermore, the Bancorp’s capital remains in excess of all required thresholds to be considered “well capitalized” under the FDIC’s risk-based capital guidelines, with common equity Tier 1 and total capital ratios of 10.40% and 11.40%, respectively, as of December 31, 2023.

Recent Developments - Allowance for Credit Losses

The allowance for credit losses represents management’s estimate of expected credit losses over the expected contractual life of our existing loan portfolio and the establishment of an allowance that is sufficient to absorb those losses.

As of January 1, 2023, we adopted ASU2016-13 Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as current expected credit losses (CECL).

Determining the appropriateness of the allowance is complex and requires judgement by management about the effect of matters that are inherently uncertain.

In determining an appropriate allowance, management makes numerous judgments, assumptions, and estimates which are inherently subjective, as they require material estimates that may be susceptible to significant change.

These estimates are derived based on continuous review of the loan portfolio, assessments of client performance, movement through delinquency stages, probability of default, losses given default, collateral values, and disposition, as well as expected cash flows, economic forecasts, and qualitative factors, such as changes in current economic conditions.

As stated in Note 4 to our consolidated financial statements set forth herein, we segment our loan portfolios based on similar risk characteristics for collective evaluation using a non-discounted cash flow approach to estimate expected losses.

We use a PD/LGD (probability of default/loss given default) model which aligns well with our internal risk rating system.

Actual losses may differ from estimated amounts due to model inefficiencies or management’s inability to adequately determine appropriate model adjustment factors.

The new accounting standard further requires management to use forecasts about future economic conditions to determine the expected credit losses over the remaining life of the asset.

Forecast adjustments are fundamentally difficult to establish and, in the current environment, due to uncertainty given the potential recession and political environment, the task is even more formidable.

We use a two-year reasonable and supportable period across all loan segments to forecast economic conditions.

We believe the two-year time horizon aligns with available industry guidance and various forecasting sources.

In assessing the factors used to derive an appropriate allowance, management benefits from a lengthy organizational history and experience with credit decisions and related outcomes but is new to the application of CECL.

We have been diligent in our efforts to gain a thorough understanding of the accounting standard, and have reviewed our portfolios, loan segmentations, methodologies and models and believe we have made appropriate and prudent decisions.

Nonetheless, if management’s underlying assumptions prove to be inaccurate, the Allowance for credit losses would have to be adjusted.

Our accounting policies related to the allowance for credit losses is disclosed in the section titled “Critical Accounting Policies” under the heading “Allowance for Credit Losses.”

Regulatory Developments Regarding the Bancorp and the Bank

Consent Order

On November 7, 2023, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order (the “Stipulation”) with the FDIC and the Indiana Department of Financial Institutions (“DFI”), consenting to the issuance of a consent order (the “Order”) relating to the Bank’s compliance with the Bank Secrecy Act and its implementing regulations (collectively, the “BSA”).

In consenting to the issuance of the Order, the Bank did not admit or deny any charges of unsafe or unsound banking practices or violations of law or regulation relating to its BSA compliance.

The Order is based on findings of the FDIC and DFI during their joint examination commencing in February 2023 (the “Examination”).

The board of directors and management of the Bancorp and the Bank have aggressively taken an active role in working to address the findings contained in the Examination and have proactively taken steps to comply with the requirements of the Order prior to its effectiveness, as further discussed below.

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Under the terms of the Order, the Bank or its board of directors is required to take certain affirmative actions to comply with the Bank’s obligations under the BSA.

These affirmative actions include, but are not limited to, the following:

strengthening the board of directors’ oversight of the Bank’s BSA activities;

developing, adopting, and implementing a revised BSA compliance program;

developing a revised system of internal controls designed to ensure full compliance with the BSA;

retaining management qualified to oversee the Bank’s BSA compliance program, including retaining a qualified BSA officer;

assessing BSA staffing needs and identifying staff positions and personnel for BSA compliance;

developing, adopting, and implementing a revised BSA training program;

developing, adopting, and implementing a revised suspicious activity reporting program;

implementing a board-approved customer due diligence program, and reviewing and enforcing enhanced customer due diligence and risk assessment procedures;

eliminating or correcting certain violations of BSA law and regulations, and correcting BSA program weaknesses;

ensuring that all reports required by the BSA are accurately and properly filed;

and developing and implementing a written plan to review past account and transaction activity to determine whether suspicious activity was properly identified and reported.

Prior to implementation, certain of the actions required by the Order are subject to review by, and approval or non-objection from, the FDIC and the DFI.

The Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and DFI.

Numerous actions have already been taken or commenced by the Bank to strengthen its BSA and anti-money laundering compliance practices, policies, procedures, and controls.

In this regard, the Bank began developing corrective actions prior to the entry of the Order and expects that it will be able to undertake and implement all required actions within the time periods specified in the Order.

These actions include, without limitation, the formation of a Risk Management and Compliance Committee of the board of directors, consisting solely of independent directors, to assist the board in overseeing compliance efforts;

enhancing the Bank’s risk management and compliance programs through restructuring reporting lines;

improving technology and increasing BSA compliance staff, including hiring senior personnel;

making additional investments into processes and system upgrades to strengthen anti-money laundering controls;

enhancing education and training of the Bank’s employees responsible for BSA and anti-money laundering compliance;

and conducting a look-back review of accounts and transaction activity covering the time periods from February 1, 2022 to March 31, 2023 to identify and properly report suspicious activity.

In this regard, and as previously announced, the Bancorp and Bank also appointed David J.

Kwait as Senior Vice President, General Counsel, Corporate Secretary, and Chief Risk Officer, overseeing the Bank’s enhanced risk management infrastructure, including BSA compliance.

The Bank will incur additional non-interest expenses associated with the implementation of the corrective actions set forth in the Order.

However, these expenses are not expected to have a material impact on the results of operations or financial condition of the Bancorp or the Bank.

Memorandum of Understanding

On November 7, 2023, the Bank entered into a memorandum of understanding (“MOU”) with the FDIC and DFI.

The MOU is an informal administrative agreement pursuant to which the Bank has agreed to take various actions and comply with certain requirements to enhance certain areas of the Bank’s operations.

The MOU documents an understanding among the Bank, the FDIC, and DFI that, among other things, the Bank will:

refrain from paying cash dividends without prior regulatory approval and develop and implement certain plans regarding the Bank’s operations, capital, and strategy.

The Bank will submit written quarterly progress reports to the FDIC and DFI detailing compliance with the MOU.

The MOU will remain in effect until modified or terminated by the FDIC and DFI.

Management does not expect the actions called for by these regulatory actions to have a substantial impact on the Bancorp’s or the Bank’s ongoing day-to-day operations, although they may have the effect of limiting or delaying the Bancorp’s or the Bank’s ability or plans to expand and engage in business combinations.

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Financial Condition

During the year ended December 31, 2023, total assets increased by $37.9 million (1.8%), to $2.1 billion, with interest-earning assets increasing by $52.5 million (2.8%).

At December 31, 2022, interest‑earning assets totaled $1.9 billion and represented 92.1% of total assets.

At December 31, 2023, interest‑earning assets totaled $2.0 billion and represented 92.9% of total assets.

Loans totaled $1.5 billion and represented 77.2% of interest-earning assets, 71.7% of total assets and 83.4% of total deposits.

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

(Dollars in thousands)

12 unchanged sentences

Loans receivable to total deposits

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Commercial real estate loans remained our largest loan segment and accounted for 33.4% of the total loan portfolio at December 31, 2023 and 32.2% at December 31, 2022.

A further breakdown of the composition of the commercial real estate loan portfolio as of December 31, 2023 is shown in the table below:

Commercial Real Estate (CRE) 12/31/2023*

% of Total Net Loans

CRE Owner Occupied (CRE OO)

Food Services & Drinking Places

Ambulatory Health Care Services

Gasoline Stations & Fuel Dealers

Merchant Wholesalers, Durable Goods

Total CRE Owner Occupied (CRE OO)

CRE Non Owner Occupied (CRE NOO)

Strip Centers - Lessors

Office Properties - Lessors

Industrial Properties - Lessors

Special Use - Lessors

Big Box Retail - Lessors

Mini Warehouses - Lessors

Total CRE Non Owner Occupied (CRE NOO)

Total Commercial Real Estate (OO & NOO)

Total Net Loans

*North American Industry Classification System (NAICS) classification coding for CRE loans began in 2023, similar NAICS 2022 proforma was not available to report

The Bancorp is primarily a portfolio lender.

2 unchanged sentences

The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis.

During the twelve months ended December 31, 2022, the Bancorp originated $44.9 million in new fixed rate mortgage loans for sale, compared to $153.1 million during the twelve months ended December 31, 2021.

During the twelve months ended December 31, 2022, the Bancorp originated $105.4 million in new mortgage loans retained in its portfolio, compared to $45.1 million during the twelve months ended December 31, 2021.

