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UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission file number 0-26128

 

Finward Bancorp

(Exact name of registrant as specified in its charter)

 

Indiana35-1927981
(State or other jurisdiction of(I.R.S. Employer Identification No.)
incorporation or organization) 
  
9204 Columbia Avenue 46321
Munster, Indiana  (Zip Code)
(Address of principal executive offices) 

(219) 836-4400

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, no par value

FNWD

The Nasdaq Stock Market, LLC

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 

Yes ☒                   No ☐

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 Large accelerated filer: ☐Accelerated filer: ☐
 Non-Accelerated filer: ☒Smaller reporting company
  Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.         ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

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If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes No ☒

 

Based on the average bid and ask prices for the registrant’s Common Stock at June 30, 2022, at that date, the aggregate market value of the registrant’s Common Stock held by nonaffiliates of the registrant (assuming solely for the purposes of this calculation that all directors and executive officers of the registrant are “affiliates”) was $133,611,144.

 

There were 4,304,026 shares of the registrant’s Common Stock, without par value, outstanding at March 30, 2023.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents have been incorporated by reference into this Annual Report on Form 10-K:

1. Definitive Proxy Statement for the 2023 Annual Meeting of Shareholders. (Part III)

 

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Finward Bancorp

Index

 

   

 

Page

 

Number

PART I.

 

Item 1. Business

4

Item 1A. Risk Factors

32

Item 1B. Unresolved Staff Comments

43

Item 2. Properties

43

Item 3. Legal Proceedings

44

Item 4. Mine Safety Disclosures

44

Item 4.5 Information About Our Executive Officers

44

PART II.

 

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

46

Item 6. [Reserved]

47

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

47

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

58

Item 8. Financial Statements

59

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

104

Item 9A. Controls and Procedures

104

Item 9B. Other Information

105

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections                    

105

PART III.

 

Item 10. Directors, Executive Officers and Corporate Governance

106

Item 11. Executive Compensation

106

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

106

Item 13. Certain Relationships and Related Transactions, and Director Independence

106

Item 14. Principal Accountant Fees and Services

106

PART IV.

 

Item 15. Exhibits and Financial Statement Schedules

107

Item 16. Form 10-K Summary 108

SIGNATURES

109

EXHIBIT INDEX

 

 

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PART I

 

Item 1. Business

 

General

 

Finward Bancorp, an Indiana corporation (the “Bancorp” or “Finward”), was incorporated on January 31, 1994, and is the holding company for Peoples Bank, an Indiana-chartered commercial bank (the “Bank”). The Bank is a wholly owned subsidiary of the Bancorp. The Bancorp’s business activities include being a holding company for the Bank and the Bank's wholly owned subsidiaries, as well as a holding company for NWIN Risk Management, Inc., a captive insurance company.

 

The Bank is primarily engaged in the business of attracting deposits from the general public and the origination of loans, mostly upon the security of single family residences and commercial real estate, as well as, construction loans and various types of consumer loans, commercial business loans and municipal loans, within its primary market areas of Lake and Porter Counties, in Northwest Indiana, and Cook County, Illinois. In addition, the Bancorp's Wealth Management Group provides estate and retirement planning, guardianships, land trusts, profit sharing and 401(k) retirement plans, IRA and Keogh accounts, investment agency accounts, and serves as the personal representative of estates and acts as trustee for revocable and irrevocable trusts.

 

The Bank’s deposit accounts are insured up to applicable limits by the Deposit Insurance Fund (“DIF”), which is administered by the Federal Deposit Insurance Corporation (“FDIC”), an agency of the federal government. As the holding company for the Bank, the Bancorp is subject to comprehensive examination, supervision and regulation by the Board of Governors of the Federal Reserve System (“FRB”), while the Bank is subject to comprehensive examination, supervision and regulation by both the FDIC and the Indiana Department of Financial Institutions (“DFI”). The Bank is also subject to regulation by the FRB governing reserves required to be maintained against certain deposits and other matters. The Bank is also a member of the Federal Home Loan Bank (“FHLB”) of Indianapolis, which is one of the eleven regional banks comprising the system of Federal Home Loan Banks.

 

On January 31, 2022, the Bancorp completed its acquisition of Royal Financial, Inc. (“RYFL”) pursuant to an Agreement and Plan of Merger dated July 28, 2021 (the “Merger Agreement”) between the Bancorp and RYFL. Pursuant to the terms of the Merger Agreement, RYFL merged with and into the Bancorp, with the Bancorp as the surviving corporation (the “RYFL Merger”). Simultaneous with the RYFL Merger, Royal Savings Bank, an Illinois state-chartered savings bank and wholly-owned subsidiary of RYFL, merged with and into the Bank, with the Bank as the surviving institution.

 

Under the terms of the Merger Agreement, RYFL stockholders who owned 101 or more shares of RYFL common stock were permitted to elect to receive either 0.4609 shares of Finward common stock or $20.14 in cash, or a combination of both, for each share of RYFL common stock owned, subject to proration and allocation provisions, such that 65% of the shares of RYFL common stock outstanding immediately prior to the closing of the merger were converted into the right to receive shares of Finward common stock and the remaining 35% of the outstanding RYFL shares were converted into the right to receive cash. Stockholders holding less than 101 shares of RYFL common stock received fixed consideration of $20.14 in cash and no stock consideration for each share of RYFL common stock.

 

As a result of RYFL stockholder stock and cash elections and the related allocation and proration provisions of the Merger Agreement, Finward issued 795,423 shares of its common stock and paid cash consideration of approximately $18.7 million in the RYFL Merger. Based on the closing price of Finward’s common stock on January 28, 2022, the transaction had an implied valuation of approximately $56.7 million. The acquisition further expanded the Bank’s banking center network in Cook County and DuPage County, Illinois, expanding the Bank’s full-service retail banking network.

 

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The Bancorp maintains its corporate office at 9204 Columbia Avenue, Munster, Indiana, from which it oversees the operation of its 26 branch locations. For further information, see “Properties.” The Bancorp’s Internet address is www.ibankpeoples.com.

 

 

Forward-Looking Statements

 

Statements contained in this filing on Form 10-K that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are also intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. The Bancorp cautions readers that forward-looking statements, including without limitation those relating to the Bancorp’s future business prospects, interest income and expense, net income, liquidity, and capital needs are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements due to a number of factors, including those set forth above in “Recent Developments” and below in “Regulation and Supervision” of this Form 10-K.

 

Certain of the statements made in this report are “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. All statements other than statements of historical fact, including statements regarding our financial position, business strategy, and the plans and objectives of our management for future operations, are forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target,” and other similar words and expressions relating to the future.

 

Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially, and adversely or positively, from the expectations of the Bancorp that are expressed or implied by any forward-looking statement. Risks, uncertainties, and factors that could cause the Bancorp’s actual results to vary materially from those expressed or implied by any forward-looking statement include but are not limited to:

 

 

changes in interest rates, market liquidity, and capital markets, as well as the magnitude of such changes, which may reduce net interest margins;

 

 

continuing increases in inflation;

 

 

current financial conditions within the banking industry, including the effects of recent failures of other financial institutions, liquidity levels, and responses by the Federal Reserve, Department of the Treasury, and the Federal Deposit Insurance Corporation to address these issues;

 

 

the use of proceeds of future offerings of securities;

 

 

capital management activities, including possible future sales of new securities, or possible repurchases or redemptions by the Bancorp of outstanding debt or equity securities;

 

 

changes in asset quality and credit risk;

 

 

our ability to sustain revenue and earnings growth;

 

 

customer acceptance of the Bancorp’s products and services;

 

 

customer borrowing, repayment, investment, and deposit practices;

 

 

customer disintermediation;

 

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the introduction, withdrawal, success, and timing of asset/liability management strategies or of mergers and acquisitions and other business initiatives and strategies;

 

 

competitive conditions;

 

 

our ability to realize cost savings or revenues or to implement integration plans and other consequences associated with mergers, acquisitions, and divestitures;

 

 

changes in fiscal, monetary, and tax policies;

 

 

factors that may cause the Bancorp to incur impairment charges on its investment securities;

 

 

electronic, cyber, and physical security breaches;

 

 

claims and litigation liabilities, including related costs, expenses, settlements, and judgments, or the outcome of matters before regulatory agencies, whether pending or commencing in the future;

 

 

changes in accounting principles and interpretations;

 

 

economic conditions;

 

 

loss of key personnel;

 

 

continuing risks and uncertainties relating to the COVID-19 pandemic and government responses thereto;

 

 

the impact, extent, and timing of technological changes, capital management activities, and other actions of the Federal Reserve Board and legislative and regulatory actions and reforms; and

 

 

other factors and risks described under the heading “Risk Factors” in Part I, Item 1A of this Form 10-K, as may be updated from time to time in our other filings with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

In addition to the above factors, we also caution that the actual amounts and timing of any future common stock dividends or share repurchases will be subject to various factors, including our capital position, financial performance, capital impacts of strategic initiatives, market conditions, and regulatory and accounting considerations, as well as any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends.

 

Because such forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. The foregoing list of important factors is not exclusive and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of us. The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K lists some of the factors that could cause the Bancorp’s actual results to vary materially from those expressed in or implied by any forward-looking statements. We direct your attention to this discussion. Other risks and uncertainties that could affect the Bancorp’s future performance are set forth below in Item 1A, “Risk Factors.”

 

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Lending Activities

 

General. The Bancorp’s product offerings include residential mortgage loans, construction loans, commercial real estate loans, consumer loans, commercial business loans and loans to municipalities. The Bancorp’s lending strategy stresses quality growth, product diversification, and competitive and profitable pricing. While lending efforts include both fixed and adjustable rate products, the focus has been on products with adjustable rates and/or shorter terms to maturity. It is management’s goal that all programs are marketed effectively to our primary market area.

 

The Bancorp is primarily a portfolio lender. Mortgage banking activities are limited to the sale of fixed rate mortgage loans with contractual maturities generally exceeding fifteen years and greater. These loans are sold, on a case-by-case basis, in the secondary market as part of the Bancorp’s efforts to manage interest rate risk. All loan sales are made to Freddie Mac or to the Federal Home Loan Bank of Indianapolis. All loans held for sale are recorded at the lower of cost or market value.

 

Under Indiana Law, an Indiana bank generally may not make any loan to a borrower or its related entities if the total of all such loans by the bank exceeds 15% of its unimpaired capital and unimpaired surplus (plus up to an additional 10% of unimpaired capital and unimpaired surplus, in the case of loans fully collateralized by readily marketable collateral); provided, however, that certain specified types of loans are exempted from these limitations or subject to different limitations. The maximum amount that the Bank could have loaned to one borrower and the borrower’s related entities at December 31, 2022, under the 15% of capital and surplus limitation, was approximately $26.1 million. At December 31, 2022, the Bank had no loans that exceeded the regulatory limitations.

 

At December 31, 2022, there were no concentrations of loans in any type of industry that exceeded 10% of total loans that were not otherwise disclosed as a loan category.

 

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Loan Portfolio. The following table sets forth selected data relating to the composition of the Bancorp’s loan portfolio by type of loan at the end of each of the last two years. The amounts are stated in thousands (000’s).

 

(Dollars in thousands)

               
   

December 31, 2022

   

December 31, 2021

 

Loans secured by real estate:

               

Residential real estate

  $ 484,595     $ 260,134  

Home equity

    38,978       34,612  

Commercial real estate

    486,431       317,145  

Construction and land development

    108,926       123,822  

Multifamily

    251,014       61,194  

Total loans secured by real estate

    1,369,944       796,907  

Commercial business

    93,278       115,772  

Consumer

    918       582  

Manufactured homes

    34,882       37,887  

Government

    9,549       8,991  

Loans receivable

    1,508,571       960,139  

Add (less):

               

Net deferred loan origination costs

    5,083       6,810  

Undisbursed loan funds

    (23 )     (229 )

Loans receivable, net of deferred fees and costs..

  $ 1,513,631     $ 966,720  

 

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Loan Maturity Schedule. The following table sets forth certain information at December 31, 2022, regarding the dollar amount of loans in the Bancorp’s portfolio based on their contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Contractual principal repayments of loans do not necessarily reflect the actual term of the loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Bancorp the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the property subject to the mortgage. The amounts are stated in thousands (000’s).

 

 

   

Maturing

   

After one

   

After five

                 
   

within

   

but within

   

but within

   

After

         
   

one year

   

five years

   

fifteen years

   

fifteen years

   

Total

 

Residential real estate

  $ 7,890     $ 25,999     $ 108,273     $ 342,433     $ 484,595  

Home equity

    18,047       225       2,937       17,769       38,978  

Commercial real estate

    29,007       107,209       349,534       681       486,431  

Construction and land development

    35,879       33,090       22,077       17,880       108,926  

Multifamily

    20,076       101,172       128,051       1,715       251,014  

Consumer

    204       673       41       -       918  

Manufactured Homes

    -       53       9,596       25,233       34,882  

Commercial business

    34,154       42,927       15,719       478       93,278  

Government

    -       3,063       6,486       -       9,549  

Total loans receivable

  $ 145,257     $ 314,411     $ 642,714     $ 406,189     $ 1,508,571  

 

The following table sets forth the dollar amount of all loans due after one year from December 31, 2022, which have predetermined interest rates or have floating or adjustable interest rates. The amounts are stated in thousands (000’s).

 

   

Predetermined

   

Floating or

         
   

rates

   

adjustable rates

   

Total

 

Residential real estate

  $ 373,733     $ 102,972       476,705  

Home equity

    19,771       1,160       20,931  

Commercial real estate

    76,037       381,387       457,424  

Construction and land development

    40,149       32,898       73,047  

Multifamily

    148,952       81,986       230,938  

Farmland

    -       -       -  

Consumer

    714       -       714  

Manufactured Homes

    34,882       -       34,882  

Commercial business

    40,619       18,505       59,124  

Government

    9,549       -       9,549  

Total loans receivable

  $ 744,406     $ 618,908     $ 1,363,314  

 

 

Lending Area. The primary lending area of the Bancorp encompasses Lake County in northwest Indiana and Cook County in northeast Illinois, where collectively a majority of loan activity is concentrated. 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.

 

Loan Origination Fees. All loan origination and commitment fees, as well as incremental direct loan origination costs, are deferred and amortized into income as yield adjustments.

 

Loan Origination Procedure. The primary sources for loan originations are referrals from commercial customers, real estate brokers and builders, solicitations by the Bancorp’s lending and retail staff, and advertising of loan programs and rates. The Bancorp employs no staff appraisers. All appraisals are performed by fee appraisers that have been approved by the Board of Directors and who meet all federal guidelines and state licensing and certification requirements.

 

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Designated officers have authorities, established by the Board of Directors, to approve loans. Loans up to $4,000,000 are approved by the loan officers’ loan committee. Loans from $4,000,000 to $7,000,000 are approved by the senior officers’ loan committee (SOLC). Loans from $7,000,000 to $15,000,000 are approved the executive officer’s loan committee. All loans in excess of $15,000,000, up to the legal lending limit of the Bank, must be approved by the Bank’s Board of Directors or its Credit Committee. (All members of the Bank’s Board of Directors and Credit Committee are also members of the Bancorp’s Board of Directors and Credit Committee, respectively.) Certain loan renewals and extensions may not require approval by the Board of Directors or the Credit Committee as long as there is no material change, credit downgrade, significant change in borrower or guarantor status, material release or change in collateral value or the eligible loan renewal or extension is not outside the current concentration limits set by the Board of Directors. The maximum in-house legal lending limit as set by the Board of Directors is the lower of 10% of the Bank’s risk based capital or $15,000,000. Requests that exceed this amount will be considered on a case-by-case basis, after taking into consideration the legal lending limit, by specific Board action. The Bank will not extend credit to any of its executive officers, directors, or principal shareholders or to any related interest of that person, except in compliance with the insider lending restrictions of Regulation O under the Federal Reserve Act and in an amount that, when aggregated with all other extensions of credit to that person, exceeds $1.000,000 unless: (1) the extension of credit has been approved in advance by a majority of the entire Board of Directors of the Bank, and (2) the interested party has abstained from participating directly or indirectly in the voting.

 

All loans secured by personal property must be covered by insurance in an amount sufficient to cover the full amount of the loan. All loans secured by real estate must be covered by insurance in an amount sufficient to cover the full amount of the loan or restore the property to its original state. First mortgage loans must be covered by a lender’s title insurance policy in the amount of the loan.

 

The Current Lending Programs

 

Residential Mortgage Loans. The primary lending activity of the Bancorp has been the granting of conventional mortgage loans to enable borrowers to purchase existing homes, refinance existing homes, or construct new homes. Conventional loans are made up to a maximum of 97% of the purchase price or appraised value, whichever is less. For loans made in excess of 80% of value, private mortgage insurance is generally required in an amount sufficient to reduce the Bancorp’s exposure to 80% or less of the appraised value of the property. Loans insured by private mortgage insurance companies can be made for up to 97% of value. During 2022, 69.9% of mortgage loans closed were conventional loans with borrowers having 20% or more equity in the property. This type of loan does not require private mortgage insurance because of the borrower’s level of equity investment.

 

Fixed rate loans currently originated generally conform to Freddie Mac guidelines for loans purchased under the one‑to‑four family program. Loan interest rates are determined based on secondary market yield requirements and local market conditions. Fixed rate mortgage loans with contractual maturities generally exceeding fifteen years and greater may be sold and/or classified as held for sale to control exposure to interest rate risk.

 

The 15 year mortgage loan program has gained wide acceptance in the Bancorp’s primary market area. As a result of the shortened maturity of these loans, this product has been priced below the comparable 20 and 30 year loan offerings. Mortgage applicants for 15 year loans tend to have a larger than normal down payment; this, coupled with the larger principal and interest payment amount, has caused the 15 year mortgage loan portfolio to consist, to a significant extent, of second time home buyers whose underwriting qualifications tend to be above average.

 

The Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice annually or are “Mini-Fixed.” The “Mini‑Fixed” mortgage reprices annually after a one, three, five, seven or ten year period. ARM originations totaled $44.6 million for 2022 and $11.5 million for 2021. During 2022, ARMs represented 35.8% of total mortgage loan originations. The ability of the Bancorp to successfully market ARM’s depends upon loan demand, prevailing interest rates, volatility of interest rates, public acceptance of such loans and terms offered by competitors.

 

Construction Loans. Construction loans on residential properties are made primarily to individuals and contractors who are under contract with individual purchasers. These loans are personally guaranteed by the borrower. The maximum loan-to-value ratio is 89% of either the current appraised value or the cost of construction, whichever is less. Residential construction loans are typically made for periods of six months to one year.

 

Loans are also made for the construction of commercial properties. All such loans are made in accordance with well-defined underwriting standards. Generally if the properties are not owner occupied, these types of loans require proof of intent to lease and a confirmed end-loan takeout. In general, loans made do not exceed 80% of the appraised value of the property. Commercial construction loans are typically made for periods not to exceed two years or date of occupancy, whichever is less.

 

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Commercial Real Estate and Multifamily Loans. Commercial real estate loans are typically made to a maximum of 80% of the appraised value. Such loans are generally made on an adjustable rate basis. These loans are typically made for terms of 15 to 20 years. Loans with an amortizing term exceeding 15 years normally have a balloon feature calling for a full repayment within seven to ten years from the date of the loan. The balloon feature affords the Bancorp the opportunity to restructure the loan if economic conditions so warrant. Commercial real estate loans include loans secured by commercial rental units, apartments, condominium developments, small shopping centers, owner occupied commercial/industrial properties, hospitality units and other retail and commercial developments.

 

While commercial real estate lending is generally considered to involve a higher degree of risk than single‑family residential lending due to the concentration of principal in a limited number of loans and the effects of general economic conditions on real estate developers and managers, the Bancorp has endeavored to reduce this risk in several ways. In originating commercial real estate loans, the Bancorp considers the feasibility of the project, the financial strength of the borrowers and lessees, the managerial ability of the borrowers, the location of the project and the economic environment. Management evaluates the debt coverage ratio and analyzes the reliability of cash flows, as well as the quality of earnings. All such loans are made in accordance with well-defined underwriting standards and are generally supported by personal guarantees, which represent a secondary source of repayment.

 

Loans for the construction of commercial properties are generally located within an area permitting physical inspection and regular review of business records. Projects financed outside of the Bancorp’s primary lending area generally involve borrowers and guarantors who are or were previous customers of the Bancorp or projects that are underwritten according to the Bank’s underwriting standards.

 

Consumer Loans. The Bancorp offers consumer loans to individuals for personal, household or family purposes. Consumer loans are either secured by adequate collateral, or unsecured. Unsecured loans are based on the strength of the applicant’s financial condition. All borrowers must meet current underwriting standards. The consumer loan program includes both fixed and variable rate products.

 

Home Equity Line of Credit. The Bancorp offers a fixed and variable rate revolving line of credit secured by the equity in the borrower’s home. Both products offer an interest only option where the borrower pays interest only on the outstanding balance each month. Equity lines will typically require a second mortgage appraisal and a second mortgage lender’s title insurance policy. Loans are generally made up to a maximum of 89% of the appraised value of the property less any outstanding liens.

 

Home Improvement Loans and Equity LoansFixed Term. Home improvement and equity loans are made up to a maximum of 85% of the appraised value of the improved property, less any outstanding liens. These loans are offered on both a fixed and variable rate basis with a maximum term of 240 months. All home equity loans are made on a direct basis to borrowers.

 

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; further detail regarding this reserve can be found in Note 4 – Loans Receivable.

 

Commercial Business Loans. Although the Bancorp’s priority in extending various types of commercial business loans changes from time to time, the basic considerations in determining the makeup of the commercial business loan portfolio are economic factors, regulatory requirements and money market conditions. The Bancorp seeks commercial loan relationships from the local business community and from its present customers. Conservative lending policies based upon sound credit analysis governs the extension of commercial credit. The following loans, although not inclusive, are considered preferable for the Bancorp’s commercial loan portfolio, loans collateralized by liquid assets; loans secured by general use machinery and equipment; secured short‑term working capital loans to established businesses secured by business assets; short‑term loans with established sources of repayment and secured by sufficient equity and real estate; and unsecured loans to customers whose character and capacity to repay are firmly established.

 

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

 

NonPerforming Assets, Asset Classification and Provision for Loan Losses

 

Loans are reviewed on a regular basis and are generally placed on a non‑accrual status when, in the opinion of management, serious doubt exists as to the collectability of a loan. Loans are generally placed on non‑accrual status when either principal or interest is 90 days or more past due. Consumer non-residential loans are generally charged off when the loan becomes over 120 days delinquent. Interest accrued and unpaid at the time a loan is placed on non‑accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance, tax and insurance reserve or recorded as interest income, depending on the assessment of the ultimate collectability of the loan.

 

The Bancorp’s mortgage loan collection procedures provide that, when a mortgage loan is 15 days or more delinquent, the borrower will be contacted by mail and payment requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower. In certain instances, the Bancorp will recast the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his, her, or its financial affairs. If the loan continues in a delinquent status for 120 days, the Bancorp will generally initiate foreclosure proceedings. Any property acquired as the result of foreclosure or by voluntary transfer of property made to avoid foreclosure is classified as foreclosed real estate until such time as it is sold or otherwise disposed of by the Bancorp. Foreclosed real estate is recorded at fair value at the date of foreclosure. At foreclosure, any write-down of the property is charged to the allowance for loan losses. Costs relating to improvement of property are capitalized, whereas holding costs are expensed. Valuations are periodically performed by management, and a valuation allowance is established by a charge to operations if the carrying value of a property exceeds its estimated fair value less selling costs. Subsequent gains or losses on disposition, including expenses incurred in connection with the disposition, are charged to operations. Collection procedures for consumer loans provide that when a consumer loan becomes ten days delinquent, the borrower will be contacted by mail and payment requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower. In certain instances, the Bancorp may grant a payment deferral. If a loan continues to be delinquent after 60 days and all collection efforts have been exhausted, the Bancorp will initiate legal proceedings. Collection procedures for commercial business loans provide that when a commercial loan becomes ten days delinquent, the borrower will be contacted by mail and payment requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower pursuant to the commercial loan collection policy. In certain instances, the Bancorp may grant a payment deferral or restructure the loan. Once it has been determined that collection efforts are unsuccessful, the Bancorp will initiate legal proceedings.

 

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The following table sets forth information regarding the Bancorp’s non-performing assets as of December 31, for each period indicated. The amounts are stated in thousands (000’s).

 

   

2022

   

2021

 

Loans accounted for on a non-accrual basis:

         

Real estate:

               

Residential

  $ 5,347     $ 4,651  

Commercial

    3,242       940  

Multifamily

    7,064       455  

Home Equity

    594       623  

Commercial business

    1,881       387  

Total

  $ 18,128     $ 7,056  
                 

Accruing loans which are contractually past due 90 days or more:

 

Real estate:

               

Commercial

  $ -     $ 91  

Residential

    166       31  

Home equity

    -       34  

Manufactured homes

    82       -  

Commercial business

    -       49  

Total

  $ 248     $ 205  
                 

Loans that qualify as troubled debt restructurings and accruing:

 

Real estate:

               

Commercial

  $ 1,984     $ 748  

Residential

    217       -  

Home Equity

    76       83  

Commercial business

    476       591  

Total

  $ 2,753     $ 1,422  
                 

Total of non-accrual, 90 days past due and accruing, and restructurings

  $ 21,129     $ 8,683  
                 

Ratio of non-performing loans to total assets

    0.94 %     0.51 %

Ratio of non-performing loans to total loans

    1.21 %     0.76 %

* non-performing loans include non-accrual loans and accruing loans which are contractually past due 90 days or more

 
                 
                 

Foreclosed real estate

  $ -     $ -  

Ratio of foreclosed real estate to total assets

    0.00 %     0.00 %
                 

Trust preferred securities

  $ 1,048     $ 992  

Ratio of trust preferred securities to total assets

    0.05 %     0.06 %

 

During 2022, gross interest income of $657 thousand would have been recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the period. Interest on such loans included in income during the period amounted to $43 thousand.

 

Federal regulations require banks to classify their own loans and to establish appropriate general and specific allowances, subject to regulatory review. These regulations are designed to encourage management to evaluate loans on a case-by-case basis and to discourage automatic classifications. Loans classified as substandard or doubtful must be evaluated by management to determine loan loss reserves. Loans classified as loss must either be written off or reserved for by a specific allowance. Amounts reported in the general loan loss reserve are included in the calculation of the Bancorp’s total risk-based capital requirement (to the extent that the amount does not exceed 1.25% of total risk-based assets), but are not included in Tier 1 leverage ratio calculations and Tier 1 risk-based capital requirements.

 

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Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. No loans were internally classified as doubtful or loss at December 31, 2022 or December 31, 2021.

 

The Bancorp's substandard loans are summarized below:

 

(Dollars in thousands)

               

Loan Segment

 

December 31, 2022

   

December 31, 2021

 

Residential real estate

  $ 6,035     $ 3,722  

Home equity

    612       632  

Commercial real estate

    7,421       3,562  

Construction and land development

    -       -  

Multifamily

    7,064       384  

Commercial business

    1,881       387  

Consumer

    -       -  

Manufactured homes

    -       -  

Government

    -       -  

Total

  $ 23,013     $ 8,687  

                                                               

In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of special mention loans. Special mention loans represent loans management is closely monitoring due to one or more factors that may cause the loan to become classified as substandard.

 

The Bancorp's special mention loans are summarized below:

 

(Dollars in thousands)

               

Loan Segment

 

December 31, 2022

   

December 31, 2021

 

Residential real estate

  $ 1,338     $ 2,940  

Home equity

    385       415  

Commercial real estate

    4,955       12,011  

Construction and land development

    2,346       3,630  

Multifamily

    1,859       153  

Commercial business

    703       1,915  

Consumer

    -       -  

Manufactured homes

    -       59  

Government

    -       -  

Total

  $ 11,586     $ 21,123  

 

A loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. Typically, management does not individually classify smaller-balance homogeneous loans, such as residential mortgages or consumer loans, as impaired, unless they are troubled debt restructurings.

 

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Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. Purchased loans with evidence of credit quality deterioration since origination are considered purchased credit impaired loans. Expected future cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable (“accretable yield”). The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and represents probable losses in the portfolio. In determining the acquisition date fair value of purchased credit impaired loans, and in subsequent accounting, the Bancorp aggregates these purchased loans into pools of loans by common risk characteristics, such as credit risk rating and loan type. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.

 

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

 

(Dollars in thousands)

               

Loan Segment

 

December 31, 2022

   

December 31, 2021

 

Residential real estate

  $ 2,506     $ 1,771  

Home equity

    419       284  

Commercial real estate

    5,327       1,600  

Construction and land development

    -       -  

Multifamily

    7,121       556  

Commercial business

    2,711       1,597  

Consumer

    17       -  

Manufactured homes

    -       -  

Government

    -       -  

Total

  $ 18,101     $ 5,808  

 

At times, the Bancorp will modify the terms of a loan to forego a portion of interest or principal or reduce the interest rate on the loan to a rate materially less than market rates, or materially extend the maturity date of a loan as part of a troubled debt restructuring. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of expected future cash flows; unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

 

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

 

(Dollars in thousands)

               

Loan Segment

 

December 31, 2022

   

December 31, 2021

 

Residential real estate

  $ 1,190     $ 342  

Home equity

    261       83  

Commercial real estate

    1,984       747  

Construction and land development

    -       -  

Multifamily

    -       -  

Commercial business

    476       694  

Consumer

    -       -  

Manufactured homes

    -       -  

Government.

    -       -  

Total

  $ 3,911     $ 1,866  

 

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The table that follows sets forth the allowance for loan losses and related ratios for the periods indicated. The amounts are stated in thousands (000’s).

 

   

2022

   

2021

 

Balance at beginning of period

  $ 13,343     $ 12,458  

Loans charged-off:

               

Real estate residential

    (29 )     (33 )

Commercial real estate

    (431 )     (530 )

Commercial business

    (57 )     (158 )

Consumer

    (91 )     (29 )

Total charge-offs

    (608 )     (750 )

Recoveries:

               

Residential real estate

    53       82  

Commercial real estate

    -       -  

Commercial business

    89       36  

Consumer

    20       8  

Total recoveries

    162       126  

Net (charge-offs) / recoveries

    (446 )     (624 )

Provision for loan losses

    -       1,509  

Balance at end of period

  $ 12,897     $ 13,343  
                 

ALL to loans outstanding

    0.85 %     1.38 %

ALL to nonperforming loans

    70.18 %     183.76 %

Net charge-offs / recoveries to average loans outstanding during the period

    -0.03 %     -0.06 %

Nonaccruing loans to total loans

    1.20 %     0.73 %

 

The following table shows the allocation of the allowance for loan losses at December 31, for the dates indicated. The dollar amounts are stated in thousands (000’s). The percent columns represent the percentage of loans in each category to total loans.

 

   

2022

   

2021

 
         

%

       $    

%

 

Real estate loans:

                               

Residential

    3,431       34.7       2,837       27.2  

Commercial and other dwelling

    8,044       56.1       8,482       57.8  

Consumer loans

    57       2.4       15       3.5  

Commercial business and other

    1,365       6.8       2,009       11.5  

Total

    12,897       100.0       13,343       100.0  

 

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Investment Activities

 

The primary objective of the investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings. Securities can be classified as trading, held-to-maturity (HTM), or available-for-sale (AFS) at the time of purchase. No securities are classified as trading or as held-to-maturity. AFS securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. During 2022, the Bancorp did not hold as investments any derivative instruments and was not involved in hedging activities as defined by Accounting Standards Codification Topic 815 Derivatives and Hedging. It has been the policy of the Bancorp to invest its excess cash in U.S. government agency securities, mortgage-backed securities, collateralized mortgage obligations, municipal securities, and treasury securities. In addition, short-term funds are generally invested as interest bearing balances in financial institutions and federal funds. At December 31, 2022, the Bancorp’s investment portfolio totaled $370.9 million. In addition, the Bancorp had $6.5 million in FHLB stock.

 

The table below shows the carrying values of the components of the investment securities portfolio at December 31, on the dates indicated. The amounts are stated in thousands (000’s).

 

   

2022

   

2021

 

U.S. government sponsored agencies:

               

Available-for-sale

    7,625       8,669  

U.S. treasury securities:

               

Available-for-sale

    389       400  

Collateralized Mortgage Obligations: and Mortgage-backed securities

               

Available-for-sale

    134,116       184,701  

Municipal Securities:

               

Available-for-sale

    227,718       332,127  

Collateralized Debt Securities:

               

Available-for-sale

    1,048       992  

Totals

  $ 370,896     $ 518,220  

 

The contractual maturities and weighted average yields for the U.S. government securities, agency securities, municipal securities, treasury security, and trust preferred securities at December 31, 2022, are summarized in the table below. Securities not due at a single maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are shown separately. The carrying values are stated in thousands (000’s).

 

The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields presented are not on a tax-equivalent basis.

 

   

Within 1 Year

   

1 - 5 Years

   

5 - 10 Years

   

After 10 Years

   

Variable Maturities

   

Total

 
   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

 

U.S. government sponsored entities:

  $ -       0.00 %   $ 5,086       1.01 %   $ 2,539       1.00 %   $ -       0.00 %   $ -       0.00 %   $ 7,625  

AFS

                                                                                       

U.S. treasury securities:

                                                                                       

AFS

    -       0.00 %     389       2.38 %     -       0.00 %     -       0.00 %     -       0.00 %     389  

Municipal Securities:

                                                                                       

AFS

    795       3.92 %     789       3.93 %     15,586       3.25 %     210,548       2.73 %     -       0.00 %     227,718  

Trust Preferred Securities:

                                                                                       

AFS

    -       0.00 %     -       0.00 %     -       0.00 %     1,048       4.03 %     -       0.00 %     1,048  

Collateralized mortgage obligations and residential mortgage- backed securities:

                                                                                       

AFS

    -       0.00 %     -       0.00 %     -       0.00 %     -       0.00 %     134,116       1.92 %     134,116  
                                                                                         

Totals

  $ 795       3.92 %   $ 6,264       1.46 %   $ 18,125       2.93 %   $ 211,596       2.74 %   $ 134,116       1.92 %   $ 370,896  

 

The Bancorp currently holds two trust preferred securities and the securities’ quarterly interest payments have been placed in “payment in kind” status. Payment in kind status results in a temporary delay in the payment of interest. As a result of a delay in the collection of the interest payments, management placed these securities in non-accrual status. At December 31, 2022, the cost basis of the two trust preferred securities on non-accrual status totaled $2.2 million.

 

Unrealized losses on securities have not been recognized into income because the securities are of high credit quality, have undisrupted cash flows, or have been independently evaluated for other-than-temporary impairment and appropriate write downs taken. Management has the intent and ability to hold the securities for the foreseeable future, and the decline in fair value is largely due to changes in interest rates and volatility in the securities markets. The fair values are expected to recover as the securities approach maturity.

 

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Sources of Funds

 

General. Deposits are the major source of the Bancorp’s funds for lending and other investment purposes. In addition to deposits, the Bancorp derives funds from maturing investment securities and certificates of deposit, dividend receipts from the investment portfolio, loan principal repayments, repurchase agreements, advances from the Federal Home Loan Bank of Indianapolis (FHLB) and other borrowings. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of other sources of funds. They may also be used on a longer-term basis for general business purposes. The Bancorp uses repurchase agreements, as well as a line-of-credit and advances from the FHLB for borrowings. At December 31, 2022, the Bancorp had $120.0 million in FHLB fixed rate advances and $15.5 million in repurchase agreements. The Bancorp had no other borrowed funds as of December 31, 2022.

 

Deposits. Retail and commercial deposits are attracted principally from within the Bancorp’s primary market area. The Bancorp offers a broad selection of deposit instruments including non-interest bearing demand accounts, interest bearing demand accounts, savings accounts, money market deposit accounts, certificate accounts and retirement savings plans. Deposit accounts vary as to terms, with the principal differences being the minimum balance required, the time period the funds must remain on deposit and the interest rate. Certificate account offerings typically range in maturity from ten days to 42 months. The deregulation of federal controls on insured deposits has allowed the Bancorp to be more competitive in obtaining funds and to be flexible in meeting the threat of net deposit outflows. The Bancorp does not obtain funds through brokers, however, the Bancorp did acquire brokered deposits through the acquisition of Royal Financial.

 

The following table presents the average daily amount of deposits and average rates paid on such deposits for the years indicated. The amounts are stated in thousands (000’s).

 

   

December 31, 2022

   

December 31, 2021

 
   

Amount

   

Rate %

   

Amount

   

Rate %

 

Noninterest bearing demand deposits

  $ 377,408       -     $ 280,900       -  

Interest bearing demand deposits

    374,815       0.36       297,012       0.08  

MMDA accounts

    286,155       0.37       253,468       0.13  

Savings accounts

    416,898       0.05       277,839       0.06  

Certificates of deposit

    368,322       0.26       271,882       0.46  

Total deposits

  $ 1,823,598       0.20     $ 1,381,101       0.18  

 

As of December 31, 2022, and 2021, approximately $516.1 million and $452.0 million, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.

 

The following table sets forth the portion of the Bank's time deposits, by account, that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31, 2022 (dollars in thousands).

 

3 months or less

  $ 7,729  

Over 3 months through 6 months

    536  

Over 6 months through 12 months

    16,616  

Over 12 months

    33,000  

Total

  $ 57,881  

 

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Borrowings. Borrowed money is used on a short-term basis to compensate for reductions in the availability of other sources of funds and is generally accomplished through repurchase agreements, as well as, through a line of credit and advances from the FHLB. Repurchase agreements generally mature within one year and are generally secured by U.S. government securities or U.S. agency securities, under the Bancorp’s control. FHLB advances with maturities ranging from one year to five years are used to fund securities and loans of comparable duration, as well as to reduce the impact that movements in short-term interest rates have on the Bancorp’s overall cost of funds. Fixed rate advances are payable at maturity, with a prepayment penalty.

 

The following tables set forth certain information regarding borrowing and repurchase agreements by the Bancorp at the end of and during the periods indicated. The amounts are stated in thousands (000’s).

 

   

At December 31,

 

Repurchase agreements:

 

2022

   

2021

 

Balance

  $ 15,503     $ 14,581  

Securities underlying the agreements:

               

Ending carrying amount

    32,660       14,885  

Ending fair value

    32,660       14,885  

Weighted average rate (1)

    0.94 %     0.26 %

 

   

For year ended December 31,

 
   

2022

   

2021

 

Highest month-end balance

  $ 28,328     $ 24,514  

Average outstanding balance

    20,649       17,789  

Weighted average rate on securities sold under agreements to repurchase (2)

    2.43 %     0.26 %

 

   

At December 31,

 
   

2022

   

2021

 

Fixed rate short-term advances from the FHLB

  $ 120,000     $ -  

Total borrowings

  $ 120,000     $ -  

 


(1) The weighted average rate for each period is calculated by weighting the principal balances outstanding for the various interest rates.

 

(2) The weighted average rate is calculated by dividing the interest expense for the period by the average daily balances of securities sold under agreements to repurchase for the period.

 

Wealth Management Group

 

The Bancorp's Wealth Management Group provides estate and retirement planning, guardianships, land trusts, profit sharing and 401(k) retirement plans, IRA and Keogh accounts, investment agency accounts, and serves as personal representative of estates and acts as trustee for revocable and irrevocable trusts. At December 31, 2022, the market value of the Wealth Management Group’s assets under management totaled $361.4 million, a decrease of $31.3 million, compared to December 31, 2021. Property, other than cash deposits, held in a fiduciary or agency capacity is not included in the consolidated balance sheets since such property is not owned by the Bancorp.

 

Analysis of Profitability and Key Operating Ratios

 

Financial Ratios and the Analysis of Changes in Net Interest Income.

 

The tables below set forth certain financial ratios of the Bancorp for the periods indicated:

 

   

Year ended December 31,

 
   

2022

   

2021

 

Return on average assets

    0.74 %     0.95 %

Return on average equity

    10.47 %     9.61 %

Average equity-to-average assets ratio

    7.07 %     9.89 %

Dividend payout ratio

    34.34 %     28.82 %

 

   

At December 31,

 
   

2022

   

2021

 

Total stockholders’ equity to total assets

    6.59 %     9.66 %

 

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The average balance sheet amounts, the related interest income or expense, and average rates earned or paid are presented in the following table.

The amounts are stated in thousands (000's).

 

   

Year ended December 31, 2022

   

Year ended December 31, 2021

 
           

Interest

                   

Interest

         
   

Average

   

Income/

   

Average

   

Average

   

Income/

   

Average

 
   

Balance

   

Expense

   

Rate

   

Balance

   

Expense

   

Rate

 

Assets:

                                               
                                                 

Interest bearing balances in financial institutions

  $ 23,553     $ 315       1.34

%

  $ 44,884     $ 61       0.14

%

Federal funds sold

    3,025       11       0.36       1,058       -       -  

Nontaxable Securities

    260,485       6,677       2.56       260,043       6,069       2.33  

Taxable Securities

    170,481       2,899       1.70       200,202       2,952       1.47  

Total investments

    457,544       9,902       2.16       506,187       9,082       1.79  

Loans:*

                                               

Real estate mortgage loans

    1,273,453       54,522       4.28       777,113       32,621       4.20  

Commercial business loans

    118,595       5,862       4.94       159,487       7,378       4.63  

Consumer loans

    38,969       1,749       4.49       31,585       1,574       4.98  

Total loans

    1,431,017       62,133       4.34       968,185       41,573       4.29  

Total interest-earning assets

    1,888,561       72,035       3.81       1,474,372       50,655       3.44  

Allowance for loan losses

    (13,385 )                     (13,353 )                

Other assets

    163,079                       112,962                  

Total assets

  $ 2,038,255                     $ 1,573,981                  
                                                 

Liabilities:

                                               
                                                 

NOW accounts

  $ 374,815     $ 1,363       0.36

%

  $ 297,012     $ 243       0.08

%

Money market demand accounts

    286,155       1,052       0.37       253,468       334       0.13  

Savings accounts

    416,898       216       0.05       277,839       174       0.06  

Certificates of deposit

    368,322       973       0.26       271,882       1,251       0.46  

Total interest-bearing deposits

    1,446,190       3,604       0.25       1,100,201       2,002       0.18  

Repurchase Agreements

    20,649       195       0.94       17,789       47       0.26  

Borrowed funds

    26,806       1,087       4.06       2,448       31       1.27  

Total interest-bearing liabilities

    1,493,645       4,886       0.33       1,120,438       2,080       0.19  
                                                 

Demand deposit accounts

    377,408                       280,900                  

Other liabilities

    23,132                       16,995                  

Total liabilities

    1,894,185                       1,418,333                  
                                                 

Stockholders' equity

    144,070                       155,648                  

Total liabilities and stockholders' equity

  $ 2,038,255                     $ 1,573,981                  

Net interest income

          $ 67,149                     $ 48,575          

Net interest spread

                    3.49

%

                    3.25

%

Net interest margin**

                    3.56

%

                    3.29

%

Ratio of interest-earning assets to interest-bearing liabilities

      1.26 x                     1.32 x

 

*  Non-accruing loans have been included in the average balances.

** Net interest income divided by average interest-earning assets.

 

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 The table below sets forth certain information regarding changes in interest income and interest expense of the Bancorpfor the periods indicated.  For each category of interest-earning asset and interest-bearing liability, information is providedon changes attributable to: (1) changes in volume (change in volume multiplied by old rate) and (2) changes in rate (change in rate multiplied by old volume).  Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.  The amounts are stated in thousands (000's).

 

   

Year Ended December 31,

 
   

2022

   

vs.

   

2021

 
   

Increase / (Decrease)

 
           

Due To

         
   

Volume

   

Rate

   

Total

 
                         

Interest income:

                       

Loans receivable

  $ 20,091     $ 469     $ 20,560  

Nontaxable securities

    10       598       608  

Taxable securities

    (471 )     418       (53 )

Interest bearing balances in other financial institutions

    (42 )     296       254  

Federal funds sold

    11       -       11  

Total interest-earning assets

    19,599       1,781       21,380  
                         

Interest Expense:

                       

NOW accounts

    79       1,041       1,120  

Money market accounts

    48       670       718  

Savings accounts

    76       (34 )     42  

Certificates of deposit

    358       (636 )     (278 )

Repurchase agreements

    9       139       148  

Borrowed funds

    865       191       1,056  

Total interest-bearing

                       

liabilities

    1,435       1,371       2,806  
                         

Net change in net interest income/(expense)

  $ 18,164     $ 410     $ 18,574  

 

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Subsidiary Activities

 

NWIN Risk Management, Inc. is a wholly owned subsidiary of the Bancorp. The subsidiary provides captive insurance for the subsidiaries of the Bancorp.

 

Peoples Service Corporation, a wholly owned subsidiary of the Bank was incorporated under the laws of the State of Indiana. The subsidiary currently provides insurance and annuity investments to the Bank’s wealth management customers.

 

NWIN, LLC is a wholly owned subsidiary of the Bank. NWIN, LLC was incorporated under the laws of the State of Nevada as an investment subsidiary. The investment subsidiary currently holds security investments, which are managed by a professional portfolio manager. In addition, the investment subsidiary is the parent of a real estate investment trust, NWIN Funding, Inc., that invests in real estate loans originated by the Bank.

 

NWIN Funding, Inc. is a subsidiary of NWIN, LLC, and was formed as an Indiana Real Estate Investment Trust (REIT). 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.

 

Columbia Development Company, LLC is a wholly owned subsidiary of the Bank and was incorporated under the laws of the State of Indiana. The subsidiary holds real estate properties that the Bank has acquired through the foreclosure process.

 

The consolidated financial statements include the Bancorp, its wholly owned subsidiaries, the Bank, NWIN Risk Management, Inc, and the Bank’s wholly owned subsidiaries, Peoples Service Corporation, NWIN, LLC and Columbia Development Company, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are dependent upon the earnings of the Bank. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

Competition

 

The Bancorp’s primary market area for deposits, loans and financial services encompasses Lake and Porter Counties, in Northwest Indiana, and Cook County in northeast Illinois. All of the Bancorp’s banking centers and offices are located in its primary market area. Approximately ninety-two percent of the Bancorp’s business activities are within this area.

 

The Bancorp faces strong competition in its primary market area for the attraction and retention of deposits and in the origination of loans. The Bancorp’s most direct competition for deposits has historically come from commercial banks, savings associations, and credit unions located in its primary market area. Particularly in times of high interest rates, the Bancorp has had significant competition from mutual funds and other firms offering financial services. The Bancorp’s competition for loans comes principally from savings associations, commercial banks, mortgage banking companies, credit unions, insurance companies, and other institutional lenders.

 

The Bancorp competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of the services it provides borrowers and other third-party sources. It competes for deposits by offering depositors a wide variety of savings accounts, checking accounts, competitive interest rates, convenient banking center locations, drive-up facilities, automatic teller machines, tax deferred retirement programs, digital banking, and other miscellaneous services.

 

The activities of the Bancorp and the Bank in the geographic market served involve competition with other banks as well as with other financial institutions and enterprises, many of which have substantially greater resources than those available to the Bancorp. In addition, non-bank financial services companies with which the Bancorp and Bank compete, while subject to regulation by the CFPB, are generally not subject to the same type of extensive regulation by the federal and state banking agencies applicable to the Bancorp and the Bank.

 

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Employees and Human Capital Resources

 

We believe that the foundation of our success in the banking business lies with the quality of our employees, the development of our employees’ skills and career goals, and our ability to provide a comprehensive rewarding experience and work environment for our employees. We encourage and support the development of our employees and, wherever possible, strive to fill positions from within the organization. As of December 31, 2022, the Bank had 281 full-time and 45 part-time employees. The employees are not represented by a collective bargaining agreement. Management believes its employee relations are good. The Bancorp has six executive officers and has no other employees. The Bancorp’s officers also are full-time employees of the Bank, and are compensated by the Bank.

 

Regulation and Supervision

 

Bank Holding Company Regulation. The Bancorp is registered as a bank holding company for the Bank and has elected to be a financial holding company under the Gramm-Leach-Bliley Act of 1999. As a bank holding company and financial holding company, the Bancorp is subject to the regulation and supervision of the FRB under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Bank holding companies are required to file periodic reports with and are subject to periodic examination by the FRB.

 

Under the BHCA, without the prior approval of the FRB, the Bancorp may not acquire direct or indirect control of more than 5% of the voting stock or substantially all of the assets of any company, including a bank, and may not merge or consolidate with another bank holding company. In addition, the Bancorp is generally prohibited by the BHCA from engaging in any nonbanking business unless such business is determined by the FRB to be so closely related to banking as to be a proper incident thereto. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the FRB's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

 

The Change in Bank Control Act (“CBCA”) prohibits a person or group of persons from acquiring “control” of a bank holding company unless the FRB has been notified and has not objected to the transaction. Under a rebuttable presumption established by the FRB, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Bancorp, would, under the circumstances set forth in the presumption, constitute acquisition of control of the Bancorp. In addition, the CBCA prohibits any entity from acquiring 25% (the BHCA has a lower limit for acquirers that are existing bank holding companies) or more of a bank holding company’s or bank’s voting securities, or otherwise obtaining control or a controlling influence over a bank holding company or bank without the approval of the FRB. On April 1, 2021, the FRB’s final rule clarifying the standards for determining whether one company has control over another became effective. The final rule establishes four categories of tiered presumptions of noncontrol that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control. As the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol. These indicia of control include nonvoting equity ownership, director representation, management interlocks, business relationship and restrictive contractual covenants. Under the final rule, investors can hold up to 24.9% of the voting securities and up to 33% of the total equity of a company without necessarily having a controlling influence.

 

Under the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), a bank holding company is expected to serve as a source of financial and managerial strength to its subsidiary bank(s). Pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary bank(s) during periods of financial stress or adversity. This support may be required by the FRB at times when the Bancorp may not have the resources to provide it or, for other reasons, would not be inclined to provide it. Additionally, under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is required to provide limited guarantee of the compliance by any insured depository institution subsidiary that may become "undercapitalized" (as defined in the statute) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency.

 

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State Bank Regulation. As an Indiana commercial bank, the Bank is subject to federal regulation and supervision by the FDIC and to state regulation and supervision by the DFI. The Bank's deposit accounts are insured by the DIF, which is administered by the FDIC. The Bank is not a member of the Federal Reserve System.

 

Both federal and Indiana law extensively regulate various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Current federal law also requires banks, among other things, to make deposited funds available within specified time periods.

 

Under FDICIA, insured state chartered banks are prohibited from engaging as principal in activities that are not permitted for national banks, unless: (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund, and (ii) the bank is, and continues to be, in compliance with all applicable capital standards.

 

Branches and Acquisitions. Branching by the Bank requires the approval of the Federal Reserve and the DFI. Under current law, Indiana chartered banks may establish branches throughout the state and in other states, subject to certain limitations. Congress authorized interstate branching, with certain limitations, beginning in 1997. Indiana law authorizes an Indiana bank to establish one or more branches in states other than Indiana through interstate merger transactions and to establish one or more interstate branches through de novo branching or the acquisition of a branch. The Dodd-Frank Act permits the establishment of de novo branches in states where such branches could be opened by a state bank chartered by that state. The consent of the state is no longer required.

 

Transactions with Affiliates. Under Indiana law, the Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies, such as the Bancorp. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate.

 

Capital Requirements. Federal regulations require FDIC insured depository institutions to meet several minimum capital standards: (i) a common equity Tier 1 capital to risk-based assets ratio of 4.5%; (ii) a Tier 1 capital to risk-based assets ratio of 6.0%; (iii) a total capital to risk-based assets ratio of 8%; and (iv) a 4% Tier 1 capital to total assets leverage ratio.

 

Common equity Tier 1 capital is generally defined as common shareholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock, and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

 

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, and residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

 

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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.

 

The FRB and FDIC have authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular risks or circumstances. As of December 31, 2022, the Bank met all applicable capital adequacy requirements.

 

Bank holding companies are generally subject to consolidated capital requirements established by the FRB. The Dodd-Frank Act required the FRB to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries. However, under the FRB’s “Small Bank Holding Company” exemption from consolidated bank holding company capital requirements, bank holding companies and savings and loan holding companies with less than $3 billion in consolidated assets, such as the Bancorp, are exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases.

 

Federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. The law requires that certain supervisory actions be taken against undercapitalized institutions, the severity of which depends on the degree of undercapitalization. The FDIC has adopted regulations to implement the prompt corrective action legislation as to insured state banks. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater, and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater, and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0%, or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0%, or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

 

Subject to a narrow exception, a receiver or conservator is required to be appointed for an institution that is “critically undercapitalized” within specified time frames. The regulations also provide that a capital restoration plan must be filed with the FDIC within 45 days of the date an institution is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company up to the lesser of 5% of the institution’s total assets when it was deemed to be undercapitalized or the amount necessary to achieve compliance with applicable capital requirements. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The FDIC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.

 

Section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “Economic Growth Act”) directed federal banking agencies to draft regulations establishing a new optional Community Bank Leverage Ratio (“CBLR”). The Economic Growth Act provides that the CBLR will apply to a “qualifying community bank” which the Economic Growth Act defines as a bank with consolidated assets of less than $10 billion and satisfying additional criteria designed to disqualify institutions with a higher risk profile. Under the Economic Growth Act, qualifying community banks that meet or exceed the CBLR and elect to follow the alternative regulatory capital structure will be deemed to have satisfied all generally applicable leverage capital and risk-based capital requirements and will be considered “well capitalized” under the FDIC prompt corrective action provisions. The Economic Growth Act directed the FRB, the FDIC, and the Office of the Comptroller of the Currency (“OCC”) to jointly determine a community bank leverage ratio percentage, not less than 8% nor more than 10%, that must be maintained to be deemed to have satisfied all generally applicable leverage capital and risk-based capital requirements and be considered well capitalized. The Economic Growth Act also directed agencies to establish procedures for dealing with a qualifying bank that subsequently falls below the new ratio.

 

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The final regulation implementing Section 201 became effective on January 1, 2021 (the “Final Rule”). Under the Final Rule, to be eligible to use the CBLR framework, a banking organization must not be an advanced approaches organization and must have (i) a leverage ratio of greater than 9%; (ii) total consolidated assets of less than $10 billion; (iii) total off-balance sheet exposures of 25% or less of total consolidated assets; and (iv) total trading assets plus trading liabilities of 5% or less of total consolidated assets. A qualifying institution may opt in and out of the CBLR framework on its quarterly call report. An institution that ceases to meet any qualifying criteria is provided with a two-quarter grace period to either comply with the CBLR requirements or comply with the general capital regulations, including the risk-based capital requirements.

 

Section 4012 of the Coronavirus Aid, Relief and Economic Security Act of 2021 (the “CARES Act”) required that the CBLR be temporarily lowered to 8%. The federal regulators issued a rule implementing the lower ratio effective April 23, 2021. The rule also established a two-quarter grace period for a qualifying institution whose leverage ratio falls below the 8% CBLR requirement so long as the bank maintains a leverage ratio of 7% or greater. Another rule was issued to transition back to the 9% CBLR by increasing the ratio to 8.5% for calendar year 2022 and 9% thereafter. The Bank did not elect to opt in to the CBLR framework.

 

The following table shows that, at December 31, 2022, and December 31, 2021, the Bank’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.

 

(Dollars in millions)

                                 

Minimum Required To Be

 
                   

Minimum Required For

   

Well Capitalized Under Prompt

 
   

Actual

   

Capital Adequacy Purposes

   

Corrective Action Regulations

 

December 31, 2022

 

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

Common equity tier 1 capital to risk-weighted assets

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

Tier 1 capital to risk-weighted assets

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

Total capital to risk-weighted assets

  $