What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-28 compared with 2023-03-30 · 1063 added, 1269 removed, 906 unchanged (72% of the section changed)

Financial Statements

Report of Independent Registered

Public Accounting Firm

To the Stockholders, Board of Directors and Audit Committee

Report of Independent Registered Public Accounting Firm

To the Stockholders, Board of Directors, and Audit Committe

Finward Bancorp

1 unchanged sentence

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.

We have audited the accompanying consolidated balance sheets of Finward Bancorp (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses effective January 1, 2023, due to the adoption of Accounting Standards Topic 326:

Financial Instruments – Credit Losses.

The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter.

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.

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.

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.

We conducted our audits 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.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits 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.

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.

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

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

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

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

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

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

How We Addressed the Matter in Our Audit

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

Testing the design of internal controls over the acquisition

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

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

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

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

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

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

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

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

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

Our audits 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 audits provide a reasonable basis for our opinion.

Page 67 of 122

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses

Financial Instruments – Credit Losses.

The Company’s loan portfolio totaled $1.5 billion as of December 31, 2023, and the associated allowance for credit losses (“ACL”) on loans was $18.8 million.

As discussed in Notes 1 and 4 to the consolidated financial statements, the Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist using relevant available information, from internal and external sources, relating to past events, current conditions, reasonable and supportable forecasts.

Historical peer and Company credit loss experience provides the basis for the estimation of expected credit losses.

Management also considers further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that exist for the period over which historical information is evaluated as well as other changes in qualitative factors not inherently considered in the quantitative analyses.

The resulting qualitative adjustments are applied to the relevant collectively evaluated loan pools.

We have identified the ACL, and more specifically the qualitative adjustments applied in the ACL, as a critical audit matter.

The principal consideration for our determination is the high degree of judgment and subjectivity in auditing the assumptions utilized by management in calculating the qualitative reserve component.

This required a high degree of judgement due to the nature and extent of audit evidence and effort required to address this matter.

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

Obtained an understanding of the Company’s process for establishing the ACL, including the selection and application of qualitative factors and related adjustments to establish the qualitative component of the ACL.

Evaluated the relevancy and reliability of the underlying data used to derive the qualitative factors, including comparison to internal, external and/or peer data.

Assessed the appropriateness and reasonableness of the qualitative factor adjustments, including evaluating management’s judgments as to which factors and relevant assessed risks impacted the qualitative adjustments for each loan pool.

Tested the accuracy of the mathematical application of the qualitative factors to adjust the historical loss experience.

/s/ FORVIS, LLP

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

Indianapolis, Indiana

March 28, 2024

Page 68 of 122

Consolidated Balance Sheets

1 unchanged sentence

Cash and non-interest bearing deposits in other financial institutions

$ 19,965  

$ 12,725  

$ 17,942 $ 19,965

Interest bearing deposits in other financial institutions

11,210  

19,987  

67,647 11,210

Federal funds sold

Total cash and cash equivalents

31,282  

33,176  

86,008 31,282

Certificates of deposit in other financial institutions

Securities available-for-sale

370,896  

526,889  

371,374 370,896

Loans held-for-sale

Loans receivable, net of deferred fees and costs

1,513,631  

966,720  

allowance for loan losses

( 12,897 )  

1,512,595 1,513,631

Allowance for credit losses

( 18,768 ) ( 12,897 )

Net loans receivable

1,500,734  

953,377  

1,493,827 1,500,734

Federal Home Loan Bank stock

1 unchanged sentence

Premises and equipment

40,212  

31,385  

38,436 40,212

Foreclosed real estate

Cash value of bank owned life insurance

31,936  

31,440  

22,395  

11,109  

32,702 31,936

22,395 22,395

Other intangible assets

50,123  

14,854  

$ 2,070,339  

$ 1,620,743  

45,262 50,123

$ 2,108,279 $ 2,070,339

LIABILITIES AND STOCKHOLDERS' EQUITY

Non-interest bearing

$ 359,092  

$ 295,294  

$ 295,594 $ 359,092

Interest bearing

1,415,925  

1,138,907  

1,775,017  

1,434,201  

1,517,827 1,415,925

1,813,421 1,775,017

Repurchase agreements

15,503  

14,581  

38,124 15,503

Borrowed funds

120,000  

80,000 120,000

Accrued expenses and other liabilities

23,426  

15,346  

29,389 23,426

Total liabilities

1,933,946  

1,464,128  

1,960,934 1,933,946

Commitments and contingencies

7 unchanged sentences

Additional paid-in capital

69,032  

30,430  

Accumulated other comprehensive (loss) income

( 64,300 )  

69,555 69,032

Accumulated other comprehensive loss

( 51,613 ) ( 64,300 )

Retained earnings

131,661  

121,909  

129,403 131,661

Total stockholders' equity

136,393  

156,615  

147,345 136,393

Total liabilities and stockholders' equity

$ 2,070,339  

$ 1,620,743  

$ 2,108,279 $ 2,070,339

See accompanying notes to consolidated financial statements.

Page 69 of 122

Consolidated Statements of Income

(Dollars in thousands, except per share data)

Twelve Months Ended December 31,

Year Ended December 31,

Interest income:

Loans receivable

$ 74,762 $ 62,133

Other interest earning assets

Total interest income

85,783 72,035

Interest expense:

3 unchanged sentences

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

54,555 67,149

Provision for credit losses

Net interest income after provision for credit losses

52,530 67,149

Noninterest income:

2 unchanged sentences

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

10,746 11,509

Noninterest expense:

Compensation and benefits

27,655 28,990

Occupancy and equipment

3 unchanged sentences

Professional services

Net loss recognized on sale of premises and equipment

Net (gain) recognized on sale of premises and equipment

12,115 13,694

Total noninterest expense

55,231 62,100

Income before income tax expenses

Income tax expenses

Income tax expenses (benefits)

( 335 ) 1,478

$ 8,380 $ 15,080

Earnings per common share:

$ 1.96 $ 3.61

$ 1.96 $ 3.60

Dividends declared per common share

$ 1.05 $ 1.24

See accompanying notes to consolidated financial statements.

Consolidated Statements of Comprehensive (Loss) Income

Page 70 of 122

Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands)

Twelve Months Ended December 31,

Year Ended December 31,

$ 8,380 $ 15,080

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

Unrealized (loss) gain arising during the period

reclassification adjustment for gains included in net income

Net securities (loss) gain during the period

Other comprehensive loss, net of tax

Comprehensive (loss) gain, net of tax

Unrealized gain (loss) arising during the period

16,630 ( 89,323 )

reclassification adjustment for losses (gains) included in net income

Net securities gain (loss) during the period

16,678 ( 89,985 )

( 3,991 ) 21,409

Other comprehensive income (loss), net of tax

12,687 ( 68,576 )

Comprehensive income (loss), net of tax

$ 21,067 $ ( 53,496 )

See accompanying notes to consolidated financial statements.

Consolidated Statements of Changes in Stockholders ’

Consolidated Statements of Changes in Stockholders ’ Equity

Comprehensive

2 unchanged sentences

Balance at January 1, 2022

$ 29,987  

$ 10,441  

$ 111,261  

$ 151,689  

14,963  

$ - $ 30,430 $ 4,276 $ 121,909 $ 156,615

- - - 15,080 15,080

Other comprehensive loss, net of tax

( 6,165 )  

- - ( 68,576 ) - ( 68,576 )

Net surrender value of 3,115 restricted stock awards

( 131 )  

- ( 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

( 4,315 )  

- - - ( 5,328 ) ( 5,328 )

Balance at December 31, 2022

$ 30,430  

$ 4,276  

$ 121,909  

$ 156,615  

$ - $ 69,032 $ ( 64,300 ) $ 131,661 $ 136,393

Balance at January 1, 2023

$ 30,430  

$ 4,276  

$ 121,909  

$ 156,615  

15,080  

Other comprehensive loss, net of tax

( 68,576 )  

$ - $ 69,032 $ ( 64,300 ) $ 131,661 $ 136,393

Cumulative effect of change in accounting principle (ASU 2016-13)

- - - ( 6,118 ) ( 6,118 )

- - - 8,380 8,380

Other comprehensive income, net of tax

- - 12,687 - 12,687

Net surrender value of 5,684 restricted stock awards

( 120 )  

- ( 196 ) - - ( 196 )

Stock-based compensation expense

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

37,981  

- 719 - - 719

Cash dividends, $ 1.05 per share

( 5,328 )  

- - - ( 4,520 ) ( 4,520 )

Balance at December 31, 2023

$ 69,032  

$ ( 64,300 )  

$ 131,661  

$ 136,393  

$ - $ 69,555 $ ( 51,613 ) $ 129,403 $ 147,345

See accompanying notes to consolidated financial statements.