During the year ended December 31, 2023, the Bank originated $37.9 million in new fixed rate mortgage loans for sale, compared to $44.9 million during the year ended December 31, 2022.

During the year ended December 31, 2023, the Bank originated $41.6 million in new 1-4 family loans retained in its portfolio, compared to $105.4 million during the year ended December 31, 2022.

These retained loans are primarily construction loans and adjustable-rate loans with a fixed-rate period of 7 years or less, and the Bank continues to sell longer-duration fixed rate mortgages into the secondary market.

Net gains realized from the mortgage loan sales totaled $1.4 million for the twelve months ended December 31, 2022, compared to $5.3 million for the twelve months ended December 31, 2021.

At December 31, 2022, the Bancorp had $1.5 million in loans that were classified as held for sale, compared to $5.0 million at December 31, 2021.

Net gains realized from the mortgage loan sales totaled $1.1 million for the year ended December 31, 2023, compared to $1.4 million for the year ended December 31, 2022.

At December 31, 2023, the Bancorp had $340 thousand in loans that were classified as held for sale, compared to $1.5 million at December 31, 2022.

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

At December 31, 2022, all non-performing loans are also accounted for on a non-accrual basis, except for two residential real estate loans totaling $166 thousand, and one consumer manufactured loan totaling $82 thousand that remained accruing and more than 90 days past due.

At December 31, 2023, all non-performing loans are also accounted for on a non-accrual basis, except for thirty residential real estate loans totaling $1.1 million, and one commercial loan totaling $712 thousand that remained accruing and more than 90 days past due.

The Bancorp's nonperforming loans are summarized below:

20 unchanged sentences

Manufactured homes

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In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of special mention loans.

9 unchanged sentences

Manufactured homes

A loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement.

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

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

Purchased loans with evidence of credit quality deterioration since origination are considered purchased credit impaired loans.

Expected future cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable (“accretable yield”).

Purchased loans with evidence of credit quality deterioration since origination are considered purchased credit impaired.

The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and represents probable losses in the portfolio.

1 unchanged sentence

Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively.

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

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

(Dollars in thousands)

December 31, 2022

December 31, 2021

Residential real estate

Commercial real estate

Construction and land development

Commercial business

Manufactured homes

At times, the Bancorp will modify the terms of a loan to forego a portion of interest or principal or reduce the interest rate on the loan to a rate materially less than market rates, or materially extend the maturity date of a loan as part of a troubled debt restructuring.

The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of expected future cash flows;

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

A loan is considered collateral dependent when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement.

The valuation basis for these modified loans is based on the present value of expected future cash flows;

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

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

(Dollars in thousands)

December 31, 2022

December 31, 2021

Residential real estate

Commercial real estate

Construction and land development

Commercial business

Manufactured homes

At December 31, 2022, management is of the opinion that there are no loans, except certain of those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure.

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

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

A loan is charged off against the allowance by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur.

The determination of the amounts of the ALL and provisions for loan losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability as of the reporting date.

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

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

The following table shows the amortized cost of loans at December 31, 2023, that were both experiencing financial difficulty and modified during the year ended December 31, 2023, segregated by portfolio segment and type of modification.

The percentage of the amortized cost of loans that were modified to borrowers in financial distress as compared to the amortized cost of each segment of financial receivable is also presented below.

For the year ended December 31, 2023

(Dollars in thousands)

December 31, 2022

December 31, 2021

Term Extension

and Interest Rate

Residential Real Estate

Commercial real estate

Construction and land development

Commercial business

Manufactured homes

The Bancorp's charge-off and recovery information is summarized below:

There were no commitments to lend additional amounts to the borrowers included in the previous table.

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The Bancorp closely monitors the performance of loans and leases that have been modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

The following table shows the performance of such loans that have been modified during the year ended December 31, 2023.

(Dollars in thousands)

As of the twelve months ended December 31, 2022

Net Charge-offs

Greater Than 90

Days Past Due

Residential Real Estate

Commercial real estate

Construction and land development

Commercial business

Manufactured homes

The ALL provisions take into consideration management’s current judgments about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio mix and local economic conditions.

In determining the provision for loan losses for the current period, management has considered risks associated with the local economy, changes in loan balances and mix, and asset quality.

In addition, management considers reserves that are not part of the ALL that have been established from 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 nonaccretable and accretable discount totaled $1.5 million compared to $1.4 million at December 31, 2021.

