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Finward Bancorp

Finward BancorpFNWDEarnings & Financial Report

Nasdaq · Financials · Savings Institution, Federally Chartered

Finward Bancorp is a U.S.-headquartered regional bank holding company. It offers a full range of retail and commercial banking products and services, including deposit accounts, personal and mortgage loans, small business financing, and wealth management solutions, primarily serving individual customers and small to mid-sized enterprises in its local operating regions.

What changed in Finward Bancorp's 10-K — 2022 vs 2023

Top changes in Finward Bancorp's 2023 10-K

364 paragraphs added · 301 removed · 233 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

103 edited+48 added−26 removed168 unchanged
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.
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 HTM. AFS securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons.
Non ‑ Performing 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.
Non ‑ Performing Assets, Asset Classification and Provision for Credit 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.
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.
Forward-Looking Statements 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 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.
All loan sales are made to Freddie Mac, US Bank, 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 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.
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.
The privacy provisions of Gramm-Leach affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors. The Bancorp does not disclose any nonpublic information about any current or former customers to anyone except as permitted by law and subject to contractual confidentiality provisions which restrict the release and use of such information. Cybersecurity Guidelines.
The privacy provisions of Gramm-Leach affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors. The Bancorp does not disclose any nonpublic information about any current or former customers to anyone except as permitted by law and subject to contractual confidentiality provisions which restrict the release and use of such information.
A financial institution also should have a robust business continuity program to recover from a cyberattack and procedures for monitoring the security of third-party service providers that may have access to nonpublic data at the institution. During 2022, the Bancorp did not discover any material cybersecurity incidents. Consumer Financial Protection Bureau.
A financial institution also should have a robust business continuity program to recover from a cyberattack and procedures for monitoring the security of third-party service providers that may have access to nonpublic data at the institution. During 2023, the Bancorp did not discover any material cybersecurity incidents. Consumer Financial Protection Bureau.
In addition, the Dodd-Frank Act expands the definition of a “high-cost mortgage” under the Truth In Lending Act, and imposes new requirements on high-cost mortgages and new disclosure, reporting and notice requirements for residential mortgage loans, as well as new requirements with respect to escrows and appraisal practices. 30 of 113 Interchange Fees for Debit Cards.
In addition, the Dodd-Frank Act expands the definition of a “high-cost mortgage” under the Truth In Lending Act, and imposes new requirements on high-cost mortgages and new disclosure, reporting and notice requirements for residential mortgage loans, as well as new requirements with respect to escrows and appraisal practices. Interchange Fees for Debit Cards.
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.
The following table sets forth certain information at December 31, 2023, 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.
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.
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, 2023, the Bank met all applicable capital adequacy requirements.
Commercial construction loans are typically made for periods not to exceed two years or date of occupancy, whichever is less. 10 of 113 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.
Commercial construction loans are typically made for periods not to exceed two years or date of occupancy, whichever is less. 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.
The impact of Basel IV on the Bancorp will depend on the manner in which it is implemented by the federal banking regulators. 26 of 113 Banking regulators may change these capital requirements from time to time, depending on the economic outlook generally and the outlook for the banking industry.
The impact of Basel IV on the Bancorp will depend on the manner in which it is implemented by the federal banking regulators. Banking regulators may change these capital requirements from time to time, depending on the economic outlook generally and the outlook for the banking industry.
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.
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, 2023, the cost basis of the two trust preferred securities on non-accrual status totaled $2.2 million.
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.
All of the Bancorp’s banking centers and offices are located in its primary market area. Approximately ninety-four 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.
However, similar standards and/or regulations may be adopted or implemented by federal and state banking agencies in the future which may be applicable to community banking organizations such as the Bancorp. 29 of 113 Recent cyberattacks against banks and other financial institutions that resulted in unauthorized access to confidential customer information have prompted the federal banking regulators to issue extensive guidance on cybersecurity.
However, similar standards and/or regulations may be adopted or implemented by federal and state banking agencies in the future which may be applicable to community banking organizations such as the Bancorp. Recent cyberattacks against banks and other financial institutions that resulted in unauthorized access to confidential customer information have prompted the federal banking regulators to issue extensive guidance on cybersecurity.
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. 11 of 113 Government Loans.
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.
The FRB expects bank holding companies to consult with it in advance of declaring dividends that could raise safety and soundness concerns (i.e., such as when the dividend is not supported by earnings or involves a material increase in the dividend rate) and in advance of repurchasing shares of common or preferred stock. Federal Deposit Insurance.
The FRB expects bank holding companies to consult with it in advance of declaring dividends that could raise safety and soundness concerns (i.e., such as when the dividend is not supported by earnings or involves a material increase in the dividend rate) and in advance of repurchasing shares of common or preferred stock. Page 29 of 122 Federal Deposit Insurance.
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.
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 for advances paid prior to maturity.
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.
The Bank did not elect to opt in to the CBLR framework. The following table shows that, at December 31, 2023, and December 31, 2022, the Bank’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.
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.
Page 26 of 122 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.
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”).
Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures. Page 27 of 122 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”).
Other risks and uncertainties that could affect the Bancorp’s future performance are set forth below in Item 1A, “Risk Factors.” 6 of 113 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.
Other risks and uncertainties that could affect the Bancorp’s future performance are set forth below in Item 1A, “Risk Factors.” Page 6 of 122 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.
Dividend Limitations. The Bancorp is a legal entity separate and distinct from the Bank. The primary source of the Bancorp’s cash flow, including cash flow to pay dividends on the Bancorp’s Common Stock, is the payment of dividends to the Bancorp by the Bank.
The Bancorp is a legal entity separate and distinct from the Bank. The primary source of the Bancorp’s cash flow, including cash flow to pay dividends on the Bancorp’s Common Stock, is the payment of dividends to the Bancorp by the Bank.
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 valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.
The Bancorp 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. 9 of 113 Designated officers have authorities, established by the Board of Directors, to approve loans.
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. Page 9 of 122 Designated officers have authorities, established by the Board of Directors, to approve loans.
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. 23 of 113 State Bank Regulation.
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.
The Economic Growth Act also directed agencies to establish procedures for dealing with a qualifying bank that subsequently falls below the new ratio. 25 of 113 The final regulation implementing Section 201 became effective on January 1, 2021 (the “Final Rule”).
The Economic Growth Act also directed agencies to establish procedures for dealing with a qualifying bank that subsequently falls below the new ratio. The final regulation implementing Section 201 became effective on January 1, 2021 (the “Final Rule”).
The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Indianapolis, which is one of eleven regional Federal Home Loan Banks.
The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Page 30 of 122 Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Indianapolis, which is one of eleven regional Federal Home Loan Banks.
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.
Page 25 of 122 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.
Depending on the implementation of this revised federal preemption standard, the operations of the Bank could become subject to additional compliance burdens in the states in which it operates. Mortgage Reform and Anti-Predatory Lending .
Depending on the implementation of this revised federal preemption standard, the operations of the Bank could become subject to additional compliance burdens in the states in which it operates. Page 32 of 122 Mortgage Reform and Anti-Predatory Lending .
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.
All home equity loans are made on a direct basis to borrowers. Page 11 of 122 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.
The Bancorp is permitted to purchase non-rated municipal securities, tax anticipation notes, and warrants within the local market area.
Government Loans. The Bancorp is permitted to purchase non-rated municipal securities, tax anticipation notes, and warrants within the local market area.
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 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, which it still maintains.
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).
Page 20 of 122 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).
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).
For each category of interest-earning asset and interest-bearing liability, information is provided on 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).
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.
Interest on such loans included in income during the period amounted to $109 thousand. Page 13 of 122 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.
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. 17 of 113 Sources of Funds General.
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. Page 18 of 122 Sources of Funds General.
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.
Loans insured by private mortgage insurance companies can be made for up to 97% of value. During 2023, 64.4% 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.
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.
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.
At December 31, 2022, the Bancorp’s excess borrowing capacity based on collateral from the FHLBI was $391.1 million. Generally, the loan terms from the FHLBI are better than the terms the Bancorp can receive from other sources making it cheaper to borrow money from the FHLBI. Federal Reserve System.
At December 31, 2023, the Bancorp’s excess borrowing capacity based on collateral from the FHLBI was $592.6 million. Generally, the loan terms from the FHLBI are better than the terms the Bancorp can receive from other sources making it cheaper to borrow money from the FHLBI. Federal Reserve System.
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 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. Page 10 of 122 Construction Loans. Construction loans on residential properties are made primarily to individuals and contractors who are under contract with individual purchasers.
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.
The maximum amount that the Bank could have loaned to one borrower and the borrower’s related entities at December 31, 2023, under the 15% of capital and surplus limitation, was approximately $27.5 million. At December 31, 2023, the Bank had no loans that exceeded the regulatory limitations.
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 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 $17.7 million for 2023 and $44.6 million for 2022. During 2023, ARMs represented 28.8% of total mortgage loan originations.
At December 31, 2022, the Bank was in compliance with this requirement. 28 of 113 At December 31, 2022, the Bancorp owned $6.5 million of stock of the Federal Home Loan Bank of Indianapolis (“FHLBI”). The FHLBI stock entitles the Bancorp to dividends from the FHLBI. The Bancorp recognized dividend income of approximately $84 thousand in 2022.
At December 31, 2023, the Bank was in compliance with this requirement. At December 31, 2023, the Bancorp owned $6.5 million of stock of the Federal Home Loan Bank of Indianapolis (“FHLBI”). The FHLBI stock entitles the Bancorp to dividends from the FHLBI. The Bancorp recognized dividend income of approximately $290 thousand in 2023.
Pursuant to FDIC rules adopted under the Dodd-Frank Act (described below), initial assessments ranged from 5 to 35 basis points of the institution’s total assets minus its tangible equity. The Bank paid net deposit insurance assessments of $861 thousand during the year ended December 31, 2022.
Pursuant to FDIC rules adopted under the Dodd-Frank Act (described below), initial assessments ranged from 5 to 35 basis points of the institution’s total assets minus its tangible equity. The Bank paid net deposit insurance assessments of $2.0 million during the year ended December 31, 2023.
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. 7 of 113 Loan Portfolio.
At December 31, 2023, 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. Page 7 of 122 Loan Portfolio.
(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.
Certain loan renewals and extensions may not require approval by the Board of Directors or the Board Risk Management 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.
(Dollars in millions) Minimum Required To Be Minimum Required For Well Capitalized Under Prompt Actual Capital Adequacy Purposes Corrective Action Regulations December 31, 2022 Amount Ratio Amount Ratio Amount Ratio Common equity tier 1 capital to risk-weighted assets $ 161.3 10.1 % $ 71.6 4.5 % $ 103.4 6.5 % Tier 1 capital to risk-weighted assets $ 161.3 10.1 % $ 95.5 6.0 % $ 127.3 8.0 % Total capital to risk-weighted assets $ 174.2 10.9 % $ 127.3 8.0 % $ 159.1 10.0 % Tier 1 capital to adjusted average assets $ 161.3 7.7 % $ 84.3 4.0 % $ 105.4 5.0 % (Dollars in millions) Minimum Required To Be Minimum Required For Well Capitalized Under Prompt Actual Capital Adequacy Purposes Corrective Action Regulations At December 31, 2021 Amount Ratio Amount Ratio Amount Ratio Common equity tier 1 capital to risk-weighted assets $ 133.7 12.6 % $ 47.8 4.5 % $ 69.0 6.5 % Tier 1 capital to risk-weighted assets $ 133.7 12.6 % $ 63.7 6.0 % $ 85.0 8.0 % Total capital to risk-weighted assets $ 147.0 13.9 % $ 85.0 8.0 % $ 106.2 10.0 % Tier 1 capital to adjusted average assets $ 133.7 8.4 % $ 64.1 4.0 % $ 80.1 5.0 % In December 2017, the Basel Committee on Banking Supervision published the last version of the Basel III accord, generally referred to as “Basel IV.” The Basel Committee stated that a key objective of the revisions incorporated into the framework is to reduce excessive variability of risk-weighted assets (“RWA”), which will be accomplished by enhancing the robustness and risk sensitivity of the standardized approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios; constraining the use of internally modeled approaches; and complementing the risk-weighted capital ratio with a finalized leverage ratio and a revised and robust capital floor.
