Finward Bancorp 10-K

Item 8. Financial Statements Report of Independent Registered Public Accounting Firm To the Stockholders, Board of Directors, and Audit Committe Finward Bancorp Munster, Indiana Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Finward Bancorp (the “Company”) as of December 31, 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and 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. 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 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 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 Codification Topic 326: 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 December 31, (Dollars in thousands) 2023 2022 ASSETS Cash and non-interest bearing deposits in other financial institutions $ 17,942 $ 19,965 Interest bearing deposits in other financial institutions 67,647 11,210 Federal funds sold 419 107 Total cash and cash equivalents 86,008 31,282 Certificates of deposit in other financial institutions - 2,456 Securities available-for-sale 371,374 370,896 Loans held-for-sale 340 1,543 Loans receivable, net of deferred fees and costs 1,512,595 1,513,631 Less: Allowance for credit losses ( 18,768 ) ( 12,897 ) Net loans receivable 1,493,827 1,500,734 Federal Home Loan Bank stock 6,547 6,547 Accrued interest receivable 8,045 7,421 Premises and equipment 38,436 40,212 Foreclosed real estate 71 - Cash value of bank owned life insurance 32,702 31,936 Goodwill 22,395 22,395 Other intangible assets 3,272 4,794 Other assets 45,262 50,123 Total assets $ 2,108,279 $ 2,070,339 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 295,594 $ 359,092 Interest bearing 1,517,827 1,415,925 Total 1,813,421 1,775,017 Repurchase agreements 38,124 15,503 Borrowed funds 80,000 120,000 Accrued expenses and other liabilities 29,389 23,426 Total liabilities 1,960,934 1,933,946 Commitments and contingencies Stockholders' Equity: Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding - - Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: December 31, 2023 - 4,298,773 December 31, 2022 - 4,298,401 - - Additional paid-in capital 69,555 69,032 Accumulated other comprehensive loss ( 51,613 ) ( 64,300 ) Retained earnings 129,403 131,661 Total stockholders' equity 147,345 136,393 Total liabilities and stockholders' equity $ 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) Year Ended December 31, 2023 2022 Interest income: Loans receivable $ 74,762 $ 62,133 Securities 9,118 9,576 Other interest earning assets 1,903 326 Total interest income 85,783 72,035 Interest expense: Deposits 25,438 3,604 Repurchase agreements 1,294 195 Borrowed funds 4,496 1,087 Total interest expense 31,228 4,886 Net interest income 54,555 67,149 Provision for credit losses 2,025 - Net interest income after provision for credit losses 52,530 67,149 Noninterest income: Fees and service charges 6,024 6,257 Wealth management operations 2,484 2,113 Gain on sale of loans held-for-sale, net 1,081 1,368 Gain (loss) on sale of securities, net ( 48 ) 662 Increase in cash value of bank owned life insurance 766 810 Gain (loss) on sale of foreclosed real estate ( 13 ) 16 Other 452 283 Total noninterest income 10,746 11,509 Noninterest expense: Compensation and benefits 27,655 28,990 Occupancy and equipment 6,557 6,785 Data processing 4,734 6,750 Marketing 840 1,907 Impairment charge on assets held for sale - 1,232 Federal deposit insurance premiums 2,003 1,228 Professional services 1,603 1,211 Net (gain) recognized on sale of premises and equipment ( 276 ) 303 Other 12,115 13,694 Total noninterest expense 55,231 62,100 Income before income tax expenses 8,045 16,558 Income tax expenses (benefits) ( 335 ) 1,478 Net income $ 8,380 $ 15,080 Earnings per common share: Basic $ 1.96 $ 3.61 Diluted $ 1.96 $ 3.60 Dividends declared per common share $ 1.05 $ 1.24 See accompanying notes to consolidated financial statements. Page 70 of 122 Consolidated Statements of Comprehensive Income (Loss) (Dollars in thousands) Year Ended December 31, 2023 2022 Net income $ 8,380 $ 15,080 Net change in net unrealized gains and losses on securities available-for-sale: Unrealized gain (loss) arising during the period 16,630 ( 89,323 ) Less: reclassification adjustment for losses (gains) included in net income 48 ( 662 ) Net securities gain (loss) during the period 16,678 ( 89,985 ) Tax effect ( 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 ’ Equity Accumulated Additional Other Common Paid-in Comprehensive Retained Total (Dollars in thousands, except per share data) Stock Capital (Loss)/Income Earnings Equity Balance at January 1, 2022 $ - $ 30,430 $ 4,276 $ 121,909 $ 156,615 Net income - - - 15,080 15,080 Other comprehensive loss, net of tax - - ( 68,576 ) - ( 68,576 ) Net surrender value of 3,115 restricted stock awards - ( 120 ) - - ( 120 ) Stock-based compensation expense - 741 - - 741 Issuance of 795,423 shares at $ 47.75 per share, for acquisition of Royal Financial, Inc. - 37,981 - - 37,981 Cash dividends, $ 1.24 per share - - - ( 5,328 ) ( 5,328 ) Balance at December 31, 2022 $ - $ 69,032 $ ( 64,300 ) $ 131,661 $ 136,393 Balance at January 1, 2023 $ - $ 69,032 $ ( 64,300 ) $ 131,661 $ 136,393 Cumulative effect of change in accounting principle (ASU 2016-13) - - - ( 6,118 ) ( 6,118 ) Net income - - - 8,380 8,380 Other comprehensive income, net of tax - - 12,687 - 12,687 Net surrender value of 5,684 restricted stock awards - ( 196 ) - - ( 196 ) Stock-based compensation expense - 719 - - 719 Cash dividends, $ 1.05 per share - - - ( 4,520 ) ( 4,520 ) Balance at December 31, 2023 $ - $ 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) Year Ended December 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 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 7,163 5,968 Deferred tax expense (benefit) ( 673 ) 1,187 Stock based compensation expense 719 741 Loss (gain) on sale of securities, net 48 ( 662 ) Gain on sale of loans held-for-sale, net ( 1,084 ) ( 1,470 ) Loss (gain) on sale of premises and equipment, net ( 276 ) 303 Impairment charge on assets held for sale - 1,232 Loss (gain) on sale of foreclosed real estate 13 ( 16 ) Gain on cash value of bank owned life insurance ( 766 ) ( 810 ) Loss on derivatives 3 102 Provision for credit losses 2,025 - Net change in: Interest receivable 2,105 ( 141 ) Other assets 3,002 ( 5,080 ) Accrued expenses and other liabilities 1,274 ( 3,476 ) Total adjustments 15,831 2,650 Net cash provided by operating activities 24,211 17,730 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of certificates of deposit in other financial institutions 2,456 232 Purchase of certificates of deposit in other financial institutions - ( 734 ) Proceeds from maturities and pay downs of securities available-for-sale 14,332 41,524 Proceeds from sales of securities available-for-sale 476 53,953 Purchase of securities available-for-sale ( 123 ) ( 30,421 ) Proceeds from bank owned life insurance - 314 Net change in loans receivable ( 6,378 ) ( 93,998 ) Proceeds from loans held for sale previously classified as loans receivable 4,530 - Purchase of Federal Home Loan Bank Stock - ( 1,997 ) Purchase of loans receivable - ( 2,663 ) Purchase of premises and equipment, net ( 1,148 ) ( 3,031 ) Proceeds from sale of premises and equipment 799 1,798 Proceeds from sale of foreclosed real estate 77 93 Cash and cash equivalents from acquisition activity, net - 33,799 Net cash provided by (used in) investing activities 15,021 ( 1,131 ) CASH FLOWS FROM FINANCING ACTIVITIES: Change in deposits 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 22,621 922 Dividends paid ( 5,335 ) ( 5,075 ) Net cash provided by (used in) financing activities 15,494 ( 18,493 ) Net change in cash and cash equivalents 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 year for: Interest $ 28,528 $ 4,572 Income taxes 241 1,347 Acquisition activity: Fair value of assets acquired, including cash and cash equivalents $ - $ 528,539 Value of goodwill and other intangible assets - 14,506 Fair value of liabilities assumed - 486,339 Cash paid for acquisition - 18,725 Issuance of common stock for acquisition - 37,981 Noncash activities: Transfer of loans receivable to loans held for sale $ 4,530 $ - Transfers from loans to foreclosed real estate 135 $ - Dividends declared not paid 517 1,332 Transfer of premises and equipment to other real estate - 1,815 Initial recognition of ASU 2016-13 9,295 - See accompanying notes to consolidated financial statements. Page 72 of 122 Notes to Consolidated Financial Statements Years ended December 31, 2023 and 2022 NOTE 1 - Summary of Significant Accounting Policies 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. was formed as an Indiana Real Estate Investment Trust. The formation of NWIN Funding, Inc. provides the Bancorp with a vehicle that may be used to raise capital utilizing portfolio mortgages as collateral, without diluting stock ownership. In addition, NWIN Funding, Inc. receives favorable state tax treatment for income generated by its operations. Columbia Development Company is a limited liability company that serves to hold certain real estate properties that are acquired through foreclosure. 