Additionally, the Bancorp has acquired loans where there was no evidence of credit quality deterioration since origination and has marked these loans to their fair values.

As part of the fair value of loans receivable, a net fair value discount was established for loans acquired and has a balance of $5.5 million at December 31, 2022, compared to $1.1 million at December 31, 2021.

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

The borrowers with term extension have had their maturity dates extended and as a result their monthly payments were reduced.

Upon the Bancorp’s determination that a modified loan has subsequently been deemed uncollectible, the loan or lease is written off.

Therefore, the amortized cost of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

At December 31, 2023, management is of the opinion that there are no loans, except certain of those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled loan modification.

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

The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management’s evaluation, is appropriate to provide coverage for current expected credit losses in the loan and lease portfolio.

The allowance for credit losses is increased by the provision for credit losses and is decreased by charge-offs, net of recoveries on prior charge-offs.

The determination of the amounts of the ACL and provisions for credit losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability as of the reporting date.

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

The ACL provisions take into consideration management’s current judgments about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio mix and local economic conditions.

In determining the provision for credit losses for the current period, management has considered risks associated with the local economy, changes in loan balances and mix, and asset quality.

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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 Bancorp's allowance to total loans and non-performing loans are

summarized below:

If the segment performs in line with expectations, the deferred cost reserve is paid as a premium to the third party originator of the loan.

The unamortized balance of the deferred cost reserve totaled $3.5 million and $4.6 million as of December 31, 2023, and 2022, respectively, and is included in net deferred loan origination cost.

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

(Dollars in thousands)

December 31, 2022

December 31, 2021

Allowance for loan losses

Allowance for credit losses

Non-performing loans

ALL-to-total loans

ALL-to-non-performing loans (coverage ratio)

The December 31, 2022, balance in the ALL account is considered adequate by management after evaluation of the loan portfolio, past experience and current economic and market conditions.

ACL-to-total loans

ACL-to-non-performing loans (coverage ratio)

The December 31, 2023, balance in the ACL account is considered adequate by management after extensive analysis performed in accordance with the provisions of the current expected credit loss model.

While management may periodically allocate portions of the allowance for specific problem loans, the whole allowance is available for any loan charge offs that occur.

The allocation of the ALL reflects performance and growth trends within the various loan categories, as well as consideration of the facts and circumstances that affect the repayment of individual loans, and loans which have been pooled as of the evaluation date, with particular attention given to non-performing loans and loans which have been classified as substandard, doubtful or loss.

The allocation of the ACL reflects performance and growth trends within the various loan categories, as well as consideration of the facts and circumstances that affect the repayment of individual loans, and loans which have been pooled as of the evaluation date, with particular attention given to non-performing loans and loans which have been classified as substandard, doubtful or loss.

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

During 2022, net sales of foreclosed real estate totaled $93 thousand and net gains from the 2022 sales totaled $16 thousand.

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

During 2023, net sales of foreclosed real estate totaled $77 thousand and net losses from the 2023 sales totaled $13 thousand.

Funds are generally invested in federal funds, interest bearing balances in other financial institutions, U.S.

1 unchanged sentence

treasury securities, federal agency obligations, obligations of state and local municipalities and corporate securities.

The securities portfolio totaled $370.9 million at December 31, 2022, compared to $526.9 million at December 31, 2021, a decrease of $156.0 million or 29.6%.

The decrease is attributable to increased unrealized losses within the portfolio and the use of cashflows from the securities portfolio to fund loan growth.

The securities portfolio totaled $371.4 million at December 31, 2023, compared to $370.9 million at December 31, 2022, an increase of $478 thousand or 0.1%.

The increase is attributable to decreased unrealized losses within the portfolio.

At December 31, 2023, the securities portfolio represented 19.0% of interest-earning assets and 17.6% of total assets compared to 19.5% of interest-earning assets and 17.9% of total assets at December 31, 2022.

As of December 31, 2022, the Bancorp’s two investments in trust preferred securities were in “payment in kind”

As of December 31, 2023, the Bancorp’s two investments in trust preferred securities were in “payment in kind” status.

Payment in kind status results in a temporary delay in the payment of interest.

1 unchanged sentence

At December 31, 2023, the cost basis of the two trust preferred securities on non-accrual status totaled $2.2 million.