Page 71 of 122

Consolidated Statements of Cash Flows

(Dollars in thousands)

Twelve months ended December 31,

Year Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

$ 8,380 $ 15,080

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

Origination of loans for sale

( 37,939 ) ( 44,856 )

Sale of loans originated for sale

40,217 49,628

Depreciation and amortization, net of accretion

Deferred tax expense

Deferred tax expense (benefit)

( 673 ) 1,187

Stock based compensation expense

Gain on sale of securities, net

Loss (gain) on sale of securities, net

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

Loss on sale of premises and equipment, net

( 1,084 ) ( 1,470 )

Loss (gain) on sale of premises and equipment, net

Impairment charge on assets held for sale

Gain (loss) on sale of foreclosed real estate

Loss (gain) on sale of foreclosed real estate

Gain on cash value of bank owned life insurance

( 766 ) ( 810 )

Loss on derivatives

Provision for loan losses

Provision for credit losses

Net change in:

Interest receivable

2,105 ( 141 )

3,002 ( 5,080 )

Accrued expenses and other liabilities

1,274 ( 3,476 )

Total adjustments

Net cash provided by operating activities

24,211 17,730

CASH FLOWS FROM INVESTING ACTIVITIES:

2 unchanged sentences

Proceeds from maturities and pay downs of securities available-for-sale

14,332 41,524

Proceeds from sales of securities available-for-sale

Purchase of securities available-for-sale

( 123 ) ( 30,421 )

Proceeds from bank owned life insurance

Net change in loans receivable

Proceeds of Federal Home Loan Bank Stock

( 6,378 ) ( 93,998 )

Proceeds from loans held for sale previously classified as loans receivable

Purchase of Federal Home Loan Bank Stock

1 unchanged sentence

Purchase of premises and equipment, net

( 1,148 ) ( 3,031 )

Proceeds from sale of premises and equipment

2 unchanged sentences

Net cash provided by (used in) investing activities

15,021 ( 1,131 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Change in deposits

Proceeds from FHLB advances

Repayment of FHLB advances

38,404 ( 134,220 )

Proceeds from borrowed funds

80,000 120,000

Repayment of borrowed funds

( 120,000 ) -

Net surrender value of restricted stock awards

( 196 ) ( 120 )

Change in repurchase agreements

Change in other borrowed funds

Dividends paid

Net cash (used in) provided by financing activities

( 5,335 ) ( 5,075 )

Net cash provided by (used in) financing activities

15,494 ( 18,493 )

Net change in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

54,726 ( 1,894 )

Cash and cash equivalents at beginning of year

31,282 33,176

Cash and cash equivalents at end of year

$ 86,008 $ 31,282

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for:

Cash paid during the year for:

$ 28,528 $ 4,572

Acquisition activity:

Fair value of assets acquired, including cash and cash equivalents

$ - $ 528,539

Value of goodwill and other intangible assets

3 unchanged sentences

Noncash activities:

Transfer of loans receivable to loans held for sale

Transfers from loans to foreclosed real estate

Dividends declared not paid

Transfer of premises and equipment to other real estate

Securities purchased not settled

Initial recognition of ASU 2016-13

See accompanying notes to consolidated financial statements.

Page 72 of 122

Notes to Consolidated Financial Statements

1 unchanged sentence

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.

Principles of Consolidation – The consolidated financial statements include Finward Bancorp (the “Bancorp” or “Finward”) 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.

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.

5 unchanged sentences

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.

On May 18, 2016, NWIN Risk Management, Inc., a captive insurance company incorporated in Nevada, was formed as a wholly owned subsidiary of the Holding Company.

NWIN Risk Management, Inc.

was dissolved as a corporate entity on August 9, 2023.

All assets of the subsidiary were distributed to the Holding Company upon decommissioning.

All intercompany transactions and balances are 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.

Estimates associated with the allowance for credit 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;

1 unchanged sentence

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.

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.

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.

1 unchanged sentence

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.

At December 31, 2023, and 2022, all of the Bancorp’s securities were classified as available-for-sale.

The Bancorp does not have a held to maturity or trading portfolio.

1 unchanged sentence

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.

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.

Prior to the adoption of ASU 2016 - 13, declines in the fair value of securities below their cost deemed to be other‑than‑temporary impairment (“OTTI”) were reflected in operations as realized losses.

Upon adoption of ASU 2016 - 13, for securities in a loss position, the Company evaluates whether the decline in fair value below amortized cost resulted from a credit loss or other factors, and if the loss is attributable to credit loss, the loss is recognized through an allowance for credit losses on securities.

In assessing credit loss, the Company considers, among other things:

the extent to which fair value is less than the amortized cost basis, adverse conditions specific to the security or industry, historical payment patterns, the likelihood of future payments and changes to the rating of a security by a rating agency.

The full amount of the loss will be charged to earnings if the Company intends to sell an impaired security or it is more likely than not that the Company would be required to sell an impaired security before recovering its amortized cost basis.

Changes in the allowance for credit losses would be recorded as a provision for credit losses.

Losses would be charged against the allowance when management believes the security is uncollectible or management intends to sell or is required to sell the security.

See Note 3—Securities for additional information.

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.

2 unchanged sentences

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.

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.

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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.

In all cases, loans are placed on non-accrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Generally, interest accrued but not received for loans placed on non-accrual status is reversed against interest income.

Interest received on such loans is accounted for on the cash-basis or cost‑recovery method, until qualifying for return to accrual.

Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses –

The allowance for loan losses (“allowance”) is a valuation allowance for probable incurred credit losses.

Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Subsequent recoveries, if any, are credited to the allowance.

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged‑off.

A loan is considered impaired when, based on current information and events, it is probable that the Bancorp will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are normally collectively evaluated for impairment, unless part of a larger relationship or a trouble debt restructuring.

Troubled Debt Restructures –

A troubled debt restructuring of a loan is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule.

All modified loans are evaluated to determine whether the loan should be reported as a troubled debt restructure (TDR).

A loan is a TDR when the Bancorp, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower by modifying or renewing a loan under terms that the Bancorp would not otherwise consider.

To make this determination, the Bancorp must determine whether (a) the borrower is experiencing financial difficulties and (b) the Bancorp granted the borrower a concession.

Allowance for credit losses – The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

Loans are charged off against the allowance when management believes uncollectibility of the loan is confirmed.

Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The allowance for credit losses is measured on a collective (segment) basis when similar risk characteristics exist.

Segments generally reflect underlying collateral categories as well taking into consideration the risk ratings and unguaranteed balance of small business loans.

Management considers various economic scenarios in its forecast when evaluating economic indicators and weights the various scenarios to arrive at the forecast that most reflects management’s expectation of future conditions.

After a two -year forecast period, a two -year reversion period adjusts loss experience to the historical average on a straight-line basis.

Loans that do not share risk characteristics are evaluated on an individual basis.

Loans evaluated individually are not also included in the collective evaluation.

When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral, adjusted for undiscounted selling costs as appropriate.

When the discounted cash flow method is used to determine the allowance for credit losses, management does not adjust the effective interest rate used to discount expected cash flows to incorporate expected prepayments.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.

The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies:

management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Bancorp.

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience.

These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.

The Company also maintains an allowance for credit losses on off-balance sheet credit exposures for unfunded loan commitments.

This allowance is reflected as a component of other liabilities which represents management’s current estimate of expected losses in the unfunded loan commitments.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life based on management’s consideration of past events, current conditions and reasonable and supportable economic forecasts.

Management tracks the level and trends in unused commitments and takes into consideration the same factors as those considered for purposes of the allowance for credit losses on outstanding loans.

Results for the full year and period end December 31, 2023, are presented under the current expected credit losses ("CECL") methodology while prior period amounts continue to be reported in accordance with the Allowance for loan and lease losses (“ALLL”) methodology.

A description of each segment of the loan portfolio, including the corresponding credit risk, is included below:

Residential real estate – We offer fixed and adjustable rate residential real estate loans with terms of up to 30 years.

We also offer a variety of lot loan options to consumers to purchase the lot on which they intend to build their home.

We also offer traditional home equity loans and lines of credit.

Our underwriting criteria for, and the risk associated with, home equity loans and lines of credit are generally the same as those for first mortgage loans.

Home Equity - Home equity loans typically have terms of 20 years or less.

We generally limit the extension of credit to 90% of the available equity of each property.

These loans carry risk associated with local employment and declining real estate values.

Commercial real estate - Commercial real estate loans are extensions of credit secured by owner occupied and non-owner occupied collateral.

Commercial real estate loans generally have terms of 10 years or less, although payments may be structured on a longer amortization basis.

We attempt to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied industrial, office, and retail buildings where the loan-to-value ratio, established by independent appraisals, does not generally exceed 80% of cost of appraised value.

We also generally require that a borrower’s cash flow exceed 120% of monthly debt service obligations.

Commercial real estate loans are generally viewed as having more risk of default than residential real estate loans.

They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to service the debt.

Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies.

Such repayment of owner occupied loans is commonly derived from the successful ongoing operations of the business occupying the property.

These typically include small businesses and professional practices.

Commercial real estate loans may also include government guaranteed loans secured by collateral in the form of residential real estate.

Repayment of such loans generally comes from the generation of cash flow as the result of the borrower’s business operations

Construction and land development – Construction and land development loans are generally limited to a term of 9 to 24 months, although payments may be structured on a longer amortization basis.

Most loans will mature and require payment in full upon completion and either the sale of the property or refinance into a permanent loan.

We believe that construction and land development loans generally carry a higher degree of risk than long-term financing of stabilized, rented, and owner-occupied properties because repayment depends on the ultimate completion of the project and usually on the subsequent sale of the property.

We attempt to reduce risk associated with construction and land development loans by obtaining personal guaranties and by keeping the maximum loan to value ratio at or below 80% of the lesser of cost or appraised value, depending on the project type.

Generally we do not have interest reserves built into loan commitments but require periodic cash payments for interest from the borrower’s cash flow.

Multifamily - Multifamily loans are a subset of commercial real estate loans and generally carry similar terms and underwriting requirements.

These loans are broken out as a separate segment due to unique risk characteristics that they exhibit.

While similar in nature to other non-owner occupied commercial real estate, they are significantly impacted by the individual credit capacity of many more individual tenants than other commercial real estate as well as the condition and capacity of the local residential housing markets.

The underlying real estate also has a lack of suitable alternative uses.

Commercial business - Commercial business loans are typically made to small and middle-market established businesses involved in professional services, accommodation and food services, health care, financial services, wholesale trade, manufacturing, distribution, retailing, and non-profits.

Most clients are privately owned with markets that range from local to national in scope.