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 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; and DuPage, Lake, and Will counties in Illinois. Substantially all loans are secured by specific items of collateral including residences, commercial real estate, land development, business assets and consumer assets. Cash Flow Reporting – For purposes of the statements of cash flows, the Bancorp considers cash on hand, noninterest bearing deposits in other financial institutions, all interest bearing deposits in other financial institutions with original maturities of 90 days or less, and federal funds sold to be cash and cash equivalents. The Bancorp reports net cash flows for customer loan and deposit transactions and short-term borrowings with maturities of 90 days or less. Certificates of deposits in other financial institutions – Certificates of deposits in other financial institutions generally mature within 5 years and are carried at cost. Securities – The Bancorp classifies securities into held-to-maturity, available-for-sale, or trading categories. Held-to-maturity securities are those which management has the positive intent and the Bancorp has the ability to hold to maturity, and are reported at amortized cost. Available-for-sale securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains and losses reported in other comprehensive (loss) income, net of tax. At December 31, 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. Realized gains and losses resulting from the sale of securities recorded on the trade date are computed by the specific identification method. Interest and dividend income, adjusted by amortization of premiums or discounts on a level yield method, are included in earnings. Page 73 of 122 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. Mortgage loans held-for-sale can be sold with servicing rights retained or released. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing rights. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold. Loans and Loan Interest Income – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, and net deferred loan fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level‑yield method without anticipating prepayments. The accrual of interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged-off no later than when they reach 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual 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 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. Page 74 of 122 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. Page 75 of 122 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. An overall general decline in the economy or some level of deterioration in a borrower's financial condition does not inherently mean the borrower is experiencing financial difficulties. Some of the factors considered by management when determining whether a borrower is experiencing financial difficulties are: ( 1 ) is the borrower currently in default on any of its debts, ( 2 ) has the borrower declared or is the borrower in the process of declaring bankruptcy, and ( 3 ) 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. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when ( 1 ) the assets have been isolated from the Bancorp, ( 2 ) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and ( 3 ) the Bancorp does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Premises and Equipment – Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. Premises and related components are depreciated using the straight-line method with useful lives ranging from 15 to 39 years. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 2 to 10 years. Page 76 of 122 Foreclosed Real Estate – Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Long-term Assets – Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Bank Owned Life Insurance – The Bancorp has purchased life insurance policies on certain key executives. In accordance with accounting for split-dollar life insurance, Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Goodwill and Intangibles – The Bancorp records the assets acquired, including identified intangible assets, and the liabilities assumed in acquisitions at their fair values. These fair values often involve estimates based on third -party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective. Under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, goodwill and indefinite-lived assets recorded are reviewed for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired. An impairment loss is recognized for any excess of carrying value over fair value of the goodwill or the indefinite-lived intangible asset. Repurchase Agreements – Substantially all repurchase agreement liabilities represent amounts advanced by various customers that are not covered by federal deposit insurance and are secured by securities owned by the Bancorp. Income Taxes – Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. At December 31, 2023 and 2022, the Bancorp evaluated tax positions taken for filing with the Internal Revenue Service and all state jurisdictions in which it operates. The Bancorp believes that income tax filing positions will be sustained under examination and does not anticipate any adjustments that would result in a material adverse effect on the Bancorp's financial condition, results of operations, or cash flows. Accordingly, the Bancorp has not recorded any reserves or related accruals for interest and penalties for uncertain tax positions at December 31, 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. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. As part of mortgage banking operations, the Company enters into commitments to originate loans whereby the interest rate on these loans is determined prior to funding (“interest rate lock commitments”). Similar to loans held for sale, the fair value of rate lock commitments is subject to change primarily due to changes in interest rates. The interest rate lock commitments on mortgage loans intended to be sold are recorded at fair value with changes in fair value recorded in current earnings as part of gain on sale of loans held-for-sale, net. Earnings Per Common Share – Basic earnings per common share is net income divided by the weighted-average number of common shares outstanding during the period. The restricted shares issued provide for dividend and voting rights and are therefore considered participating securities. Accordingly, all restricted stock is included in basic earnings per share. Comprehensive (Loss) Income – Comprehensive (loss) income consists of net income and other comprehensive (loss) income. Other comprehensive (loss) income includes unrealized gains and losses on securities available-for-sale. Page 77 of 122 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 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 estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular instruments. Changes in assumptions or in market conditions could significantly affect the estimates. Operating Segments – While the Bancorp's executive management monitors the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Bancorp's financial service operations are considered by management to be aggregated in one reportable operating segment. Reclassification – Certain amounts appearing in the consolidated financial statements and notes thereto 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 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. 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. Page 78 of 122 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 ASC 326 Allowance for credit losses December 31, 2022 Adoption January 1, 2023 Residential real estate $ 3,021 $ 2,223 $ 5,244 Home equity 410 128 538 Commercial real estate 5,784 1,446 7,230 Construction and land development 1,253 1,735 2,988 Multifamily 1,007 141 1,148 Farmland - - - Commercial business 1,365 325 1,690 Consumer 57 22 79 Manufactured homes - 112 112 Government - 55 55 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. The amendments eliminate the accounting guidance for troubled debt restructurings by companies that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross writeoffs for financing receivables and net investment in leases by year of origination in the vintage disclosures. ASU 2022 - 02 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. 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. 