The Bancorp’s end-of-period investment portfolio and other short-term investments and stock balances were as follows:

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The carrying value of the Bancorp’s investment portfolio and other short-term investments and stock balances at December 31, 2023 and 2022 were as follows:

(Dollars in thousands)

10 unchanged sentences

Federal Home Loan Bank stock

The net decrease in interest bearing deposits in other financial institutions is primarily the result of the timing of investments in interest earning assets relative to the inflow and outflow of deposits and repurchase agreements.

The net increase in interest bearing deposits in other financial institutions is primarily the result of the timing of investments in interest earning assets relative to the inflow and outflow of deposits and repurchase agreements.

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

The Bancorp offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships.

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

(Dollars in thousands)

1 unchanged sentence

Total deposits

The overall increase in total deposits was primarily a result of the Royal acquisition, the Bancorp’s efforts to maintain and grow core deposits, and customer preferences for the security and liquidity of the Bancorp’s deposit product offerings.

The Bancorp’s borrowed funds are primarily used to fund asset growth not supported by deposit generation.

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

On December 31, 2023, balances for certificates of deposit totaled $532.1 million, compared to $363.1 million on December 31, 2022, an increase of $169.0 million or 46.5%.

The decrease in core deposits and increase in certificate of deposit balances is related to customer preferences for higher yielding deposits.

The Bancorp’s borrowed funds are primarily used to fund asset growth not supported by deposit generation.

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

(Dollars in thousands)

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Total borrowed funds

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Repurchase agreements increased as part of normal account fluctuations within that product line.

Borrowed funds increased as short-term FHLB advances were taken during the year, due to cyclical inflows and outflows of interest-earnings assets and interest-bearing liabilities.

Borrowed funds decreased due to cyclical inflows and outflows of interest-earning assets and interest-bearing liabilities.

Liquidity and Capital Resources

For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, and pay dividends and operating expenses.

Because profit and liquidity are often conflicting objectives, management attempts to maximize the Bank’s net interest margin by making adequate, but not excessive, liquidity provisions.

Furthermore, funds are managed so that future profits will not be significantly impacted as funding costs increase.

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

During 2022, cash and cash equivalents decreased $1.9 million compared to an increase of $13.3 million for 2021.

The primary sources of cash and cash equivalents were cash and cash equivalents from acquisition activity, the sale of loans originated for sale, proceeds from the sale of securities, proceeds from the maturity and paydown of securities, and proceeds from FHLB advances.

The primary uses of cash and cash equivalents were the purchase of securities, change in deposits, and loan originations.

During 2023, cash and cash equivalents increased $54.7 million compared to a decrease of $1.9 million for 2022.

The primary sources of cash and cash equivalents were proceeds from the sale of loans originated for sale, proceeds from the sale of securities, proceeds from the maturity and paydown of securities, and proceeds from the Federal Reserve’s BTFP.

The primary uses of cash and cash equivalents were the payment of dividends, change in deposits, and loan originations.

During 2023, net cash from operating activities totaled $24.2 million, compared to $17.7 million for 2022.

Cash provided from operating activities was primarily a result of net income and sale of loans originated for sale, offset by loans originated for sale and net change in other assets, accrued expenses, and other liabilities.

Net cash outflows from investing activities totaled $1.1 million during 2022, compared to outflows of $127.7 million during 2021.

Cash outflows from investing activities were primarily related to the net change in loans receivable and purchase of securities, offset against the cash and cash equivalents from acquisition activity, net, and proceeds from the sales and maturities of securities.

Net cash outflows from financing activities totaled $18.5 million in 2022, compared to net cash inflows of $122.1 million in 2021.

The net cash outflows from financing activities were primarily a result of net change in deposits and repayment of FHLB advances, offset against the change in proceeds from FHLB advances.

During 2022, the Bancorp’s Board of Directors maintained dividends as earnings and capital continued to be sufficient to warrant the current dividend.

Cash provided from operating activities was primarily a result of net income, sale of loans originated for sale and net change in other assets, accrued expenses, and other liabilities, offset by loans originated for sale and gain on sale of loans held-for-sale.

Net cash inflows from investing activities totaled $15.0 million during 2023, compared to outflows of $1.1 million during 2022.

Cash inflows from investing activities were primarily related to the net change in loans receivable and purchase of securities, offset against the proceeds from the sales and maturities of securities and certificates of deposit in other financial institutions.

Net cash inflows from financing activities totaled $15.5 million in 2023, compared to net cash outflows of $18.5 million in 2022.

The net cash flows from financing activities were primarily a result of net change in deposits, proceeds from borrowings, the net change in repurchase agreements and dividends paid.