Many of the loans to this segment are secured by liens on corporate assets and personal guarantees of the principals.

The regional economic strength or weakness impacts the relative risk in this loan category.

There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.

Risks associated with commercial and industrial loans include monitoring the condition of the collateral which often consists of inventory, accounts receivable, and other non-real estate assets.

Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service this debt.

Consumer – Consumer loans are underwritten based on the borrower’s income, current debt level, past credit history, and the availability and value of collateral.

Consumer rates are both fixed and variable, with negotiable terms.

Our installment loans typically amortize over periods up to seven years.

Although we typically require monthly principal and interest payments on our loan products, we will offer consumer loans at interest only with a single maturity date when a specific source of repayment is available.

Consumer loans are generally considered to have greater risk than our first and second mortgages on real estate because they may be unsecured, or, or if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value than real estate.

Manufactured homes .

The Bancorp purchases fixed rate closed loans from a third party that are subject to Bancorp’s underwriting requirements and secured by manufactured homes.

The maturity date on these loans can range up to 25 years.

In addition, these loans have a reserve account held at the Bancorp.

Government - The Bancorp is permitted to purchase non-rated municipal securities, tax anticipation notes, and warrants within the local market area.

Troubled Loan Modifications – A troubled loan modification 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 loan modification (TLM).

A loan is a TLM when the Bancorp, for economic or legal reasons related to the borrower's financial difficulties, grants a type of loan modification 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 modification for principal forgiveness, interest rate reduction, other-than-insignificant payment delay or other-than-insignificant term extension.

This determination requires consideration of all of the facts and circumstances surrounding the modification.

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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.

( 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 ) is there doubt as to whether the borrower will continue to be a going concern based on factors including but not limited to projections of insufficient cash flows to service debt in accordance with contractual terms and anticipated inability to obtain funding from other sources at a market rate.

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.

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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.

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 – Land is carried at cost.

Premises and equipment are carried at cost less accumulated depreciation.

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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.

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.

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.

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.

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.

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An impairment loss is recognized for any excess of carrying value over fair value of the goodwill or the indefinite-lived intangible asset.

Repurchase Agreements –

Substantially, all repurchase agreement liabilities represent amounts advanced by various customers that are not covered by federal deposit insurance and are secured by securities owned by the Bancorp.

Income Taxes –

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

Repurchase Agreements – Substantially all repurchase agreement liabilities represent amounts advanced by various customers that are not covered by federal deposit insurance and are secured by securities owned by the Bancorp.

Income Taxes – Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates.

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Accordingly, the Bancorp has not recorded any reserves or related accruals for interest and penalties for uncertain tax positions at December 31, 2023 and 2022.

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.

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.

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.

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.

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.

Restrictions on Cash –– As part of derivative contracts entered into by the Bancorp, cash balances of $ 4.1 million were pledged as collateral at December 31, 2023.

At December 31, 2023, the Company’s correspondent cash accounts exceeded federally insured limits by $ 18.7 million.

Additionally, the Company had approximately $ 56.2 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 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.

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.

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.

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 ):

Reclassification – Certain amounts appearing in the consolidated financial statements and notes thereto as of and for the year ended December 31, 2022, may have been reclassified to conform to the December 31, 2023 presentation.

Trust Assets – Assets of the Bancorp’s wealth management department, other than cash on deposit at the Bancorp, are not included in these consolidated financial statements because they are not assets of the Bancorp.

Dividends – Banking regulations require maintaining certain capital levels and these regulations, along with certain provisions of state law, may limit the dividends paid by the Bank to the Bancorp or by the Bancorp to shareholders.

Pursuant to the MOU discussed in Note 12, the Bank must seek regulatory approval prior to paying cash dividends.

Adoption of New Accounting Pronouncements – In June 2016, FASB issued ASU 2016 - 13, Financial Instruments - Credit Losses:

Measurement of Credit Losses on Financial Instruments (“CECL”).

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 (“ACL”) 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 new credit loss guidance became effective for the Bancorp as of January 1, 2023.

On January 1, 2023, the Bancorp adopted ASU No.

2016 - 13 using a modified retrospective transition method, resulting in an implementation entry of $ 9.3 million, increasing the ACL by $ 6.1 million and unfunded commitment liability of $ 3.1 million, retained earnings decreased $ 6.2 million and a deferred tax asset of $ 2.2 million was generated.

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

In addition, $ 1.0 million of non-accretable credit loan discounts on purchase credit impaired loans now classified as purchase credit deteriorated were reallocated to the ACL.

Upon adopting ASU 2016 - 13, the Bancorp did not record an allowance as of January 1, 2023, with respect to its available-for-sale debt securities as the majority of these securities are municipal securities for which the risk of loss is minimal.

The main drivers of the day one adjustment related to implementation is summarized in the following table:

As Reported Under

(Dollars in thousands)

Pre-ASC 326 Adoption

Impact of ASC 326

Allowance for credit losses

December 31, 2022

January 1, 2023

Residential real estate

$ 3,021 $ 2,223 $ 5,244

Commercial real estate

5,784 1,446 7,230

Construction and land development

1,253 1,735 2,988

1,007 141 1,148

Commercial business

1,365 325 1,690

Manufactured homes

Total allowance for credit losses on loans

$ 12,897 $ 6,187 $ 19,084

Accrued expenses and other liabilities

- 3,108 3,108

Total allowance for credit losses

$ 12,897 $ 9,295 $ 22,192

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.

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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.

ASU 2022 - 02 was 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.

The Bancorp adopted ASU 2022 - 02 on January 1, 2023 without material effect on the Bancorp's financial statements.

Upcoming Accounting Pronouncements - 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.

It is intended to help stakeholders during the global market-wide reference rate transition period.

In December of 2022, the FASB issued ASU No.

2022 - 06 which extended the period of time preparers can utilize the reference rate reform relief guidance in Topic 848.

The guidance ensures the relief in Topic 848 covers the period of time during which a significant number of modifications may take place and the ASU defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024.

The Bancorp continues to implement its transition plan after the cessation of LIBOR and the modification of its loans and other financial instruments with attributes that were either directly or indirectly influenced by LIBOR.

The Bancorp expects to utilize the LIBOR transition relief allowed under ASU 2020 - 04, ASU 2021 - 01 and ASU 2022 - 06, as applicable, and does not expect such adoption to have a material 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.

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.

1 unchanged sentence

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

In September 2022, the FASB issued ASU No.

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

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

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

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

In December 2022, the FASB issued ASU No.

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

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

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

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

NOTE 2 –

Acquisition Activity

On January 31, 2022, Finward Bancorp (“Finward”) completed its previously announced acquisition of Royal Financial, Inc., a Delaware corporation (“RYFL”), pursuant to an Agreement and Plan of Merger dated July 28, 2021 ( the “Merger Agreement”) between Finward and RYFL.

In March 2023, the FASB issued Accounting Standards (ASU) No.

2023 - 02 “Investments Equity Method and Joint Ventures (Topic 323 ):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits.

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 in any interim period.

ASU 2023 - 02 did not have a material impact on our consolidated financial statements.

In July 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023 - 03, “Presentation of Financial Statements (Topic 205 ), Income Statement - Reporting Comprehensive Income (Topic 220 ), Distinguishing Liabilities from Equity (Topic 480 ), Equity (Topic 505 ), and Compensation - Stock Compensation (Topic 718 ):

Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.

120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S- X:

Income or Loss Applicable to Common Stock” (“ASU 2023 - 03” ).

This ASU amends various paragraphs in the accounting codification pursuant to the issuance of Commission Staff Bulletin ("SAB") number 120.

ASU 2023 - 03 does not provide any new guidance, so there is no transition or effective date.

ASU 2023 - 03 did not have a material impact on our condensed consolidated financial statements.

In October 2023, the FASB issued ASU 2023 - 06, Disclosure Improvements:

Codification Amendment in Response to the SEC’s Disclosure Update and Simplification Initiative.

The ASU incorporates several disclosure and presentation requirements currently residing in the SEC Regulations S- X and S-K.

The amendments will be applied prospectively and are effective when the SEC removes the related requirements from Regulations S- X or S-K.

Any amendments the SEC does not remove by June 30, 2027 will not be effective.

As we are currently subject to these SEC requirements, this ASU is not expected to have a material impact on our consolidated financial statements or related disclosures.

In November 2023, the FASB issued ASU 2023 - 07, Segment Reporting (Topic 280 ):

Improvements to Reportable Segment Disclosures, which requires all public entities to provide enhanced disclosures about significant segment expenses.

The amendments in this ASU are to be applied retrospectively and are effective for our annual financial statements starting in fiscal 2024 and interim periods starting in fiscal 2025, with early adoption permitted.

We are currently evaluating the impact of this accounting standard, but do not expect it to have a material impact on our consolidated financial statements.

Income Taxes.

In December 2023, the FASB issued ASU 2023 - 09, Income Taxes (Topic 740 ):

Improvements to Income Tax Disclosures, which enhances transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid and to improve the effectiveness of income tax disclosures.

This accounting standards update will be effective for us for fiscal year 2025, with early adoption permitted.

We are currently evaluating the impact of this accounting standard, but do not expect it to have a material impact on our consolidated financial statements.

NOTE 2 – Acquisition Activity

On January 31, 2022, 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.

5 unchanged sentences

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.

1 unchanged sentence

Cash and due from banks

$ 52,524  

Investment securities, available for sale

Certificate of deposit in other financial institutions

450,757  

Premises and equipment, net

13,896  

11,286  

Core deposit intangible

1 unchanged sentence

Total assets purchased

$ 543,045  

Common shares issued

37,981  

18,725  

Total purchase price

$ 56,706  

Non-interest bearing

$ 32,095  

63,639  

Savings and money market

184,149  

Certificates of deposits

195,153  

Total Deposits

475,036  

Interest payable

Other liabilities

11,228  

Total liabilities assumed

$ 486,339  

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.