(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 % Page 28 of 122 In December 2017, the Basel Committee on Banking Supervision published the last version of the Basel III accord, generally referred to as “Basel IV.” The Basel Committee stated that a key objective of the revisions incorporated into the framework is to reduce excessive variability of risk-weighted assets (“RWA”), which will be accomplished by enhancing the robustness and risk sensitivity of the standardized approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios; constraining the use of internally modeled approaches; and complementing the risk-weighted capital ratio with a finalized leverage ratio and a revised and robust capital floor.
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; 5 of 113 ● 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”).
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: ● The Bank’s ability to demonstrate compliance with the terms of the previously disclosed consent order and memorandum of understanding entered into between the Bank and the Federal Deposit Insurance Corporation (“FDIC”) and Indiana Department of Financial Institutions (“DFI”), or to demonstrate compliance to the satisfaction of the FDIC and/or DFI within prescribed time frames; ● The Bank’s agreement under the memorandum of understanding to refrain from paying cash dividends without prior regulatory approval; ● changes in interest rates, market liquidity, and capital markets, as well as the magnitude of such changes, which may reduce net interest margins; ● continuing effects of inflation; ● current financial conditions within the banking industry, liquidity levels, concentrations in certain loan products or categories, net interest margin compression, 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; Page 5 of 122 ● 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; ● 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; ● 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”).
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.
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.
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.
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 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).
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.
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.
We encourage and support the development of our employees and, wherever possible, strive to fill positions from within the organization. As of December 31, 2023, the Bank had 276 full-time and 28 part-time employees. The employees are not represented by a collective bargaining agreement. Management believes its employee relations are good. The Bancorp has four executive officers.
Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. Accounting for Income Taxes At December 31, 2022, the Bancorp has consolidated total deferred tax assets of $32.7 million and consolidated total deferred tax liabilities of $3.5 million, resulting in a consolidated net deferred tax asset of $29.2 million.
Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. Accounting for Income Taxes At December 31, 2023, the Bancorp has consolidated total deferred tax assets of $31.4 million and consolidated total deferred tax liabilities of $3.3 million, resulting in a consolidated net deferred tax asset of $28.1 million.
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.
At December 31, 2023, the market value of the Wealth Management Group’s assets under management totaled $387.1 million, an increase of $25.7 million, compared to December 31, 2022. 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.
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 % 19 of 113 The average balance sheet amounts, the related interest income or expense, and average rates earned or paid are presented in the following table.
The tables below set forth certain financial ratios of the Bancorp for the periods indicated: Year ended December 31, 2023 2022 Return on average assets 0.40 % 0.74 % Return on average equity 6.28 % 10.47 % Average equity-to-average assets ratio 6.41 % 7.07 % Dividend payout ratio 53.55 % 34.34 % At December 31, 2023 2022 Total stockholders’ equity to total assets 6.99 % 6.59 % Page 21 of 122 The average balance sheet amounts, the related interest income or expense, and average rates earned or paid are presented in the following table.
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 the loan continues in a delinquent status for 120 days, the Bancorp will generally initiate foreclosure proceedings. 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.
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.
The Bancorp's substandard loans are summarized below: (Dollars in thousands) Loan Segment December 31, 2023 December 31, 2022 Residential real estate $ 2,098 $ 6,035 Home equity 479 612 Commercial real estate 2,544 7,421 Construction and land development - - Multifamily 4,245 7,064 Commercial business 2,896 1,881 Consumer 2 - Manufactured homes - - Government - - Total $ 12,264 $ 23,013 In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of special mention loans.
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”).
(“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”).
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 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 Board Risk Management Committee (all members of the Bank’s Board of Directors and Board Risk Management Committee are also members of the Bancorp’s Board of Directors and Board Risk Management Committee, respectively).
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.
Wealth Management Group In addition, the Bancorp's Wealth Management Group currently provides estate and retirement planning, custodial services, guardianships, IRA accounts, investment agency accounts, serves as the personal representative of estates, and acts as corporate trustee for revocable and irrevocable trusts.
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.
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.
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 16 of 113 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.
The percent columns represent the percentage of loans in each category to total loans. 2023 2022 $ % $ % Real estate loans: Residential 4,682 35.2 3,431 34.7 Commercial and other dwelling 12,249 55.6 8,044 56.1 Consumer loans 7 2.1 57 2.4 Commercial business and other 1,830 7.1 1,365 6.8 Total 18,768 100.0 12,897 100.0 Page 17 of 122 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.
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.
At December 31, Repurchase agreements: 2023 2022 Balance $ 38,124 $ 15,503 Securities underlying the agreements: Ending carrying amount 54,458 32,660 Ending fair value 54,458 32,660 Weighted average rate (1) 4.00 % 0.94 % For year ended December 31, 2023 2022 Highest month-end balance $ 48,947 $ 28,328 Average outstanding balance 35,543 20,649 Weighted average rate on securities sold under agreements to repurchase (2) 5.14 % 2.43 % At December 31, 2023 2022 Fixed rate short-term advances from the FHLB $ - $ 120,000 Fixed rate advances from the Federal Reserve with outstanding rates of 4.38% as of December 31, 2023 80,000 - Total borrowings $ 80,000 $ 120,000 (1) The weighted average rate for each period is calculated by weighting the principal balances outstanding for the various interest rates.
No institution may pay a dividend if it is in default of the federal deposit insurance assessment. 27 of 113 Under the Dodd-Frank Act, the FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund at no less than 1.35% of estimated insured deposits, which is increased from the previous ratio of 1.15%.
Under the Dodd-Frank Act, the FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund at no less than 1.35% of estimated insured deposits, which is increased from the previous ratio of 1.15%.
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.
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.
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.
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.
The Bancorp cannot accurately predict whether any of this potential legislation will ultimately be enacted, and, if enacted, the ultimate effect that it, or implementing regulations, would have upon the financial condition or results of operations of the Bancorp or the Bank. 31 of 113 Federal Taxation For federal income tax purposes, the Bank reports its income and expenses on the accrual method of accounting.
The Bancorp cannot accurately predict whether any of this potential legislation will ultimately be enacted, and, if enacted, the ultimate effect that it, or implementing regulations, would have upon the financial condition or results of operations of the Bancorp or 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.
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 Bancorp is unable to predict whether and when any such further capital requirements would be imposed and, if so, to what levels and on what schedule. New Accounting Standards With Regulatory Effect.
The Bancorp is unable to predict whether and when any such further capital requirements would be imposed and, if so, to what levels and on what schedule. New Accounting Standards With Regulatory Effect. In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”).
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.
The amounts are stated in thousands (000’s). 2023 2022 U.S. government sponsored agencies $ 7,883 $ 7,625 U.S. treasury securities - 389 Collateralized Mortgage Obligations and Mortgage-backed securities 123,464 134,116 Municipal Securities 238,670 227,718 Collateralized Debt Securities 1,357 1,048 Total $ 371,374 $ 370,896 The contractual maturities and weighted average yields for the U.S. government agency securities, municipal securities, and trust preferred securities at December 31, 2023, are summarized in the table below.
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. 4 of 113 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.
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.
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.
Loans that qualify as troubled loan modifications and accruing: 2023 Real estate: Residential $ 868 Total $ 868 Loans that qualify as troubled debt restructurings and accruing: 2022 Real estate: Commercial $ 1,984 Residential 217 Home Equity 76 Commercial business 476 Total $ 2,753 2023 2022 Loans accounted for on a non-accrual basis: Real estate: Residential $ 1,693 $ 5,347 Commercial 833 3,242 Multifamily 3,715 7,064 Home Equity 468 594 Commercial business 2,897 1,881 Consumer 2 - Total $ 9,608 $ 18,128 Accruing loans which are contractually past due 90 days or more: Real estate: Commercial $ 712 $ - Residential 1,131 166 Manufactured homes - 82 Total $ 1,843 $ 248 Ratio of non-performing loans to total assets 0.61 % 0.94 % Ratio of non-performing loans to total loans 0.76 % 1.21 % * non-performing loans include non-accrual loans and accruing loans which are contractually past due 90 days or more Trust preferred securities $ 1,357 $ 1,048 Ratio of trust preferred securities to total assets 0.06 % 0.05 % During 2023, gross interest income of $679 thousand would have been recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the period.
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.
The Bancorp uses repurchase agreements, as well as a line-of-credit and advances from the FHLB for borrowings. At December 31, 2023, the Bancorp had $80.0 million from the Bank Term Funding Program (described below) and $38.1 million in repurchase agreements. The Bancorp had no other borrowed funds as of December 31, 2023. Deposits.
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").
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.
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 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 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.
The federal banking agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services.
These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services.
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.
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.
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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments Regarding the Bancorp and the Bank” below. 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.
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 18 of 113 Borrowings.
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, 2023 (dollars in thousands). 3 months or less $ 15,248 Over 3 months through 6 months 10,469 Over 6 months through 12 months 21,301 Over 12 months 20,355 Total $ 67,373 Page 19 of 122 Borrowings.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

39 edited+19 added−1 removed112 unchanged
These factors include: ● variations in our operating results or the quality of our assets; ● operating results that vary from the expectations of management, securities analysts, and investors; ● increases in loan losses, non-performing loans, and other real estate owned; ● changes in the U.S. corporate tax rates; ● changes in expectations as to our future financial performance; ● announcements of new products, strategic developments, new technology, acquisitions, and other material events by us or our competitors; ● ability to fund the Bancorp’s assets through core deposits and/or wholesale funding; ● the operating and securities price performance of other companies that investors believe are comparable to us; ● actual or anticipated sales of our equity or equity-related securities; ● our past and future dividend practices; ● our creditworthiness; ● interest rates; ● the credit, mortgage, and housing markets, and the markets for securities relating to mortgages or housing; ● developments with respect to financial institutions generally; and 42 of 113 ● economic, financial, geopolitical, regulatory, congressional, or judicial events that affect us or the financial markets.
These factors include: ● variations in our operating results or the quality of our assets; ● operating results that vary from the expectations of management, securities analysts, and investors; ● increases in loan losses, non-performing loans, and other real estate owned; ● changes in the U.S. corporate tax rates; ● changes in expectations as to our future financial performance; ● announcements of new products, strategic developments, new technology, acquisitions, and other material events by us or our competitors; ● ability to fund the Bancorp’s assets through core deposits and/or wholesale funding; ● the operating and securities price performance of other companies that investors believe are comparable to us; ● actual or anticipated sales of our equity or equity-related securities; ● our past and future dividend practices; ● our creditworthiness; ● interest rates; ● the credit, mortgage, and housing markets, and the markets for securities relating to mortgages or housing; ● developments with respect to financial institutions generally; and ● economic, financial, geopolitical, regulatory, congressional, or judicial events that affect us or the financial markets.
In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. Our allowance for loan losses at any particular date may not be sufficient to cover future loan losses.
In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. Our Allowance for credit losses at any particular date may not be sufficient to cover future loan losses.
Higher loan losses could require the Bancorp to increase its allowance for loan losses through a charge to earnings. When we loan money, we incur the risk that our borrowers will not repay their loans. We reserve for loan losses by establishing an allowance through a charge to earnings.
Higher loan losses could require the Bancorp to increase its Allowance for credit losses through a charge to earnings. When we loan money, we incur the risk that our borrowers will not repay their loans. We reserve for loan losses by establishing an allowance through a charge to earnings.
Our regulators may subject us to supervisory and enforcement actions, such as the imposition of certain restrictions on our operations, requirements that we take remedial action, the classification of our assets and the determination of the level of our allowance for loan losses, that are aimed at protecting the insurance fund and the depositors and borrowers of the Bank but that are detrimental to holders of the Bancorp’s common stock.
Our regulators may subject us to supervisory and enforcement actions, such as the imposition of certain restrictions on our operations, requirements that we take remedial action, the classification of our assets and the determination of the level of our Allowance for credit losses, that are aimed at protecting the insurance fund and the depositors and borrowers of the Bank but that are detrimental to holders of the Bancorp’s common stock.
The unexpected loss of services of certain of our skilled personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience, customer relationships, and the difficulty of promptly finding qualified replacement personnel. 36 of 113 Loss of key employees may disrupt relationships with certain customers.
The unexpected loss of services of certain of our skilled personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience, customer relationships, and the difficulty of promptly finding qualified replacement personnel. Loss of key employees may disrupt relationships with certain customers.
Because payments on loans secured by commercial properties often depend upon the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy, among other things.