Management strongly believes that safety and soundness is enhanced by maintaining a high level of capital.

Stockholders' equity totaled $136.4 million at December 31, 2022, compared to $156.6 million at December 31, 2021, a decrease of $20.2 million (3.2%).

The decrease was primarily the result of an increase in net unrealized losses of available for sale securities of $68.6 million and dividends of $5.3 million, offset against issuance of shares for the acquisition of Royal of $38.0 million and net income of $15.1 million.

Stockholders' equity totaled $147.3 million at December 31, 2023, compared to $136.4 million at December 31, 2022, an increase of $11.0 million (8.0%).

The increase was primarily the result of net income of $8.4 million and a decrease in net unrealized losses on available for sale securities of $12.7 million, which were partially offset by a decrease from the impact of adoption of ASU No.

2016-13 totaling $6.1 million and dividends of $4.5 million.

At December 31, 2023, book value per share was $34.28 compared to $31.73 for 2022.

The following table shows that, at December 31, 2022, the Bank’s capital exceeded all regulatory capital requirements.

The following table shows that, at December 31, 2023, the Bank’s capital exceeded all regulatory capital requirements.

The dollar amounts are in millions.

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Tier 1 capital to adjusted average assets

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.

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The Bancorp’s ability to pay dividends to its shareholders is largely dependent upon the Bank’s ability to pay dividends to the Bancorp.

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.

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;

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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 profits.

In addition, under the terms of the MOU, the Bank must seek regulatory approval prior to paying cash dividends.

See “– Regulatory Developments Regarding the Bancorp and the Bank – Memorandum of Understanding” above.

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 was paid to shareholders on January 6, 2023.

Results of Operations –

The aggregate amount of dividends that the Bank was eligible to declare in 2023, without the need for qualifying for an exemption or prior DFI approval, was its 2023 net income.

On December 26, 2023, the Board of Directors of the Bancorp declared a fourth quarter dividend of $0.12 per share.

The Bancorp’s fourth quarter dividend was paid to shareholders on February 5, 2024.

Results of Operations –

Comparison of 2023 to 2022

Net income for 2022 was $15.1 million, compared to $15.0 million for 2021, an increase of $117 thousand (0.8%).

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

Net income for 2023 was $8.4 million, compared to $15.1 million for 2022, a decrease of $6.7 million (44.4%).

The decrease is primarily due to lower net interest income, an increase in the provision for credit losses and a decrease in noninterest income, which were partially offset by a decrease in noninterest expenses and a decrease in income tax expense.

The earnings represent a return on average assets of 0.40% for 2023, compared to 0.74% for 2022.

The return on average equity was 6.28% for 2023, compared to 10.47% for 2022.

Net interest income for 2022, was $67.1 million, an increase of $18.6 million (38.2%) from $48.6 million for 2021.

The increased net interest margin is primarily related to increased loan balances from the acquisition of Royal, organic loan growth, and the ability to manage deposit and borrowing costs to support earning asset growth.

Net interest income for 2023, was $54.6 million, a decrease of $12.6 million (18.8%) from $67.1 million for 2022.

The decreased net interest margin is primarily the result of the increase in short-term interest rates relative to long-term interest rates as part of the Federal Reserve’s response to high inflation and other factors.

The compression seen in 2023 may continue moderately, unless target rates decrease, and our interest-bearing liabilities can be repriced at those lower rates.

The weighted-average yield on interest-earning assets was 4.45% for 2023, compared to 3.81% for 2022.

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The net interest margin was 2.83% for 2023, compared to 3.56% for 2022.

The Bancorp’s tax equivalent net interest margin for 2022, was 3.74% compared to 3.51% for 2021.

The Bancorp’s tax equivalent net interest margin for 2023, was 2.98% compared to 3.74% for 2022.

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

The increase in interest earning asset income for the year ended December 31, 2022, compared to the year ended December 31, 2021, is primarily related to increased reinvestment rates in 2022 for loans, securities, and excess cash balances, as a result of the Federal Reserve rate increases occurring though out 2022.

The increase in interest earning asset income for the year ended December 31, 2023, compared to the year ended December 31, 2022, is primarily related to increased reinvestment rates in 2023 for loans, securities, and excess cash balances, as a result of the Federal Reserve rate increases occurring throughout 2023.

The increase in interest bearing liability expense is primarily the result of the Bancorp adjusting deposit and repurchase agreement pricing to align with the current interest rate cycle, along with increased borrowing costs as a result of the Federal Reserve rate increases.