During the year-ended December 31, 2022, adjustments were 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, and 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.

Goodwill of approximately $ 11.5 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, has been recorded in the RYFL acquisition and is the result of expected operational synergies and other factors.

This goodwill 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, 2023, and January 1, 2022:

6 unchanged sentences

Interest income

$ 73,730  

$ 70,585  

$ 85,783 $ 73,730

Interest expense

( 4,987 )  

Recovery of (provision for) loan losses

( 31,228 ) ( 4,987 )

Provision for loan losses

Non-interest income

11,648  

16,607  

10,746 11,648

Non-interest expense (1)

( 60,228 )  

( 55,231 ) ( 60,228 )

Income before provision for income taxes

20,163  

25,183  

Income tax expense

( 2,235 )  

$ 17,928  

$ 21,658  

335 ( 2,235 )

$ 8,380 $ 17,928

Earnings per common share:

$ 4.29  

$ 6.23  

$ 4.28  

$ 6.23  

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:

$ 1.96 $ 4.29

$ 1.96 $ 4.28

Excludes $ 2.9 million in pre-tax merger expenses for the twelve months ended December 31, 2022.

For the year ended December 31, 2022, the Bancorp 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)

5 unchanged sentences

Period merger expense

$ 2,852  

NOTE 3 –

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:

2 unchanged sentences

government sponsored entities

$ 8,883  

$ ( 1,258 )  

$ 8,884 $ - $ ( 1,001 ) $ 7,883

treasury securities

Collateralized mortgage obligations and residential mortgage-backed securities

163,000  

( 28,884 )  

134,116  

149,410 - ( 25,946 ) 123,464

Municipal securities

281,032  

( 53,321 )  

227,718  

278,813 60 ( 40,203 ) 238,670

Collateralized debt obligations

( 1,125 )  

2,170 - ( 813 ) 1,357

Total securities available-for-sale

$ 455,477  

$ ( 84,588 )  

$ 370,896  

$ 439,277 $ 60 $ ( 67,963 ) $ 371,374

(Dollars in thousands)

1 unchanged sentence

government sponsored entities

$ 8,883  

$ ( 214 )  

$ 8,669  

$ 8,883 $ - $ ( 1,258 ) $ 7,625

treasury securities

Collateralized mortgage obligations and residential mortgage-backed securities

187,279  

( 3,539 )  

184,701  

163,000 - ( 28,884 ) 134,116

Municipal securities

322,750  

( 527 )  

332,127  

281,032 7 ( 53,321 ) 227,718

Collateralized debt obligations

( 1,181 )  

2,173 - ( 1,125 ) 1,048

Total securities available-for-sale

$ 521,485  

$ 10,865  

$ ( 5,461 )  

$ 526,889  

$ 455,477 $ 7 $ ( 84,588 ) $ 370,896

The cost basis, estimated fair value of available-for-sale securities, and carrying amount, if different, at December 31, 2023, by contractual maturity were as follows.

6 unchanged sentences

Due from five to ten years

21,099  

18,993  

21,801 20,486

Due over ten years

266,405  

213,189  

257,383 217,850

Collateralized mortgage obligations and residential mortgage-backed securities

163,000  

134,116  

$ 455,477  

$ 370,896  

149,410 123,464

$ 439,277 $ 371,374

Sales of available-for-sale securities were as follows:

(Dollars in thousands)

$ 53,953  

$ 43,756  

( 71 )  

The tax provisions related to these net realized gains were approximately $ 157 thousand for 2022 and $ 417 thousand for 2021.

$ 476 $ 53,953

( 48 ) ( 71 )

The tax benefits related to these net realized losses were approximately $ 11 thousand for 2023.

The tax provisions related to these net realized gains were approximately $ 157 thousand for 2022.

Accumulated other comprehensive income/(loss) balances, net of tax, related to available-for-sale securities, were as follows:

(Dollars in thousands)

Unrealized  

Ending balance, December 31, 2022

$ 10,441  

Current period change

Ending balance, December 31, 2023

$ 4,276  

(Dollars in thousands)

Ending balance, December 31, 2021

$ 4,276  

Current period change

10 unchanged sentences

government sponsored entities

$ 7,625  

$ ( 1,258 )  

$ 7,625  

$ ( 1,258 )  

$ - $ - $ 7,883 $ ( 1,001 ) $ 7,883 $ ( 1,001 ) 100.0 %

Collateralized mortgage obligations and residential mortgage-backed securities

32,700  

( 4,955 )  

101,416  

( 23,929 )  

134,116  

( 28,884 )  

- - 123,464 ( 25,946 ) 123,464 ( 25,946 ) 100.0 %

Municipal securities

171,581  

( 35,935 )  

52,961  

( 17,386 )  

224,542  

( 53,321 )  

- - 229,595 ( 40,203 ) 229,595 ( 40,203 ) 96.2 %

Collateralized debt obligations

( 1,125 )  

- - 1,357 ( 813 ) 1,357 ( 813 ) 100.0 %

Total temporarily impaired

$ 204,281  

$ ( 40,890 )  

$ 163,050  

$ ( 43,698 )  

$ 367,331  

$ ( 84,588 )  

$ - $ - $ 362,299 $ ( 67,963 ) $ 362,299 $ ( 67,963 ) 97.6 %

Number of securities

7 unchanged sentences

government sponsored entities

$ 8,669  

$ ( 214 )  

$ 8,669  

$ ( 214 )  

$ - $ - $ 7,625 $ ( 1,258 ) $ 7,625 $ ( 1,258 ) 100.0 %

Collateralized mortgage obligations and residential mortgage-backed securities

126,373  

( 3,175 )  

( 364 )  

134,482  

( 3,539 )  

32,700 ( 4,955 ) 101,416 ( 23,929 ) 134,116 ( 28,884 ) 100.0 %

Municipal securities

70,309  

( 527 )  

70,309  

( 527 )  

171,581 ( 35,935 ) 52,961 ( 17,386 ) 224,542 ( 53,321 ) 98.6 %

Collateralized debt obligations

( 1,181 )  

- - 1,048 ( 1,125 ) 1,048 ( 1,125 ) 100.0 %

Total temporarily impaired

$ 205,351  

$ ( 3,916 )  

$ 9,101  

$ ( 1,545 )  

$ 214,452  

$ ( 5,461 )  

$ 204,281 $ ( 40,890 ) $ 163,050 $ ( 43,698 ) $ 367,331 $ ( 84,588 ) 99.0 %

Number of securities

Unrealized losses on securities have not been recognized into income because the securities are of high credit quality, have undisrupted cash flows, or have been independently evaluated for other-than-temporary impairment and appropriate write downs taken.

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.

Unrealized losses on securities have not been recognized into income because the securities are of high credit quality or have undisrupted cash flows.

Management has the intent and ability to hold those securities for the foreseeable future, and the decline in fair value is largely due to changes in interest rates and volatility in securities markets.

The fair values are expected to recover as the securities approach maturity.

NOTE 4 –

Loans Receivable

AFS securities are not within the scope of the CECL methodology;

however, the accounting for credit losses on these securities is affected by ASC 326 - 30.

ASC 326 allows for prospective adoption of previously recorded other-than-temporary impairment (OTTI) on AFS securities.

At adoption, the Bank had $ 173 thousand of previously recorded credit impairment on trust preferred AFS securities.

The Bank believes this continues to represent the expected credit losses of the amortized cost basis, therefore, no additional ACL has been established for AFS debt securities at January 1, 2023.

The need for an ACL is monitored quarterly and is measured by evaluating the present value of cash flows as compared to the amortized cost basis of the security.

After adoption, if there is a decrease in future expected cash flows due to a deterioration in credit, an ACL will be recorded.

If there is an improvement in credit, any previously recorded ACL will be reduced.

Improvement in credit beyond any ACL that has been established will be recorded in the income statement in the period in which the cash recovery is received.

At December 31, 2023 collateralized debt obligations with a cost basis of $ 2.2 million and fair value of $ 1.4 million had previously recorded impairment of $ 173 thousand, which will not be recoverable until maturity of the security.

NOTE 4 – Loans Receivable

Year end loans are summarized below:

4 unchanged sentences

Residential real estate

$ 484,595  

$ 260,134  

38,978  

34,612  

$ 484,948 $ 484,595

46,599 38,978

Commercial real estate

486,431  

317,145  

503,202 486,431

Construction and land development

108,926  

123,822  

251,014  

61,194  

115,227 108,926

219,917 251,014

Total loans secured by real estate

1,369,944  

796,907  

1,369,893 1,369,944

Commercial business

93,278  

115,772  

97,386 93,278

Manufactured homes

34,882  

37,887  

30,845 34,882

Loans receivable

1,508,571  

960,139  

1,508,755 1,508,571

Net deferred loan origination costs

Undisbursed loan funds

( 23 )  

Loans receivable, net of deferred fees and costs

$ 1,513,631  

$ 966,720  

(Dollars in thousands)

Beginning Balance

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 )  

$ 3,021  

Commercial real estate

( 431 )  

Construction and land development...

( 866 )  

Commercial business

( 57 )  

( 676 )  

( 91 )  

Manufactured homes

$ 13,343  

$ ( 608 )  

$ 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 )  

$ 2,480  

Commercial real estate

( 530 )  

Construction and land development

Commercial business

( 158 )  

( 377 )  

( 29 )  

Manufactured homes

$ 12,458  

$ ( 750 )  

$ 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.