Because payments on loans secured by commercial properties often depend upon the successful operation and management of the properties or related businesses, repayment of such loans may be affected by adverse conditions in the real estate market or the economy, among other things.
Decreases in deposits and changes in the mix of funding sources, particularly in light of recent high profile bank failures and customers’ responses to such events, may adversely affect the Bancorp’s liquidity, funding costs, and net income. Turmoil in the financial markets could result in lower fair values for our investment securities.
Decreases in deposits and changes in the mix of funding sources, particularly in light of recent high profile bank failures and customers’ responses to such events, may adversely affect the Bancorp’s liquidity, funding costs, and net income. Page 42 of 122 Turmoil in the financial markets could result in lower fair values for our investment securities.
Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on our business, financial condition, and results of operations. We may not be able to attract and retain skilled people. The Bank’s success depends on its ability to attract and retain skilled people.
Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on our business, financial condition, and results of operations. Page 38 of 122 We may not be able to attract and retain skilled people. The Bank’s success depends on its ability to attract and retain skilled people.
These broad market fluctuations may adversely affect our stock price, notwithstanding our operating results. The trading volume in the Bancorp ’ s common stock is less than that of other larger financial institutions.
These broad market fluctuations may adversely affect our stock price, notwithstanding our operating results. Page 45 of 122 The trading volume in the Bancorp ’ s common stock is less than that of other larger financial institutions.
All of the instruments held in the Bancorp’s investment portfolio are designated as available-for-sale, and many of these instruments are particularly sensitive to interest rate fluctuations, especially long-term fixed-income securities, including U.S. Treasury notes and bonds and corporate and municipal bonds.
All of the instruments held in the Bancorp’s investment portfolio are designated as AFS, and many of these instruments are particularly sensitive to interest rate fluctuations, especially long-term fixed-income securities, including U.S. Treasury notes and bonds and corporate and municipal bonds.
Unlike ARM loans, fixed-rate loans carry the risk that, because they do not reprice to market interest rates, their yield may be insufficient to offset increases in the Bank’s cost of funds during a rising interest rate environment.
The Bank offers adjustable rate mortgage (ARM) loans and fixed-rate loans. Unlike ARM loans, fixed-rate loans carry the risk that, because they do not reprice to market interest rates, their yield may be insufficient to offset increases in the Bank’s cost of funds during a rising interest rate environment.
The profitability of our mortgage banking operations depends in large part upon our ability to aggregate a high volume of loans and to sell them in the secondary market at a gain.
Currently, we sell a large portion of the mortgage loans we originate. The profitability of our mortgage banking operations depends in large part upon our ability to aggregate a high volume of loans and to sell them in the secondary market at a gain.
Commercial real estate lending may expose the Bancorp to increased lending risks. At December 31, 2022, the Bank’s commercial real estate loan portfolio amounted to $486.4 million, or 32.2% of total loans. Commercial real estate lending is inherently riskier than residential mortgage lending.
Commercial real estate lending may expose the Bancorp to increased lending risks. At December 31, 2023, the Bank’s commercial real estate loan portfolio amounted to $503.2 million, or 33.4% of total loans. Commercial real estate lending is inherently riskier than residential mortgage lending.
Thus, we are dependent upon the existence of an active secondary market and our ability to profitably sell loans into that market. 34 of 113 Our ability to sell mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by Fannie Mae, Freddie Mac, and Ginnie Mae (the “Agencies”) and other institutional and non-institutional investors.
Our ability to sell mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by Fannie Mae, Freddie Mac, and Ginnie Mae (the “Agencies”) and other institutional and non-institutional investors.
Our mortgage lending profitability could be significantly reduced if we are not able to resell mortgages at a reasonable gain on sale or experience other problems with the secondary market process or we are unable to retain our mortgage loan sales force due to regulatory changes. Currently, we sell a large portion of the mortgage loans we originate.
Page 36 of 122 Our mortgage lending profitability could be significantly reduced if we are not able to resell mortgages at a reasonable gain on sale or experience other problems with the secondary market process or we are unable to retain our mortgage loan sales force due to regulatory changes.
We may be required to increase our allowance for loan losses, thus reducing earnings. Commercial business lending may expose the Bancorp to increased lending risks. At December 31, 2022, the Bank’s commercial business loan portfolio amounted to $93.3 million, or 6.2% of total loans.
We may be required to increase our Allowance for credit losses, thus reducing earnings. Commercial business lending may expose the Bancorp to increased lending risks. At December 31, 2023, the Bank’s commercial business loan portfolio amounted to $97.4 million, or 6.5% of total loans.
Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations.
Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations. In addition, merger and acquisition costs incurred by the Bancorp may temporarily increase operating expenses.
For further discussion, see Notes 1 and 6, “ Summary of Significant Accounting Policies ” and “ Goodwill and Other Intangible Assets ,” to the Consolidated Financial Statements included in Item 8 this report. 37 of 113 Damage to our reputation could damage our business.
For further discussion, see Notes 1 and 6, “ Summary of Significant Accounting Policies ” and “ Goodwill and Other Intangible Assets ,” to the Consolidated Financial Statements included in Item 8 this report. Damage to our reputation could damage our business. Our business depends upon earning and maintaining the trust and confidence of our customers, investors, and employees.
While economic conditions have improved, significant challenges remain, including continued elevated inflation levels and recent uncertainty in the financial institutions industry. As a result, there can be no assurance that the economic recovery will continue, and future deterioration would likely exacerbate the adverse effects of recent difficult market conditions on us and others in the financial institutions industry.
As a result, there can be no assurance that the economic recovery will continue, and future deterioration would likely exacerbate the adverse effects of recent difficult market conditions on us and others in the financial institutions industry.
Unrealized losses in the Bancorp ’ s investment portfolio could affect liquidity. As market interest rates increased during 2022 and continued into the early months of 2023, the Bancorp has experienced increased unrealized losses within its investment portfolio.
Unrealized losses in the Bancorp ’ s investment portfolio could affect liquidity. The increase in market interest rates experienced in 2022 and the early months of 2023, caused the Bancorp to experience increased unrealized losses within its investment portfolio.
Our business depends upon earning and maintaining the trust and confidence of our customers, investors, and employees. Damage to our reputation could cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, compliance failures, litigation, regulatory outcomes, or governmental investigations.
Damage to our reputation could cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, compliance failures, litigation, regulatory outcomes, or governmental investigations.
We are exposed to intangible asset risk in that our goodwill may become impaired. As of December 31, 2022, we had $27.2 million of goodwill and other intangible assets.
Page 39 of 122 We are exposed to intangible asset risk in that our goodwill may become impaired. As of December 31, 2023, we had $25.7 million of goodwill and other intangible assets.
The board may, at its discretion, reduce or eliminate dividends or change its dividend policy in the future. Item 1B. Unresolved Staff Comments Not applicable.
The board may, at its discretion, reduce or eliminate dividends or change its dividend policy in the future.
Among the risks we face are the following: ● Credit Risk – the risk that loan customers or other parties will be unable to perform their contractual repayment obligations. ● Market Risk – the risk that changes in market rates and prices will adversely affect our financial condition and results of operations. ● Liquidity Risk – the risk that the Bancorp or the Bank will have insufficient cash or access to cash to meet its operating needs. ● Operational Risk – the risk of financial and reputational loss resulting from fraud, inadequate or failed internal processes, cyber-security breaches, people and systems, or external events. ● Economic Risk – the risk that the economy in our markets could decline, resulting in increased unemployment, decreased real estate values, and increased loan charge-offs. ● Compliance Risk – the risk of additional action by our regulators or additional regulation that could hinder our ability to do business profitably. 32 of 113 ● Regulatory Risk – the risk presented by the need to comply with all laws, rules, and regulations from multiple regulatory agencies, including but not limited to the FDIC, the Consumer Financial Protection Bureau, the IDFI, the FRB, the SEC, and the U.S.
Among the risks we face are the following: ● Credit Risk – the risk that loan customers or other parties will be unable to perform their contractual repayment obligations. ● Market Risk – the risk that changes in market rates and prices will adversely affect our financial condition and results of operations. ● Liquidity Risk – the risk that the Bancorp or the Bank will have insufficient cash or access to cash to meet its operating needs. ● Operational Risk – the risk of financial and reputational loss resulting from fraud, inadequate or failed internal processes, cyber-security breaches, people and systems, or external events. ● Economic Risk – the risk that the economy in our markets could decline, resulting in increased unemployment, decreased real estate values, and increased loan charge-offs.
The Bancorp also is experiencing an increase in competition to acquire other banks, due to the overall strength of financial institutions and their high capital levels. In addition, credit unions and FinTech companies are now actively pursuing small bank acquisitions. Increased competition for bank acquisitions may slow the Bancorp’s ability to grow earning assets at comparable historical growth rates.
Page 43 of 122 The Bancorp also is experiencing an increase in competition to acquire other banks, due to the overall strength of financial institutions and their high capital levels. In addition, credit unions and FinTech companies are now actively pursuing small bank acquisitions.
Reduced confidence in the financial institutions sector could result in customer disintermediation and the loss of deposit and borrowing relationships, among other effects, which could result in a material adverse effect on the Bancorp’s financial condition and results of operations. 41 of 113 Risks Related to the Bancorp ’ s Common Stock An investment in the Bancorp ’ s common stock is not an insured deposit.
Reduced confidence in the financial institutions sector could result in customer disintermediation and the loss of deposit and borrowing relationships, among other effects, which could result in a material adverse effect on the Bancorp’s financial condition and results of operations.
Although we have not experienced any material losses related to a technology-related operational interruption or cyber-attack, there can be no assurance that such failures, interruptions, or security breaches will not occur in the future or, if they do occur, that the impact will not be substantial. 35 of 113 The occurrence of any failures, interruptions, or security breaches of our technology systems could damage our reputation, result in a loss of customer business, result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of proprietary information, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition, results of operations, or stock price.
The occurrence of any failures, interruptions, or security breaches of our technology systems could damage our reputation, result in a loss of customer business, result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of proprietary information, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition, results of operations, or stock price.
With increased concerns regarding certain recent high profile bank failures, customers increasingly are concerned about the extent to which their deposits are insured by the FDIC. Customers may have insecurity regarding the extent to which their deposits exceed the current FDIC deposit insurance threshold of $250,000 per depositor and therefore are uninsured.
Customers may have insecurity regarding the extent to which their deposits exceed the current FDIC deposit insurance threshold of $250,000 per depositor and therefore are uninsured.
As of December 31, 2022, the Bancorp held approximately $227.7 million of municipal securities within the investment portfolio, which comprised approximately 61.3% of the portfolio, and approximately $134.1 million of collateralized mortgage obligations and residential mortgage-backed securities within the portfolio, which comprised approximately 36.2% of the portfolio.
As of December 31, 2023, the Bancorp held approximately $238.7 million of municipal securities within the investment portfolio, which comprised approximately 64.2% of the portfolio, and approximately $123.5 million of collateralized mortgage obligations and residential mortgage-backed securities within the portfolio, which comprised approximately 33.2% of the portfolio.
The Bancorp’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity.
Page 44 of 122 Risks Related to the Bancorp ’ s Common Stock An investment in the Bancorp ’ s common stock is not an insured deposit. The Bancorp’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity.
The increase in unrealized losses is reflected in Accumulated Other Comprehensive Income (Loss) (AOCI) on the Bancorp’s balance sheet and reduces the Bancorp’s book capital and tangible common equity ratio. However, unrealized losses do not affect the Bancorp’s regulatory capital ratios.
From December 31, 2022 to December 31, 2023, the investment portfolio experienced unrealized gains of approximately $16.7 million. The decrease in unrealized losses is reflected in Accumulated Other Comprehensive Income (Loss) (AOCI) on the Bancorp’s balance sheet and reduces the Bancorp’s book capital and tangible common equity ratio. However, unrealized losses do not affect the Bancorp’s regulatory capital ratios.
The occurrence of operational interruption, cyber incident, or a deficiency in the cyber security of our technology systems (internal or outsourced) could negatively impact our financial condition or results of operations. We have policies and procedures expressly designed to prevent or limit the effect of a failure, interruption, or security breach of our systems and maintain cyber security insurance.
The occurrence of operational interruption, cyber incident, or a deficiency in the cyber security of our technology systems (internal or outsourced) could negatively impact our financial condition or results of operations.