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. This guidance is effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Bancorp has assessed ASU 2022 - 03 and does not expect it to have a material impact on its accounting and disclosures. Page 79 of 122 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. Stockholders holding less than 101 shares of RYFL common stock received fixed consideration of $ 20.14 in cash per share and no stock consideration. Page 80 of 122 As a result of RYFL stockholder stock and cash elections and the related allocation and proration provisions of the merger agreement, Finward issued 795,423 shares of its common stock and paid cash consideration of approximately $ 18.7 million in the Merger. Based on the January 28, 2022, closing price of $ 47.75 per share of Finward common stock, the transaction had an implied valuation of approximately $ 56.7 million. In connection with the acquisition, Robert W. Youman, was appointed to the boards of directors of Finward and Peoples Bank effective as of the closing of the Merger. RYFL had a home office and eight branch offices in Cook County and DuPage County, Illinois. The acquisition has further expanded the Bank’s banking center network in Cook County and DuPage County, Illinois. Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on the valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the RYFL acquisition is allocated as follows (in thousands): ASSETS Cash and due from banks $ 52,524 Investment securities, available for sale - Certificate of deposit in other financial institutions 245 Total Loans 450,757 Premises and equipment, net 13,896 FHLB stock 1,303 Goodwill 11,286 Core deposit intangible 3,220 Interest receivable 1,836 Other assets 7,978 Total assets purchased $ 543,045 Common shares issued 37,981 Cash paid 18,725 Total purchase price $ 56,706 LIABILITIES Deposits Non-interest bearing $ 32,095 NOW accounts 63,639 Savings and money market 184,149 Certificates of deposits 195,153 Total Deposits 475,036 Interest payable 75 Other liabilities 11,228 Total liabilities assumed $ 486,339 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. Page 81 of 122 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: For the twelve months ended For the twelve months ended (in thousands) December 31, 2023 December 31, 2022 Selected Financial Data Interest income $ 85,783 $ 73,730 Interest expense ( 31,228 ) ( 4,987 ) Provision for loan losses ( 2,025 ) - Non-interest income 10,746 11,648 Non-interest expense (1) ( 55,231 ) ( 60,228 ) Income before provision for income taxes 8,045 20,163 Income tax expense 335 ( 2,235 ) Net income $ 8,380 $ 17,928 Earnings per common share: Basic $ 1.96 $ 4.29 Diluted $ 1.96 $ 4.28 ( 1 ) 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) Twelve months ended Noninterest expense: December 31, 2022 Compensation and benefits $ 132 Data processing 1,929 Marketing 135 Other 656 Period merger expense $ 2,852 Page 82 of 122 NOTE 3 – Securities The estimated fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows: (Dollars in thousands) Gross Gross Estimated Cost Unrealized Unrealized Fair Basis Gains Losses Value December 31, 2023 U.S. government sponsored entities $ 8,884 $ - $ ( 1,001 ) $ 7,883 U.S. treasury securities - - - - Collateralized mortgage obligations and residential mortgage-backed securities 149,410 - ( 25,946 ) 123,464 Municipal securities 278,813 60 ( 40,203 ) 238,670 Collateralized debt obligations 2,170 - ( 813 ) 1,357 Total securities available-for-sale $ 439,277 $ 60 $ ( 67,963 ) $ 371,374 (Dollars in thousands) Gross Gross Estimated Cost Unrealized Unrealized Fair Basis Gains Losses Value December 31, 2022 U.S. government sponsored entities $ 8,883 $ - $ ( 1,258 ) $ 7,625 U.S. treasury securities 389 - - 389 Collateralized mortgage obligations and residential mortgage-backed securities 163,000 - ( 28,884 ) 134,116 Municipal securities 281,032 7 ( 53,321 ) 227,718 Collateralized debt obligations 2,173 - ( 1,125 ) 1,048 Total securities available-for-sale $ 455,477 $ 7 $ ( 84,588 ) $ 370,896 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. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. (Dollars in thousands) Available-for-sale Estimated Cost Fair December 31, 2023 Basis Value Due in one year or less $ 250 $ 249 Due from one to five years 10,433 9,325 Due from five to ten years 21,801 20,486 Due over ten years 257,383 217,850 Collateralized mortgage obligations and residential mortgage-backed securities 149,410 123,464 Total $ 439,277 $ 371,374 Page 83 of 122 Sales of available-for-sale securities were as follows: (Dollars in thousands) December 31, December 31, 2023 2022 Proceeds $ 476 $ 53,953 Gross gains - 733 Gross losses ( 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 gain/(loss) Ending balance, December 31, 2022 $ ( 64,300 ) Current period change 12,687 Ending balance, December 31, 2023 $ ( 51,613 ) (Dollars in thousands) Unrealized gain/(loss) Ending balance, December 31, 2021 $ 4,276 Current period change ( 68,576 ) Ending balance, December 31, 2022 $ ( 64,300 ) Securities with carrying values of approximately $ 324.1 million and $ 223.7 million were pledged as of December 31, 2023 and 2022, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law. Securities with unrealized losses at December 31, 2023, and 2022, not recognized in income are as follows: (Dollars in thousands) Less than 12 months 12 months or longer Total Estimated Estimated Estimated Percentage of Fair Unrealized Fair Unrealized Fair Unrealized Total Portfolio Value Losses Value Losses Value Losses in Loss Position December 31, 2023 U.S. government sponsored entities $ - $ - $ 7,883 $ ( 1,001 ) $ 7,883 $ ( 1,001 ) 100.0 % Collateralized mortgage obligations and residential mortgage-backed securities - - 123,464 ( 25,946 ) 123,464 ( 25,946 ) 100.0 % Municipal securities - - 229,595 ( 40,203 ) 229,595 ( 40,203 ) 96.2 % Collateralized debt obligations - - 1,357 ( 813 ) 1,357 ( 813 ) 100.0 % Total temporarily impaired $ - $ - $ 362,299 $ ( 67,963 ) $ 362,299 $ ( 67,963 ) 97.6 % Number of securities - 434 434 Page 84 of 122 (Dollars in thousands) Less than 12 months 12 months or longer Total Estimated Estimated Estimated Percentage of Fair Unrealized Fair Unrealized Fair Unrealized Total Portfolio Value Losses Value Losses Value Losses in Loss Position December 31, 2022 U.S. government sponsored entities $ - $ - $ 7,625 $ ( 1,258 ) $ 7,625 $ ( 1,258 ) 100.0 % Collateralized mortgage obligations and residential mortgage-backed securities 32,700 ( 4,955 ) 101,416 ( 23,929 ) 134,116 ( 28,884 ) 100.0 % Municipal securities 171,581 ( 35,935 ) 52,961 ( 17,386 ) 224,542 ( 53,321 ) 98.6 % Collateralized debt obligations - - 1,048 ( 1,125 ) 1,048 ( 1,125 ) 100.0 % Total temporarily impaired $ 204,281 $ ( 40,890 ) $ 163,050 $ ( 43,698 ) $ 367,331 $ ( 84,588 ) 99.0 % Number of securities 311 135 446 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. 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: (Dollars in thousands) December 31, 2023 December 31, 2022 Loans secured by real estate: Residential real estate $ 484,948 $ 484,595 Home equity 46,599 38,978 Commercial real estate 503,202 486,431 Construction and land development 115,227 108,926 Multifamily 219,917 251,014 Total loans secured by real estate 1,369,893 1,369,944 Commercial business 97,386 93,278 Consumer 610 918 Manufactured homes 30,845 34,882 Government 10,021 9,549 Loans receivable 1,508,755 1,508,571 Add (less): Net deferred loan origination costs 3,705 5,083 Undisbursed loan funds 135 ( 23 ) Loans receivable, net of deferred fees and costs $ 1,512,595 $ 1,513,631 Page 85 of 122 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 and Accruing Total Past Due and Accruing Current Accruing Loans Non-accrual Loans Total Loans Receivable December 31, 2023 Residential real estate $ 5,857 $ 4,362 $ 1,131 $ 11,350 $ 471,905 $ 483,255 $ 1,693 $ 484,948 Home equity 226 18 - 244 45,887 46,131 468 46,599 Commercial real estate 3,168 262 712 4,142 498,227 502,369 833 503,202 Construction and land development. 2,523 - - 2,523 112,704 115,227 - 115,227 Multifamily 5,333 - - 5,333 210,869 216,202 3,715 219,917 Commercial business 105 29 - 134 94,355 94,489 2,897 97,386 Consumer 12 - - 12 596 608 2 610 Manufactured homes 634 379 - 1,013 29,832 30,845 - 30,845 Government - - - - 10,021 10,021 - 10,021 Total $ 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 $ 3,758 $ 2,520 $ 166 $ 6,444 $ 472,804 $ 479,248 $ 5,347 $ 484,595 Home equity 315 42 - 357 38,027 38,384 594 38,978 Commercial real estate 1,399 150 - 1,549 481,640 483,189 3,242 486,431 Construction and land development 2,673 - - 2,673 106,253 108,926 - 108,926 Multifamily 1,724 616 - 2,340 241,610 243,950 7,064 251,014 Commercial business 1,775 - - 1,775 89,622 91,397 1,881 93,278 Consumer 3 - - 3 915 918 - 918 Manufactured homes 601 256 82 939 33,943 34,882 - 34,882 Government - - - - 9,549 9,549 - 9,549 Total $ 12,248 $ 3,584 $ 248 $ 16,080 $ 1,474,363 $ 1,490,443 $ 18,128 $ 1,508,571 Page 86 of 122 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 2023 2022 2021 2020 2019 Prior Revolving Revolving Converted to Term Total 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 Pass (1-6) $ 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 Total $ 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 ) Home equity Pass (1-6) $ 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 Total $ 110 $ 275 $ 101 $ 14 $ 65 $ 2,149 $ 43,122 $ 763 $ 46,599 Current period gross charge-off - - - - - ( 16 ) ( 27 ) - ( 43 ) Commercial real estate Pass (1-6) $ 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 Total $ 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 Pass (1-6) $ 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 Total $ 48,883 $ 25,024 $ 17,616 $ 3,988 $ 4,284 $ 473 $ 12,539 $ 2,420 $ 115,227 Current period gross charge-off - - - - - - - - - Multifamily Pass (1-6) $ 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 Total $ 9,333 $ 53,493 $ 79,788 $ 43,335 $ 13,156 $ 20,626 $ 186 $ - $ 219,917 Current period gross charge-off - - - - - - - - - Commercial business Pass (1-6) $ 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 Total $ 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 ) Consumer Pass (1-6) $ 338 $ 73 $ 108 $ 4 $ 14 $ 71 $ - $ - $ 608 Substandard (8) - - - 2 - - - - 2 Total $ 338 $ 73 $ 108 $ 6 $ 14 $ 71 $ - $ - $ 610 Current period gross charge-off ( 95 ) - - - - - - - ( 95 ) Manufactured homes Pass (1-6) $ - $ 1,942 $ 12,556 $ 9,214 $ 5,031 $ 2,102 $ - $ - $ 30,845 Total $ - $ 1,942 $ 12,556 $ 9,214 $ 5,031 $ 2,102 $ - $ - $ 30,845 Current period gross charge-off - - - - - - - - - Government Pass (1-6) $ 1,890 $ 1,815 $ 1,433 $ - $ - $ 4,883 $ - $ - $ 10,021 Total $ 1,890 $ 1,815 $ 1,433 $ - $ - $ 4,883 $ - $ - $ 10,021 Current period gross charge-off - - - - - - - - - Page 87 of 122 The Bancorp's credit quality indicators are summarized below at December 31, 2022: December 31, 2022 (Dollars in thousands) 1 - 6 7 8 Loan Segment Pass Special mention Substandard Total Residential real estate $ 477,222 $ 1,338 $ 6,035 $ 484,595 Home equity 37,981 385 612 38,978 Commercial real estate 474,055 4,955 7,421 486,431 Construction and land development 106,580 2,346 - 108,926 Multifamily 242,091 1,859 7,064 251,014 Commercial business 90,694 703 1,881 93,278 Consumer 918 - - 918 Manufactured homes 34,882 - - 34,882 Government 9,549 - - 9,549 Total $ 1,473,972 $ 11,586 $ 23,013 $ 1,508,571 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. Thehe Bancorp reassesses its risk ratings annually, and no changes to our credit quality indicators have occurred. The loan grading system is as follows: 1 – Superior Quality Loans in this category are substantially risk free. Loans fully collateralized by a Bank certificate of deposit or Bank deposits with a hold are substantially risk free. 2 – Excellent Quality The borrower generates excellent and consistent cash flow for debt coverage, excellent average credit scores, excellent liquidity and net worth and are reputable operators with over 15 years’ experience. Current and debt to tangible net worth ratios are excellent. Loan to value is substantially below policy and collateral condition is excellent. 3 – Great Quality The borrower generates more than sufficient cash flow to fund debt service and cash flow is improving. Average credit scores are very strong. Operators are reputable with significant years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are very strong. Loan to value is significantly below policy and collateral condition is significantly above average. 4 – Above Average Quality The borrower generates more than sufficient cash flow to fund debt service but cash flow trends may be stable or slightly declining. Average credit scores are strong. The borrower is a reputable operator with many years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are strong. Loan to value is below policy and collateral condition is above average. 5 – Average Quality Borrowers are considered creditworthy and can repay the debt in the normal course of business, however, cash flow trends may be inconsistent or fluctuating. Average credit scores are satisfactory and years of experience is acceptable. Liquidity and net worth are satisfactory. Current and debt to tangible net worth ratios are average. Loan to value is slightly below policy and the collateral condition is slightly above average. Page 88 of 122 6 – Pass Borrowers are considered credit worthy but financial condition may show signs of weakness due to internal or external factors. Cash flow trends may be declining annually. Average credit scores may be low but remain acceptable. Borrower has limited years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are below average. Loan to value is nearing policy limits and collateral condition is average. 7 – Special Mention A special mention asset has identified weaknesses that deserve Management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the asset or in the 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. The Special Mention rating is viewed as transitional and will be monitored closely. Loans in this category may exhibit some of the following risk factors. Cash flow trends may be consistently declining or may be questionable. Debt coverage ratios may be at or near 1:1. Average credit scores may be very weak or the borrower may have minimal years of experience. Liquidity, net worth, current and debt to tangible net worth ratios may be very weak. Loan to value may be at policy limits or may exceed policy limits. Collateral condition may be below average. 8 – Substandard This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit, some loss could be incurred in collection if the deficiencies are not corrected. 9 – Doubtful Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable. 10 – Loss Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted. Performing loans are loans that are paying as agreed and are approximately less than ninety days past due on payments of interest and principal. 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. Page 89 of 122 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) Payment Delay Term Extension Interest Rate Reduction Combination Term Extension and Interest Rate Reduction % of Total Segment Financing Receivables Residential Real Estate $ - $ 868 $ - $ - 0.18 % Total $ - $ 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) Current 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Residential Real Estate $ 868 $ - $ - $ - Total $ 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 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. Page 90 of 122 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) Total 2022 $ 1,010 2023 1,078 Accretable yield, or income expected to be recorded in the future is as follows: (dollars in thousands) Total 2024 $ 673 2025 667 2026 484 2027 313 2028 and thereafter 3,068 Total $ 5,205 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. Page 91 of 122 (Dollars in thousands) Beginning Balance Adoption of ASC 326 PCD Gross-up Charge-offs Recoveries Provisions 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 $ 3,021 $ 1,688 $ 535 $ ( 997 ) $ 149 $ ( 412 ) $ 3,984 Home equity 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 Multifamily 1,007 141 - - 131 ( 346 ) 933 Commercial business 1,365 320 5 ( 1,064 ) 265 758 1,649 Consumer 57 5 17 ( 95 ) 15 8 7 Manufactured homes - 112 - - - 69 181 Government - 55 - - - 10 65 Total $ 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 Home equity 357 - - - - 53 410 Commercial real estate 5,515 - - ( 431 ) - 700 5,784 Construction and land development 2,119 - - - - ( 866 ) 1,253 Multifamily 848 - - - - 159 1,007 Commercial business 2,009 - - ( 57 ) 89 ( 676 ) 1,365 Consumer 15 - - ( 91 ) 20 113 57 Manufactured homes - - - - - - - Government - - - - - - - Total $ 13,343 $ - $ - $ ( 608 ) $ 162 $ - $ 12,897 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 Real Estate Equipment/Inventory Accounts Receivable Other Total ACL Allocation Residential real estate $ 30 $ - $ - $ - $ - $ 30 Commercial real estate 2,541 - - - 2,541 53 Multifamily 4,244 - - - 4,244 85 Commercial business - 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. Page 92 of 122 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 Credit Loss Nonaccrual Loans Past Due over 90 Days Still Accruing Residential real estate $ 442 $ 1,251 $ 1,131 Home equity 161 307 - Commercial real estate 603 230 712 Construction and land development - - - Multifamily 2,357 1,358 - Commercial business 1,724 1,173 - Consumer - 2 - Manufactured homes - - - Government - - - Total $ 5,287 $ 4,321 $ 1,843 The Bancorp's impairment analysis is summarized below: Ending Balances (Dollars in thousands) Individually evaluated for impairment reserves Collectively evaluated for impairment reserves Loan receivables Individually evaluated for impairment Purchased credit impaired individually evaluated for impairment Collectively evaluated for impairment The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2022: Residential real estate $ 24 $ 2,997 $ 484,595 $ 1,518 $ 988 $ 482,089 Home equity 3 407 38,978 294 125 38,559 Commercial real estate 13 5,771 486,431 2,392 2,935 481,104 Construction and land development - 1,253 108,926 - - 108,926 Multifamily - 1,007 251,014 6,739 382 243,893 Commercial business 297 1,068 93,278 1,758 953 90,567 Consumer - 57 918 - 17 901 Manufactured homes - - 34,882 - - 34,882 Government - - 9,549 - - 9,549 Total $ 337 $ 12,560 $ 1,508,571 $ 12,701 $ 5,400 $ 1,490,470 December 31, 2023 (dollars in thousands) Interest income recognized during the period on nonaccrual loans Residential real estate $ 173 Home equity 19 Commercial real estate 70 Construction and land development 9 Multifamily 31 Commercial business 156 Consumer 2 Total $ 460 Page 93 of 122 For the twelve months ended As of December 31, 2022 December 31, 2022 (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Residential real estate $ 2,255 $ 3,711 $ - $ 2,528 $ 202 Home equity 399 416 - 253 12 Commercial real estate 5,314 5,406 - 3,409 205 Construction & land development - - - 344 - Multifamily 7,121 7,163 - 3,387 16 Farmland - - - - - Commercial business 2,278 2,392 - 1,365 76 Consumer 17 17 - 15 - Manufactured homes - - - - - Government - - - - - With an allowance recorded: Residential real estate $ 251 $ 276 $ 24 $ 194 $ 5 Home equity 20 20 3 21 1 Commercial real estate 13 14 13 678 - Construction & land development - - - - - Multifamily - - - - - Farmland - - - - - Commercial business 433 561 297 352 13 Consumer - - - - - Manufactured homes - - - - - Government - - - - - Total: Residential real estate $ 2,506 $ 3,987 $ 24 $ 2,722 $ 207 Home equity $ 419 $ 436 $ 3 $ 274 $ 13 Commercial real estate $ 5,327 $ 5,420 $ 13 $ 4,087 $ 205 Construction & land development $ - $ - $ - $ 344 $ - Multifamily $ 7,121 $ 7,163 $ - $ 3,387 $ 16 Farmland $ - $ - $ - $ - $ - Commercial business $ 2,711 $ 2,953 $ 297 $ 1,717 $ 89 Consumer $ 17 $ 17 $ - $ 15 $ - Manufactured homes $ - $ - $ - $ - $ - Government $ - $ - $ - $ - $ - 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. Page 94 of 122 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. Year ended, December 31, (Dollars in thousands) 2023 Balance, beginning of period $ - Adoption of ASC 326 3,108 Provision 333 Balance, end of period $ 3,441 Note 5 – Premises and Equipment, Net At year end, premises and equipment are summarized as follows: (Dollars in thousands) 2023 2022 Cost: Land $ 11,773 $ 11,773 Buildings and improvements 41,794 40,753 Furniture and equipment 19,401 19,434 Total cost 72,968 71,960 Less accumulated depreciation ( 34,532 ) ( 31,748 ) Premises and equipment, net $ 38,436 $ 40,212 Depreciation expense was approximately $ 2.9 million and $ 3.0 million for 2023 and 2022, respectively. Note 6 – Goodwill and Other Intangible Assets At year end, goodwill and other intangible assets are summarized as follows: (Dollars in thousands) 2023 2022 Goodwill balance January 1, $ 22,395 $ 11,109 Goodwill acquired - Royal Financial - 11,286 Goodwill balance December 31, $ 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. Page 95 of 122 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 year ended December 31, is as follows: (dollars in thousands) Total 2022 $ 1,552 2023 $ 1,522 Amortization to be recorded in future periods, is as follows: (dollars in thousands) Total 2024 $ 1,411 2025 688 2026 360 2027 294 Thereafter 519 Total $ 3,272 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 $ 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) 2023 2022 Federal: Current $ 92 $ ( 169 ) Deferred ( 584 ) 1,074 State: Current 246 460 Deferred, net of valuation allowance ( 89 ) 113 Income tax expense (benefit) $ ( 335 ) $ 1,478 Page 96 of 122 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: (Dollars in thousands) 2023 2022 Federal statutory rate 21 % 21 % Tax expense at statutory rate $ 1,689 $ 3,477 State tax, net of federal effect 124 453 Tax exempt income ( 1,314 ) ( 1,419 ) Bank owned life insurance ( 161 ) ( 153 ) Captive insurance ( 159 ) ( 282 ) Tax credit investments ( 531 ) ( 494 ) Non-deductible transaction costs - 98 Other 17 ( 202 ) 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: (Dollars in thousands) 2023 2022 Deferred tax assets: Allowance for credit losses $ 5,686 $ 3,346 Deferred compensation 356 361 Unrealized depreciation on securities available-for-sale, net 16,285 20,280 Net operating loss 6,546 7,010 Tax credits 683 52 Nonaccrual loan interest income 99 288 Share based compensation 293 339 Unqualified deferred compensation plan 67 65 Other-than-temporary impairment 41 42 Accrued compensation 260 55 Purchase accounting 426 364 Deferred loan costs, net of fees 337 339 Other 313 190 Total deferred tax assets 31,392 32,731 Deferred tax liabilities: Depreciation ( 1,213 ) ( 1,322 ) Prepaid expenses ( 491 ) ( 637 ) Mortgage servicing rights ( 249 ) ( 295 ) Deferred stock dividends ( 119 ) ( 121 ) Goodwill ( 608 ) ( 533 ) Partnership ( 383 ) ( 366 ) Other ( 201 ) ( 213 ) Total deferred tax liabilities ( 3,264 ) ( 3,487 ) Valuation allowance ( 62 ) - Net deferred tax asset $ 28,066 $ 29,244 Page 97 of 122 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. 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 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 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 $ 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 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 $ 3.8 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. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Bancorp's policy to record such accruals through income tax accounts; no such accruals existed at any time during 2023 or 2022. The Bancorp and its subsidiaries are subject to US Federal income tax as well as income tax of the states of Indiana and Illinois. The Bancorp is no longer subject to examination by taxing authorities for the years before 2020. 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. Brokered certificates of deposit totaled $ 29.9 million at December 31, 2023 and $ 40.0 million at December 31, 2022. Page 98 of 122 The Bancorp’s end-of-period deposit portfolio balances were as follows: (Dollars in thousands) December 31, 2023 December 31, 2022 Balance Balance Checking $ 653,529 $ 755,377 Savings 302,782 402,365 Money market 324,993 254,157 Certificates of deposit 532,117 363,118 Total deposits $ 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 2025 41,841 2026 4,193 2027 3,678 2028 and thereafter 281 Total $ 532,117 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, 2023 and 2022, borrowed funds and their outstanding rates are summarized below: (Dollars in thousands) December 31, December 31, 2023 2022 Fixed rate advances from the Federal Reserve with outstanding rates of 4.38 % as of December 31, 2023 $ 80,000 $ - Fixed rate advances from the FHLB with outstanding rates of 4.30 % as of December 31, 2022 $ - $ 120,000 Total $ 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, 2023 or 2022. The Bank had no other borrowings at December 31, 2023, or 2022. Page 99 of 122 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. Repurchase agreements generally mature within one year and are secured by U.S. government and U.S. agency securities, under the Bank’s control. At December 31, information concerning these retail repurchase agreements is summarized below: (Dollars in thousands) 2023 2022 Ending balance $ 38,124 $ 15,503 Average balance during the year 35,543 20,649 Maximum month-end balance during the year 48,947 28,328 Securities underlying the agreements at year end: Carrying value 54,458 32,660 Fair value 54,458 32,660 Average interest rate during the year 4.00 % 0.94 % Average interest rate at year end 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. The unqualified deferred compensation plan liability at December 31, 2023 and 2022 was approximately $ 263 thousand and $ 251 thousand, respectively. The UDC Plan expense amounted to approximately $ 7 thousand for 2023 and $ 4 thousand for 2022. Directors have deferred some of their fees in consideration of future payments. Fee deferrals, including interest, totaled approximately $ 52 thousand and $ 53 thousand for 2023 and 2022, respectively. 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. Page 100 of 122 Restricted stock awards are generally granted with an award price equal to the market price of the Bancorp’s common stock on the award date. Restricted stock awards have been issued with a three year cliff-vesting period. Forfeiture provisions exist for personnel that separate employment before the vesting period expires. Compensation expense related to restricted stock awards is recognized over the vesting period. Total compensation cost that has been charged 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 $ 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 Shares Weighted Average Grant Date Fair Value Non-vested at January 1, 2023 55,833 $ 43.87 Granted 11,137 34.10 Vested ( 17,549 ) 44.24 Forfeited ( 7,772 ) 43.21 Non-vested at December 31, 2023 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 The Bank is subject to regulatory capital guidelines adopted by the FDIC. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet various capital requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 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. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions by the institution and certain discretionary bonus payments to management if an institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. Page 101 of 122 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. (Dollars in millions) Minimum Required To Be Minimum Required For Well Capitalized Under Prompt Actual Capital Adequacy Purposes Corrective Action Regulations December 31, 2023 Amount Ratio Amount Ratio Amount Ratio Common equity tier 1 capital to risk-weighted assets $ 168.3 10.4 % $ 72.6 4.5 % $ 104.9 6.5 % Tier 1 capital to risk-weighted assets $ 168.3 10.4 % $ 96.9 6.0 % $ 129.1 8.0 % Total capital to risk-weighted assets $ 183.3 11.4 % $ 129.1 8.0 % $ 161.4 10.0 % Tier 1 capital to adjusted average assets $ 168.3 7.8 % $ 86.6 4.0 % $ 108.2 5.0 % (Dollars in millions) Minimum Required To Be Minimum Required For Well Capitalized Under Prompt Actual Capital Adequacy Purposes Corrective Action Regulations December 31, 2022 Amount Ratio Amount Ratio Amount Ratio Common equity tier 1 capital to risk-weighted assets $ 161.3 10.1 % $ 71.6 4.5 % $ 103.4 6.5 % Tier 1 capital to risk-weighted assets $ 161.3 10.1 % $ 95.5 6.0 % $ 127.3 8.0 % Total capital to risk-weighted assets $ 174.2 10.9 % $ 127.3 8.0 % $ 159.1 10.0 % Tier 1 capital to adjusted average assets $ 161.3 7.7 % $ 84.3 4.0 % $ 105.4 5.0 % The Bancorp’s ability to pay dividends to its shareholders is largely dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. The aggregate amount of dividends that may be declared by the Bank in 2023, without the need for qualifying for an exemption or prior DFI approval, is its 2023 net profit. Moreover, the FDIC and the Federal Reserve Board may prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. 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. Page 102 of 122 Note 13 – Earnings per Common Share Earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding. A reconciliation of the numerators and denominators of the basic earnings per common share and diluted earnings per common share computations for 2023 and 2022 is presented below. (dollars in thousands except per share data) 2023 2022 Basic earnings per common share: Net income as reported $ 8,380 $ 15,080 Weighted average common shares outstanding 4,273,824 4,176,125 Basic earnings per common share $ 1.96 $ 3.61 Diluted earnings per common share: Net income as reported $ 8,380 $ 15,080 Weighted average common shares outstanding 4,273,824 4,176,125 Add: Dilutive effect of unvested restricted stock awards 8,458 17,357 Weighted average common and dilutive potential common shares outstanding 4,282,282 4,193,482 Diluted earnings per common share $ 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. For the year ended December 31, 2023, the following activity occurred on these loans: (Dollars in thousands) Aggregate balance at the beginning of the year $ 3,529 New loans 650 Repayments ( 383 ) Aggregate balance at the end of the year $ 3,796 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 The Bancorp is a party to financial instruments in the normal course of business to meet the financing needs of its customers. These financial instruments, which include commitments to make loans and standby letters of credit, are not reflected in the accompanying consolidated financial statements. Such financial instruments are recorded when they are funded. The Bancorp’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to originate loans and standby letters of credit is represented by the contractual amount of those instruments. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. The Bancorp uses the same credit policy to make such commitments as it uses for on-balance sheet items. Since commitments to make loans may expire without being used, the amount does not necessarily represent future cash commitments. Page 103 of 122 The Bancorp had outstanding commitments to originate loans as follows: (Dollars in thousands) Fixed Variable (Dollars in thousands) Rate Rate Total December 31, 2023: Residential real estate $ 7 $ 22,086 $ 22,093 Home equity 46,444 5,601 52,045 Commercial real estate 1,365 7,775 9,140 Construction and land development 13,010 35,390 48,400 Multifamily 117 1,058 1,175 Consumer 28,611 - 28,611 Commercial business 993 81,623 82,616 Lot - - - Total $ 90,547 $ 153,533 $ 244,080 December 31, 2022: Residential real estate $ 3 $ 21,980 $ 21,983 Home equity 48,796 5,636 54,432 Commercial real estate 3,166 11,610 14,776 Construction and land development 24,296 22,427 46,723 Multifamily 884 1,338 2,222 Consumer 29,586 - 29,586 Commercial business 823 75,623 76,446 Lot - 6,143 6,143 Total $ 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, 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 The Bancorp uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Bancorp has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Bancorp to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Bancorp enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Bancorp agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Bancorp agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Bancorp’s results of operations. The Bancorp enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (i.e., interest rate lock commitment). The interest rate lock commitments are considered derivatives and are recorded on the accompanying consolidated balance sheets at fair value in accordance with FASB ASC 815, Derivatives and Hedging. Page 104 of 122 The following table shows the amounts of non-hedging derivative financial instruments: December 31, 2023 Asset derivatives Liability derivatives (Dollars in thousands) Statement of Financial Condition classification Fair value Statement of Financial Condition classification Fair value Interest rate swap contracts Other assets $ 5,591 Other liabilities $ 5,591 Interest rate lock commitments Other assets 35 N/A - Total $ 5,626 $ 5,591 December 31, 2022 Asset derivatives Liability derivatives (Dollars in thousands) Statement of Financial Condition classification Fair value Statement of Financial Condition classification Fair value Interest rate swap contracts Other assets $ 8,972 Other liabilities $ 8,972 Interest rate lock commitments Other assets 38 N/A - Total $ 9,010 $ 8,972 The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments: Year-ended (Dollars in thousands) Statement of Income Classification 2023 2022 Interest rate swap contracts Fees and service charges $ 387 $ 267 Interest rate lock commitments Gain on sale of loans held-for-sale, net ( 3 ) ( 103 ) Total $ 384 $ 164 Page 105 of 122 The following table shows the offsetting of financial assets and derivative assets: Gross Amounts not Offset in the Statement of Financial Condition Gross Amounts of Gross Amounts Offset in the Net Amounts of Assets Presented Cash Collateral (Dollars in thousands) Recognized Assets Statement of Financial Condition in the Statement of Financial Condition Financial Instruments Received Net Amount December 31, 2023 Interest rate swap contracts $ 5,591 $ - $ 5,591 $ - $ 4,050 $ 1,541 Interest rate lock commitments 35 - 35 - - 35 Total $ 5,626 $ - $ 5,626 $ - $ 4,050 $ 1,576 Gross Amounts not Offset in the Statement of Financial Condition Gross Amounts of Gross Amounts Offset in the Net Amounts of Liabilities Presented Cash Collateral (Dollars in thousands) Recognized Liabilities Statement of Financial Condition in the Statement of Financial Condition Financial Instruments Received Net Amount December 31, 2022 Interest rate swap contracts $ 8,972 $ - $ 8,972 $ - $ - $ 8,972 Interest rate lock commitments 38 - 38 - - 38 Total $ 9,010 $ - $ 9,010 $ - $ - $ 9,010 The following table shows the offsetting of financial liabilities and derivative liabilities: Gross Amounts not Offset in the Statement of Financial Condition Gross Amounts of Gross Amounts Offset in the Net Amounts of Liabilities Presented Cash Collateral (Dollars in thousands) Recognized Liabilities Statement of Financial Condition in the Statement of Financial Condition Financial Instruments Pledged Net Amount December 31, 2023 Interest rate swap contracts $ 5,591 $ - $ 5,591 $ - $ - $ 5,591 Total $ 5,591 $ - $ 5,591 $ - $ - $ 5,591 Gross Amounts not Offset in the Statement of Financial Condition Gross Amounts of Gross Amounts Offset in the Net Amounts of Liabilities Presented Cash Collateral (Dollars in thousands) Recognized Liabilities Statement of Financial Condition in the Statement of Financial Condition Financial Instruments Pledged Net Amount December 31, 2022 Interest rate swap contracts $ 8,972 $ - $ 8,972 $ - $ 3,930 $ 5,042 Total $ 8,972 $ - $ 8,972 $ - $ 3,930 $ 5,042 Page 106 of 122 Note 17 – Fair Values of Financial Instruments The Fair Value Measurements Topic (the “Topic”) establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Topic describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgments and assumptions used in pricing could result in different estimates of value. In certain cases where market data is not readily available because of lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy. 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. Impairment related to a credit loss must be measured using the discounted cash flow method. Credit loss recognition is limited to the fair value of the security. The impairment is recognized by establishing an ACL through provision for credit losses. Impairment related to noncredit factors is recognized in accumulated other comprehensive income, net of applicable taxes. The Bank evaluates AFS security impairment on a quarterly basis. ASC 326 allows for prospective adoption of previously recorded other-than-temporary impairment on AFS securities. This allows the Bank to maintain the same amortized cost basis of the securities before and after adoption date. At adoption, the Bank has $ 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, has established an ACL for AFS debt securities. The 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. To the extent that there are improvements in credit related to these securities, the ACL will be reduced to account for the improvements. If any improvements in credit exceed the amount of previously reduced amortized cost bases, recoveries will be recorded through the income statement in the period received. The table below shows the allowance for collateralized debt credit losses: (Dollars in thousands) Allowance for collateralized debt credit losses Ending balance, December 31, 2022 $ 173 Additions not previously recognized - Ending balance, December 31, 2023 $ 173 Page 107 of 122 The Bancorp’s subordination for each trust preferred security is calculated by taking the total performing collateral and subtracting the sum of the total collateral within the Bancorp’s class and the total collateral within all senior classes, and then stating this result as a percentage of the total performing collateral. This measure is an indicator of the level of collateral that can default before potential cash flow disruptions may occur. In addition, management calculates subordination assuming future collateral defaults by utilizing the default/deferral assumptions in the Bancorp’s impairment analysis. Subordination assuming future default/deferral assumptions is calculated by deducting future defaults from the current performing collateral. At December 31, 2023 and 2022, management reviewed the subordination levels for each security in context of the level of current collateral defaults and deferrals within each security; the potential for additional defaults and deferrals within each security; the length of time that the security has been in “payment in kind” status; and the Bancorp’s class position within each security. At December 31, 2023 and 2022, the trust preferred securities with a cost basis of $ 2.2 million have been placed in “payment in kind” status. The Bancorp’s securities that are classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For the securities in “payment in kind” status, management anticipates to receive the unpaid contractual interest payments from the issuer, because of the self-correcting cash flow waterfall provisions within the structure of the securities. When a tranche senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest cash flows are paid to the senior tranche and recorded as a reduction of principal. The coverage test represents an over collateralization target by stating the balance of the performing collateral as a percentage of the balance of the Bancorp’s tranche, plus the balance of all senior tranches. The principal reduction in the senior tranche continues until the appropriate coverage test is passed. As a result of the principal reduction in the senior tranche, more cash is available for future payments to the Bancorp’s tranche. Management will not capitalize the “payment in kind” interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume. The fair value of the Bancorp’s interest rate swap contracts, both assets and liabilities, are valued by a third -party pricing agent using an income approach and are classified within Level 2 of the valuation hierarchy. The fair value of the Bancorp’s interest rate lock commitments is based on the price of the underlying loans expected to be sold to an investor while taking into consideration the probability the rate lock commitments will close and are classified within Level 2 of the valuation hierarchy. The Bancorp utilized a third party pricing service for classifying and valuing the fair value of trust preferred securities held. These securities were categorized as unobservable Level 3 and priced using an Option-Adjusted Discounted Cash flow model to value these securities. The significant inputs to this model include yield, prepayment speed, default rate, and loss severity. Page 108 of 122 Assets and Liabilities Measured at Fair Values on a Recurring Basis There were no transfers to or from Levels 1 and 2 during the years ended December 31, 2023 and 2022. Changes in Level 3 assets relate to the result of changes in estimated fair values, payments received, and sales of securities that have been classified as Level 3 during all of 2023 and 2022. Assets measured at fair value on a recurring basis are summarized below: (Dollars in thousands) Fair Value Measurements at December 31, 2023 Using (Dollars in thousands) Estimated Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Interest rate swap contracts $ 5,591 $ - $ 5,591 $ - Interest rate lock commitments 35 - 35 - Available-for-sale debt securities: U.S. government sponsored entities 7,883 - 7,883 - Collateralized mortgage obligations and residential mortgage-backed securities 123,464 - 123,464 - Municipal securities 238,670 - 238,670 - Collateralized debt obligations 1,357 - - 1,357 Total securities available-for-sale $ 371,374 $ - $ 370,017 $ 1,357 Liabilities: Interest rate swap contracts $ 5,591 $ - $ 5,591 $ - (Dollars in thousands) Fair Value Measurements at December 31, 2022 Using (Dollars in thousands) Estimated Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Interest rate swap contracts $ 8,972 $ - $ 8,972 $ - Interest rate lock commitments 38 - 38 - Available-for-sale debt securities: U.S. government sponsored entities 7,625 - 7,625 - U.S. treasury securities 389 - 389 - Collateralized mortgage obligations and residential mortgage-backed securities. 134,116 - 134,116 - Municipal securities 227,718 - 227,718 - Collateralized debt obligations 1,048 - - 1,048 Total securities available-for-sale $ 370,896 $ - $ 369,848 $ 1,048 Liabilities: Interest rate swap contracts $ 8,972 $ - $ 8,972 $ - Page 109 of 122 A reconciliation of available-for-sale securities, which require significant adjustment based on unobservable data, is presented below: (Dollars in thousands) Estimated Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Available-for- sale securities Beginning balance, January 1, 2022 $ 992 Principal payments - Total unrealized gains, included in other comprehensive income 56 Ending balance, December 31, 2022 $ 1,048 Beginning balance, January 1, 2023 $ 1,048 Principal payments ( 3 ) Total unrealized gains, included in other comprehensive loss 312 Ending balance, December 31, 2023 $ 1,357 Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis Assets and liabilities measured at fair value on a non-recurring basis are summarized below: (Dollars in thousands) Fair Value Measurements at December 31, 2023 Using (Dollars in thousands) Estimated Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Collateral dependent loans $ 8,673 $ - $ - $ 8,673 (Dollars in thousands) Fair Value Measurements at December 31, 2022 Using (Dollars in thousands) Estimated Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Impaired loans $ 2,620 $ - $ - $ 2,620 Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. Collateral dependent loans can include accruing loans that exhibit risk characteristics which differ from their pool or non-performing loans with risk characteristics not similar to other special attention loans in their pool. Individual reserves are determined based on an analysis of the loan’s expected future cash flows, the loan’s observable market value, or the fair value of the collateral less costs to sell. When foreclosure is probable, impairment is determined based on the collateral’s fair value less costs to sell. As a practical expedient, fair value less costs to sell may be used when developing the estimate of credit losses. Page 110 of 122 The following table shows carrying values and related estimated fair values of financial instruments as of the dates indicated. Estimated fair values are further categorized by the inputs used to measure fair value. Items that are not financial instruments are not included. December 31, 2023 Estimated Fair Value Measurements at December 31, 2023 Using (Dollars in thousands) Carrying Value Estimated Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial assets: Cash and cash equivalents $ 86,008 $ 86,008 $ 86,008 $ - $ - Loans held-for-sale 340 349 - 349 - Loans receivable, net 1,493,827 1,412,069 - - 1,412,069 Federal Home Loan Bank stock 6,547 6,547 - 6,547 - Accrued interest receivable 8,045 8,045 - 8,045 - Financial liabilities: Non-interest bearing deposits 295,594 295,594 295,594 - - Interest bearing deposits 1,517,827 1,513,640 985,710 527,930 - Repurchase agreements 38,124 37,938 31,033 6,905 - Borrowed funds 80,000 79,791 - 79,791 - Accrued interest payable 3,065 3,065 - 3,065 - December 31, 2022 Estimated Fair Value Measurements at December 31, 2022 Using (Dollars in thousands) Carrying Value Estimated Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial assets: Cash and cash equivalents $ 31,282 $ 31,282 $ 31,282 $ - $ - Certificates of deposit in other financial institutions 2,456 2,404 - 2,404 - Loans held-for-sale 1,543 1,555 - 1,555 - Loans receivable, net 1,500,734 1,437,496 - - 1,437,496 Federal Home Loan Bank stock 6,547 6,547 - 6,547 - Accrued interest receivable 7,421 7,421 - 7,421 - Financial liabilities: Non-interest bearing deposits 359,092 359,092 359,092 - - Interest bearing deposits 1,415,925 1,414,738 1,052,807 361,931 - Repurchase agreements 15,503 15,361 7,975 7,386 - Borrowed funds 120,000 119,689 - 119,689 - Interest rate swap agreements 8,972 8,972 - 8,972 - Accrued interest payable 336 336 - 336 - Page 111 of 122 The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended December 31, 2023 and 2022: Cash and cash equivalent carrying amounts approximate fair value. Certificates of deposits in other financial institutions fair value amounts are based on estimates of the rate the Bancorp would receive on similar deposits (Level 2 ). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 2 ). The estimated fair value for net loans receivable is based on the exit price notion which is the exchange price that would be received to transfer the loans at the most advantageous market price in an orderly transaction between market participants on the measurement date (Level 3 ). Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer of the security. Fair values of accrued interest receivable and payable approximate book value, as the carrying values are determined using the observable interest rate, balance, and last payment date. Non-interest and interest bearing deposits, which include checking, savings, and money market deposits, are estimated to have fair values based on the amount payable as of the reporting date (Level 1 ). The fair value of fixed-maturity certificates of deposit (included in interest bearing deposits) are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2 ). Estimated fair values for short-term repurchase agreements, which represent sweeps from demand deposits to accounts secured by pledged securities, are estimated based on the amount payable as of the reporting date (Level 1 ). Longer-term repurchase agreements, with contractual maturity dates of three months or more, are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2 ). The fair value of FHLB Advances and proceeds from the Federal Reserve BTFP are estimated by discounting the future cash flows using quoted rates for similar advances with similar maturities (Level 2 ). The estimated fair value of other financial instruments, and off-balance sheet loan commitments, approximate cost and are not considered significant to this presentation. Page 112 of 122 Note 18 – Parent Company Only Statements (Dollars in thousands) Finward Bancorp Condensed Balance Sheets December 31, December 31, 2023 2022 Assets Cash on deposit with Peoples Bank $ 3,846 $ 2,061 Investment in Peoples Bank 144,266 131,431 Investment in NWIN Risk Management, Inc - 2,401 Dividends receivable from Peoples Bank 516 1,331 Other assets - 538 Total assets $ 148,628 $ 137,762 Liabilities and stockholders’ equity Dividends payable $ 516 $ 1,333 Other liabilities 767 36 Total liabilities 1,283 1,369 Additional paid in capital 69,555 69,032 Accumulated other comprehensive (loss) ( 51,613 ) ( 64,300 ) Retained earnings 129,403 131,661 Total stockholders’ equity 147,345 136,393 Total liabilities and stockholders’ equity $ 148,628 $ 137,762 (Dollars in thousands) Finward Bancorp Condensed Statements of Income Year Ended December 31, 2023 2022 Dividends from Peoples Bank $ 4,529 $ 24,263 Dividends from NWIN Risk 66 925 Operating expenses ( 104 ) ( 117 ) Income before income taxes and equity in undistributed income of Peoples Bank 4,491 25,071 Income tax benefit ( 21 ) ( 50 ) Income before equity in undistributed income of Peoples Bank 4,512 25,121 Equity in undistributed (distributions in excess of) income of Peoples Bank income of NWIN Risk Management, Inc 731 431 Net income $ 8,380 $ 15,080 Page 113 of 122 (Dollars in thousands) Finward Bancorp Condensed Statements of Comprehensive Income Year Ended December 31, 2023 2022 Net Income $ 8,380 $ 15,080 Net change in net unrealized gains and losses on securities available-for-sale: Unrealized loss arising during the period 16,630 ( 89,323 ) Less: reclassification adjustment for gains (loss) included in net income 48 ( 662 ) Net securities gain (loss) during the period 16,678 ( 89,985 ) Tax effect ( 3,991 ) 21,409 Other comprehensive loss, net of tax 12,687 ( 68,576 ) Comprehensive (loss) income, net of tax $ 21,067 $ ( 53,496 ) (Dollars in thousands) Finward Bancorp Condensed Statements of Cash Flows Year Ended December 31, 2023 2021 Cash flows from operating activities: Net income $ 8,380 $ 15,080 Adjustments to reconcile net income to net cash provided by operating activities Distributions in excess of income (equity in undistributed income): Peoples Bank ( 3,137 ) 10,472 NWIN Risk Management, Inc ( 729 ) ( 431 ) Stock based compensation expense 718 741 Change in other assets 1,353 ( 218 ) Change in other liabilities 731 ( 846 ) Net cash provided by operating activities 7,316 24,798 Cash flows from investing activities: Cash and cash equivalents from acquisition activity, net - ( 18,725 ) Net cash used in investing activities - ( 18,725 ) Cash flows from financing activities: Dividends paid ( 5,335 ) ( 5,075 ) Net surrender value of restricted stock awards ( 196 ) ( 120 ) Net cash used in financing activities ( 5,531 ) ( 5,195 ) Net change in cash 1,784 878 Cash at beginning of year 2,061 1,183 Cash at end of year $ 3,846 $ 2,061 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 335 $ 1,347 Dividends declared not paid 516 1,332 Page 114 of 122 Note 19 – Subsequent Events Entry into A Material Definitive Agreement Sale-Leaseback Transaction - On January 29, 2024, the Bank entered into an agreement for the purchase and sale of property (the “Sale Agreement”), with MountainSeed Real Estate Services, LLC (the “Buyer”), a Georgia limited liability company, which provides for the sale to the Buyer of 5 properties owned and operated as branch locations by the Bank (the “Properties”) for an aggregate purchase price of $ 17.2 million, including certain closing adjustments. Four of the Properties are located in Lake County, Indiana and one Property is located in Cook County, Illinois. Under the Sale Agreement, the Bank agreed, concurrently with the closing of the sale of the Properties, to enter into lease agreements (the “Lease Agreements”) with the Buyer under which the Bank will lease each of the Properties. Each of the Lease Agreements has an initial term of 15 years. The Bank’s obligations under the Lease Agreements are guaranteed by the Bancorp. The sale-leaseback transaction closed on February 22, 2024. The Bancorp did not close any branches or exit any markets as part of the sale-leaseback transaction. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no items reportable under this item.