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The following table shows the change in noninterest income for the year ending December 31, 2023, and December 31, 2022.

(Dollars in thousands, except per share data)

Twelve Months Ended December 31,

Year Ended December 31,

12/31/2023 vs.

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

Gain on sale of securities, net

Gain (loss) on sale of securities, net

Increase in cash value of bank owned life insurance

Gain on sale of foreclosed real estate

Gain (loss) on sale of foreclosed real estate

Total noninterest income

The increase in fees and service charges is primarily the result of the acquisition of Royal and the resulting increase in our customer base.

The decrease in wealth management operations is the result of lower fee income year over year due to market conditions.

The decrease in gain on sale of loans is the result of significant refinance activity in 2021 due to the economic and low-rate environment, which resulted in more loans originated and sold in 2021 compared to 2022.

We expect demand for fixed rate mortgage loans held-for-sale in the secondary market to be lower as borrowing rates on loans increase.

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

The decrease in fees and service charges is primarily the result of decreased lending fees earned resulting from lower loan volume year over year.

The increase in wealth management operations is the result of higher fee income year over year due to customer base growth and market conditions.

The decrease in gain on sale of loans is the result of a decline in the volume of loans sold due to the increases in interest rates in the economy during 2023 and 2022.

We expect demand for fixed rate mortgage loans held-for-sale in the secondary market to be lower as borrowing rates on loans remain elevated.

The following table shows the change in noninterest expense for the year ending December 31, 2023, and December 31, 2022.

(Dollars in thousands, except per share data)

Twelve Months Ended December 31,

Year Ended December 31,

12/31/2023 vs.

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Total noninterest expense

The increase in compensation and benefits is primarily the result of the Royal acquisition, management’s continued focus on talent management, and wage inflation.

The increase in data processing expense is primarily the result of data conversion expenses related to the acquisition of Royal, increased system utilization due to growth of the Bank, and continued investment in technological advancements such as Salesforce and nCino.

The increase in occupancy and equipment expense is primarily related to the Royal acquisition and higher operating costs.

Marketing expenses have increased to enhance brand recognition in new markets and gain more wallet share.

The increase in impairment charge on assets held for sale is the result of impairment on the carrying value of branches held for sale.

The increase in federal deposit insurance premiums is primarily the result of growth of the bank’s average assets.

The increase in net loss recognized on sale of premises and equipment is the result of the sale of a branch to reduce future fixed costs, allowing for redeployment of a portion of occupancy expenses into building a digital-forward foundation so that Finward can better serve its customers.

The increase in other operating expenses is primarily the result of one-time expenses related to the acquisition of Royal, continued investments in strategic initiatives focusing on growth of the organization, and inflationary pressures.

Income tax expenses for the year ended December 31, 2022, totaled $1.5 million, compared to income tax expense of $1.4 for the year ended December 31, 2021, an increase of $64 thousand (4.5%).

The combined effective federal and state tax rates for the Bancorp was 8.9% for the year ended December 31, 2022, compared to 8.6% for the year ended December 31, 2021.

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

Critical Accounting Policies

Critical accounting policies are those accounting policies that management believes are most important to the portrayal of the Bancorp’s financial condition and that require management’s most difficult, subjective or complex judgments.

The Bancorp’s most critical accounting policies are summarized below.

Other accounting policies, including those related to the fair values of financial instruments and the status of contingencies, are summarized in Note 1 to the Bancorp’s consolidated financial statements.

Valuation of Investment Securities –

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.

The decrease in compensation and benefits is primarily the result of nonrecurring expenses related to the acquisition of Royal Financial.

The decrease in data processing expense is primarily the result of the data conversion expenses incurred in 2022 related to the acquisition of Royal Financial.

The decrease in occupancy and equipment expense is primarily due to the elimination of expenses on three branches that were closed in 2022.

The decrease in marketing is a result of nonrecurring expenses related to the Royal Financial acquisition advertising campaign in 2022.

The decrease in impairment charge on assets held for sale is the result of prior year impairment on the carrying value of branches held for sale.

The increase in federal deposit insurance premiums is primarily the result of growth of the Bank’s average assets.

The net loss recognized on sale of premises and equipment in 2022 resulted from the sale of a branch office.

The resulting cost savings were redeployed into building a digital-forward foundation so that the Bancorp can better serve its customers.

The decrease in other operating expenses is primarily the result of one-time expenses incurred in the prior year related to the acquisition of Royal Financial.