However, the Bancorp’s access to liquidity sources could be affected by unrealized losses if securities within the investment portfolio must be sold at a loss or tangible capital ratios decline from an increase in unrealized losses or realized credit losses. 33 of 113 Above average interest rate risk associated with fixed-rate loans may have an adverse effect on our financial position or results of operations.
However, the Bancorp’s access to liquidity sources could be affected by unrealized losses if securities within the investment portfolio must be sold at a loss or tangible capital ratios decline from an increase in unrealized losses or realized credit losses.
In addition, merger and acquisition costs incurred by the Bancorp may temporarily increase operating expenses. 38 of 113 Risks Related to the Banking Industry Our business may be adversely affected by conditions in the financial markets and economic conditions generally.
Risks Related to the Banking Industry Our business may be adversely affected by conditions in the financial markets and economic conditions generally.
Future economic conditions in our market area will depend on factors outside of our control, such as political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government, military, and fiscal policies, and inflation. 39 of 113 Concern by customers over deposit insurance may cause a decrease in deposits and changes in the mix of funding sources available to the Bancorp.
Future economic conditions in our market area will depend on factors outside of our control, such as political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government, military, and fiscal policies, and inflation.
However, such policies, procedures, or insurance may prove insufficient to prevent, repel, or mitigate a cyber incident. Significant interruptions to our business from technology issues could result in expensive remediation efforts and distraction of management.
Significant interruptions to our business from technology issues could result in expensive remediation efforts and distraction of management.
Use of emerging alternative payment platforms, such as Apple Pay or Bitcoin or other cryptocurrencies, can alter consumer credit card behavior and consequently impact our interchange fee income. 40 of 113 The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits.
The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits.
Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks.
Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. Use of emerging alternative payment platforms, such as Apple Pay or Bitcoin or other cryptocurrencies, can alter consumer credit card behavior and consequently impact our interchange fee income.
Peoples Bank’s loan portfolio includes a significant amount of loans with fixed rates of interest. At December 31, 2022, $809.7 million, or 53.7% of the Bank’s total loans receivable had fixed interest rates. The Bank offers adjustable rate mortgage (ARM) loans and fixed-rate loans.
Page 35 of 122 Above average interest rate risk associated with fixed-rate loans may have an adverse effect on our financial position or results of operations. Peoples Bank’s loan portfolio includes a significant amount of loans with fixed rates of interest. At December 31, 2023, $681.4 million, or 45.2% of the Bank’s total loans receivable had fixed interest rates.
Removed
From December 31, 2021 to December 31, 2022, the investment portfolio experienced unrealized losses of approximately $90.0 million, which coincided with an increase by the Federal Reserve in the federal funds target rate from 0.25% as of December 31, 2021 to 4.50% as of December 31, 2022.
Added
Page 34 of 122 ● Compliance Risk – the risk of additional action by our regulators or additional regulation that could hinder our ability to do business profitably. ● Regulatory Risk – the risk presented by the need to comply with all laws, rules, and regulations from multiple regulatory agencies, including but not limited to the FDIC, the Consumer Financial Protection Bureau, the IDFI, the FRB, the SEC, and the U.S.
Added
Further, these loans typically have larger loan balances, and several of our borrowers have more than one commercial real estate loan outstanding with us.
Added
Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.
Added
Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral, if any, typically is longer than for one-to four-family residential mortgage loans because there are fewer potential purchasers of the collateral.
Added
Because we plan to continue to emphasize the origination of these loans, it may be necessary to increase our allowance for loan losses because of the increased credit risk associated with these types of loans. Any increase to our allowance for loan losses would adversely affect our earnings.
Added
Thus, we are dependent upon the existence of an active secondary market and our ability to profitably sell loans into that market.
Added
Page 37 of 122 We have policies and procedures expressly designed to prevent or limit the effect of a failure, interruption, or security breach of our systems and maintain cyber security insurance. However, such policies, procedures, or insurance may prove insufficient to prevent, repel, or mitigate a cyber incident.
Added
Although we have not experienced any material losses related to a technology-related operational interruption or cyber-attack, there can be no assurance that such failures, interruptions, or security breaches will not occur in the future or, if they do occur, that the impact will not be substantial.
Added
Page 40 of 122 The Bancorp and Bank are subject to extensive regulation and oversight, including with respect to the Order and MOU.
Added
On November 7, 2023, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order with its bank regulatory agencies, the FDIC and DFI, consenting to the issuance of a consent order (the “Order”) relating to the Bank’s compliance with the Bank Secrecy Act and its implementing regulations (collectively, the “BSA”).
Added
In consenting to the issuance of the Order, the Bank did not admit or deny any charges of unsafe or unsound banking practices or violations of law or regulation relating to its BSA compliance.
Added
Under the terms of the Order, the Bank or its board of directors is required to take certain affirmative actions to comply with the Bank’s obligations under the BSA.
Added
These include, but are not limited to, the following: strengthening the board of directors’ oversight of BSA activities; developing, adopting, and implementing a revised BSA compliance program; developing a revised system of internal controls designed to ensure full compliance with the BSA; retaining management qualified to oversee the Bank’s BSA compliance program, including retaining a qualified BSA officer; assessing BSA staffing needs and identifying staff positions and personnel for BSA compliance; developing, adopting, and implementing a revised BSA training program; developing, adopting, and implementing a revised suspicious activity reporting program; implementing a board-approved customer due diligence program, and reviewing and enforcing enhanced customer due diligence and risk assessment procedures; eliminating or correcting certain violations of BSA law and regulations, and correcting BSA program weaknesses; ensuring that all reports required by the BSA are accurately and properly filed; and developing and implementing a written plan to review past account and transaction activity to determine whether suspicious activity was properly identified and reported.
Added
In addition, under the MOU the Bank has agreed to take various actions and comply with certain requirements to enhance certain areas of the Bank’s operations, including, among other things, the Bank refraining from paying cash dividends without prior regulatory approval and developing and implementing certain plans regarding the Bank’s operations, capital, and strategy.
Added
The Order is expected to result in additional non-interest BSA compliance expenses for the Bank and the Bancorp. It also may have the effect of limiting or delaying the Bank’s and the Bancorp’s ability to obtain regulatory approval for certain expansionary activities, to the extent desired by the Bancorp.
Added
Our failure to comply with the Order or MOU may result in additional regulatory action, including civil money penalties against the Bank and its officers and directors or enforcement through court proceedings, which could have a material and adverse effect on our business, results of operations, financial condition, cash flows, and stock price.
Added
Page 41 of 122 While economic conditions have improved, significant challenges remain, including continued elevated inflation levels and recent uncertainty in the financial institutions industry.
Added
Concern by customers over deposit insurance may cause a decrease in deposits and changes in the mix of funding sources available to the Bancorp. With increased concerns regarding certain recent high profile bank failures, customers increasingly are concerned about the extent to which their deposits are insured by the FDIC.
Added
Increased competition for bank acquisitions may slow the Bancorp’s ability to grow earning assets at comparable historical growth rates.

Item 2. Properties

Properties — owned and leased real estate

3 edited+1 added−1 removed0 unchanged
Item 2. Properties The Bancorp maintains its corporate office at 9204 Columbia Avenue, Munster, Indiana, from which it oversees the operation of the Bank’s 26 banking locations. The Bancorp owns all of its office properties.
Item 2. Properties The Bancorp maintains its corporate office at 9204 Columbia Avenue, Munster, Indiana, from which it oversees the operation of the Bank’s 26 banking locations.
As of December 31, 2022, the Bank operated 14 branches in Northwest Indiana, with 13 of the branches located in Lake County and 1 branch located in Porter County, Indiana, and 12 branches located in Cook County, Illinois. The Bank owns all of its branch properties.
As of the date of this report, the Bank operated 14 branches in Northwest Indiana, with 13 of the branches located in Lake County and 1 branch located in Porter County, Indiana, and 11 branches located in Cook County, Illinois and 1 branch located in DuPage County, Illinois.
All of the Bank’s branches are equipped with automated teller machines and have drive-through facilities. The Bank outsources its core processing activities to Fidelity National Information Services, Inc., or FIS Corporation located in Jacksonville, Florida. FIS provides real time services for loans, deposits, retail delivery systems, card solutions, digital banking, and wealth management.
The Bank outsources its core processing activities to Fidelity National Information Services, Inc., or FIS Corporation located in Jacksonville, Florida. FIS provides real time services for loans, deposits, retail delivery systems, card solutions, digital banking, and wealth management. The net book value of the Bank’s property, premises and equipment totaled $38.4 million at December 31, 2023. Page 48 of 122
Removed
The net book value of the Bank’s property, premises and equipment totaled $40.2 million at December 31, 2022. 43 of 113
Added
The Bank owns 21 of its branch properties and leases 5 of its branch properties under the terms of long-term leases with a third-party. All of the Bank’s branches are equipped with automated teller machines and have drive-through facilities,with the exception of one branch that is under a short-term lease and does not have a drive-through.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

8 edited+5 added−18 removed4 unchanged
Lowry has been with the Bank since 1985 and has previously served as the Bank’s Chief Financial Officer, Controller, Internal Auditor and Assistant Controller. Mr. Lowry is a Certified Public Accountant (CPA) licensed in Indiana and a Chartered Global Management Accountant (CGMA). Mr.
Lowry has been with the Bank since 1985 and has previously served as the Bank’s Chief Financial Officer, Treasurer, Controller, Internal Auditor and Assistant Controller. Mr. Lowry is a Certified Public Accountant (CPA) licensed in Indiana and a Chartered Global Management Accountant (CGMA). Mr.
Lowry is currently serving on the board of the Food Bank of Northwest Indiana and is a past board chairman and chair of the executive committee. In addition, Mr. Lowry volunteered for the IRS Volunteer Income Tax Assistance (VITA) program. He is a member of the American Institute of Certified Public Accountants and the Indiana CPA Society. Peymon S.
Lowry is currently serving on the board of the Food Bank of Northwest Indiana and is a past board chairman and chair of the executive committee. In addition, Mr. Lowry volunteered for the IRS Volunteer Income Tax Assistance (VITA) program. He is a member of the American Institute of Certified Public Accountants and the Indiana CPA Society.
Item 4.5 Information About Our Executive Officers Pursuant to General Instruction G(3) of Form 10-K, the following information is included as an unnumbered item in this Part I in lieu of being included in the Bancorp’s Proxy Statement for the 2022 Annual Meeting of Shareholders: The executive officers of the Bancorp are as follows: Executive Officer Age at December 31, 2022 Position David A.
Item 4.5 Information About Our Executive Officers Pursuant to General Instruction G(3) of Form 10-K, the following information is included as an unnumbered item in this Part I in lieu of being included in the Bancorp’s Proxy Statement for the 2023 Annual Meeting of Shareholders: The executive officers of the Bancorp are as follows: Executive Officer Age at December 31, 2023 Position Benjamin J.
Scheub is Executive Vice President, Chief Revenue Officer of the Bancorp and the Bank. He is responsible for the Bank’s Wealth Management group, Retail Banking group, Marketing, Commercial, and Retail lending groups. Mr. Scheub joined the Bank in 1996 and has previously held positions in the commercial lending group.
Page 49 of 122 Todd M. Scheub is Executive Vice President, Chief Revenue Officer of the Bancorp and President of the Bank. He is responsible for the Bank’s Wealth Management group, Retail Banking group, Marketing, Commercial, and Retail lending groups. Mr. Scheub joined the Bank in 1996 and has previously held positions in the commercial lending group.
Bochnowski currently serves as President and Chief Executive Officer of the Bancorp. Mr. Bochnowski joined the Bancorp in 2010, became Executive Vice President and Chief Operating Officer of the Bancorp in 2013, and was promoted to President and Chief Operating Officer in 2015. He became the Chief Executive Officer in 2016.
Bochnowski joined the Bancorp in 2010, became Executive Vice President and Chief Operating Officer of the Bancorp in 2013, and was promoted to President and Chief Operating Officer in 2015. He became the Chief Executive Officer in 2016. He was appointed to the Board of the Indiana Department of Financial Institutions by the Governor of Indiana in 2019.
Cerven 64 Executive Vice President, Chief Risk Officer, General Counsel, Corporate Secretary Todd Scheub 55 Executive Vice President, Chief Revenue Officer The following is a description of the principal occupation and employment of the executive officers of the Bancorp during at least the past five years: David A. Bochnowski, is the Executive Chairman of the Bancorp and Bank.
Schmitt 43 Senior Vice President, Chief Financial Officer and Treasurer The following is a description of the principal occupation and employment of the executive officers of the Bancorp during at least the past five years: Benjamin J. Bochnowski currently serves as President and Chief Executive Officer of the Bancorp and the Chief Executive Officer of the Bank. Mr.
Scheub is a Board Member at Campagna Academy, Lake County Economic Alliance, and the Indiana University Northwest Business School Advisory Board. 45 of 113 PART II
Scheub is a Board Member at Lake County Economic Alliance, and the Indiana University Northwest Business School Advisory Board. Benjamin L. Schmitt is Senior Vice President, Chief Financial Officer and Treasurer of the Bancorp and the Bank. Mr. Schmitt joined the Bancorp and Bank in 2024.
He also serves as the Chairman of the Board of Directors of One Region, a non-profit business organization focused on population growth. Mr. Bochnowski volunteers with the Volunteer Income Tax Assistance (VITA) Program for low income individuals, and has been a mentor for the Entrepreneurship Boot Camp for Veterans at Purdue University. Robert T.
He is the Chairman of the Indiana Bankers Association. He also serves as the Chairman of the Board of Directors of One Region, a non-profit business organization focused on population growth, and Allies for Community Business, a community-based micro-lending fund serving Chicago and the surrounding metropolitan area. Robert T.
Removed
Bochnowski 77 Executive Chairman Benjamin J. Bochnowski 42 President, Chief Executive Officer Robert T. Lowry 61 Executive Vice President, Chief Operating Officer Peymon S. Torabi 46 Executive Vice President, Chief Financial Officer and Treasurer Leane E.
Added
Bochnowski 43 President, Chief Executive Officer of Finward Bancorp, Chief Executive Officer of Peoples Bank Robert T. Lowry 62 Executive Vice President, Chief Operating Officer Todd M. Scheub 56 Executive Vice President, Chief Revenue Officer of Finward Bancorp, President of Peoples Bank Benjamin L.
Removed
His duties include assisting his successor in the transition into the role of Chief Executive Officer of the Company and Bank, assisting the Company and Bank with their strategic goals and budgeting process, and engaging in community and banking activities supporting the mission of the Company and Bank.
Added
He previously served as President of Rally Consulting LLC from August 2023 to February 2024, where he advised on special projects and managed strategic efforts of commercial and community banking clients. Prior to that, Mr.
Removed
He formerly served as the Chief Executive Officer for thirty-five years, retiring from that position in April of 2016. He has been Chairman of the Company and Bank since 1995. He has been a director since 1977 and was the Bank’s legal counsel from 1977 to 1981. Mr.
Added
Schmitt served as Managing Director within the financial services investment banking group at Piper Sandler Companies from January 2020 to June 2023, where he advised banking clients on capital raising, merger and acquisition transactions, and other strategic advisory assignments.
Removed
Bochnowski is the past Chairman of America’s Community Bankers, now merged with the American Bankers Association. He is a past Chairman of the American Banker Association’s Government Relations Council. He was selected by the Securities and Exchange Commission to serve on the Commission’s Advisory Council on Small and Emerging Companies.
Added
Previously, he worked at Sandler O’Neill & Partners, L.P. in a similar capacity serving banking clients, as Director from January 2013 to January 2020, and held other investment banking advisory positions at Sandler O’Neill from September 2004 to December 2012. Mr. Schmitt began his career as an investment analyst from 2003 to 2004 at Mercer Investment Consulting. Mr.
Removed
He is a former Chairman of the Indiana Department of Financial Institutions; former director of the Federal Home Loan Bank of Indianapolis, and, a former member of the Federal Reserve Thrift Advisory Council.
Added
Schmitt received his Bachelor of Business Administration degree in Finance with Honors from the University of Iowa Tippie College of Business. Page 50 of 122 PART II
Removed
He is a trustee and treasurer of the Munster Community Hospital, a director of the Community Health Care System, serves as Vice-Chairman of Calumet College, and serves on the board of Trustees of Valparaiso University.
Removed
He is a former Chairman of the Legacy Foundation of Lake County, a former Director of One Region, a former Director of Habitat for Humanity, and a former director of the Local Initiatives Support Corporation (LISC), among others. Before joining the Bank, Mr. Bochnowski was an attorney in private practice.
Removed
He holds an undergraduate Bachelor of Science and Juris Doctor degrees from Georgetown University and a Master’s Degree from Howard University. He served as an officer in the United States Army and received a Bronze Star for his service in the Vietnam conflict. Mr.
Removed
Bochnowski is the father of Benjamin Bochnowski, the President and Chief Executive Officer of the Bancorp and Bank. As previously disclosed, on January 27, 2023, Mr. Bochnowski informed the Board of his decision to retire as Executive Chairman and as a member of the Board effective as of June 30, 2023. 44 of 113 Benjamin J.
Removed
He was appointed to the Board of the Indiana Department of Financial Institutions by the Governor of Indiana in 2019. He is also a Director and member of the Executive Committee of the Indiana Bankers Association, and serves on the Membership Committee of the American Bankers Association.
Removed
Torabi is Executive Vice President, Chief Financial Officer and Treasurer of the Bancorp and the Bank. Mr. Torabi is a Certified Public Accountant (CPA) licensed in Indiana and a graduate of Purdue University Northwest with a Master’s of Accountancy and undergraduate work in finance and accounting. Mr.
Removed
Torabi has been with the Bank since 2003 and has previously served as the Bank’s Controller and Assistant Controller. Mr. Torabi has served as a limited-term lecturer for the College of Business at Purdue University Northwest since 2006, during which time he has taught advanced financial accounting, accounting information systems, and corporate taxation. Most recently, Mr.
Removed
Torabi has been teaching courses on bank management and bank financial reporting, and helping to develop curriculum for a joint initiative between the Indiana Bankers Association and the College of Business at Purdue University Northwest, to train and engage banking leaders of the future. Mr. Torabi is a 2015 graduate of the American Bankers Association Stonier Graduate School of Banking.
Removed
He also proudly serves his community as a member of the Advisory Board for the College of Business at Purdue University Northwest, treasurer for the Board of Directors of the Hospice of the Calumet, and as a member of the Advisory Board for The Salvation Army of Lake County, Indiana.
Removed
Leane English Cerven is Executive Vice President, Chief Risk Officer, General Counsel, and Corporate Secretary of Finward Bancorp and Peoples Bank. Ms. Cerven has been employed by the Bancorp and the Bank since 2010.
Removed
Prior to joining the Bancorp and the Bank, she was Vice President and Legal Counsel for Bank One and an Associate Attorney with Mayer, Brown & Platt. She is licensed to practice law in Indiana and Illinois. Ms. Cerven holds a J.D. from Valparaiso University School of Law and a B.A. (Political Science/Spanish) from the University of Minnesota, Minneapolis.
Removed
She is a 2014 graduate of the American Bankers Association Stonier Graduate School of Banking, chair of the Stonier Graduate School of Banking Advisory Board, and a Stonier capstone advisor and facilitator. She is also a former co-chair of the ABA’s General Counsels Group.
Removed
She is the president-elect of the South Shore Arts Board of Directors, Munster, Indiana, and serves on the Finance Council for St. Thomas More Church, Munster, Indiana, and on the Bioethics Committees for St. Catherine Hospital, East Chicago, Indiana and St. Mary Medical Center, Hobart, Indiana. Todd M.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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There is no express expiration date for this program. (2) The number of shares above includes shares of common stock reacquired from the Bancorp’s executive officers and employees to satisfy the tax withholding obligations on restricted stock awards granted under the Bancorp’s 2015 Stock Option and Incentive Plan.
There is no express expiration date for this program. (2) The number of shares above consist of shares of common stock reacquired from the Bancorp’s executive officers and employees to satisfy the tax withholding obligations on restricted stock awards granted under the Bancorp’s 2015 Stock Option and Incentive Plan.
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Bancorp’s Common Stock is listed on the Nasdaq Capital Market under the symbol “FNWD.” As of March 30, 2023, the Bancorp had 4,304,026 shares of common stock outstanding and 549 stockholders of record.
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Bancorp’s Common Stock is listed on the Nasdaq Capital Market under the symbol “FNWD.” As of March 28, 2024, the Bancorp had 4,304,026 shares of common stock outstanding and 549 stockholders of record.
The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased during the twelve months ended December 31, 2022 under the stock repurchase program.
The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program is reviewed annually by the Board of Directors. No shares were repurchased during the year ended December 31, 2023 under the stock repurchase program.
Period Total Number of Shares Purchased (2) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares That May Yet Be Purchased Under the Program(1) January 1, 2022 – January 31, 2022 - N/A - 48,828 February 1, 2022 – February 28, 2022 2,366 $48.73 - 48,828 March 1, 2022 – March 31, 2022 - N/A - 48,828 April 1, 2022 – April 30, 2022 113 $45.87 - 48,828 May 1, 2022 – May 31, 2022 - N/A - 48,828 June 1, 2022 – June 30, 2022 - N/A - 48,828 July 1, 2022 – July 31, 2022 - N/A - 48,828 August 1, 2022 – August 31, 2022 - N/A - 48,828 September 1, 2022 – September 30, 2022 - N/A - 48,828 October 1, 2022 –October 31, 2022 - N/A - 48,828 November 1, 2022 – November 30, 2022 - N/A - 48,828 December 1, 2022 – December 31, 2022 - N/A - 48,828 - N/A - 48,828 (1) The stock repurchase program was announced on April 24, 2014, whereby the Bancorp is authorized to repurchase up to 50,000 shares of the Bancorp’s common stock outstanding.
Period Total Number of Shares Purchased (2) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares That May Yet Be Purchased Under the Program(1) January 1, 2023 – January 31, 2023 - N/A - 48,828 February 1, 2023 – February 28, 2023 - N/A - 48,828 March 1, 2023 – March 31, 2023 4,188 $37.45 - 48,828 April 1, 2023 – April 30, 2023 - N/A - 48,828 May 1, 2023 – May 31, 2023 798 $28.88 - 48,828 June 1, 2023 – June 30, 2023 698 $22.80 - 48,828 July 1, 2023 – July 31, 2023 - N/A - 48,828 August 1, 2023 – August 31, 2023 - N/A - 48,828 September 1, 2023 – September 30, 2023 - N/A - 48,828 October 1, 2023 –October 31, 2023 - N/A - 48,828 November 1, 2023 – November 30, 2023 - N/A - 48,828 December 1, 2023 – December 31, 2023 - N/A - 48,828 (1) The stock repurchase program was announced on April 24, 2014, whereby the Bancorp is authorized to repurchase up to 50,000 shares of the Bancorp’s common stock outstanding.
For the twelve months ended December 31, 2022, 2,479 shares were reacquired at an average per share price of $48.60 pursuant to these tax withholding transactions. 46 of 113 Item 6. [Reserved]
For the year ended December 31, 2023, 5,684 shares were reacquired at an average per share price of $34.45 pursuant to these tax withholding transactions. Page 51 of 122

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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The determination of the amounts of the ALL and provisions for loan losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability as of the reporting date.
The determination of the amounts of the ACL and provisions for credit losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability as of the reporting date.
The determination of the amounts of the ALL and provisions for loan losses is based upon management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability.
The determination of the amounts of the ACL and provisions for credit losses is based upon management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability.
Fees and service charges, wealth management operations income, gains and losses from the sale of assets, provisions for loan losses, income taxes and operating expenses also affect the Bancorp's profitability. A summary of the Bancorp’s significant accounting policies are detailed in Note 1 to the Bancorp’s consolidated financial statements included in this report.
Fees and service charges, wealth management operations income, gains and losses from the sale of assets, provisions for credit losses, income taxes and operating expenses also affect the Bancorp's profitability. A summary of the Bancorp’s significant accounting policies are detailed in Note 1 to the Bancorp’s consolidated financial statements included in this report.
The allocation of the ALL reflects performance and growth trends within the various loan categories, as well as consideration of the facts and circumstances that affect the repayment of individual loans, and loans which have been pooled as of the evaluation date, with particular attention given to non-performing loans and loans which have been classified as substandard, doubtful or loss.
The allocation of the ACL reflects performance and growth trends within the various loan categories, as well as consideration of the facts and circumstances that affect the repayment of individual loans, and loans which have been pooled as of the evaluation date, with particular attention given to non-performing loans and loans which have been classified as substandard, doubtful or loss.
The appropriateness of the current period provision and the overall adequacy of the ALL are determined through a disciplined and consistently applied quarterly process that reviews the Bancorp’s current credit risk within the loan portfolio and identifies the required allowance for loan losses given the current risk estimates.
The appropriateness of the current period provision and the overall adequacy of the ACL are determined through a disciplined and consistently applied quarterly process that reviews the Bancorp’s current credit risk within the loan portfolio and identifies the required allowance for credit losses given the current risk estimates.
As of December 31, 2022, the Bancorp’s two investments in trust preferred securities were in “payment in kind” status. Payment in kind status results in a temporary delay in the payment of interest. As a result of a delay in the collection of the interest payments, management placed these securities on non-accrual status.
As of December 31, 2023, the Bancorp’s two investments in trust preferred securities were in “payment in kind” status. Payment in kind status results in a temporary delay in the payment of interest. As a result of a delay in the collection of the interest payments, management placed these securities on non-accrual status.
The risk factors are applied to these types of loans to determine the appropriate level for the ALL. Adjustments may be made to these allocations that reflect management’s judgment on current conditions, delinquency trends, and charge-off activity.
The risk factors are applied to these types of loans to determine the appropriate level for the ACL. Adjustments may be made to these allocations that reflect management’s judgment on current conditions, delinquency trends, and charge-off activity.
We consider the following factors when determining an other-than-temporary impairment for a security: The length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; and an assessment of whether the Bancorp has (1) the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before its anticipated market recovery.
We consider the following factors when determining credit-related impairment for a security: the length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; and an assessment of whether the Bancorp has (1) the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before its anticipated market recovery.
The methodology used to determine the current year provision and the overall adequacy of the ALL includes a disciplined and consistently applied quarterly process that combines a review of the current position with a risk assessment worksheet.
The methodology used to determine the current year provision and the overall adequacy of the ACL includes a disciplined and consistently applied quarterly process that combines a review of the current position with a risk assessment worksheet.
Based on the above discussion, management believes that the ALL is currently adequate, but not excessive, given the risk inherent in the loan portfolio.
Based on the above discussion, management believes that the ACL is currently adequate, but not excessive, given the risk inherent in the loan portfolio.
If either of these conditions is met, management will recognize other-than-temporary impairment. If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.
If either of these conditions is met, management will recognize credit-related impairment. If, in management’s judgment, a credit-related impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.
Actual results could differ from those estimates. Estimates associated with the allowance for loan losses are particularly susceptible to material change in the near term. At December 31, 2022, the Bancorp had total assets of $2.1 billion and total deposits of $1.8 billion.
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. At December 31, 2023, the Bancorp had total assets of $2.1 billion and total deposits of $1.8 billion.
At December 31, 2022, the cost basis of the two trust preferred securities on non-accrual status totaled $2.2 million.
At December 31, 2023, the cost basis of the two trust preferred securities on non-accrual status totaled $2.2 million.
The increase in interest earning asset income for the year ended December 31, 2022, compared to the year ended December 31, 2021, is primarily related to increased reinvestment rates in 2022 for loans, securities, and excess cash balances, as a result of the Federal Reserve rate increases occurring though out 2022.
The increase in interest earning asset income for the year ended December 31, 2023, compared to the year ended December 31, 2022, is primarily related to increased reinvestment rates in 2023 for loans, securities, and excess cash balances, as a result of the Federal Reserve rate increases occurring throughout 2023.
No loans were internally classified as doubtful or loss at December 31, 2022 or December 31, 2021.
No loans were internally classified as doubtful or loss at December 31, 2023 or December 31, 2022.
Non-performing loans include those loans that are 90 days or more past due and accruing and those loans that have been placed on non-accrual status.
Page 56 of 122 Non-performing loans include those loans that are 90 days or more past due and accruing and those loans that have been placed on non-accrual status.
Management will utilize an independent valuation specialist to value securities semi-annually for other-than-temporary impairment. Allowance for Loan Losses – The Bancorp maintains an Allowance for Loan Losses (“ALL”) to absorb probable incurred credit losses that arise from the loan portfolio. The ALL is increased by the provision for loan losses, and decreased by charge-offs net of recoveries.
Management will utilize an independent valuation specialist to value securities semi-annually for credit-related impairment. Allowance for credit losses – The Bancorp maintains an Allowance for credit losses (“ACL”) to absorb probable incurred credit losses that arise from the loan portfolio. The ACL is increased by the provision for credit losses, and decreased by charge-offs net of recoveries.
The Bancorp's deposit accounts are insured up to applicable limits by the Deposit Insurance Fund (DIF) that is administered by the Federal Deposit Insurance Corporation (FDIC), an agency of the federal government. At December 31, 2022, stockholders' equity totaled $136.4 million, with book value per share at $31.73.
The Bancorp's deposit accounts are insured up to applicable limits by the Deposit Insurance Fund (DIF) that is administered by the Federal Deposit Insurance Corporation (FDIC), an agency of the federal government. At December 31, 2023, stockholders' equity totaled $147.3 million, with book value per share at $34.28.
The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the twelve months ended December 31, 2022, the Bancorp originated $44.9 million in new fixed rate mortgage loans for sale, compared to $153.1 million during the twelve months ended December 31, 2021.
The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the year ended December 31, 2023, the Bank originated $37.9 million in new fixed rate mortgage loans for sale, compared to $44.9 million during the year ended December 31, 2022.
Net gains realized from the mortgage loan sales totaled $1.4 million for the twelve months ended December 31, 2022, compared to $5.3 million for the twelve months ended December 31, 2021. At December 31, 2022, the Bancorp had $1.5 million in loans that were classified as held for sale, compared to $5.0 million at December 31, 2021.
Net gains realized from the mortgage loan sales totaled $1.1 million for the year ended December 31, 2023, compared to $1.4 million for the year ended December 31, 2022. At December 31, 2023, the Bancorp had $340 thousand in loans that were classified as held for sale, compared to $1.5 million at December 31, 2022.
Expected future cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable (“accretable yield”).
Purchased loans with evidence of credit quality deterioration since origination are considered purchased credit impaired. 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”).
Borrowed funds increased as short-term FHLB advances were taken during the year, due to cyclical inflows and outflows of interest-earnings assets and interest-bearing liabilities. Liquidity and Capital Resources For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, and pay dividends and operating expenses.
Borrowed funds decreased due to cyclical inflows and outflows of interest-earning assets and interest-bearing liabilities. Liquidity and Capital Resources For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, and pay dividends and operating expenses.
Cash provided from operating activities was primarily a result of net income and sale of loans originated for sale, offset by loans originated for sale and net change in other assets, accrued expenses, and other liabilities. Net cash outflows from investing activities totaled $1.1 million during 2022, compared to outflows of $127.7 million during 2021.
During 2023, net cash from operating activities totaled $24.2 million, compared to $17.7 million for 2022. Cash provided from operating activities was primarily a result of net income, sale of loans originated for sale and net change in other assets, accrued expenses, and other liabilities, offset by loans originated for sale and gain on sale of loans held-for-sale.
In addition, the Bancorp utilizes borrowings (i.e., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds. During 2022, cash and cash equivalents decreased $1.9 million compared to an increase of $13.3 million for 2021.
In addition, the Bancorp utilizes borrowings (i.e., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds. During 2023, cash and cash equivalents increased $54.7 million compared to a decrease of $1.9 million for 2022.
Management has allocated reserves to both performing and non-performing loans based on current information available. 52 of 113 During 2022, net sales of foreclosed real estate totaled $93 thousand and net gains from the 2022 sales totaled $16 thousand.
Management has allocated reserves to both performing and non-performing loans based on current information available. During 2023, net sales of foreclosed real estate totaled $77 thousand and net losses from the 2023 sales totaled $13 thousand.
Funds are generally invested in federal funds, interest bearing balances in other financial institutions, U.S. government securities, U.S. treasury securities, federal agency obligations, obligations of state and local municipalities and corporate securities. The securities portfolio totaled $370.9 million at December 31, 2022, compared to $526.9 million at December 31, 2021, a decrease of $156.0 million or 29.6%.
Funds are generally invested in federal funds, interest bearing balances in other financial institutions, U.S. government securities, U.S. treasury securities, federal agency obligations, obligations of state and local municipalities and corporate securities. The securities portfolio totaled $371.4 million at December 31, 2023, compared to $370.9 million at December 31, 2022, an increase of $478 thousand or 0.1%.
The 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.
The Bancorp's substandard loans are summarized below: (Dollars in thousands) Loan Segment December 31, 2023 December 31, 2022 Residential real estate $ 2,098 $ 6,035 Home equity 479 612 Commercial real estate 2,544 7,421 Construction and land development - - Multifamily 4,245 7,064 Commercial business 2,896 1,881 Consumer 2 - Manufactured homes - - Government - - Total $ 12,264 $ 23,013 Page 57 of 122 In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of special mention loans.
The following table shows the change in noninterest income for the year ending December 31, 2022, and December 31, 2021.
Page 63 of 122 The following table shows the change in noninterest income for the year ending December 31, 2023, and December 31, 2022.
Estimated collateral liquidation values are based on established loan underwriting standards and adjusted for current mitigating factors on a loan-by-loan basis. Aggregate substandard loan collateral deficiencies are determined for residential, commercial real estate, commercial business, and consumer loan portfolios. These deficiencies are then stated as a percentage of the total substandard balances to determine the appropriate risk factors.
Aggregate substandard loan collateral deficiencies are determined for residential, commercial real estate, commercial business, and consumer loan portfolios. These deficiencies are then stated as a percentage of the total substandard balances to determine the appropriate risk factors.
Particular attention is given to non-accruing loans and accruing loans past due 90 days or more, and loans that have been classified as substandard, doubtful, or loss.
Particular attention is given to non-accruing loans and accruing loans past due 90 days or more, and loans that have been classified as substandard, doubtful, or loss. Changes in the provision are directionally consistent with changes in observable data.
(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 entirely dependent upon the Bank’s ability to pay dividends to the Bancorp.
(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 % Page 62 of 122 The Bancorp’s ability to pay dividends to its shareholders is largely dependent upon the Bank’s ability to pay dividends to the Bancorp.
Critical Accounting Policies Critical accounting policies are those accounting policies that management believes are most important to the portrayal of the Bancorp’s financial condition and that require management’s most difficult, subjective or complex judgments. The Bancorp’s most critical accounting policies are summarized below.
Page 64 of 122 Critical Accounting Estimates Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that management believes are most important to the portrayal of the Bancorp’s financial condition and that require management’s most difficult, subjective or complex judgments. The Bancorp’s most critical accounting estimates are summarized below.
Comparing the net interest margin on a tax equivalent basis more accurately compares the returns on tax-exempt loans and securities to those on taxable interest-earning assets.
The net interest margin was 2.83% for 2023, compared to 3.56% for 2022. The Bancorp’s tax equivalent net interest margin for 2023, was 2.98% compared to 3.74% for 2022. Comparing the net interest margin on a tax equivalent basis more accurately compares the returns on tax-exempt loans and securities to those on taxable interest-earning assets.
At December 31, 2022, interest‑earning assets totaled $1.9 billion and represented 92.1% of total assets. Loans totaled $1.5 billion and represented 79.4% of interest-earning assets, 73.1% of total assets and 85.3% of total deposits. The loan portfolio, which is the Bancorp’s largest asset, is a significant source of both interest and fee income.
Loans totaled $1.5 billion and represented 77.2% of interest-earning assets, 71.7% of total assets and 83.4% of total deposits. The loan portfolio, which is the Bancorp’s largest asset, is a significant source of both interest and fee income.
Moreover, the FDIC and the Federal Reserve Board may prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. On November 29, 2022, the Board of Directors of the Bancorp declared a fourth quarter dividend of $0.31 per share.
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.
The Bancorp’s end-of-period investment portfolio and other short-term investments and stock balances were as follows: December 31, December 31, (Dollars in thousands) 2022 2021 Balance % Securities Balance % Securities U.S. government sponsored entities $ 7,625 2.1 % $ 8,669 1.6 % U.S. treasury securities 389 0.1 % 400 0.1 % Collateralized mortgage obligations and residential mortgage-backed securities 134,116 36.2 % 184,701 35.1 % Municipal securities 227,718 61.3 % 332,127 63.0 % Collateralized debt obligations 1,048 0.3 % 992 0.2 % Total securities available-for-sale $ 370,896 100.0 % $ 526,889 100.0 % December 31, December 31, YTD (Dollars in thousands) 2022 2021 Change Balance Balance $ % Interest bearing deposits in other financial institutions $ 11,210 $ 19,987 $ (8,777 ) -43.9 % Fed funds sold 107 464 (357 ) -76.9 % Certificates of deposit in other financial institutions 2,456 1,709 747 43.7 % Federal Home Loan Bank stock 6,547 3,247 3,300 101.6 % The net decrease in interest bearing deposits in other financial institutions is primarily the result of the timing of investments in interest earning assets relative to the inflow and outflow of deposits and repurchase agreements.
Page 60 of 122 The carrying value of the Bancorp’s investment portfolio and other short-term investments and stock balances at December 31, 2023 and 2022 were as follows: December 31, December 31, (Dollars in thousands) 2023 2022 Balance % Securities Balance % Securities U.S. government sponsored entities $ 7,883 2.1 % $ 7,625 2.1 % U.S. treasury securities - 0.0 % 389 0.1 % Collateralized mortgage obligations and residential mortgage-backed securities 123,464 33.2 % 134,116 36.2 % Municipal securities 238,670 64.3 % 227,718 61.3 % Collateralized debt obligations 1,357 0.4 % 1,048 0.3 % Total securities available-for-sale $ 371,374 100.0 % $ 370,896 100.0 % December 31, December 31, YTD (Dollars in thousands) 2023 2022 Change Balance Balance $ % Interest bearing deposits in other financial institutions $ 67,647 $ 11,210 $ 56,437 503.5 % Fed funds sold 419 107 312 291.6 % Certificates of deposit in other financial institutions - 2,456 (2,456 ) -100.0 % Federal Home Loan Bank stock 6,547 6,547 - - The net increase in interest bearing deposits in other financial institutions is primarily the result of the timing of investments in interest earning assets relative to the inflow and outflow of deposits and repurchase agreements.
Cash outflows from investing activities were primarily related to the net change in loans receivable and purchase of securities, offset against the cash and cash equivalents from acquisition activity, net, and proceeds from the sales and maturities of securities. Net cash outflows from financing activities totaled $18.5 million in 2022, compared to net cash inflows of $122.1 million in 2021.
Net cash inflows from investing activities totaled $15.0 million during 2023, compared to outflows of $1.1 million during 2022. Cash inflows from investing activities were primarily related to the net change in loans receivable and purchase of securities, offset against the proceeds from the sales and maturities of securities and certificates of deposit in other financial institutions.
The decrease is attributable to increased unrealized losses within the portfolio and the use of cashflows from the securities portfolio to fund loan growth. At December 31, 2022, the securities portfolio represented 19.5% of interest-earning assets and 17.9% of total assets compared to 34.6% of interest-earning assets and 32.5% of total assets at December 31, 2021.
The increase is attributable to decreased unrealized losses within the portfolio. At December 31, 2023, the securities portfolio represented 19.0% of interest-earning assets and 17.6% of total assets compared to 19.5% of interest-earning assets and 17.9% of total assets at December 31, 2022.
The following table shows that, at December 31, 2022, the Bank’s capital exceeded all regulatory capital requirements. The dollar amounts are in millions.
At December 31, 2023, book value per share was $34.28 compared to $31.73 for 2022. The following table shows that, at December 31, 2023, the Bank’s capital exceeded all regulatory capital requirements. The dollar amounts are in millions.
The Bancorp’s fourth quarter dividend was paid to shareholders on January 6, 2023. Results of Operations – Comparison of 2022 to 2021 Net income for 2022 was $15.1 million, compared to $15.0 million for 2021, an increase of $117 thousand (0.8%).
The Bancorp’s fourth quarter dividend was paid to shareholders on February 5, 2024. Results of Operations – Comparison of 2023 to 2022 Net income for 2023 was $8.4 million, compared to $15.1 million for 2022, a decrease of $6.7 million (44.4%).
At December 31, 2022, all non-performing loans are also accounted for on a non-accrual basis, except for two residential real estate loans totaling $166 thousand, and one consumer manufactured loan totaling $82 thousand that remained accruing and more than 90 days past due. 48 of 113 The Bancorp's nonperforming loans are summarized below: (Dollars in thousands) Loan Segment December 31, 2022 December 31, 2021 Residential real estate $ 5,513 $ 4,682 Home equity 594 657 Commercial real estate 3,242 1,031 Construction and land development - - Multifamily 7,064 455 Commercial business 1,881 436 Consumer - - Manufactured homes 82 - Government - - Total $ 18,376 $ 7,261 Nonperforming loans to total loans 1.21 % 0.75 % Nonperforming loans to total assets 0.89 % 0.45 % 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.
The Bancorp's nonperforming loans are summarized below: (Dollars in thousands) Loan Segment December 31, 2023 December 31, 2022 Residential real estate $ 2,824 $ 5,513 Home equity 468 594 Commercial real estate 1,545 3,242 Construction and land development - - Multifamily 3,715 7,064 Commercial business 2,897 1,881 Consumer 2 - Manufactured homes - 82 Government - - Total $ 11,451 $ 18,376 Nonperforming loans to total loans 0.76 % 1.21 % Nonperforming loans to total assets 0.54 % 0.89 % 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.
During the twelve months ended December 31, 2022, the Bancorp originated $105.4 million in new mortgage loans retained in its portfolio, compared to $45.1 million during the twelve months ended December 31, 2021.
During the year ended December 31, 2023, the Bank originated $41.6 million in new 1-4 family loans retained in its portfolio, compared to $105.4 million during the year ended December 31, 2022.
A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased. This reserve is available for use for manufactured home loan nonperformance and costs associated with nonperformance. If the segment performs in line with expectation, the deferred cost reserve is paid as an origination cost to the third party originator of the loan.
Page 59 of 122 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.
The Bancorp’s end-of-period borrowing balances were as follows: December 31, December 31, YTD (Dollars in thousands) 2022 2021 Change Balance Balance $ % Repurchase agreements $ 15,503 $ 14,581 $ 922 6.3 % Borrowed funds 120,000 - 120,000 100.0 % Total borrowed funds $ 135,503 $ 14,581 $ 120,922 829.3 % Repurchase agreements increased as part of normal account fluctuations within that product line.
The Bancorp’s end-of-period borrowing balances were as follows: December 31, December 31, YTD (Dollars in thousands) 2023 2022 Change Balance Balance $ % Repurchase agreements $ 38,124 $ 15,503 $ 22,621 145.9 % Borrowed funds 80,000 120,000 (40,000 ) -33.3 % Total borrowed funds $ 118,124 $ 135,503 $ (17,379 ) -12.8 % Page 61 of 122 Repurchase agreements increased as part of normal account fluctuations within that product line.
Management has allocated general reserves to both performing and non-performing loans based on historical data and current information available. Risk factors for non-performing and internally classified loans are based on an analysis of either the projected discounted cash flows or the estimated collateral liquidation value for individual loans defined as substandard or doubtful.
Page 65 of 122 Risk factors for non-performing and internally classified loans are based on an analysis of either the projected discounted cash flows or the estimated collateral liquidation value for individual loans defined as substandard or doubtful. Estimated collateral liquidation values are based on established loan underwriting standards and adjusted for current mitigating factors on a loan-by-loan basis.
The return on average equity was 10.47% for 2022, compared to 9.61% for 2021. 55 of 113 Net interest income for 2022, was $67.1 million, an increase of $18.6 million (38.2%) from $48.6 million for 2021.
The return on average equity was 6.28% for 2023, compared to 10.47% for 2022. Net interest income for 2023, was $54.6 million, a decrease of $12.6 million (18.8%) from $67.1 million for 2022.
Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates.
Significant judgments are required in determining whether unrealized losses on securities are due to credit-related causes, as opposed to changes in interest rates in the economy, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates.
December 31, December 31, (Dollars in thousands) 2022 2021 Balance % Loans Balance % Loans Residential real estate $ 484,595 32.1 % 260,134 27.1 % Home equity 38,978 2.6 % 34,612 3.6 % Commercial real estate 486,431 32.2 % 317,145 33.0 % Construction and land development 108,926 7.2 % 123,822 12.9 % Multifamily 251,014 16.6 % 61,194 6.4 % Consumer 918 0.1 % 582 0.1 % Manufactured Homes 34,882 2.3 % 37,887 3.9 % Commercial business 93,278 6.2 % 115,772 12.1 % Government 9,549 0.7 % 8,991 0.9 % Loans receivable 1,508,571 100.0 % 960,139 100.0 % Plus: Net deferred loans origination costs 5,083 6,810 Undisbursed loan funds (23 ) (229 ) Loans receivable, net of deferred fees and costs $ 1,513,631 $ 966,720 Adjustable rate loans / loans receivable $ 698,842 46.3 % $ 542,975 56.6 % December 31, December 31, 2022 2021 Loans receivable to total assets 73.1 % 59.6 % Loans receivable to earning assets 79.4 % 63.4 % Loans receivable to total deposits 85.3 % 67.4 % The Bancorp is primarily a portfolio lender.
December 31, December 31, (Dollars in thousands) 2023 2022 Balance % Loans Balance % Loans Residential real estate $ 484,948 32.1 % $ 484,595 32.1 % Home equity 46,599 3.1 % 38,978 2.6 % Commercial real estate 503,202 33.4 % 486,431 32.2 % Construction and land development 115,227 7.6 % 108,926 7.2 % Multifamily 219,917 14.6 % 251,014 16.6 % Consumer 610 0.0 % 918 0.1 % Manufactured Homes 30,845 2.0 % 34,882 2.3 % Commercial business 97,386 6.5 % 93,278 6.2 % Government 10,021 0.7 % 9,549 0.7 % Loans receivable 1,508,755 100.0 % 1,508,571 100.0 % Plus: Net deferred loans 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 Adjustable rate loans / loans receivable $ 681,444 45.2 % $ 698,842 46.3 % December 31, December 31, 2023 2022 Loans receivable to total assets 71.7 % 73.1 % Loans receivable to earning assets 77.2 % 79.4 % Loans receivable to total deposits 83.4 % 85.3 % Page 55 of 122 Commercial real estate loans remained our largest loan segment and accounted for 33.4% of the total loan portfolio at December 31, 2023 and 32.2% at December 31, 2022.
The twelve-month earnings increase is primarily related to higher net interest income, offset again higher noninterest expense and lower noninterest income. The earnings represent a return on average assets of 0.74% for 2022, compared to 0.95% for 2021.
The decrease is primarily due to lower net interest income, an increase in the provision for credit losses and a decrease in noninterest income, which were partially offset by a decrease in noninterest expenses and a decrease in income tax expense. The earnings represent a return on average assets of 0.40% for 2023, compared to 0.74% for 2022.
The combined effective federal and state tax rates for the Bancorp was 8.9% for the year ended December 31, 2022, compared to 8.6% for the year ended December 31, 2021. The Bancorp’s higher current effective tax rate is a result of higher earnings relative to tax preferred income.
The combined effective federal and state tax rate for the Bancorp was (4.16%) for the year ended December 31, 2023, compared to 8.9% for the year ended December 31, 2022.
The primary sources of cash and cash equivalents were cash and cash equivalents from acquisition activity, the sale of loans originated for sale, proceeds from the sale of securities, proceeds from the maturity and paydown of securities, and proceeds from FHLB advances.
The primary sources of cash and cash equivalents were proceeds from the sale of loans originated for sale, proceeds from the sale of securities, proceeds from the maturity and paydown of securities, and proceeds from the Federal Reserve’s BTFP. The primary uses of cash and cash equivalents were the payment of dividends, change in deposits, and loan originations.
The Bancorp's allowance to total loans and non-performing loans are summarized below: (Dollars in thousands) December 31, 2022 December 31, 2021 Allowance for loan losses $ 12,897 $ 13,343 Total loans $ 1,513,631 $ 966,720 Non-performing loans $ 18,376 $ 7,261 ALL-to-total loans 0.85 % 1.38 % ALL-to-non-performing loans (coverage ratio) 70.2 % 183.8 % The December 31, 2022, balance in the ALL account is considered adequate by management after evaluation of the loan portfolio, past experience and current economic and market conditions.
The Bancorp's allowance to total loans and non-performing loans are summarized below: (Dollars in thousands) 12/31/2023 12/31/2022 Allowance for credit losses $ 18,768 $ 12,897 Total loans $ 1,512,595 $ 1,513,631 Non-performing loans $ 11,451 $ 18,376 ACL-to-total loans 1.24 % 0.85 % ACL-to-non-performing loans (coverage ratio) 163.9 % 70.2 % The December 31, 2023, balance in the ACL account is considered adequate by management after extensive analysis performed in accordance with the provisions of the current expected credit loss model.
Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources. The allowance for loan losses (ALL) is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses, and decreased by charge-offs net of recoveries.
Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources.
(Dollars in thousands, except per share data) Twelve Months Ended December 31, 12/31/2022 vs. 12/31/2021 2022 2021 $ Change % Change Noninterest income: Fees and service charges 6,257 5,388 869 16.1 % Wealth management operations 2,113 2,375 (262 ) -11.0 % Gain on sale of loans held-for-sale, net 1,368 5,296 (3,928 ) -74.2 % Gain on sale of securities, net 662 1,987 (1,325 ) -66.7 % Increase in cash value of bank owned life insurance 810 715 95 13.3 % Gain on sale of foreclosed real estate 16 47 (31 ) -66.0 % Other 283 139 144 103.6 % Total noninterest income 11,509 15,947 (4,438 ) -27.8 % The increase in fees and service charges is primarily the result of the acquisition of Royal and the resulting increase in our customer base.
YTD (Dollars in thousands, except per share data) Year Ended December 31, 12/31/2023 vs. 12/31/2022 2023 2022 $ Change % Change Noninterest income: Fees and service charges $ 6,024 $ 6,257 $ (233 ) -3.7 % Wealth management operations 2,484 2,113 371 17.6 % Gain on sale of loans held-for-sale, net 1,081 1,368 (287 ) -21.0 % Gain (loss) on sale of securities, net (48 ) 662 (710 ) -107.3 % Increase in cash value of bank owned life insurance 766 810 (44 ) -5.4 % Gain (loss) on sale of foreclosed real estate (13 ) 16 (29 ) -181.3 % Other 452 283 169 59.7 % Total noninterest income $ 10,746 $ 11,509 $ (763 ) -6.6 % The decrease in fees and service charges is primarily the result of decreased lending fees earned resulting from lower loan volume year over year.
At the end of each reporting period securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with the Investments – Debt and Equity Securities Topic of the Accounting Standards Codification.
At the end of each reporting period securities held in the investment portfolio are evaluated on an individual security level for determination of the need for an allowance for credit losses.
The Bancorp’s borrowed funds are primarily used to fund asset growth not supported by deposit generation.
The decrease in core deposits and increase in certificate of deposit balances is related to customer preferences for higher yielding deposits. The Bancorp’s borrowed funds are primarily used to fund asset growth not supported by deposit generation.
(Dollars in thousands, except per share data) Twelve Months Ended December 31, 12/31/2022 vs. 12/31/2021 2022 2021 $ Change % Change Noninterest expense: Compensation and benefits 28,990 24,241 4,749 19.6 % Occupancy and equipment 6,785 5,537 1,248 22.5 % Data processing 6,750 3,648 3,102 85.0 % Marketing 1,907 1,085 822 75.8 % Impairment charge on assets held for sale 1,232 - 1,232 0.0 % Federal deposit insurance premiums 1,228 861 367 42.6 % Professional services 1,211 1,205 6 0.5 % Net loss recognized on sale of premises and equipment 303 - 303 0.0 % Other 13,694 10,059 3,635 36.1 % Total noninterest expense 62,100 46,636 15,464 33.2 % 56 of 113 The increase in compensation and benefits is primarily the result of the Royal acquisition, management’s continued focus on talent management, and wage inflation.
YTD (Dollars in thousands, except per share data) Year Ended December 31, 12/31/2023 vs. 12/31/2022 2023 2022 $ Change % Change Noninterest expense: Compensation and benefits $ 27,655 $ 28,990 $ (1,335 ) -4.6 % Occupancy and equipment 6,557 6,785 (228 ) -3.4 % Data processing 4,734 6,750 (2,016 ) -29.9 % Marketing 840 1,907 (1,067 ) -56.0 % Impairment charge on assets held for sale - 1,232 (1,232 ) -100.0 % Federal deposit insurance premiums 2,003 1,228 775 63.1 % Professional services 1,603 1,211 392 32.4 % Net loss recognized on sale of premises and equipment - 303 (303 ) -100.0 % Other 11,839 13,694 (1,855 ) -13.5 % Total noninterest expense $ 55,231 $ 62,100 $ (6,869 ) -11.1 % The decrease in compensation and benefits is primarily the result of nonrecurring expenses related to the acquisition of Royal Financial.
Where appropriate, ALL allocations are made to these loans based on management’s assessment of financial position, current cash flows, collateral values, financial strength of guarantors, industry trends, and economic conditions. ALL allocations for homogeneous loans, such as residential mortgage loans and consumer loans, are based on historical charge-off activity and current delinquency trends.
Commercial and industrial, and commercial real estate loans that exhibit credit weaknesses and loans that have been classified as impaired are subject to an individual review. Where appropriate, ACL allocations are made to these loans based on management’s assessment of financial position, current cash flows, collateral values, financial strength of guarantors, industry trends, and economic conditions.
In determining the provision for loan losses for the current period, management has considered risks associated with the local economy, changes in loan balances and mix, and asset quality. In addition, management considers reserves that are not part of the ALL that have been established from acquisition activity.
The ACL provisions take into consideration management’s current judgments about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio mix and local economic conditions. In determining the provision for credit losses for the current period, management has considered risks associated with the local economy, changes in loan balances and mix, and asset quality.
The increase in net loss recognized on sale of premises and equipment is the result of the sale of a branch to reduce future fixed costs, allowing for redeployment of a portion of occupancy expenses into building a digital-forward foundation so that Finward can better serve its customers.
The increase in federal deposit insurance premiums is primarily the result of growth of the Bank’s average assets. The net loss recognized on sale of premises and equipment in 2022 resulted from the sale of a branch office. The resulting cost savings were redeployed into building a digital-forward foundation so that the Bancorp can better serve its customers.
The 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. 50 of 113 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 At December 31, 2022, management is of the opinion that there are no loans, except certain of those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure.
At December 31, 2023, management is of the opinion that there are no loans, except certain of those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled loan modification.
The weighted-average cost of funds was 0.26% for 2022, compared to 0.15% for 2021. The impact of the 3.81% return on interest earning assets and the 0.26% cost of funds resulted in a net interest spread of 3.55% for 2022, compared to a net interest spread of 3.29% for 2021.
The weighted-average yield on interest-earning assets was 4.45% for 2023, compared to 3.81% for 2022. The weighted-average cost of funds was 1.96% for 2023, compared to 0.33% for 2022.
Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes.
Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes. The Bancorp offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships.
The aggregate amount of dividends that may be declared by the Bank in 2022, without the need for qualifying for an exemption or prior DFI approval, is its 2023 net profits.
The aggregate amount of dividends that the Bank was eligible to declare in 2023, without the need for qualifying for an exemption or prior DFI approval, was its 2023 net income. On December 26, 2023, the Board of Directors of the Bancorp declared a fourth quarter dividend of $0.12 per share.
Net income for 2022 was $15.1 million, or $3.60 diluted earnings per common share. The return on average assets was 0.74%, while the return on average stockholders’ equity was 10.47%. On January 31, 2022, the Bancorp completed its acquisition of Royal Financial, Inc.
Net income for 2023 was $8.4 million, or $1.96 diluted earnings per common share. The return on average assets was 0.40%, while the return on average stockholders’ equity was 6.28%.
The decrease in wealth management operations is the result of lower fee income year over year due to market conditions. The decrease in gain on sale of loans is the result of significant refinance activity in 2021 due to the economic and low-rate environment, which resulted in more loans originated and sold in 2021 compared to 2022.
The increase in wealth management operations is the result of higher fee income year over year due to customer base growth and market conditions. The decrease in gain on sale of loans is the result of a decline in the volume of loans sold due to the increases in interest rates in the economy during 2023 and 2022.
We expect demand for fixed rate mortgage loans held-for-sale in the secondary market to be lower as borrowing rates on loans increase. The decrease in gains on the sale of securities is a result of current market conditions and actively repositioning the portfolio.
We expect demand for fixed rate mortgage loans held-for-sale in the secondary market to be lower as borrowing rates on loans remain elevated. The following table shows the change in noninterest expense for the year ending December 31, 2023, and December 31, 2022.
The net cash outflows from financing activities were primarily a result of net change in deposits and repayment of FHLB advances, offset against the change in proceeds from FHLB advances.
Net cash inflows from financing activities totaled $15.5 million in 2023, compared to net cash outflows of $18.5 million in 2022. The net cash flows from financing activities were primarily a result of net change in deposits, proceeds from borrowings, the net change in repurchase agreements and dividends paid.
Income tax expenses for the year ended December 31, 2022, totaled $1.5 million, compared to income tax expense of $1.4 for the year ended December 31, 2021, an increase of $64 thousand (4.5%).
The decrease in other operating expenses is primarily the result of one-time expenses incurred in the prior year related to the acquisition of Royal Financial. Income tax benefit for the year ended December 31, 2023, totaled $335 thousand, compared to income tax expense of $1.4 million for the year ended December 31, 2022, a decrease of $1.8 million (122.7%).
The increase in data processing expense is primarily the result of data conversion expenses related to the acquisition of Royal, increased system utilization due to growth of the Bank, and continued investment in technological advancements such as Salesforce and nCino. The increase in occupancy and equipment expense is primarily related to the Royal acquisition and higher operating costs.
The decrease in data processing expense is primarily the result of the data conversion expenses incurred in 2022 related to the acquisition of Royal Financial. The decrease in occupancy and equipment expense is primarily due to the elimination of expenses on three branches that were closed in 2022.
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. 49 of 113 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.
The Bancorp's special mention loans are summarized below: (Dollars in thousands) Loan Segment December 31, 2023 December 31, 2022 Residential real estate $ 3,084 $ 1,338 Home equity 168 385 Commercial real estate 7,434 4,955 Construction and land development 6,902 2,346 Multifamily - 1,859 Commercial business 1,610 703 Consumer - - Manufactured homes - - Government - - Total $ 19,198 $ 11,586 Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date.
Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.
Subsequent decreases to the expected cash flows will generally result in a provision for credit losses. A loan is considered collateral dependent when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement.
The 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. 47 of 113 Financial Condition During the year ended December 31, 2022, total assets increased by $449.6 million (27.7%), to $2.1 billion, with interest-earning assets increasing by $382.4 million (25.1%).
Page 54 of 122 Financial Condition During the year ended December 31, 2023, total assets increased by $37.9 million (1.8%), to $2.1 billion, with interest-earning assets increasing by $52.5 million (2.8%). At December 31, 2023, interest‑earning assets totaled $2.0 billion and represented 92.9% of total assets.
Stockholders' equity totaled $136.4 million at December 31, 2022, compared to $156.6 million at December 31, 2021, a decrease of $20.2 million (3.2%).
Management strongly believes that safety and soundness is enhanced by maintaining a high level of capital. Stockholders' equity totaled $147.3 million at December 31, 2023, compared to $136.4 million at December 31, 2022, an increase of $11.0 million (8.0%).
Marketing expenses have increased to enhance brand recognition in new markets and gain more wallet share. The increase in impairment charge on assets held for sale is the result of impairment on the carrying value of branches held for sale. The increase in federal deposit insurance premiums is primarily the result of growth of the bank’s average assets.
The decrease in marketing is a result of nonrecurring expenses related to the Royal Financial acquisition advertising campaign in 2022. The decrease in impairment charge on assets held for sale is the result of prior year impairment on the carrying value of branches held for sale.
Removed
(“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”).
Added
Recent Developments within the Banking Industry During the first half of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, uninsured deposit concentrations, unrealized securities losses, and eroding consumer confidence in the banking system.
Removed
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.
Added
In this regard, in March 2023, Silicon Valley Bank and Signature Bank were closed and taken over by the Federal Deposit Insurance Corporation (FDIC).
Removed
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.

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