$ 1,512,595 $ 1,513,631

The Bancorp's age analysis of past due loans is summarized below:

(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:

Greater Than 90

Days Past Due

Total Past Due and Accruing

Accruing Loans

December 31, 2023

Residential real estate

$ 2,997  

$ 484,595  

$ 1,518  

$ 482,089  

38,978  

38,559  

$ 5,857 $ 4,362 $ 1,131 $ 11,350 $ 471,905 $ 483,255 $ 1,693 $ 484,948

226 18 - 244 45,887 46,131 468 46,599

Commercial real estate

486,431  

481,104  

3,168 262 712 4,142 498,227 502,369 833 503,202

Construction and land development.

108,926  

251,014  

243,893  

2,523 - - 2,523 112,704 115,227 - 115,227

5,333 - - 5,333 210,869 216,202 3,715 219,917

Commercial business

93,278  

90,567  

105 29 - 134 94,355 94,489 2,897 97,386

12 - - 12 596 608 2 610

Manufactured homes

34,882  

$ 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:

634 379 - 1,013 29,832 30,845 - 30,845

- - - - 10,021 10,021 - 10,021

$ 17,858 $ 5,050 $ 1,843 $ 24,751 $ 1,474,396 $ 1,499,147 $ 9,608 $ 1,508,755

December 31, 2022

Residential real estate

$ 2,463  

$ 260,134  

$ 1,016  

$ 258,363  

34,612  

34,328  

$ 3,758 $ 2,520 $ 166 $ 6,444 $ 472,804 $ 479,248 $ 5,347 $ 484,595

315 42 - 357 38,027 38,384 594 38,978

Commercial real estate

317,145  

315,545  

1,399 150 - 1,549 481,640 483,189 3,242 486,431

Construction and land development

123,822  

61,194  

60,638  

2,673 - - 2,673 106,253 108,926 - 108,926

1,724 616 - 2,340 241,610 243,950 7,064 251,014

Commercial business

115,772  

114,175  

1,775 - - 1,775 89,622 91,397 1,881 93,278

3 - - 3 915 918 - 918

Manufactured homes

37,887  

$ 12,659  

$ 960,139  

$ 3,026  

$ 2,782  

$ 954,331  

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

601 256 82 939 33,943 34,882 - 34,882

- - - - 9,549 9,549 - 9,549

$ 12,248 $ 3,584 $ 248 $ 16,080 $ 1,474,363 $ 1,490,443 $ 18,128 $ 1,508,571

The following table shows the amortized cost of loans, segregated by portfolio segment, credit quality rating and year of origination as of December 31, 2023, and gross charge-offs for the year ended December 31, 2023.

December 31, 2023

(Dollars in thousands)

Special mention

Converted to Term

Total Loans Receivable

$ 148,105 $ 323,820 $ 321,183 $ 234,861 $ 108,683 $ 274,027 $ 94,893 $ 3,183 $ 1,508,755

Total current period gross charge-off

$ ( 95 ) $ ( 150 ) $ - $ ( 367 ) $ ( 50 ) $ ( 1,882 ) $ ( 27 ) $ - ( 2,571 )

Residential real estate

$ 477,222  

$ 1,338  

$ 6,035  

$ 484,595  

37,981  

38,978  

$ 20,740 $ 97,671 $ 106,778 $ 115,001 $ 23,873 $ 113,987 $ 1,716 $ - $ 479,766

Special Mention (7)

405 - 473 173 431 1,602 - - 3,084

Substandard (8)

- 786 152 471 217 472 - - 2,098

$ 21,145 $ 98,457 $ 107,403 $ 115,645 $ 24,521 $ 116,061 $ 1,716 $ - $ 484,948

Current period gross charge-off

- ( 40 ) - ( 25 ) ( 39 ) ( 893 ) - - ( 997 )

$ 110 $ 114 $ 101 $ 14 $ 61 $ 2,051 $ 42,801 $ 700 $ 45,952

Special Mention (7)

- - - - 4 31 70 63 168

Substandard (8)

- 161 - - - 67 251 - 479

$ 110 $ 275 $ 101 $ 14 $ 65 $ 2,149 $ 43,122 $ 763 $ 46,599

Current period gross charge-off

- - - - - ( 16 ) ( 27 ) - ( 43 )

Commercial real estate

474,055  

486,431  

$ 52,880 $ 127,607 $ 90,108 $ 55,236 $ 56,255 $ 108,489 $ 2,649 $ - $ 493,224

Special Mention (7)

- 69 2,429 1,274 1,123 2,397 142 - 7,434

Substandard (8)

- - - 230 - 2,314 - - 2,544

$ 52,880 $ 127,676 $ 92,537 $ 56,740 $ 57,378 $ 113,200 $ 2,791 $ - $ 503,202

Current period gross charge-off

- - - - - ( 372 ) - - ( 372 )

Construction and land development

106,580  

108,926  

242,091  

251,014  

$ 48,518 $ 24,948 $ 13,411 $ 1,732 $ 4,284 $ 473 $ 12,539 $ 2,420 $ 108,325

Special Mention (7)

365 76 4,205 2,256 - - - - 6,902

$ 48,883 $ 25,024 $ 17,616 $ 3,988 $ 4,284 $ 473 $ 12,539 $ 2,420 $ 115,227

Current period gross charge-off

- - - - - - - - -

$ 9,333 $ 53,493 $ 78,122 $ 41,773 $ 13,156 $ 19,609 $ 186 $ - $ 215,672

Substandard (8)

- - 1,666 1,562 - 1,017 - - 4,245

$ 9,333 $ 53,493 $ 79,788 $ 43,335 $ 13,156 $ 20,626 $ 186 $ - $ 219,917

Current period gross charge-off

- - - - - - - - -

Commercial business

90,694  

93,278  

$ 13,110 $ 13,774 $ 9,327 $ 5,705 $ 4,105 $ 12,905 $ 33,954 $ - $ 92,880

Special Mention (7)

373 197 58 - 129 436 417 - 1,610

Substandard (8)

43 1,094 256 214 - 1,121 168 - 2,896

$ 13,526 $ 15,065 $ 9,641 $ 5,919 $ 4,234 $ 14,462 $ 34,539 $ - $ 97,386

Current period gross charge-off

- ( 110 ) - ( 342 ) ( 11 ) ( 601 ) - - ( 1,064 )

$ 338 $ 73 $ 108 $ 4 $ 14 $ 71 $ - $ - $ 608

Substandard (8)

- - - 2 - - - - 2

$ 338 $ 73 $ 108 $ 6 $ 14 $ 71 $ - $ - $ 610

Current period gross charge-off

( 95 ) - - - - - - - ( 95 )

Manufactured homes

34,882  

$ 1,473,972  

$ 11,586  

$ 23,013  

$ 1,508,571  

$ - $ 1,942 $ 12,556 $ 9,214 $ 5,031 $ 2,102 $ - $ - $ 30,845

Current period gross charge-off

- - - - - - - - -

$ 1,890 $ 1,815 $ 1,433 $ - $ - $ 4,883 $ - $ - $ 10,021

Current period gross charge-off

- - - - - - - - -

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

December 31, 2022

2 unchanged sentences

Residential real estate

$ 253,472  

$ 2,940  

$ 3,722  

$ 260,134  

33,565  

34,612  

$ 477,222 $ 1,338 $ 6,035 $ 484,595

37,981 385 612 38,978

Commercial real estate

301,572  

12,011  

317,145  

474,055 4,955 7,421 486,431

Construction and land development

120,192  

123,822  

60,657  

61,194  

106,580 2,346 - 108,926

242,091 1,859 7,064 251,014

Commercial business

113,470  

115,772  

90,694 703 1,881 93,278

Manufactured homes

37,828  

37,887  

$ 930,329  

$ 21,123  

$ 8,687  

$ 960,139  

34,882 - - 34,882

9,549 - - 9,549

$ 1,473,972 $ 11,586 $ 23,013 $ 1,508,571

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.

Thehe Bancorp reassesses its risk ratings annually, and no changes to our credit quality indicators have occurred.

The loan grading system is as follows:

31 unchanged sentences

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.

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 Bank’s credit position at some future date.

Special mention assets are not adversely classified and do not expose the Bank 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.

7 unchanged sentences

Collateral condition may be below average.

8 – Substandard

This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged.

7 unchanged sentences

Performing loans are loans that are paying as agreed and are approximately less than ninety days past due on payments of interest and principal.

During the twelve months ending December 31, 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.

Non-performing loans include those loans that are 90 days or more past due and those loans that have

been placed on non-accrual status.

Loan Modification Disclosures Pursuant to ASU 2022 - 02

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)

Term Extension

and Interest Rate

Residential Real Estate

$ - $ 868 $ - $ - 0.18 %

$ - $ 868 $ - $ - 0.06 %

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

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 and leases that have been modified during the year ended December 31, 2023.

(Dollars in thousands)

Greater Than 90

Days Past Due

Residential Real Estate

$ 868 $ - $ - $ -

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.

Troubled Debt Restructuring (TDR) Disclosures Prior to the Adoption of ASU 2022 - 02

During the year 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.

No troubled debt restructuring loans had subsequently defaulted during the year ending December 31, 2022.

As of December 31, 2023, the Bancorp had 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, 2022.

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.

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

Acquired Loan Purchase Discounts

As part of the fair value of loans receivable, there was a net fair value discount for loans acquired of $ 5.2 million at December 31, 2023, compared to $ 5.5 million at December 31, 2022.

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

(dollars in thousands)

For the twelve months ended

As of December 31, 2022

December 31, 2022

Unpaid Principal

Related Allowance

Average Recorded

Interest Income

With no related allowance recorded:

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

(dollars in thousands)

2028 and thereafter

Allowance for Credit Losses

The allowance for credit losses is established for current expected credit losses on the Bancorp’s loan portfolios utilizing guidance in Accounting Standards Codification (ASC) Topic 326.

The Bancorp adopted ASU 2016 - 13 on January 1, 2023.

Therefore, as of December 31, 2022, the provision for credit losses and other allowance for loan loss disclosures for the year ended December 31, 2022, were calculated under the incurred loss method.

The determination of the allowance requires significant judgment to estimate credit losses measured on a collective pool basis when similar risk characteristics exist, and for loans evaluated individually.

In determining the allowance, the Bancorp estimates expected future losses for the loan’s entire contractual term adjusted for expected payments when appropriate.

The allowance estimate considers relevant available information, from internal and external sources relating to the historical loss experience, current conditions, and reasonable and supportable forecasts for the Bancorp’s outstanding loan balances.

The allowance is an estimation that reflects management’s evaluation of expected losses related to the Bancorp’s financial assets measured at amortized cost.

To ensure that the allowance is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and an appropriate provision is made to adjust the allowance.

The Bancorp categorizes the loan portfolios into nine segments based on similar risk characteristics.

Loans within each segment are collectively evaluated using the Probability of Default (“PD”)/Loss Given Default (“LGD”) methodology (PD/LGD).

In creating the CECL model, the Bancorp has established a two -year reasonable and supportable forecast period with a two -year straight line reversion to the long-term historical average.

Due to its minimal loss history, the Bancorp elected to use peer data for a more reasonable calculation.

The following table shows the changes in the allowance for loan losses, segregated by portfolio segment, for the year ended December 31, 2023, and 2022.

(Dollars in thousands)

Beginning Balance

Adoption of ASC 326

Ending Balance

The Bancorp's activity in the allowance for credit losses, by loan segment, is summarized below for the twelve months ended December 31, 2023:

Allowance for credit losses:

Residential real estate

$ 2,255  

$ 3,711  

$ 2,528  

$ 3,021 $ 1,688 $ 535 $ ( 997 ) $ 149 $ ( 412 ) $ 3,984

410 99 29 ( 43 ) - 203 698

Commercial real estate

5,784 1,003 443 ( 372 ) 3 184 7,045

Construction and land development

1,253 1,735 - - - 1,218 4,206

1,007 141 - - 131 ( 346 ) 933

Commercial business

1,365 320 5 ( 1,064 ) 265 758 1,649

57 5 17 ( 95 ) 15 8 7

Manufactured homes

With an allowance recorded:

- 112 - - - 69 181

- 55 - - - 10 65

$ 12,897 $ 5,158 $ 1,029 $ ( 2,571 ) $ 563 $ 1,692 $ 18,768

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

357 - - - - 53 410

Commercial real estate

5,515 - - ( 431 ) - 700 5,784

Construction and land development

2,119 - - - - ( 866 ) 1,253

848 - - - - 159 1,007

Commercial business

2,009 - - ( 57 ) 89 ( 676 ) 1,365

15 - - ( 91 ) 20 113 57

Manufactured homes

- - - - - - -

$ 13,343 $ - $ - $ ( 608 ) $ 162 $ - $ 12,897

A collateral dependent loan relies solely on the operation or sale of the collateral for repayment.

In evaluating the overall risk associated with the loan, the Bancorp considers character, overall financial condition and resources, and payment record of the borrower;

the prospects for support from any financially responsible guarantors;

and the nature and degree of protection provided by the cash flow and value of any underlying collateral.

However, as other sources of repayment become inadequate over time, the significance of the collateral's value increases and the loan may become collateral dependent.

The table below presents the amortized cost basis and allowance for credit losses (“ACL”) allocated for collateral dependent loans in accordance with ASC 326, which are individually evaluated to determine expected credit losses.

(Dollars in thousands)

December 31, 2023

Equipment/Inventory

Accounts Receivable

ACL Allocation

Residential real estate

$ 2,506  

$ 3,987  

$ 2,722  

$ 30 $ - $ - $ - $ - $ 30

Commercial real estate

$ 5,327  

$ 5,420  

$ 4,087  

Construction & land development

$ 7,121  

$ 7,163  

$ 3,387  

2,541 - - - 2,541 53

4,244 - - - 4,244 85

Commercial business

$ 2,711  

$ 2,953  

$ 1,717  

- 1,583 1,557 192 3,332 738

$ 6,815 $ 1,583 $ 1,557 $ 192 $ 10,117 $ 906

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 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 December 31, 2022, respectively, and is included in net deferred loan origination cost.

The following table presents non–accrual loans, and loans past due over 90 days still on accrual by class of loans:

As of December 31, 2023

Nonaccrual with

No Allowance for

Loans Past Due

over 90 Days Still

Residential real estate

$ 442 $ 1,251 $ 1,131

Commercial real estate

Construction and land development

2,357 1,358 -

Commercial business

1,724 1,173 -

Manufactured homes

$ 5,287 $ 4,321 $ 1,843

The Bancorp's impairment analysis is summarized below:

Ending Balances

(Dollars in thousands)

evaluated for

impairment reserves

Loan receivables

evaluated for

Purchased credit

evaluated for

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

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

- 1,007 251,014 6,739 382 243,893

Commercial business

297 1,068 93,278 1,758 953 90,567

- 57 918 - 17 901

Manufactured homes

- - 34,882 - - 34,882

- - 9,549 - - 9,549

$ 337 $ 12,560 $ 1,508,571 $ 12,701 $ 5,400 $ 1,490,470

December 31, 2023

(dollars in thousands)

Interest income recognized

during the period on

nonaccrual loans

Residential real estate

Commercial real estate

Construction and land development

Commercial business

For the twelve months ended

8 unchanged sentences

Residential real estate

$ 1,683  

$ 3,017  

$ 1,689  

$ 2,255 $ 3,711 $ - $ 2,528 $ 202

399 416 - 253 12

Commercial real estate

5,314 5,406 - 3,409 205

Construction & land development

7,121 7,163 - 3,387 16

Commercial business

2,278 2,392 - 1,365 76

Manufactured homes

1 unchanged sentence

Residential real estate

$ 251 $ 276 $ 24 $ 194 $ 5

Commercial real estate

13 14 13 678 -

Construction & land development

Commercial business

433 561 297 352 13

Manufactured homes

Residential real estate

$ 1,771  

$ 3,105  

$ 1,834  

$ 2,506 $ 3,987 $ 24 $ 2,722 $ 207

$ 419 $ 436 $ 3 $ 274 $ 13

Commercial real estate

$ 1,600  

$ 5,894  

$ 5,327 $ 5,420 $ 13 $ 4,087 $ 205

Construction & land development

Commercial business

$ 1,597  

$ 1,716  

$ 2,006  

Manufactured homes

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

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  

38,459  

38,978  

Commercial real estate

483,065  

486,431  

Construction and land development.

106,253  

108,926  

247,670  

251,014  

Commercial business

90,974  

93,278  

Manufactured homes

33,943  

34,882  

$ 12,248  

$ 3,584  

$ 5,903  

$ 21,735  

$ 1,486,836  

$ 1,508,571  

December 31, 2021

Residential real estate

$ 2,507  

$ 2,142  

$ 5,473  

$ 254,661  

$ 260,134  

33,811  

34,612  

Commercial real estate

314,010  

317,145  

Construction and land development.

118,391  

123,822  

61,085  

61,194  

Commercial business

113,363  

115,772  

Manufactured homes

37,083  

37,887  

$ 9,261  

$ 4,902  

$ 4,002  

$ 18,165  

$ 941,974  

$ 960,139  

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

(Dollars in thousands)

Residential real estate

$ 5,347  

$ 4,651  

Commercial real estate

Construction and land development.

$ - $ - $ - $ 344 $ -

$ 7,121 $ 7,163 $ - $ 3,387 $ 16

$ - $ - $ - $ - $ -

Commercial business

$ 2,711 $ 2,953 $ 297 $ 1,717 $ 89

$ 17 $ 17 $ - $ 15 $ -

Manufactured homes

$ 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.

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

(dollars in thousands)

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

$ - $ - $ - $ - $ -

Accrued interest receivable on loans totaled $ 5.7 million and is excluded from the estimate of credit losses.

The Bancorp made the accounting policy election to not measure an ACL for accrued interest receivable.

Accrued interest deemed uncollectible will be written off through interest income.

Liability for Credit Losses on Unfunded Loan Commitments

The liability for credit losses inherent in unfunded loan commitments is included in accrued expenses and other liabilities on the Consolidated Balance Sheet.

The adequacy of the reserve for unfunded commitments is determined quarterly based on methodology similar to the methodology for determining the ACL.

The following table shows the changes in the liability for credit losses on unfunded loan commitments.

(Dollars in thousands)

2027 and thereafter

$ 5,493  

Note 5 –

Premises and Equipment, Net

Balance, beginning of period

Adoption of ASC 326

Balance, end of period

Note 5 – Premises and Equipment, Net

At year end, premises and equipment are summarized as follows:

(Dollars in thousands)

$ 11,773  

$ 8,933  

$ 11,773 $ 11,773

Buildings and improvements

40,753  

35,837  

41,794 40,753

Furniture and equipment

19,434  

18,724  

71,960  

63,494  

19,401 19,434

72,968 71,960

Less accumulated depreciation

( 31,748 )  

( 34,532 ) ( 31,748 )

Premises and equipment, net

$ 40,212  

$ 31,385  

$ 38,436 $ 40,212

Depreciation expense was approximately $ 2.9 million and $ 3.0 million for 2023 and 2022, 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

Note 6 – Goodwill and Other Intangible Assets

At year end, goodwill and other intangible assets are summarized as follows:

(Dollars in thousands)

Goodwill balance January 1,

$ 11,109  

$ 22,395 $ 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.

$ 22,395 $ 22,395

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.

Goodwill is tested annually for impairment.

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.

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.

In addition to goodwill, a core deposit intangible was established from previous acquisitions.

The Bancorp had core deposit intangible balances of $ 3.3 million and $ 4.8 million as of December 31, 2023, and 2022, respectively.

The table below summarizes the annual amortization:

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

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

(dollars in thousands)

$ 1,552  

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

(dollars in thousands)

$ 1,522  

$ 4,794  

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

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

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

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

Note 7 –

At year-end, components of income tax expense consist of the following:

Approximately $ 217 thousand and $ 541 thousand of amortization was taken as income during the year ended December 31, 2023 and 2022, respectively.

Amortization to be recorded in future periods is $ 124 thousand in 2024, $ 72 thousand in 2025, and $ 54 thousand thereafter.

Note 7 – Income Taxes

At year-end, components of income tax expense (benefit) consist of the following:

(Dollars in thousands)

$ ( 169 )  

$ 1,021  

$ 92 $ ( 169 )

( 584 ) 1,074

Deferred, net of valuation allowance

Income tax expense

$ 1,478  

$ 1,414  

Income tax expense (benefit)

$ ( 335 ) $ 1,478

Effective tax rates differ from the federal statutory rate of 21 % for 2023 and 2022 applied to income before income taxes due to the following:

2 unchanged sentences

Tax expense at statutory rate

$ 3,477  

$ 3,439  

$ 1,689 $ 3,477

State tax, net of federal effect

Tax exempt income

( 1,419 )  

( 1,314 ) ( 1,419 )

Bank owned life insurance

( 153 )  

( 161 ) ( 153 )

Captive insurance

( 282 )  

( 159 ) ( 282 )

Tax credit investments

( 494 )  

( 531 ) ( 494 )

Non-deductible transaction costs

( 202 )  

Total income tax expense

$ 1,478  

$ 1,414  

Total income tax expense (benefit)

$ ( 335 ) $ 1,478

At December 31, the components of the net deferred tax asset recorded in other assets in the consolidated balance sheets are as follows:

1 unchanged sentence

Deferred tax assets:

$ 3,346  

$ 3,385  

Allowance for credit losses

$ 5,686 $ 3,346

Deferred compensation

Unrealized depreciation on securities available-for-sale, net

20,280  

16,285 20,280

Net operating loss

3 unchanged sentences

Other-than-temporary impairment

Accrued vacation

Accrued compensation

Purchase accounting

Nondeductible transaction costs

Deferred loan costs, net of fees

Total deferred tax assets

32,731  

31,392 32,731

Deferred tax liabilities:

( 1,322 )  

( 637 )  

( 1,213 ) ( 1,322 )

Prepaid expenses

( 491 ) ( 637 )

Mortgage servicing rights

( 295 )  

( 249 ) ( 295 )

Deferred stock dividends

( 121 )  

( 533 )  

Unrealized appreciation on securities available-for-sale, net

Purchase accounting

( 366 )  

( 213 )  

( 119 ) ( 121 )

( 608 ) ( 533 )

( 383 ) ( 366 )

( 201 ) ( 213 )

Total deferred tax liabilities

( 3,487 )  

( 3,264 ) ( 3,487 )

Valuation allowance

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.

$ 28,066 $ 29,244

At December 31, 2023, the Bancorp has Indiana net operating loss carryforwards of approximately $ 3.1 million which will expire in 2038 if not used.

The Bancorp also has a state tax credit carryforward of approximately $ 79 thousand which expires from 2024 to 2033.

Management has concluded that the state net operating losses are more likely than not to be utilized and therefore no valuation allowance is necessary.

A valuation allowance, net of federal effect, of $ 62 thousand was recorded in 2023 on the state tax credit carryforward, as it is not expected to be utilized before expiration.

Under Section 382 of the Internal Revenue Code, the annual limitation on the use of the federal loss carryforwards is $ 362 thousand for First Personal while there is no limitation on the use of the Illinois loss carryforwards.

Management has determined that all of the loss carryforwards 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.

during 2019, of which $ 3.6 million of the federal loss carryforwards expire in years ranging from 2029 to 2034, $ 3.6 million of the federal loss carryforwards do not expire, and the Illinois loss carryforwards 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 loss carryforwards.

Management has determined that all of the losses are more likely than not to be utilized before expiration.

The Bancorp acquired $ 3.3 million of federal net operating loss carryforwards and $ 57.9 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;

during 2022, of which $ 2.7 million of the federal loss carryforwards expire in years ranging from 2030 to 2036, $ 623 thousand of the federal loss carryforwards do not expire, and the Illinois losses expire in years ranging from 2026 to 2032.

Under Section 382 of the Internal Revenue Code, the annual limitation on the use of the federal loss carryforwards is $ 822 thousand for Royal, while there is no limitation on the use of the Illinois loss carryforwards.

Management has determined that all of the loss carryforwards are more likely than not to be utilized before expiration.

At December 31, 2023 $ 6.3 million of the federal loss carryforwards, $ 68.1 million of the Illinois loss carryforward and $ 3.0 million 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.

Accordingly, retained earnings at both December 31, 2023 and 2022 includes, approximately $ 14.5 million, for which no provision for federal income taxes has been made.

If, in the future this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes would be imposed at the then applicable rate.

The unrecorded deferred income tax liability on the above amounts was approximately $ 3.0 million and $ 1.8 million at both December 31, 2022, and 2021, respectively.

The unrecorded deferred income tax liability on the above amounts was approximately $ 3.8 million at both December 31, 2023 and 2022.

The Bancorp had no unrecognized tax benefits at any time during 2023 or 2022 and does not anticipate any significant increase or decrease in unrecognized tax benefits during 2023.

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The Bancorp is no longer subject to examination by taxing authorities for the years before 2020.

Note 8 –

Note 8 – Deposits

The aggregate amount of retail and brokered certificates of deposit with a balance of $250 thousand or more was approximately $ 137.1 million at December 31, 2023 and $ 93.6 million at December 31, 2022.

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

(Dollars in thousands)

$ 258,266  

$ 10,000  

$ 268,266  

48,013  

10,000  

58,013  

10,815  

20,000  

30,815  

$ 323,118  

$ 40,000  

$ 363,118  

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

Brokered certificates of deposit totaled $ 29.9 million at December 31, 2023 and $ 40.0 million at December 31, 2022.

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

(Dollars in thousands)

$ 755,377  

$ 629,038  

402,365  

293,976  

254,157  

271,970  

December 31, 2023

December 31, 2022

$ 653,529 $ 755,377

302,782 402,365

324,993 254,157

Certificates of deposit

363,118  

239,217  

532,117 363,118

Total deposits

$ 1,775,017  

$ 1,434,201  

$ 1,813,421 $ 1,775,017

At December 31, 2023, scheduled maturities of certificates of deposit were as follows:

(Dollars in thousands)

2024 $ 482,124

2028 and thereafter

As of December 31, 2023, and 2022, approximately $ 530.2 million and $ 516.1 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:

Note 9 – Borrowed Funds

At December 31, 2023 and 2022, borrowed funds and their outstanding rates are summarized below:

(Dollars in thousands)

Fixed rate advances from the Federal Reserve with outstanding rates of 4.38 % as of December 31, 2023

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

$ 120,000  

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

(Dollars in thousands)

120,000  

$ 120,000  

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

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

$ - $ 120,000

$ 80,000 $ 120,000

Outstanding borrowings at December 31, 2023 were scheduled to mature in 2024.

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.

During the first quarter of 2023, the Bancorp participated in the BTFP by accessing $ 100 million of low-cost capital under the program, and reducing that funding to $ 80 million by paying off BTFP funds as liquidity needs changed throughout the year.

As of December 31, 2023, the Bancorp had pledged securities as collateral for the program with a par value of $ 105.3 million.

Fixed rate advances from the FHLB were collateralized by mortgage loans with a carrying value totaling approximately $ 593.0 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.

The Bank did not have a balance on the line of credit at December 31, 2023 or 2022.

The Bank had no other borrowings at December 31, 2023, or 2022.

At December 31, 2023, the Bank had available approximately $ 824.0 million in credit lines with various money center banks, including the FHLB and Federal Reserve.

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government and U.S.

agency securities, under the Bank’s control.

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

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Ending balance

$ 15,503  

$ 14,581  

$ 38,124 $ 15,503

Average balance during the year

20,649  

17,789  

35,543 20,649

Maximum month-end balance during the year

28,328  

24,514  

48,947 28,328

Securities underlying the agreements at year end:

Carrying value

32,660  

14,885  

32,660  

14,885  

54,458 32,660

Average interest rate during the year

0.94 %  

4.00 % 0.94 %

Average interest rate at year end

2.43 %  

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”).

5.14 % 2.43 %

Note 10 – Employees ’ Benefit Plans

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.

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, 2023 and 2022 was approximately $ 263 thousand and $ 251 thousand, respectively.

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Fee deferrals, including interest, totaled approximately $ 52 thousand and $ 53 thousand for 2023 and 2022, 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.

The deferred fee liability at both December 31, 2023 and 2022 was approximately $ 1.4 million.

Note 11 – Stock Based Compensation

The Bancorp’s 2015 Stock Option and Incentive Plan (the “Incentive Plan”), permits the grant of equity awards for up to 250,000 shares of common stock.

Awards granted under the Incentive Plan may be in the form of incentive stock options, non-qualified stock options, restricted stock, unrestricted stock, performance shares, or performance units.

The purposes of the Plan are (i) to align the personal interests of plan participants with those of the shareholders of the Bancorp, (ii) to encourage key individuals to accept or continue employment or service with the Bancorp and its subsidiaries, and (iii) to furnish incentives to such key individuals to improve operations and increase profits by providing such key individuals the opportunity to acquire common stock of the Bancorp or to receive monetary payments based on the value of such common stock.

Restricted stock awards are generally granted with an award price equal to the market price of the Bancorp’s common stock on the award date.

Restricted stock awards have been issued with a three year cliff-vesting period.

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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.

Total compensation cost that has been charged to expense for those plans was approximately $ 719 thousand and $ 741 thousand for the years ended December 31, 2023 and 2022, 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:

Shares were surrendered with a total value of $ 196 thousand and $ 120 thousand for the years ended December 31, 2023 and 2022, respectively.

A summary of changes in the Bancorp’s non-vested restricted stock for the year ended December 31, 2023, follows:

Non-vested Shares

Non-vested at January 1, 2023

44,235  

$ 42.33  

24,555  

( 11,158 )  

( 1,799 )  

55,833 $ 43.87

( 17,549 ) 44.24

( 7,772 ) 43.21

Non-vested at December 31, 2023

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.

41,649 $ 41.22

As of December 31, 2023, there was approximately $ 661 thousand of total unrecognized compensation cost related to non-vested restricted shares granted under the Incentive Plan.

The cost is expected to be recognized over a weighted-average period of 1.2 years.

Note 12 –

Regulatory Capital

Note 12 – Regulatory Capital

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

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At December 31, 2023, and 2022, 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.

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.

In addition, the following table shows that, at December 31, 2022, and 2021, the Bank’s capital exceeded all applicable regulatory capital requirements.

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.

In addition, the following table shows that, at December 31, 2023, and 2022, the Bank’s capital exceeded all applicable regulatory capital requirements.

The dollar amounts are in millions.

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Common equity tier 1 capital to risk-weighted assets

$ 161.3  

10.1 %  

$ 71.6  

$ 103.4  

$ 168.3 10.4 % $ 72.6 4.5 % $ 104.9 6.5 %

Tier 1 capital to risk-weighted assets

$ 161.3  

10.1 %  

$ 95.5  

$ 127.3  

$ 168.3 10.4 % $ 96.9 6.0 % $ 129.1 8.0 %

Total capital to risk-weighted assets

$ 174.2  

10.9 %  

$ 127.3  

$ 159.1  

$ 183.3 11.4 % $ 129.1 8.0 % $ 161.4 10.0 %

Tier 1 capital to adjusted average assets

$ 161.3  

$ 84.3  

$ 105.4  

$ 168.3 7.8 % $ 86.6 4.0 % $ 108.2 5.0 %

(Dollars in millions)

4 unchanged sentences

Corrective Action Regulations

At December 31, 2021

December 31, 2022

Common equity tier 1 capital to risk-weighted assets

$ 133.7  

12.6 %  

$ 47.8  

$ 69.0  

$ 161.3 10.1 % $ 71.6 4.5 % $ 103.4 6.5 %

Tier 1 capital to risk-weighted assets

$ 133.7  

12.6 %  

$ 63.7  

$ 85.0  

$ 161.3 10.1 % $ 95.5 6.0 % $ 127.3 8.0 %

Total capital to risk-weighted assets

$ 147.0  

13.9 %  

$ 85.0  

$ 106.2  

$ 174.2 10.9 % $ 127.3 8.0 % $ 159.1 10.0 %

Tier 1 capital to adjusted average assets

$ 133.7  

$ 64.1  

$ 80.1  

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.

$ 161.3 7.7 % $ 84.3 4.0 % $ 105.4 5.0 %

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;

3 unchanged sentences

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

Additionally, as noted in the “Regulatory Developments Regarding the Bancorp and the Bank” section of the Management Discussion and Analysis, on November 7, 2023, the Bank entered into MOU with the FDIC which noted the Bank will refrain from paying cash dividends without prior regulatory approval.

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.

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.

3 unchanged sentences

Net income as reported

$ 15,080  

$ 14,963  

$ 8,380 $ 15,080

Weighted average common shares outstanding

4,176,125  

3,477,309  

4,273,824 4,176,125

Basic earnings per common share

$ 3.61  

$ 4.30  

$ 1.96 $ 3.61

Diluted earnings per common share:

Net income as reported

$ 15,080  

$ 14,963  

$ 8,380 $ 15,080

Weighted average common shares outstanding

4,176,125  

3,477,309  

4,273,824 4,176,125

Dilutive effect of unvested restricted stock awards

17,357  

Weighted average common and dilutive potential common shares outstanding

4,193,482  

3,477,309  

4,282,282 4,193,482

Diluted earnings per common share

$ 3.60  

$ 4.30  

Note 14 –

Related Party Transactions

$ 1.96 $ 3.60

Note 14 – Related Party Transactions

The Bancorp had aggregate loans outstanding to directors and executive officers (with individual balances exceeding $ 120 thousand) of approximately $ 3.8 million at December 31, 2023, and approximately $ 3.5 million at December 31, 2022.

2 unchanged sentences

Aggregate balance at the beginning of the year

$ 3,883  

Aggregate balance at the end of the year

$ 3,529  

Deposits from directors and executive officers totaled approximately $ 4.0 million and $ 3.7 million at December 31, 2023, and 2022, respectively.

Note 15 –

Commitments and Contingencies

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.

1 unchanged sentence

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.

3 unchanged sentences

(Dollars in thousands)

December 31, 2023:

Residential real estate

$ 21,983  

54,432  

$ 7 $ 22,086 $ 22,093

46,444 5,601 52,045

Commercial real estate

14,776  

1,365 7,775 9,140

Construction and land development

46,723  

29,586  

13,010 35,390 48,400

117 1,058 1,175

28,611 - 28,611

Commercial business

76,446  

$ 252,311  

993 81,623 82,616

$ 90,547 $ 153,533 $ 244,080

December 31, 2022:

Residential real estate

$ 19,295  

49,010  

$ 3 $ 21,980 $ 21,983

48,796 5,636 54,432

Commercial real estate

10,778  

3,166 11,610 14,776

Construction and land development

59,308  

23,422  

24,296 22,427 46,723

884 1,338 2,222

29,586 - 29,586

Commercial business

61,985  

$ 234,384  

823 75,623 76,446

- 6,143 6,143

$ 107,554 $ 144,757 $ 252,311

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.

At December 31, 2023, and 2022, the Bancorp had standby letters of credit totaling approximately $ 18.3 million and $ 13.7 million, respectively, which are not included in the tables above.

The Bancorp evaluates each customer’s creditworthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary by the Bancorp upon extension of credit, is based on management’s credit evaluation of the borrower.

Collateral obtained may include accounts receivable, inventory, property, land or other assets.

Note 16 –

Derivative Financial Instruments

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.

6 unchanged sentences

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).

8 unchanged sentences

Interest rate swap contracts

$ 8,972  

Other liabilties

$ 8,972  

$ 5,591 Other liabilities

Interest rate lock commitments

$ 9,010  

$ 8,972  

$ 5,626 $ 5,591

December 31, 2022

5 unchanged sentences

Interest rate swap contracts

$ 2,686  

Other liabilties

$ 2,686  

$ 8,972 Other liabilities

Interest rate lock commitments

$ 2,827  

$ 2,686  

$ 9,010 $ 8,972

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

5 unchanged sentences

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

( 103 )  

( 3 ) ( 103 )

The following table shows the offsetting of financial assets and derivative assets:

12 unchanged sentences

Interest rate swap contracts

$ 8,972  

$ - $ 8,972 $ -  

$ 8,972  

$ 5,591 $ - $ 5,591 $ - $ 4,050 $ 1,541

Interest rate lock commitments

$ 9,010  

$ - $ 9,010 $ -  

$ 9,010  

35 - 35 - - 35

$ 5,626 $ - $ 5,626 $ - $ 4,050 $ 1,576

Gross Amounts not Offset in the

11 unchanged sentences

Interest rate swap contracts

$ 2,686  

$ - $ 2,686 $ -  

$ 2,686  

$ 8,972 $ - $ 8,972 $ - $ - $ 8,972

Interest rate lock commitments

$ 2,827  

$ - $ 2,827 $ -  

$ 2,827  

38 - 38 - - 38

$ 9,010 $ - $ 9,010 $ - $ - $ 9,010

The following table shows the offsetting of financial liabilities and derivative liabilities:

12 unchanged sentences

Interest rate swap contracts

$ 8,972  

$ 3,930  

$ 5,042  

$ 8,972  

$ 3,930  

$ 5,042  

$ 5,591 $ - $ 5,591 $ - $ - $ 5,591

Gross Amounts not Offset in the

11 unchanged sentences

Interest rate swap contracts

$ 2,686  

$ 3,930  

$ 2,686  

$ 3,930  

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.

$ 8,972 $ - $ 8,972 $ - $ 3,930 $ 5,042

Note 17 – Fair Values of Financial Instruments

The Topic describes three levels of inputs that may be used to measure fair value:

3 unchanged sentences

or other inputs that are observable or can be corroborated by observable market data.

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.

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.

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

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

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

Debt and Equity Securities Topic.

Impairment is other-than-temporary if the decline in the fair value of the security is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received.

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

The Bancorp considers the following factors when determining other-than-temporary impairment for a security:

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

the financial condition and near-term prospects of the issuer;

the underlying fundamentals of the relevant market and the outlook for such market for the near future;

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

If either of these conditions are met, management will recognize other-than-temporary impairment.

If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.

The Bancorp’s management utilizes a specialist to perform an other-than-temporary impairment analysis for each of its two pooled trust preferred securities, 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 –

What changed 10-K

Item 8. Financial Statements and Supplementary Data