Income tax benefit for the year ended December 31, 2023, totaled $335 thousand, compared to income tax expense of $1.4 million for the year ended December 31, 2022, a decrease of $1.8 million (122.7%).

The combined effective federal and state tax rate for the Bancorp was (4.16%) for the year ended December 31, 2023, compared to 8.9% for the year ended December 31, 2022.

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Critical Accounting Estimates

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that management believes are most important to the portrayal of the Bancorp’s financial condition and that require management’s most difficult, subjective or complex judgments.

The Bancorp’s most critical accounting estimates are summarized below.

Valuation of Investment Securities – The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Different judgments and assumptions used in pricing could result in different estimates of value.

In certain cases where market data is not readily available because of lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy.

At the end of each reporting period securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with the Investments –

Debt and Equity Securities Topic of the Accounting Standards Codification.

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

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

At the end of each reporting period securities held in the investment portfolio are evaluated on an individual security level for determination of the need for an allowance for credit losses.

Significant judgments are required in determining whether unrealized losses on securities are due to credit-related causes, as opposed to changes in interest rates in the economy, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates.

We consider the following factors when determining credit-related impairment for a security:

the length of time and the extent to which the market value has been less than amortized cost;

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and an assessment of whether the Bancorp has (1) the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before its anticipated market recovery.

If either of these conditions is 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.

Management will utilize an independent valuation specialist to value securities semi-annually for other-than-temporary impairment.

Allowance for Loan Losses –

The Bancorp maintains an Allowance for Loan Losses (“ALL”) to absorb probable incurred credit losses that arise from the loan portfolio.

The ALL is increased by the provision for loan losses, and decreased by charge-offs net of recoveries.

The determination of the amounts of the ALL and provisions for loan losses is based upon management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability.

The methodology used to determine the current year provision and the overall adequacy of the ALL includes a disciplined and consistently applied quarterly process that combines a review of the current position with a risk assessment worksheet.

If either of these conditions is met, management will recognize credit-related impairment.

If, in management’s judgment, a credit-related 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.

Management will utilize an independent valuation specialist to value securities semi-annually for credit-related impairment.

Allowance for credit losses – The Bancorp maintains an Allowance for credit losses (“ACL”) to absorb probable incurred credit losses that arise from the loan portfolio.

The ACL is increased by the provision for credit losses, and decreased by charge-offs net of recoveries.

The determination of the amounts of the ACL and provisions for credit losses is based upon management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability.

The methodology used to determine the current year provision and the overall adequacy of the ACL includes a disciplined and consistently applied quarterly process that combines a review of the current position with a risk assessment worksheet.

Factors that are taken into consideration in the analysis include an assessment of national and local economic trends, a review of current year loan portfolio growth and changes in portfolio mix, and an assessment of trends for loan delinquencies and loan charge-off activity.

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

Where appropriate, ALL allocations are made to these loans based on management’s assessment of financial position, current cash flows, collateral values, financial strength of guarantors, industry trends, and economic conditions.

ALL allocations for homogeneous loans, such as residential mortgage loans and consumer loans, are based on historical charge-off activity and current delinquency trends.

Where appropriate, ACL allocations are made to these loans based on management’s assessment of financial position, current cash flows, collateral values, financial strength of guarantors, industry trends, and economic conditions.

ACL allocations for homogeneous loans, such as residential mortgage loans and consumer loans, are based on historical charge-off activity and current delinquency trends.

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

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Risk factors for non-performing and internally classified loans are based on an analysis of either the projected discounted cash flows or the estimated collateral liquidation value for individual loans defined as substandard or doubtful.

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policy changes and out of market lending activity.

The risk factors are applied to these types of loans to determine the appropriate level for the ALL.

Adjustments may be made to these allocations that reflect management’s judgment on current conditions, delinquency trends, and charge-off activity.

Based on the above discussion, management believes that the ALL is currently adequate, but not excessive, given the risk inherent in the loan portfolio.

The risk factors are applied to these types of loans to determine the appropriate level for the ACL.

Adjustments may be made to these allocations that reflect management’s judgment on current conditions, delinquency trends, and charge-off activity.

Based on the above discussion, management believes that the ACL is currently adequate, but not excessive, given the risk inherent in the loan portfolio.

Impact of Inflation and Changing Prices

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The primary assets and liabilities of the Bancorp are monetary in nature.

As a result, interest rates have a more significant impact on the Bancorp’s performance than the effects of general levels of inflation.

Interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services.

1 unchanged sentence

Not applicable.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis