UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

	~~For the quarterly period ended June 30, 2021 or~~

For the quarterly period ended June 30, 2022 or

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

	~~For the transition period from ______ to ______~~

	~~Commission File Number: 0-26128~~

For the transition period from ______ to ______

Commission File Number: 0-26128

Finward Bancorp

(Exact name of registrant as specified in its charter)

	Indiana	35-1927981
	(State or other jurisdiction of incorporation	(I.R.S. Employer Identification Number)
	or organization)

	9204 Columbia Avenue
	Munster, Indiana	46321
	(Address of principal executive offices)	(ZIP code)

Registrant's telephone number, including area code: (219) 836‑4400

~~N/A~~

	N/A
	(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which

registered

~~N/A~~Common stock, no par value

~~N/A~~FNWD

~~N/A~~The NASDAQ Stock Market, LLC

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

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

Yes ☒ No ☐

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

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒

Smaller Reporting Company ☒ Emerging growth company ☐

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

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

There were ~~3,479,139~~4,297,900 shares of the registrant’s Common Stock, without par value, outstanding at August ~~13, 2021.~~15, 2022.

Finward Bancorp

Index

	Page
	Number
PART I. Financial Information

Item 1. Unaudited Financial Statements and Notes	1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3. Quantitative and Qualitative Disclosures about Market Risk	4442

Item 4. Controls and Procedures	4442

PART II. Other Information	4543

SIGNATURES	4644

EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications
101 XBRL Interactive Data File

Finward Bancorp

Consolidated Balance Sheet

~~Condensed Consolidated Balance Sheets~~

	June 30,
(Dollars in thousands)	2021			December 31,			June 30, 2022 (unaudited)			December 31, 2021
	(unaudited)			2020
ASSETS

Cash and non-interest bearing deposits in other financial institutions	$	17,570		$	14,014		$	20,844		$	12,725
Interest bearing deposits in other financial institutions		50,406			5,908			55,602			19,987
Federal funds sold		649			0			2,856			464

Total cash and cash equivalents		68,625			19,922			79,302			33,176

Certificates of deposit in other financial institutions		1,471			1,897			1,482			1,709

Securities available-for-sale		473,927			410,669			400,466			526,889
Loans held-for-sale		5,878			11,329			1,525			4,987
Loans receivable		969,491			965,146
Loans receivable, net of deferred fees and costs								1,474,381			966,720
Less: allowance for loan losses		(13,639	)		(12,458	)		(13,406	)		(13,343	)
Net loans receivable		955,852			952,688			1,460,975			953,377
Federal Home Loan Bank stock		3,247			3,918			3,038			3,247
Accrued interest receivable		4,803			4,713			6,892			5,444
Premises and equipment		30,046			30,785			45,985			31,385
Foreclosed real estate		368			538
Cash value of bank owned life insurance		31,082			30,725			31,571			31,440
Goodwill		11,109			11,109			22,615			11,109
Other intangible assets		3,622			4,119			5,588			3,126
Other assets		13,483			13,880			42,046			14,854

Total assets	$	1,603,513		$	1,496,292		$	2,101,485		$	1,620,743

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Non-interest bearing	$	275,819		$	241,620		$	370,567		$	295,294
Interest bearing		1,119,277			1,060,719			1,546,648			1,138,907
Total		1,395,096			1,302,339			1,917,215			1,434,201
Repurchase agreements		24,399			13,711			24,536			14,581
Borrowed funds		0			6,149
Accrued expenses and other liabilities		28,449			22,404			23,080			15,346

Total liabilities		1,447,944			1,344,603			1,964,831			1,464,128

Commitments and contingent liabilties
Commitments and contingencies

Stockholders' Equity:
Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding		0			0			0			0
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: June 30, 2021 - 3,479,139		0			0
December 31, 2020 - 3,462,916
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: June 30, 2022 - 4,296,949 December 31, 2021 - 3,480,701
Additional paid-in capital		30,141			29,987			68,623			30,430
Accumulated other comprehensive income		8,209			10,441
Accumulated other comprehensive (loss) income								(57,781	)		4,276
Retained earnings		117,219			111,261			125,812			121,909

Total stockholders' equity		155,569			151,689			136,654			156,615

Total liabilities and stockholders' equity	$	1,603,513		$	1,496,292		$	2,101,485		$	1,620,743

See accompanying notes to ~~condensed~~ consolidated financial statements.

Finward Bancorp

~~Condensed~~ Consolidated Statements of Income

(unaudited)

	Three Months Ended				Six Months Ended
(Dollars in thousands)	June 30,				June 30,				Three Months Ended June 30,				Six Months Ended June 30,
(unaudited)	2021		2020		2021		2020
(Unaudited)									2022		2021		2022		2021
Interest income:
Loans receivable									$	15,221	$	10,275	$	28,507	$	21,021
Real estate loans	$	8,211	$	9,305	$	16,450	$	18,662
Commercial loans		1,751		1,834		3,991		3,319
Consumer loans		313		158		580		345
Total loan interest		10,275		11,297		21,021		22,326
Securities		2,144		1,564		4,105		3,269		2,469		2,144		5,066		4,105
Other interest earning assets		16		44		36		179		50		16		61		36

Total interest income		12,435		12,905		25,162		25,774		17,740		12,435		33,634		25,162

Interest expense:
Deposits		549		1,380		1,200		3,444		389		549		726		1,200
Repurchase agreements		12		17		22		57		26		12		42		22
Borrowed funds		2		93		22		187		27		2		33		22

Total interest expense		563		1,490		1,244		3,688		442		563		801		1,244

Net interest income		11,872		11,415		23,918		22,086		17,298		11,872		32,833		23,918
Provision for loan losses		576		508		1,154		1,022		0		576		0		1,154

Net interest income after provision for loan losses		11,296		10,907		22,764		21,064		17,298		11,296		32,833		22,764

Noninterest income:
Gain on sale of loans held-for-sale, net	$	1,116	$	2,464	$	3,165	$	3,617
Fees and service charges		1,471		1,151		2,537		2,200		1,560		1,471		2,864		2,537
Wealth management operations		576		514		1,183		1,068		588		576		1,183		1,183
Gain on sale of loans held-for-sale, net										291		1,116		898		3,165
Gain on sale of securities, net		269		667		686		1,177		258		269		639		686
Increase in cash value of bank owned life insurance		188		188		357		357		193		188		445		357
Gain on sale of foreclosed real estate, net		36		43		27		103
Gain (loss) on sale of foreclosed real estate										0		36		0		27
Other		24		19		38		70		6		24		11		38

Total noninterest income	$	3,680	$	5,046	$	7,993	$	8,592		2,896		3,680		6,040		7,993

Noninterest expense:
Compensation and benefits	$	5,897	$	5,620	$	11,582	$	10,930		7,538		5,897		14,905		11,582
Data processing										1,246		597		4,300		1,125
Occupancy and equipment		1,324		1,295		2,696		2,704		1,729		1,324		3,229		2,696
Data processing		597		532		1,125		1,088
Marketing		195		180		394		388		385		195		1,036		394
Federal deposit insurance premiums		204		159		384		355		380		204		599		384
Other		2,793		2,227		5,322		4,640		3,898		2,793		7,376		5,322

Total noninterest expense	$	11,010	$	10,013	$	21,503	$	20,105		15,176		11,010		31,445		21,503

Income before income tax expenses		3,966		5,940		9,254		9,551		5,018		3,966		7,428		9,254
Income tax expenses		395		1,089		1,140		1,587		587		395		862		1,140

Net income	$	3,571	$	4,851	$	8,114	$	7,964	$	4,431	$	3,571	$	6,566	$	8,114

Earnings per common share:
Basic	$	1.03	$	1.40	$	2.33	$	2.30	$	1.04	$	1.03	$	1.60	$	2.33
Diluted	$	1.03	$	1.40	$	2.33	$	2.30	$	1.04	$	1.03	$	1.59	$	2.33

Dividends declared per common share	$	0.31	$	0.31	$	0.62	$	0.62	$	0.31	$	0.31	$	0.62	$	0.62

See accompanying notes to ~~condensed~~ consolidated financial statements.

Finward Bancorp

~~Condensed~~ Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

	Three Months Ended						Six Months Ended
(Dollars in thousands)	June 30,						June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020			2022			2021			2022			2021

Net income	$	3,571		$	4,851		$	8,114		$	7,964		$	4,431		$	3,571		$	6,566		$	8,114

Net change in net unrealized gains and losses on securities available-for-sale:
Unrealized (losses)/gains arising during the period		5,624			1,207			(2,137	)		7,319
Unrealized (loss) gain arising during the period														(30,521	)		5,624			(77,910	)		(2,137	)
Less: reclassification adjustment for gains included in net income		(269	)		(667	)		(686	)		(1,177	)		(258	)		(269	)		(639	)		(686	)
Net securities (loss)/gain during the period		5,355			540			(2,823	)		6,142
Net securities (loss) gain during the period														(30,779	)		5,355			(78,549	)		(2,823	)
Tax effect		(1,126	)		(112	)		591			(1,289	)		6,460			(1,126	)		16,492			591
Net of tax amount		4,229			428			(2,232	)		4,853
Other comprehensive (loss) gain, net of tax														(24,319	)		4,229			(62,057	)		(2,232	)

Comprehensive (loss)/income, net of tax	$	7,800		$	5,279		$	5,882		$	12,817
Comprehensive (loss) gain, net of tax														(19,888	)		7,800			(55,491	)		5,882

See accompanying notes to ~~condensed~~ consolidated financial statements.

Finward Bancorp

~~Condensed~~ Consolidated Statements of Changes in ~~Stockholders'~~Stockholder's Equity

(unaudited)

						Accumulated														Accumulated
			Additional			Other											Additional			Other
	Common		Paid-in			Comprehensive			Retained			Total			Common		Paid-in			Comprehensive			Retained			Total
(Dollars in thousands, except per share data)	Stock		Capital			Income			Earnings			Equity			Stock		Capital			(Loss)/Income			Earnings			Equity

Balance at January 1, 2020	$	0	$	29,657		$	4,261		$	99,624		$	133,542

Comprehensive income:
Net income		0		0			0			3,113			3,113
Net unrealized gain on securities available-for- sale, net of reclassification and tax effects		0		0			4,425			0			4,425
Comprehensive income		0		0			0			0			7,538
Net surrender value of 1,904 restricted stock awards		0		(85	)		0			0			(85	)
Stock-based compensation expense		0		94			0			0			94
Cash dividends, $0.31 per share		0		0			0			(1,074	)		(1,074	)

Balance at March 31, 2020	$	0	$	29,666		$	8,686		$	101,663		$	140,015

Comprehensive income:
Net income		0		0			0			4,851			4,851
Net unrealized gain on securities available-for- sale, net of reclassification and tax effects		0		0			428			0			428
Comprehensive income		0		0			0			0			5,279
Stock-based compensation expense		0		108			0			0			108
Cash dividends, $0.31 per share		0		0			0			(1,073	)		(1,073	)

Balance at June 30, 2020	$	0	$	29,774		$	9,114		$	105,441		$	144,329

Balance at January 1, 2021	$	0	$	29,987		$	10,441		$	111,261		$	151,689		$	0	$	29,987		$	10,441		$	111,261		$	151,689

Comprehensive income:
Net income		0		0			0			4,543			4,543			0		0			0			4,543			4,543
Net unrealized loss on securities available-for- sale, net of reclassification and tax effects		0		0			(6,461	)		0			(6,461	)
Comprehensive income		0		0			0			0			(1,918	)
Other comprehensive loss, net of tax																0		0			(6,461	)		0			(6,461	)
Net surrender value of 1,711 restricted stock awards		0		(68	)		0			0			(68	)		0		(68	)		0			0			(68	)
Stock-based compensation expense		0		146			0			0			146			0		146			0			0			146
Cash dividends, $0.31 per share		0		0			0			(1,079	)		(1,079	)
Cash dividends, $0.31 per share																0		0			0			(1,079	)		(1,079	)

Balance at March 31, 2021	$	0	$	30,065		$	3,980		$	114,725		$	148,770		$	0	$	30,065		$	3,980		$	114,725		$	148,770

Comprehensive income:
Net income		0		0			0			3,571			3,571			0		0			0			3,571			3,571
Net unrealized gain on securities available-for- sale, net of reclassification and tax effects		0		0			4,229			0			4,229
Comprehensive income		0		0			0			0			7,800
Other comprehensive loss, net of tax																0		0			4,229			0			4,229
Net surrender value of 1,404 restricted stock awards		0		(63	)		0			0			(63	)		0		(63	)		0			0			(63	)
Stock-based compensation expense		0		139			0			0			139			0		139			0			0			139
Cash dividends, $0.31 per share		0		0			0			(1,077	)		(1,077	)
Cash dividends, $0.31 per share																0		0			0			(1,077	)		(1,077	)

Balance at June 30, 2021	$	0	$	30,141		$	8,209		$	117,219		$	155,569		$	0	$	30,141		$	8,209		$	117,219		$	155,569


Balance at January 1, 2022															$	0	$	30,430		$	4,276		$	121,909		$	156,615

Net income																0		0			0			2,135			2,135
Other comprehensive loss, net of tax																0		0			(37,738	)		0			(37,738	)
Net surrender value of 2,336 restricted stock awards																0		(115	)		0			0			(115	)
Stock-based compensation expense																0		169			0			0			169
Issuance of 795,423 shares at $47.75 per share, for acquisition of Royal Financial, Inc																0		37,902			0			0			37,902
Cash dividends, $0.31 per share																0		0			0			(1,331	)		(1,331	)

Balance at March 31, 2022															$	0	$	68,386		$	(33,462	)	$	122,713		$	157,637

Net income																0		0			0			4,431			4,431
Other comprehensive loss, net of tax																0		0			(24,319	)		0			(24,319	)
Net surrender value of 113 restricted stock awards																0		(5	)		0			0			(5	)
Stock-based compensation expense																0		163			0			0			163
Other adjustments																0		79			0			0			79
Cash dividends, $0.31 per share																0		0			0			(1,332	)		(1,332	)

Balance at June 30, 2022															$	0	$	68,623		$	(57,781	)	$	125,812		$	136,654

See accompanying notes to ~~condensed~~ consolidated financial statements.

Finward Bancorp

~~Condensed~~ Consolidated Statements of Cash Flows

(unaudited)

	Six Months Ended
(Dollars in thousands)	June 30,						Six months ended June 30,
	2021			2020			2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8,114		$	7,964		$	6,566		$	8,114
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Origination of loans for sale		(85,903	)		(114,170	)		(29,179	)		(85,903	)
Sale of loans originated for sale		94,163			113,362			33,506			94,163
Depreciation and amortization, net of accretion		2,041			2,186			3,121			2,154
Amortization of mortgage servicing rights		113			32
Stock based compensation expense		285			202			332			285
Net surrender value of restricted stock awards		(131	)		(85	)
Gain on sale of securities, net		(686	)		(1,177	)		(639	)		(686	)
Gain on sale of loans held-for-sale, net		(3,293	)		(3,021	)		(966	)		(3,293	)
Loss/(gain) on derivatives		128			(298	)
Gain on sale of foreclosed real estate, net		(27	)		(103	)
Gain on sale of foreclosed real estate								0			(27	)
Gain on cash value of bank owned life insurance								(445	)		(357	)
Loss on derivatives								68			128
Provision for loan losses		1,154			1,022			0			1,154
Net change in:
Interest receivable		(90	)		(255	)		388			(90	)
Other assets		1,728			(1,708	)		(3,038	)		1,728
Cash value of bank owned life insurance		(357	)		(357	)
Accrued expenses and other liabilities		(3,723	)		7,303			(3,824	)		(3,723	)
Net cash - operating activities		13,516			10,897
Net cash provided by operating activities								5,890			13,647

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposits in other financial institutions		426			531
Proceeds from maturities of certificates of deposit in other financial institutions								472			426
Proceeds from maturities and pay downs of securities available-for-sale		43,322			31,409			15,596			43,322
Proceeds from sales of securities available-for-sale		19,290			35,098			43,775			19,290
Purchase of securities available-for-sale		(119,075	)		(77,506	)		(11,713	)		(119,075	)
Proceeds from bank owned life insurance								314			0
Net change in loans receivable		1,660			(70,211	)		(54,178	)		1,660
Proceeds (purchase) of Federal Home Loan Bank Stock		671			(6	)
Proceeds of Federal Home Loan Bank Stock								1,512			671
Purchase of loans receivable		(5,978	)		(4,658	)		(2,663	)		(5,978	)
Purchase of premises and equipment, net		(470	)		(866	)		(2,081	)		(470	)
Proceeds from sale of foreclosed real estate, net		197			575
Net cash - investing activities		(59,957	)		(85,634	)
Proceeds from sale of foreclosed real estate								0			197
Cash and cash equivalents from acquisition activity, net								33,799			0
Net cash provided by (used in) investing activities								24,833			(59,957	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		92,757			123,264
Change in deposits								7,978			92,757
Repayment of FHLB advances		(6,000	)		(2,000	)		0			(6,000	)
Change in other borrowed funds		10,539			5,660
Net surrender value of restricted stock awards								(120	)		(131	)
Change in repurchase agreements and other borrowed funds								9,955			10,539
Dividends paid		(2,152	)		(2,140	)		(2,410	)		(2,152	)
Net cash - financing activities		95,144			124,784
Net cash (used in) provided by financing activities								15,403			95,013
Net change in cash and cash equivalents		48,703			50,047			46,126			48,703
Cash and cash equivalents at beginning of period		19,922			47,258			33,176			19,922
Cash and cash equivalents at end of period	$	68,625		$	97,305		$	79,302		$	68,625

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	1,262		$	3,802		$	781		$	1,262
Income taxes		2,020			0			1,157			2,020
Acquisition activity:
Fair value of assets acquired, including cash and cash equivalents							$	528,321		$	0
Value of goodwill and other intangible assets								14,726			0
Fair value of liabilities assumed								486,341			0
Cash paid for acquisition								18,725			0
Issuance of common stock for acquisition								37,981			0
Noncash activities:
Transfers from loans to foreclosed real estate	$	0		$	23
Dividends declared not paid		1,077			1,073			1,332			1,077
Securities purchased not settled		9,764			0			0			9,764

See accompanying notes to ~~condensed~~ consolidated financial statements.

Finward Bancorp

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 - Basis of Presentation

Organization and Description of Business

The consolidated financial statements include the accounts of Finward Bancorp (the “Bancorp” or ~~“Finward”~~“FNWD”), its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary) and Peoples Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC, NWIN Funding, Incorporated,1683 Real Estate LLC, and Columbia Development Company, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are primarily dependent upon the earnings of the Bank. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by U.S. generally accepted accounting principles for complete presentation of consolidated financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of the Bancorp as of June 30, ~~2021,~~2022, and December 31, ~~2020,~~2021, and the consolidated statements of income, comprehensive income (loss), and changes in stockholders’ equity for the three and six months ended June 30, ~~2021,~~2022, and ~~2020,~~2021, and consolidated statements of cash flows for the six months ended June 30, ~~2021,~~2022, and ~~2020.~~2021. The income reported for the six month period ended June 30, ~~2021,~~2022, is not necessarily indicative of the results to be expected for the full year.

On ~~May 13, 2021,~~ the Bancorp filed Articles of Amendment to its Articles of Incorporation with the Secretary of State of the State of Indiana to change the name of the company from “NorthWest Indiana Bancorp” to “Finward Bancorp.” The name change was approved by the Bancorp’s shareholders on ~~March 3, 2021~~ ~~and became effective on~~ ~~May 24, 2021.~~

The Notes to the Consolidated Financial Statements appearing in Finward Bancorp’s Annual Report on Form 10-K (~~2020~~2021 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. The Consolidated Balance Sheet at December 31, ~~2020~~2021 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on net income.

~~Revision of Previously Issued Financial Statements~~

~~We have revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form~~ 10-Q related to immaterial errors. The errors relate to certain deferred costs booked related to our manufactured home loan product, which resulted in increased assets and understatements of expense in prior periods.

~~We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins~~ ~~No.~~99 ~~and~~ ~~No.~~~~108~~ ~~and, based upon quantitative and qualitative factors, determined that the errors were~~ ~~not~~ ~~material to the previously issued financial statements and disclosures included in our Annual Reports on Form~~ 10~~-K for the years ended~~ ~~December 31, 2020~~ ~~and~~ ~~2019,~~ ~~or for any quarterly periods included therein or through our Quarterly Report on Form~~ 10~~-Q for the quarterly period ended~~ ~~March 31, 2021.~~

~~The following tables present the revisions to the line items of our previously issued financial statements to reflect the correction of the errors:~~

Consolidated Balance Sheet

As of December 31, 2020

As Reported

Adjustment

As Revised

Loans receivable
$ 966,578 $ (1,432 ) $ 965,146
Net loans receivable 954,120 (1,432 ) 952,688
Other assets
13,681 199 13,880
Total assets
1,497,525 (1,233 ) 1,496,292
Retained earnings
112,494 (1,233 ) 111,261
Total shareholders' equity
152,922 (1,233 ) 151,689
Total liabilities and Stockholders' equity
1,497,525 (1,233 ) 1,496,292

Consolidated Statement of Operations

Three months ended June 30, 2020

As Reported

Adjustment

As Revised

Compensation and benefits
$ 5,371 $ 249 $ 5,620
Total noninterest expense
9,764 249 10,013
Income before income tax expense
6,189 (249 ) 5,940
Income tax expenses
1,126 (37 ) 1,089
Net income
5,063 (212 ) 4,851
Earnings per common share:

Basic
1.46 (0.06 ) 1.40
Diluted
1.46 (0.06 ) 1.40

Six months ended June 30, 2020

As Reported

Adjustment

As Revised

Compensation and benefits
$ 10,588 $ 342 $ 10,930
Total noninterest expense
19,763 342 20,105
Income before income tax expense
9,893 (342 ) 9,551
Income tax expenses
1,638 (51 ) 1,587
Net income
8,255 (291 ) 7,964
Earnings per common share:

Basic
2.39 (0.09 ) 2.30
Diluted
2.39 (0.09 ) 2.30

Consolidated Statements of Comprehensive Income

Three months ended June 30, 2020

As Reported

Adjustment

As Revised

Net income
$ 5,063 $ (212 ) $ 4,851
Comprehensive income, net of tax
5,491 (212 ) 5,279

Six months ended June 30, 2020

As Reported

Adjustment

As Revised

Net income
$ 8,255 $ (291 ) $ 7,964
Comprehensive income, net of tax
13,108 (291 ) 12,817

Consolidated Statements of Changes in Stockholders' Equity

Balance at January 1, 2020

As Reported

Adjustment

As Revised

Retained earnings
$ 100,185 $ (561 ) $ 99,624
Total equity
134,103 (561 ) 133,542

For the quarter ending March 31, 2020

Net income
3,192 (79 ) 3,113
Retained earnings
102,303 (640 ) 101,663
Total equity
140,655 (640 ) 140,015

For the quarter ending June 30, 2020

Net income
5,063 (212 ) 4,851
Retained earnings
106,293 (852 ) 105,441
Total equity
145,181 (852 ) 144,329

Balance at January 1, 2021

Retained earnings
112,494 (1,233 ) 111,261
Total equity
152,922 (1,233 ) 151,689

For the quarter ending March 31, 2021

Net income
4,679 (136 ) 4,543
Retained earnings
116,094 (1,369 ) 114,725
Total equity
150,139 (1,369 ) 148,770

Consolidated Statements of Cash Flows

Six months ended June 30, 2020

As Reported

Adjustment

As Revised

Net income
$ 8,255 $ (291 ) $ 7,964
Net change in other assets
(1,657 ) (51 ) (1,708 )
Net cash - operating activities
11,239 (342 ) 10,897
Net change in loan
(70,553 ) 342 (70,211 )
Net cash - investing activities
(85,976 ) 342 (85,634
)

Note 2 - Use of Estimates

Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of foreclosed real estate, loan servicing rights, investment securities, deferred tax assets, goodwill, and the status of contingencies are particularly susceptible to material change in the near term.

Note 3 - Acquisition Activity

On January 31, 2022, Finward Bancorp (“Finward”) completed its previously announced acquisition of Royal Financial, Inc., a Delaware corporation (“RYFL”), pursuant to an Agreement and Plan of Merger dated July 28, 2021 (the “Merger Agreement”) between Finward and RYFL. The stockholders of both Finward and RYFL approved the Merger Agreement at the respective stockholder meetings of the companies held on December 13, 2021. Pursuant to the Merger Agreement, RYFL merged with and into Finward, with Finward as the surviving corporation (the “Merger”), and Royal Savings Bank, an Illinois state-chartered savings bank and wholly-owned subsidiary of RYFL, merged with and into Peoples Bank, the wholly-owned Indiana state-chartered commercial bank subsidiary of Finward, with Peoples Bank as the surviving bank.

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

As a result of RYFL stockholder stock and cash elections and the related allocation and proration provisions of the merger agreement, Finward issued 795,423 shares of its common stock and paid cash consideration of approximately $18.7 million in the Merger. Based on the January 28, 2022, closing price of $47.75 per share of Finward common stock, the transaction had an implied valuation of approximately $56.7 million. In connection with the acquisition, Robert W. Youman, was appointed to the boards of directors of Finward and Peoples Bank effective as of the closing of the Merger. RYFL had a home office and eight branch offices in Cook County and DuPage County, Illinois. The acquisition has further expanded the Bank’s banking center network in Cook County and DuPage County, Illinois.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on the valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the RYFL acquisition is allocated as follows:

ASSETS			*LIABILITIES*
Cash and due from banks	$	52,524	Deposits
Investment securities, available for sale		0	Non-interest bearing	$	32,095
Certificate of deposit in other financial institutions		245	NOW accounts		63,639
			Savings and money market		184,149
Total Loans		450,757	Certificates of deposits		195,153
			Total Deposits		475,036
Premises and equipment, net		13,896
FHLB stock		1,303	Interest payable		75
Goodwill		11,506	Other liabilities		11,228
Core deposit intangible		3,220
Interest receivable		1,836
Other assets		7,758
Total assets purchased	$	543,045
Common shares issued		37,981
Cash paid		18,725
Total purchase price	$	56,706	Total liabilities assumed	$	486,339

During the second quarter of 2022, an adjustment was made to the carrying value of other assets of $189 thousand, due to the valuation of prepaids brought over in the acquisition, and premises and equipment, net, of $48 thousand, due to a correction in the valuation of buildings, in addition, a correction was made to the valuation of shares issued increasing the value by $79 thousand. The resulting impact of these changes was a decrease to the goodwill balance related to the RYFL acquisition of $158 thousand.

Final estimates of fair value on the date of acquisition have not been finalized yet. Prior to the end of the one-year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods as if the adjustments to the provisional amounts had been recognized as of the acquisition date.

Goodwill of approximately $11.5 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, is expected to be recorded in the RYFL acquisition and is the result of expected operational synergies and other factors. This goodwill is not expected to be deductible for tax purposes. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the RYFL acquisition will change.

Gross loans acquired during the RYFL transaction totaled $456.7 million. As of the six months ended June 30, 2022, the remaining outstanding principal of loans directly related to the RYFL acquisition total $425.8 million, of which $8.1 million are expected to be uncollectable.

The following pro-forma and earnings (unaudited) of the combined company are presented as if the RYFL merger had occurred on January 1, 2022 and January 1, 2021:

	For the three months ended			For the three months ended			For the six months ended			For the six months ended
(in thousands)	*June 30, 2022*			*June 30, 2021*			*June 30, 2022*			*June 30, 2021*
Selected Financial Data
Interest income	$	17,740		$	17,263		$	35,329		$	34,654
Interest expense		(442	)		(998	)		(902	)		(2,189	)
Recovery of (provision for) loan losses		0			(816	)		0			(1,094	)
Non-interest income		2,896			3,902			6,179			8,418
Non-interest expense (1)		(15,176	)		(13,831	)		(29,573	)		(26,776	)
Income before provision for income taxes		5,018			5,520			11,033			13,013
Income tax expense		(587	)		(639	)		(1,619	)		(1,812	)
Net income	$	4,431		$	4,881		$	9,414		$	11,201

Earnings per common share:
Basic	$	1.04		$	1.40		$	2.29		$	3.22
Diluted	$	1.04		$	1.40		$	2.28		$	3.22

(1)

Excludes $2.9 million in pre-tax merger expenses for the six months ended June 30, 2022.

For the six months ended June 30, 2022, the Bancorp has recorded $2.9 million in pre-tax one-time merger expenses related to the RYFL acquisition, and these expenses have been allocated to the following non-interest expense line items within the income statement:

(in thousands)	Six months ended
Noninterest expense:	June 30, 2022
Compensation and benefits	$	132
Data processing		1,929
Marketing		135
Other		656

Period merger expense	$	2,852

Note 34 - Securities

The estimated fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

	(Dollars in thousands)									(Dollars in thousands)
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Cost		Unrealized		Unrealized			Fair		Cost		Unrealized		Unrealized			Fair
	Basis		Gains		Losses			Value		Basis		Gains		Losses			Value
June 30, 2021
June 30, 2022
U.S. government sponsored entities		10,883		5		(92	)		10,796	$	8,883	$	0	$	(949	)	$	7,934
U.S. treasury securities		401		0		0			401		594		0		0			594
Collateralized mortgage obligations and residential mortgage-backed securities		194,601		2,009		(1,249	)		195,361		171,286		2		(21,227	)		150,061
Municipal securities		255,485		11,111		(197	)		266,399		290,675		20		(49,848	)		240,847
Collateralized debt obligations		2,173		0		(1,203	)		970		2,173		0		(1,143	)		1,030
Total securities available-for-sale	$	463,543	$	13,125	$	(2,741	)	$	473,927	$	473,611	$	22	$	(73,167	)	$	400,466

	(Dollars in thousands)									(Dollars in thousands)
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Cost		Unrealized		Unrealized			Fair		Cost		Unrealized		Unrealized			Fair
	Basis		Gains		Losses			Value		Basis		Gains		Losses			Value
December 31, 2020
Money market fund	$	52,941	$	0	$	0		$	52,941
December 31, 2021
U.S. government sponsored entities		7,881		3		(24	)		7,860	$	8,883	$	0	$	(214	)	$	8,669
U.S. treasury securities											400		0		0			400
Collateralized mortgage obligations and residential mortgage-backed securities		151,355		3,417		(36	)		154,736		187,279		961		(3,539	)		184,701
Municipal securities		183,103		11,102		(2	)		194,203		322,750		9,904		(527	)		332,127
Collateralized debt obligations		2,182		0		(1,253	)		929		2,173		0		(1,181	)		992
Total securities available-for-sale	$	397,462	$	14,522	$	(1,315	)	$	410,669	$	521,485	$	10,865	$	(5,461	)	$	526,889

The cost basis and estimated fair value of available-for-sale debt securities at June 30, ~~2021,~~2022, by contractual maturity, were as follows. Securities not due at a single maturity date, primarily collateralized mortgage obligations and residential mortgage-backed securities, are shown separately.

	(Dollars in thousands)				(Dollars in thousands)
	Available-for-sale				Available-for-sale
	Estimated						Estimated
	Fair		Tax-Equivalent		Cost		Fair
June 30, 2021	Value		Yield (%)
June 30, 2022					Basis		Value
Due in one year or less	$	202		1.13	$	494	$	495
Due from one to five years		3,228		4.23		1,954		1,956
Due from five to ten years		27,336		2.47		26,832		24,869
Due over ten years		247,800		2.98		273,045		223,085

Collateralized mortgage obligations and residential mortgage-backed securities		195,361		1.69		171,286		150,061
Total	$	473,927		2.43	$	473,611	$	400,466

Sales of available-for-sale securities were as follows for the three months ended:

	(Dollars in thousands)						(Dollars in thousands)
	June 30,			June 30,			June 30,			June 30,
	2021			2020			2022			2021

Proceeds	$	12,386		$	17,212		$	27,539		$	12,386
Gross gains		289			724			295			289
Gross losses		(20	)		(57	)		(37	)		(20	)

Sales of available-for-sale securities were as follows for the six months ended:

	(Dollars in thousands)						(Dollars in thousands)
	June 30,			June 30,			June 30,			June 30,
	2021			2020			2022			2021

Proceeds	$	19,290		$	35,098		$	43,775		$	19,290
Gross gains		706			1,237			692			706
Gross losses		(20	)		(60	)		(53	)		(20	)

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

(Dollars in thousands)

Unrealized
gain/(loss)

Ending balance, December 31, 2020
$ 10,441
Current period change
(2,232 )
Ending balance, June 30, 2021
$ 8,209

	(Dollars in thousands)
	Unrealized gain/(loss)
Ending balance, December 31, 2021	$	4,276
Current period change		(62,057	)
Ending balance, June 30, 2022	$	(57,781	)

Securities with market values of approximately ~~$45.0~~$236.7 million and ~~$52.4~~$39.5 million were pledged as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.

Securities with gross unrealized losses at June 30, ~~2021,~~2022, and December 31, ~~2020~~2021 not recognized in income are as follows:

	(Dollars in thousands)															(Dollars in thousands)
	Less than 12 months					12 months or longer					Total					Less than 12 months					12 months or longer					Total
	Estimated					Estimated					Estimated					Estimated					Estimated					Estimated					Percentage of
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Total Portfolio
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			in Loss Position
June 30, 2021
June 30, 2022
U.S. government sponsored entities	$	8,791	$	(92	)	$	0	$	0		$	8,791	$	(92	)	$	0	$	0		$	7,934	$	(949	)	$	7,934	$	(949	)		100.0	%
Collateralized mortgage obligations and residential mortgage-backed securities		92,998		(1,249	)		0		0			92,998		(1,249	)		91,051		(11,037	)		58,348		(10,190	)		149,399		(21,227	)		99.6	%
Municipal securities		27,532		(197	)		0		0			27,532		(197	)		230,567		(48,029	)		6,170		(1,819	)		236,737		(49,848	)		98.3	%
Collateralized debt obligations		0		0			970		(1,203	)		970		(1,203	)		0		0			1,030		(1,143	)		1,030		(1,143	)		100.0	%
Total temporarily impaired	$	129,321	$	(1,538	)	$	970	$	(1,203	)	$	130,291	$	(2,741	)	$	321,618	$	(59,066	)	$	73,482	$	(14,101	)	$	395,100	$	(73,167	)		98.7	%
Number of securities				77					2					79					415					41					456

	(Dollars in thousands)
	Less than 12 months					12 months or longer					Total
	Estimated					Estimated					Estimated					Percentage of
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Total Portfolio
	Value		Losses			Value		Losses			Value		Losses			in Loss Position
December 31, 2021
U.S. government sponsored entities	$	8,669	$	(214	)	$	0	$	0		$	8,669	$	(214	)		100.0	%
Collateralized mortgage obligations and residential mortgage-backed securities		126,373		(3,175	)		8,109		(364	)		134,482		(3,539	)		72.8	%
Municipal securities		70,309		(527	)		0		0			70,309		(527	)		21.2	%
Collateralized debt obligations		0		0			992		(1,181	)		992		(1,181	)		100.0	%
Total temporarily impaired	$	205,351	$	(3,916	)	$	9,101	$	(1,545	)	$	214,452	$	(5,461	)		40.7	%
Number of securities				133					5					138

(Dollars in thousands)

Less than 12 months

12 months or longer

Total

Estimated

Estimated

Estimated

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

December 31, 2020

U.S. government sponsored entities
$ 4,975 $ (24 ) $ 0 $ 0 $ 4,975 $ (24 )
Collateralized mortgage obligations and residential mortgage-backed securities
11,953 (36 ) 0 0 11,953 (36 )
Municipal securities
1,864 (2 ) 0 0 1,864 (2 )
Collateralized debt obligations
0 0 929 (1,253 ) 929 (1,253 )
Total temporarily impaired
$ 18,792 $ (62 ) $ 929 $ (1,253 ) $ 19,721 $ (1,315 )
Number of securities
8 2 10

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

Note 45 - Loans Receivable

The Bancorp’s current lending programs are described below:

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

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

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

The Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice annually or are “Mini-Fixed.” The “Mini‑Fixed” mortgage reprices annually after a one, three, five, seven or ten year period. 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.

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

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

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

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

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

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

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

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

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

Manufactured Homes. The Bancorp purchases fixed rate closed loans from a third party that are subject to Bancorp’s underwriting requirements and secured by manufactured homes. The maturity date on these loans can range up to 25 years. In addition, these loans ~~have partial recourse~~are partially secured by a reserve account held at the Bancorp.

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

(Dollars in thousands)

June 30, 2021

December 31, 2020

Loans secured by real estate:

Residential real estate
$ 268,649 $ 286,048
Home equity
36,684 39,233
Commercial real estate
315,087 298,257
Construction and land development
104,154 93,562
Multifamily
53,639 50,571
Farmland
309 215
Total loans secured by real estate
778,522 767,886
Commercial business
149,414 158,140
Consumer
544 1,025
Manufactured homes
28,135 24,232
Government
8,462 10,142
Subtotal
965,077 961,425
Add (less):

Net deferred loan origination fees and purchase premiums..
4,235 3,871
Undisbursed loan funds and clearings
179 (150 )
Loans receivable
$ 969,491 $ 965,146

Loans receivable are summarized below:

(Dollars in thousands)
	June 30, 2022			December 31, 2021
Loans secured by real estate:
Residential real estate	$	459,151		$	260,134
Home equity		35,672			34,612
Commercial real estate		420,735			317,145
Construction and land development		153,422			123,822
Multifamily		248,495			61,194
Total loans secured by real estate		1,317,475			796,907
Commercial business		103,649			115,772
Consumer		1,673			582
Manufactured homes		37,693			37,887
Government		8,081			8,991
Loans receivable		1,468,571			960,139
Add (less):
Net deferred loan origination costs		6,482			6,810
Undisbursed loan funds		(672	)		(229	)
Loans receivable, net of deferred fees and costs..	$	1,474,381		$	966,720

(Dollars in thousands)	Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance			Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2021:
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2022:													The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2022:

Allowance for loan losses:
Residential real estate	$	2,176	$	0		$	15	$	103		$	2,294		$	2,493	$	-		$	29	$	234		$	2,756
Home equity		309		0			0		62			371			354		-			-		19			373
Commercial real estate		5,726		0			0		213			5,939			5,530		-			-		(3	)		5,527
Construction and land development		1,587		0			0		211			1,798			2,135		-			-		(391	)		1,744
Multifamily		680		0			0		60			740			889		-			-		239			1,128
Farmland		0		0			0		0			0
Commercial business		2,552		0			11		(89	)		2,474			1,941		-			7		(140	)		1,808
Consumer		17		(11	)		1		16			23			45		(27	)		10		42			70
Manufactured homes		0		0			0		0			0			-		-			-		-			0
Government		0		0			0		0			0			-		-			-		-			0
Total	$	13,047	$	(11	)	$	27	$	576		$	13,639		$	13,387	$	(27	)	$	46	$	-		$	13,406

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2020:

Allowance for loan losses:

Residential real estate
$ 1,828 $ (2 ) $ 4 $ (122 ) $ 1,708
Home equity
246 0 0 (15 ) 231
Commercial real estate
3,693 (80 ) 0 99 3,712
Construction and land development
1,223 (17 ) 0 (5 ) 1,201
Multifamily
562 0 0 47 609
Farmland
0 0 0 0 0
Commercial business
1,901 (78 ) 16 536 2,375
Consumer
42 (1 ) 5 (16 ) 30
Manufactured homes
0 0 0 0 0
Government
16 0 0 (16 ) 0
Total
$ 9,511 $ (178 ) $ 25 $ 508 $ 9,866

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2021:

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2021:

Allowance for loan losses:
Residential real estate	$	2,211	$	(4	)	$	25	$	62		$	2,294	$	2,176	$	0		$	15	$	103		$	2,294
Home equity		276		(1	)		0		96			371		309		0			-		62			371
Commercial real estate		5,406		0			0		533			5,939		5,726		-			-		213			5,939
Construction and land development		1,405		0			0		393			1,798		1,587		-			-		211			1,798
Multifamily		626		0			0		114			740		680		-			-		60			740
Farmland		0		0			0		0			0
Commercial business		2,508		0			19		(53	)		2,474		2,552		-			11		(89	)		2,474
Consumer		26		(17	)		5		9			23		17		(11	)		1		16			23
Manufactured homes		0		0			0		0			0		-		-			-		-			-
Government		0		0			0		0			0		-		-			-		-			-
Total	$	12,458	$	(22	)	$	49	$	1,154		$	13,639	$	13,047	$	(11	)	$	27	$	576		$	13,639

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2020:

Allowance for loan losses:

Residential real estate
$ 1,812 $ (2 ) $ 10 $ (112 ) $ 1,708
Home equity
223 0 0 8 231
Commercial real estate
3,773 (80 ) 0 19 3,712
Construction and land development
1,098 (17 ) 0 120 1,201
Multifamily
529 0 0 80 609
Farmland
0 0 0 0 0
Commercial business
1,504 (78 ) 17 932 2,375
Consumer
43 (13 ) 8 (8 ) 30
Manufactured homes
0 0 0 0 0
Government
17 0 0 (17 ) 0
Total
$ 8,999 $ (190 ) $ 35 $ 1,022 $ 9,866

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2022:

Allowance for loan losses:
Residential real estate	$	2,480	$	-		$	50	$	226		$	2,756
Home equity		357		-			-		16			373
Commercial real estate		5,515		-			-		12			5,527
Construction and land development		2,119		-			-		(375	)		1,744
Multifamily		848		-			-		280			1,128
Commercial business		2,009		-			38		(239	)		1,808
Consumer		15		(37	)		12		80			70
Manufactured homes		-		-			-		-			0
Government		-		-			-		-			0
Total	$	13,343	$	(37	)	$	100	$	-		$	13,406

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2021:

Allowance for loan losses:
Residential real estate	$	2,211	$	(4	)	$	25	$	62		$	2,294
Home equity		276		(1	)		-		96			371
Commercial real estate		5,406		-			-		533			5,939
Construction and land development		1,405		-			-		393			1,798
Multifamily		626		-			-		114			740
Commercial business		2,508		-			19		(53	)		2,474
Consumer		26		(17	)		5		9			23
Manufactured homes		-		-			-		-			-
Government		-		-			-		-			-
Total	$	12,458	$	(22	)	$	49	$	1,154		$	13,639

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,~~expectations, the deferred cost reserve is paid as a premium to the third party originator of the loan. The unamortized balance of the deferred cost reserve totaled ~~$4.4~~$5.3 million and ~~$3.8~~$5.8 million as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, and is included in net deferred loan origination ~~costs and purchase premiums.~~costs.

The Bancorp's impairment analysis is summarized below:

Ending Balances

(Dollars in thousands)

Individually
evaluated for
impairment
reserves

Collectively
evaluated for
impairment
reserves

Loan receivables

Individually
evaluated for
impairment

Purchased credit
impaired
individually
evaluated for
impairment

Collectively
evaluated for
impairment

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at June 30, 2021:

Residential real estate
$ 85 $ 2,209 $ 268,649 $ 730 $ 1,002 $ 266,917
Home equity
5 366 36,684 164 129 36,391
Commercial real estate
1,204 4,735 315,087 7,260 146 307,681
Construction and land development
0 1,798 104,154 0 0 104,154
Multifamily
0 740 53,639 0 596 53,043
Farmland
0 0 309 0 0 309
Commercial business
476 1,998 149,414 944 1,147 147,323
Consumer
0 23 544 0 0 544
Manufactured homes
0 0 28,135 0 0 28,135
Government
0 0 8,462 0 0 8,462
Total
$ 1,770 $ 11,869 $ 965,077 $ 9,098 $ 3,020 $ 952,959

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2020:

Residential real estate
$ 173 $ 2,038 $ 286,048 $ 868 $ 1,297 $ 283,883
Home equity
1 275 39,233 216 137 38,880
Commercial real estate
1,089 4,317 298,257 6,190 151 291,916
Construction and land development
0 1,405 93,562 0 0 93,562
Multifamily
0 626 50,571 95 621 49,855
Farmland
0 0 215 0 0 215
Commercial business
512 1,996 158,140 1,086 1,160 155,894
Consumer
0 26 1,025 0 0 1,025
Manufactured homes
0 0 24,232 0 0 24,232
Government
0 0 10,142 0 0 10,142
Total
$ 1,775 $ 10,683 $ 961,425 $ 8,455 $ 3,366 $ 949,604

The Bancorp's impairment analysis is summarized below:

	Ending Balances

(Dollars in thousands)	Individually evaluated for impairment reserves		Collectively evaluated for impairment reserves		Loan receivables		Individually evaluated for impairment		Purchased credit impaired individually evaluated for impairment		Collectively evaluated for impairment

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at June 30, 2022:

Residential real estate	$	31	$	2,725	$	459,151	$	290	$	2,057	$	456,804
Home equity		3		370		35,672		21		133		35,518
Commercial real estate		446		5,081		420,735		846		2,970		416,919
Construction and land development		-		1,744		153,422		-		800		152,622
Multifamily		-		1,128		248,495		-		2,940		245,555
Commercial business		251		1,557		103,649		306		1,024		102,319
Consumer		-		70		1,673		-		20		1,653
Manufactured homes		-		-		37,693		-		-		37,693
Government		-		-		8,081		-		-		8,081
Total	$	731	$	12,675	$	1,468,571	$	1,463	$	9,944	$	1,457,164

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2021:

Residential real estate	$	17	$	2,463	$	260,134	$	755	$	1,016	$	258,363
Home equity		4		353		34,612		147		137		34,328
Commercial real estate		386		5,129		317,145		1,600		-		315,545
Construction and land development		-		2,119		123,822		-		-		123,822
Multifamily		-		848		61,194		-		556		60,638
Commercial business		277		1,732		115,772		524		1,073		114,175
Consumer		-		15		582		-		-		582
Manufactured homes		-		-		37,887		-		-		37,887
Government		-		-		8,991		-		-		8,991
Total	$	684	$	12,659	$	960,139	$	3,026	$	2,782	$	954,331

The Bancorp's credit quality indicators are summarized below at June 30, 2021 and December 31, 2020:

Credit Exposure - Credit Risk Portfolio By Creditworthiness Category

June 30, 2021

(Dollars in thousands)
1-5 6 7 8

Loan Segment

Pass

Pass/monitor

Special mention

Substandard

Total

Residential real estate
$ 224,121 $ 36,446 $ 3,969 $ 4,113 $ 268,649
Home equity
34,900 712 560 512 36,684
Commercial real estate
233,022 59,866 13,801 8,398 315,087
Construction and land development
80,521 19,971 3,662 0 104,154
Multifamily
46,911 4,951 1,377 400 53,639
Farmland
101 208 0 0 309
Commercial business
127,244 20,092 1,162 916 149,414
Consumer
544 0 0 0 544
Manufactured homes
27,335 740 60 0 28,135
Government
8,462 0 0 0 8,462
Total
$ 783,161 $ 142,986 $ 24,591 $ 14,339 $ 965,077

The Bancorp's credit quality indicators are summarized below at June 30, 2022 and December 31, 2021:

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
	June 30, 2022
(Dollars in thousands)	1-6		7		8

Loan Segment	Pass		Special mention		Substandard		Total
Residential real estate	$	451,077	$	2,055	$	6,019	$	459,151
Home equity		34,648		400		624		35,672
Commercial real estate		403,000		10,890		6,845		420,735
Construction and land development		152,622		800		0		153,422
Multifamily		244,053		1,541		2,901		248,495
Commercial business		100,313		3,057		279		103,649
Consumer		1,673		0		0		1,673
Manufactured homes		37,693		0		0		37,693
Government		8,081		0		0		8,081
Total	$	1,433,160	$	18,743	$	16,668	$	1,468,571

	December 31, 2020										December 31, 2021
(Dollars in thousands)	1-5		6		7		8				1-6		7		8

Loan Segment	Pass		Pass/monitor		Special mention		Substandard		Total		Pass		Special mention		Substandard		Total
Residential real estate	$	234,317	$	41,805	$	3,539	$	6,387	$	286,048	$	253,472	$	2,940	$	3,722	$	260,134
Home equity		37,044		933		761		495		39,233		33,565		415		632		34,612
Commercial real estate		222,892		55,202		11,983		8,180		298,257		301,572		12,011		3,562		317,145
Construction and land development		77,855		12,055		3,652		0		93,562		120,192		3,630		0		123,822
Multifamily		43,594		5,065		1,408		504		50,571		60,657		153		384		61,194
Farmland		0		215		0		0		215
Commercial business		135,671		20,067		1,341		1,061		158,140		113,470		1,915		387		115,772
Consumer		1,025		0		0		0		1,025		582		0		0		582
Manufactured homes		23,501		731		0		0		24,232		37,828		59		0		37,887
Government		10,142		0		0		0		10,142		8,991		0		0		8,991
Total	$	786,041	$	136,073	$	22,684	$	16,627	$	961,425	$	930,329	$	21,123	$	8,687	$	960,139

The Bancorp has established a standard loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio. The use and application of these grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system is as follows:

1 – Superior Quality

Loans in this category are substantially risk free. Loans fully collateralized by a Bank certificate of deposit or Bank deposits with a hold are substantially risk free.

2 – Excellent Quality

The borrower generates excellent and consistent cash flow for debt coverage, excellent average credit scores, excellent liquidity and net worth and are reputable operators with over 15 years experience. Current and debt to tangible net worth ratios are excellent. Loan to value is substantially below policy and collateral condition is excellent.

3 – Great Quality

The borrower generates more than sufficient cash flow to fund debt service and cash flow is improving. Average credit scores are very strong. Operators are reputable with significant years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are very strong. Loan to value is significantly below policy and collateral condition is significantly above average.

4 – Above Average Quality

The borrower generates more than sufficient cash flow to fund debt service but cash flow trends may be stable or slightly declining. Average credit scores are strong. The borrower is a reputable operator with many years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are strong. Loan to value is below policy and collateral condition is above average.

5 – Average Quality

Borrowers are considered creditworthy and can repay the debt in the normal course of business, however, cash flow trends may be inconsistent or fluctuating. Average credit scores are satisfactory and years of experience is acceptable. Liquidity and net worth are satisfactory. Current and debt to tangible net worth ratios are average. Loan to value is slightly below policy and the collateral condition is slightly above average.

6 – Pass

Borrowers are considered credit worthy but financial condition may show signs of weakness due to internal or external factors. Cash flow trends may be declining annually. Average credit scores may be low but remain acceptable. Borrower has limited years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are below average. Loan to value is nearing policy limits and collateral condition is average.

7 – Special Mention

A special mention asset has identified weaknesses that deserve Management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. There is still adequate protection by the current sound worth and paying capacity of the obligor or of the collateral pledged. The Special Mention rating is viewed as transitional and will be monitored closely.

Loans in this category may exhibit some of the following risk factors. Cash flow trends may be consistently declining or may be questionable. Debt coverage ratios may be at or near 1:1. Average credit scores may be very weak or the borrower may have minimal years of experience. Liquidity, net worth, current and debt to tangible net worth ratios may be very weak. Loan to value may be at policy limits or may exceed policy limits. Collateral condition may be below average.

8 – Substandard

This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit, some loss could be incurred in collection if the deficiencies are not corrected.

9– Doubtful

Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.

10– Loss

Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.

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

During the six months ending June 30, 2022, ten residential real estate loans totaling $974 thousand and one home equity loan totaling $7 thousand, were modified to include deferral of principal resulting in troubled debt restructuring classification. No trouble debt restructuring loans had subsequently defaulted during the six months ending June 30, 2022. During the six months ending June 30, 2021, 2two residential real estate loans to one customer totaling $150 thousand were modified to included deferral of principal ~~resulting in troubled debt restructuring classification. NaN~~and one commercial real estate loan totaling $835 thousand was restructured with a reduced interest rate and extended amortization resulting in troubled debt restructuring ~~classification. NaN~~classifications. Two residential real estate trouble debt restructuring loans totaling $73 thousand had subsequently defaulted during the six months ending June 30, 2021.~~During the~~ ~~six~~ ~~months ending~~ ~~June, 2020,~~ 1 commercial real estate loan totaling $148 thousand, 1 residential loan totaling $52 thousand and 1 home equity loan totaling $24 thousand were renewed as a troubled debt restructuring. NaN commercial business trouble debt restructuring loan totaling $294 thousand has subsequently defaulted during the ~~six~~ ~~months ending~~ ~~June 30, 2020.~~ All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

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

For the six months ended

For the three months ended

As of June 30, 2021

June 30, 2021

June 30, 2021

(Dollars in thousands)

Recorded
Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

Average
Recorded
Investment

Interest Income Recognized

With no related allowance recorded:

Residential real estate
$ 1,571 $ 2,904 $ - $ 1,735 $ 42 $ 1,655 $ 20
Home equity
271 283 - 317 5 300 1
Commercial real estate
1,538 2,121 - 1,295 26 1,354 14
Construction and land development
0 0 - 0 0 0 0
Multifamily
596 678 - 670 11 648 6
Farmland
0 0 - 0 0 0 0
Commercial business
1,408 1,408 - 1,447 36 1,422 18
Consumer
0 0 - 0 0 0 0
Manufactured homes
0 0 - 0 0 0 0
Government
0 0 - 0 0 0 0

With an allowance recorded:

Residential real estate
$ 161 $ 161 $ 85 $ 198 $ 5 $ 162 $ 0
Home equity
22 22 5 15 0 23 0
Commercial real estate
5,868 5,868 1,204 5,655 113 5,901 63
Construction and land development
0 0 0 0 0 0 0
Multifamily
0 0 0 0 0 0 0
Farmland
0 0 0 0 0 0 0
Commercial business
683 683 476 719 22 704 11
Consumer
0 0 0 0 0 0 0
Manufactured homes
0 0 0 0 0 0 0
Government
0 0 0 0 0 0 0

Total:

Residential real estate
$ 1,732 $ 3,065 $ 85 $ 1,933 $ 47 $ 1,817 $ 20
Home equity
$ 293 $ 305 $ 5 $ 332 $ 5 $ 323 $ 1
Commercial real estate
$ 7,406 $ 7,989 $ 1,204 $ 6,950 $ 139 $ 7,255 $ 77
Construction & land development
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Multifamily
$ 596 $ 678 $ 0 $ 670 $ 11 $ 648 $ 6
Farmland
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Commercial business
$ 2,091 $ 2,091 $ 476 $ 2,166 $ 58 $ 2,126 $ 29
Consumer
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Manufactured homes
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Government
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

The Bancorp’s individually evaluated impaired loans are summarized below.

(Dollars in thousands)							For the six months ended				For the three months ended
(unaudited)	As of June 30, 2022						June 30, 2022				June 30, 2022
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	2,057	$	4,844	$	-	$	2,438	$	155	$	2,816	$	125
Home equity		133		253		-		214		13		191		6
Commercial real estate		2,970		3,236		-		2,448		220		3,290		210
Construction and land development		800		1,023		-		573		0		860		0
Multifamily		2,940		3,269		-		2,337		62		3,228		62
Commercial business		1,024		1,024		-		1,159		76		1,136		61
Consumer		20		20		-		14		0		21		0
Manufactured homes		0		0		-		0		0		0		0
Government		0		0		-		0		0		0		0

With an allowance recorded:
Residential real estate	$	290	$	328	$	31	$	154	$	9	$	188	$	6
Home equity		21		21		3		21		1		21		0
Commercial real estate		846		847		446		844		0		849		0
Construction and land development		0		-		-		0		0		0		0
Multifamily		0		-		-		0		0		0		0
Commercial business		306		369		251		338		16		311		0
Consumer		0		-		-		0		0		0		0
Manufactured homes		0		-		-		0		0		0		0
Government		0		-		-		0		0		0		0

Total:
Residential real estate	$	2,347	$	5,172	$	31	$	2,592	$	164	$	3,004	$	131
Home equity	$	154	$	274	$	3	$	235	$	14	$	212	$	6
Commercial real estate	$	3,816	$	4,083	$	446	$	3,292	$	220	$	4,139	$	210
Construction & land development	$	800	$	1,023	$	-	$	573	$	0	$	860	$	0
Multifamily	$	2,940	$	3,269	$	-	$	2,337	$	62	$	3,228	$	62
Commercial business	$	1,330	$	1,393	$	251	$	1,497	$	92	$	1,447	$	61
Consumer	$	20	$	20	$	-	$	14	$	0	$	21	$	0
Manufactured homes	$	-	$	-	$	-	$	0	$	0	$	0	$	0
Government	$	-	$	-	$	-	$	0	$	0	$	0	$	0

							For the six months ended				For the three months ended										For the six months ended				For the three months ended
	As of December 31, 2020						June 30, 2020				June 30, 2020				As of December 31, 2021						June 30, 2021				June 30, 2021
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,895	$	3,228	$	-	$	2,107	$	49	$	2,090	$	25	$	1,683	$	3,017	$	-	$	1,735	$	42	$	1,817	$	20
Home equity		352		363		-		384		9		362		4		262		275		-		317		5		341		1
Commercial real estate		1,177		1,761		-		1,379		47		1,295		34		765		765		-		1,295		26		1,174		14
Construction & land development		0		0		-		0		0		0		0		0		0		-		0		0		0		0
Multifamily		716		798		-		784		14		775		7		556		647		-		670		11		708		6
Farmland		0		0		-		0		0		0		0
Commercial business		1,497		1,514		-		1,588		40		1,475		23		1,205		1,324		-		1,447		36		1,467		18
Consumer		0		0		-		0		0		0		0		0		0		-		0		0		0		0
Manufactured homes		0		0		-		0		0		0		0		0		0		-		0		0		0		0
Government		0		0		-		0		0		0		0		0		0		-		0		0		0		0

With an allowance recorded:
Residential real estate	$	270	$	314	$	173	$	107	$	1	$	120	$	0	$	88	$	88	$	17	$	198	$	5	$	165	$	0
Home equity		1		9		1		5		0		0		0		22		22		4		15		0		23		0
Commercial real estate		5,164		5,164		1,089		67		1		92		1		835		835		386		5,655		113		5,901		63
Construction & land development		0		0		0		0		0		0		0		0		-		-		0		0		0		0
Multifamily		0		0		0		0		0		0		0		0		-		-		0		0		0		0
Farmland		0		0		0		0		0		0		0
Commercial business		749		749		512		676		19		826		16		392		392		277		719		22		704		11
Consumer		0		0		0		0		0		0		0		0		-		-		0		0		0		0
Manufactured homes		0		0		0		0		0		0		0		0		-		-		0		0		0		0
Government		0		0		0		0		0		0		0		0		-		-		0		0		0		0

Total:
Residential real estate	$	2,165	$	3,542	$	173	$	2,214	$	50	$	2,210	$	25	$	1,771	$	3,105	$	17	$	1,933	$	47	$	1,982	$	20
Home equity	$	353	$	372	$	1	$	389	$	9	$	362	$	4	$	284	$	297	$	4	$	332	$	5	$	364	$	1
Commercial real estate	$	6,341	$	6,925	$	1,089	$	1,446	$	48	$	1,387	$	35	$	1,600	$	1,600	$	386	$	6,950	$	139	$	7,075	$	77
Construction & land development	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	-	$	0	$	0	$	0	$	0
Multifamily	$	716	$	798	$	0	$	784	$	14	$	775	$	7	$	556	$	647	$	-	$	670	$	11	$	708	$	6
Farmland	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Commercial business	$	2,246	$	2,263	$	512	$	2,264	$	59	$	2,301	$	39	$	1,597	$	1,716	$	277	$	2,166	$	58	$	2,171	$	29
Consumer	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	-	$	0	$	0	$	0	$	0
Manufactured homes	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	-	$	-	$	-	$	0	$	0	$	0	$	0
Government	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	-	$	-	$	-	$	0	$	0	$	0	$	0

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

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investments Greater than 90 Days Past Due and Accruing
June 30, 2022
Residential real estate	$	2,137	$	2,306	$	3,260	$	7,703	$	451,448	$	459,151	$	610
Home equity		114		7		527		648		35,024		35,672		0
Commercial real estate		135		1,734		2,477		4,346		416,389		420,735		517
Construction and land development		337		56		0		393		153,029		153,422		0
Multifamily		24		307		109		440		248,055		248,495		0
Commercial business		1,706		1,205		281		3,192		100,457		103,649		81
Consumer		4		0		0		4		1,669		1,673		0
Manufactured homes		230		334		0		564		37,129		37,693		0
Government		0		0		0		0		8,081		8,081		0
Total	$	4,687	$	5,949	$	6,654	$	17,290	$	1,451,281	$	1,468,571	$	1,208

December 31, 2021
Residential real estate	$	2,507	$	824	$	2,142	$	5,473	$	254,661	$	260,134	$	31
Home equity		169		67		565		801		33,811		34,612		34
Commercial real estate		231		1,960		944		3,135		314,010		317,145		91
Construction and land development		5,148		283		0		5,431		118,391		123,822		0
Multifamily		0		0		109		109		61,085		61,194		0
Commercial business		573		1,594		242		2,409		113,363		115,772		49
Consumer		0		3		0		3		579		582		0
Manufactured homes		633		171		0		804		37,083		37,887		0
Government		0		0		0		0		8,991		8,991		0
Total	$	9,261	$	4,902	$	4,002	$	18,165	$	941,974	$	960,139	$	205

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

(Dollars in thousands)

30-59 Days Past
Due

60-89 Days Past
Due

Greater Than
90 Days Past Due

Total Past Due

Current

Total Loans

Recorded
Investments
Greater than 90
Days Past
Due and Accruing

June 30, 2021

Residential real estate
$ 1,894 $ 1,191 $ 2,396 $ 5,481 $ 263,168 $ 268,649 $ 79
Home equity
398 47 413 858 35,826 36,684 0
Commercial real estate
619 488 1,421 2,528 312,559 315,087 95
Construction and land development
328 0 42 370 103,784 104,154 41
Multifamily
256 0 120 376 53,263 53,639 0
Farmland
0 0 0 0 309 309 0
Commercial business
1,316 0 215 1,531 147,883 149,414 33
Consumer
1 0 0 1 543 544 0
Manufactured homes
249 109 0 358 27,777 28,135 0
Government
0 0 0 0 8,462 8,462 0
Total
$ 5,061 $ 1,835 $ 4,607 $ 11,503 $ 953,574 $ 965,077 $ 248

December 31, 2020

Residential real estate
$ 2,797 $ 1,119 $ 4,875 $ 8,791 $ 277,257 $ 286,048 $ 80
Home equity
616 323 416 1,355 37,878 39,233 29
Commercial real estate
1,172 237 680 2,089 296,168 298,257 437
Construction and land development
471 0 20 491 93,071 93,562 20
Multifamily
94 266 150 510 50,061 50,571 0
Farmland
0 0 0 0 215 215 0
Commercial business
845 96 269 1,210 156,930 158,140 0
Consumer
2 0 0 2 1,023 1,025 0
Manufactured homes
303 173 0 476 23,756 24,232 0
Government
380 0 0 380 9,762 10,142 0
Total
$ 6,680 $ 2,214 $ 6,410 $ 15,304 $ 946,121 $ 961,425 $ 566

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

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

(Dollars in thousands)					June 30, 2022		December 31, 2021
	June 30, 2021		December 31, 2020
Residential real estate	$	4,180	$	6,390	$	4,975	$	4,651
Home equity		495		476		610		623
Commercial real estate		6,521		5,390		2,594		940
Construction and land development.		0		0
Construction and land development						0		0
Multifamily		400		504		369		455
Farmland		0		0
Commercial business		429		1,039		265		387
Consumer		0		0		0		0
Manufactured homes		0		0		0		0
Government		0		0		0		0
Total	$	12,025	$	13,799	$	8,813	$	7,056

As a result of acquisition activity, the Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At June 30, ~~2021,~~2022, total purchased credit impaired loans with unpaid principal balances totaled ~~$5.0~~$11.9 million with a recorded investment of ~~$3.0~~$9.9 million. At December 31, ~~2020,~~2021, purchased credit impaired loans with unpaid principal balances totaled ~~$5.4~~$4.2 million with a recorded investment of ~~$3.4~~$2.8 million.

Accretable interest taken from the purchase credit impaired portfolio, or income recorded for the six months ended June 30, is as follows:

(dollars in thousands)

Total

2020
$ 57
2021
21

Accretable interest taken from the purchase credit impaired portfolio, or income recorded for the three months ended June 30, is as follows:

(dollars in thousands)

Total

2020
$ 28
2021
0

~~The accretable interest portion~~As part of the ~~purchase credit impaired portfolio has fully amortized~~fair value of loans receivable, there was a net fair value discount for loans acquired of $6.0 million at June 30, 2022, compared to $1.1 million at December 31, 2021.

~~Accretable yield, or income recorded for the~~ ~~six~~

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

(dollars in thousands)	Total		Total
2020	$	975

2021		605	$	300
2022				440

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

(dollars in thousands)	Total		Total
2020	$	615
2021		300	$	605
2022				547

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

(dollars in thousands)	Total		Total
2021	$	384
2022		758
Remainder 2022			$	240
2023		271		665
2024				649
2025				507
2026 and thereafter				3,565
Total	$	1,413	$	5,958

~~Note~~ 5 ~~- Foreclosed Real Estate~~

~~Foreclosed real estate at period-end is summarized below:~~

(Dollars in thousands)

June 30, 2021

December 31, 2020

Residential real estate
$ 158 $ 328
Commercial business
210 210
Total
$ 368 $ 538
20

Note 6 – Intangibles and Acquisition Related Accounting
The Bancorp established a goodwill balance totaling $11.5 million with the acquisition of RYFL, and also maintains goodwill balances totaling $11.1 million from ~~past~~prior acquisitions. Goodwill totaled $22.6 million and $11.1 million as of June 30, 2022 and December 31, 2021, respectively. During the three months ended June 30, 2022, there was remeasurement of goodwill reducing the balance by $158 thousand, see Note 3 – Acquisition Activity for more detail on the remeasurement. Goodwill is tested annually for impairment. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Bancorp’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Bancorp to provide quality, cost effective banking services in a competitive marketplace. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. ~~Additionally, as part of the Bancorp’s annual impairment test of goodwill as of~~ ~~December 31, 2020,~~ ~~the Bancorp enlisted a~~ ~~third~~ party expert to assist with the evaluation of goodwill for impairment. The evaluation involved the comparison of the fair value of the Bancorp to its carrying value. The Bancorp determined its fair value using a blend of the income approach (discounted cash flow model) and market approach (guideline public company method and guideline transaction method). The determination of the fair value using the discounted cash flow model required the Bancorp to make significant estimates and assumptions related to forecasts of future income, provision for credit losses, and discount rates. The determination of the fair value using the guideline public company method required management to make significant assumptions related to price to tangible book value multiples and price to earnings multiples, as well as significant assumptions related to control premiums. The determination of the fair value using the guideline transaction method required management to review the value of the business based on pricing multiples derived from the sale of companies that are similar to the Bancorp. The Bancorp’s estimation of fair value for the quantitative goodwill impairment testing exceeded its carrying value as of ~~December 31, 2020~~ ~~and therefore, 0 impairment was recognized.~~ There has not been any impairment of goodwill identified or recorded. ~~Goodwill totaled $11.1 million as of~~ ~~June 30, 2021~~ ~~and~~ ~~December 31, 2020.~~

19
In addition to goodwill, a core deposit ~~intangibles were~~intangible was established with the acquisition of RYFL and from ~~past acquisitions and are subject to amortization. As of~~ ~~June 30, 2021,~~ ~~the~~previous acquisitons. The Bancorp had core deposit intangible balances of ~~$3.6 million.~~$5.6 million and $3.1 million as of June 30, 2022, and December 31, 2021, respectively. The table below summarizes the annual amortization:

Amortization recorded for the six months ended June 30, 2021 is as follows:

(dollars in thousands)

Total

Current period
$ 497
The amortization recorded for the three months ended June 30, is as follows:

Amortization recorded for the three months ended June 30, 2021 is as follows:

(dollars in thousands)

Total

Current period
$ 249
(dollars in thousands)

Total

2021
$ 249
2022
$ 410

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

(dollars in thousands

Total

Remainder 2021
497
2022
983
2023
962
2024
919
2025
261
Total
$ 3,622
The amortization recorded for the six months ended June 30, is as follows:
(dollars in thousands)

Total

2021
$ 497
2022
$ 757
Amortization to be recorded in future periods, is as follows:
(dollars in thousands)

Total

Current year
795
2023
1,522
2024
1,411
2025
688
2026
360
5 years and thereafter
812
Total
$ 5,588
For the RYFL acquisition, as part of the fair value of certificates of deposit, a fair value premium was established of $1.0 million. Approximately $175 thousand and $304 thousand of amortization was taken as income during the three and six months ended June 30, 2022, respectively. It is estimated amortization to be recorded in future periods is as follows; an additional $237 thousand in 2022, $217 thousand in 2023, $124 thousand in 2024, $72 thousand in 2025, and $55 thousand thereafter.

Note 7 - Concentrations of Credit Risk
The primary lending area of the Bancorp encompasses Lake County in northwest Indiana and Cook County in northeast Illinois, where collectively a majority of loan activity is concentrated. The Bancorp is also an active lender in Porter County, and to a lesser extent, LaPorte, Newton and Jasper counties in Indiana; and DuPage, Lake, and Will counties in Illinois. Substantially all loans are secured by specific items of collateral including residences, commercial real estate, land development, business assets and consumer assets.

Note 8 - Earnings per Share
Earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding. A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations for the three and six months ended June 30, ~~2021,~~2022, and ~~2020,~~2021, are as follows:

Three Months Ended

Six Months Ended

(Dollars in thousands, except per share data)

June 30,

June 30,

(dollars in thousands except per share data)

Three months ended June 30,

Six months ended June 30,

2021

2020

2021

2020

2022

2021

2022

2021

Basic earnings per common share:

Net income as reported
$ 3,571 $ 4,851 $ 8,114 $ 7,964 $ 4,431 $ 3,571 $ 6,566 $ 8,114
Weighted average common shares outstanding
3,478,392 3,463,136 3,475,017 3,460,820 4,242,559 3,478,392 4,108,579 3,475,017
Basic earnings per common share
$ 1.03 $ 1.40 $ 2.33 $ 2.30 $ 1.04 $ 1.03 $ 1.60 $ 2.33

Diluted earnings per common share:
-
Net income as reported
$ 3,571 $ 4,851 $ 8,114 $ 7,964 $ 4,431 $ 3,571 $ 6,566 $ 8,114
Weighted average common shares outstanding
3,478,392 3,463,136 3,475,017 3,460,820 4,242,559 3,478,392 4,108,579 3,475,017
Add: Dilutive effect of unvested restricted stock awards
15,944 0 16,316 0
Weighted average common and dilutive potential common shares outstanding
3,478,392 3,463,136 3,475,017 3,460,820 4,258,503 3,478,392 4,124,895 3,475,017
Diluted earnings per common share
$ 1.03 $ 1.40 $ 2.33 $ 2.30 $ 1.04 $ 1.03 $ 1.59 $ 2.33

21

Note 9 - Stock Based Compensation
The Bancorp’s 2015 Stock Option and Incentive Plan (the “Plan”), which was adopted by the Bancorp’s Board of Directors on February 27, 2015, and approved by the Bancorp’s shareholders on April 24, 2015, permits the grant of equity awards for up to 250,000 shares of common stock. Awards granted under the Plan may be in the form of incentive stock options, non-qualified stock options, restricted stock, unrestricted stock, performance shares, or performance units.

20
As required by the Stock Compensation Topic, companies are required to record compensation cost for stock options and awards provided to employees in return for employment service. For the three months ended June 30, 2022, stock based compensation expense of $163 thousand was recorded, compared to $139 thousand for the three months ended June 30, 2021. For the six months ended June 30, ~~2021,~~2022, stock based compensation expense of ~~$285~~$332 thousand was recorded, compared to ~~$202~~$285 thousand for the six months ended June 30, ~~2020.~~2021. It is anticipated that current outstanding unvested awards will result in additional compensation expense of approximately ~~$1.1~~$1.5 million through ~~2024~~2025 with an ~~additional $285 thousand in~~ ~~2021,~~ ~~$464 thousand in~~ ~~2022,~~ ~~$291 thousand in~~ ~~2023,~~ ~~and $53 thousand in~~ ~~2024.~~weighted average life of 2.1 years.

~~There were 19,693 shares of restricted stock granted during the~~ ~~first~~~~six~~ ~~months of~~ ~~2021~~ ~~compared to 13,243 shares granted during the~~ ~~first~~~~six~~ ~~months of~~ ~~2020.~~Restricted stock awards are issued with an award price equal to the market price of the Bancorp’s common stock on the award date and vest between three and five years after the grant date. Forfeiture provisions exist for personnel that separate employment before the vesting period expires. A summary of restricted stock activity under the Bancorp’s Plan described above for the ~~year ended~~ ~~December 31, 2020,~~ ~~and~~the six months ended June 30, ~~2021,~~2022, follows:

Non-vested Shares

Shares

Weighted
Average
Grant Date
Fair Value

Shares

Weighted
Average
Grant Date
Fair Value

Non-vested at January 1, 2020
30,205 $ 35.63
Non-vested at January 1, 2022
44,235 $ 42.33
Granted
13,243 44.30 22,891 46.42
Vested
(6,400 ) 27.50 (11,158 ) 41.63
Forfeited
(220 ) 43.65 (1,587 ) 44.17
Non-vested at December 31, 2020
36,828 $ 40.11

Non-vested at January 1, 2021
36,828 $ 40.11
Granted
19,693 40.96
Vested
(13,493 ) 34.84
Forfeited
(355 ) 41.50
Non-vested at June 30, 2021
42,673 $ 42.16
Non-vested at June 30, 2022
54,381 $ 44.14

Note 10 – Change in Accounting Principles
In ~~January 2017,~~ ~~the FASB issued ASU~~ ~~2017~~-~~04,~~ ~~Intangibles – Goodwill and Other (Topic~~ ~~350~~~~): Simplifying the Test for Goodwill Impairment. This Standard simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step~~ 2 ~~from the goodwill impairment test. Step~~ 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, ~~an entity, prior to the amendments in ASU~~ ~~No.~~~~2017~~-~~04,~~ had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in this ASU, an entity should (1~~) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (~~2~~) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should~~ ~~not~~ ~~exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU~~ ~~No.~~~~2017~~-04 ~~removes the requirements for any reporting unit with a~~ ~~zero~~ ~~or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step~~ 2 of the goodwill impairment test. Finally, this ASU amends the Overview and Background sections of the Accounting Standards Codification as part of the FASB’s initiative to unify and improve such sections across Topics and Subtopics. The new guidance was effective for the Bancorp’s year ending ~~December 31, 2020,~~ ~~and was adopted on~~ ~~January 1, 2020.~~ ~~The adoption of this ASU has~~ ~~not~~ ~~had a material impact on the consolidated financial statements, and the Bancorp has~~ ~~not~~ ~~recorded goodwill impairment to date as part of their acquisition activity.~~
22

On ~~January 1, 2020,~~ ~~the Bancorp adopted the provision of ASU~~ ~~2018–13,~~ ~~which modifies the disclosure requirements on fair value measurements. The amendment removes certain disclosures required by Topic~~ ~~820~~ ~~related to transfers between Level~~ 1 ~~and Level~~ 2 ~~of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level~~ 3 fair value measurements. The update also adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 ~~fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level~~ 3 ~~fair value measurements. For certain unobservable inputs, the Bancorp~~ ~~may~~ disclose other quantitative information in lieu of the weighted average if we determine that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 ~~fair value measurements. The adoption of this new guidance did~~ ~~not~~ ~~have a material impact on our consolidated financial statements~~
In December 2019, the FASB issued ASU 2019-12 which remove specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences where there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. It also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacts changes in tax laws in interim periods. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Bancorp adopted ASU 2019-12 on January 1, 2021 and it did not have a material impact on its accounting and disclosures.

Note 11 - Upcoming Accounting Standards
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU includes increased disclosures and various changes to the accounting and measurement of financial assets including the Bancorp’s loans and available-for-sale debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. In October 2019, the FASB voted and approved proposed changes to the effective date of this ASU for smaller reporting companies, such as the Bancorp, and other non-SEC reporting entities. The approval changed the effective date of the ASU to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. The new credit loss guidance will be effective for the ~~Bancorp's year ending~~Bancorp as of ~~December 31,~~January 1, 2023. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Early adoption for all institutions is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is in the process of evaluating the impact adoption of this update will have on the Bancorp’s consolidated financial statements. This process of evaluation has engaged multiple areas of the Bancorp’s management in discussing loss estimation methods and the application of these methods to specific segments of the loans receivable portfolio. Management has been actively monitoring developments and evaluating the use of different methods allowed. Due to continuing development of understanding of application, additional time is required to understand how this ASU will affect the Bancorp’s financial statements. Management plans on running parallel calculations and finalizing a method or methods of adoption in time for the effective date.

21
In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020, through December 31, 2022. The Bancorp is implementing a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Bancorp believes the adoption of this guidance on activities after December 31, 2020, through December 31, 2022, will not have a material impact on the consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08 related to accounting for acquired revenue contracts with customers in a business combination. The amendments in this update address diversity in practice and inconsistency related to recognition of an acquired contract liability and the effect of payment terms on subsequent revenue recognition for the acquirer. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We plan to adopt this pronouncement for our fiscal year beginning January 1, 2023, and we do not expect it to have a material effect on our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-01 related to the portfolio layer method of hedge accounting. The amendments in this update clarify the accounting and promote consistency in reporting for hedges where the portfolio layer method is applied. This update is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. As we currently do not have items accounted for under the portfolio layer method of hedge accounting, we do not expect the update to have an effect on our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which addresses and amends areas identified by the FASB as part of its post-implementation review of the accounting standard that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by companies that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross writeoffs for financing receivables and net investment in leases by year of origination in the vintage disclosures. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for entities that have adopted the CECL accounting standard. Early adoption, however, is permitted if an entity has adopted the CECL accounting standard. The Bancorp is assessing ASU 2022-02 and its impact on its accounting and disclosures.
In June 2022, the FASB issued ASU No.2022-03 “Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This guidance is effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Bancorp has assessed ASU 2022-03 and does not expect it to have a material impact on its accounting and disclosures.
23
22

Note 12 – Derivative Financial Instruments

The Bancorp uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Bancorp has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Bancorp to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Bancorp enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Bancorp agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Bancorp agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Bancorp’s results of operations.

The Bancorp enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (i.e., interest rate lock commitment). The interest rate lock commitments are considered derivatives and are recorded on the accompanying consolidated balance sheets at fair value in accordance with FASB ASC 815, Derivatives and Hedging.

The following table shows the amounts of non-hedging derivative financial instruments:

June 30, 2022

Asset derivatives

Liability derivatives

(Dollars in thousands)

Notational or contractual amount

Statement of Financial Condition classification

Fair value

Statement of Financial Condition classification

Fair value

Interest rate swap contracts
$ 92,565
Other assets
$ 6,696
Other liabilties
$ 6,696
Interest rate lock commitments
3,965
Other assets
73 N/A 0
Total
$ 96,530 $ 6,769 $ 6,696

June 30, 2021

(Unaudited)

Notational or contractual

Asset derivatives

Liability derivatives

(Dollars in thousands)

amount

Statement of Financial Condition classification

Fair value

Statement of Financial Condition classification

Fair value

Interest rate swap contracts
$ 87,667
Other assets
$ 2,938
Other liabilties
$ 2,938
Interest rate lock commitments
13,641
Other assets
246 N/A 0
Total
$ 101,308 $ 3,184 $ 2,938
December 31, 2020

December 31, 2021
December 31, 2021

Notational or contractual

Asset derivatives

Liability derivatives

Asset derivatives

Liability derivatives

(Dollars in thousands)

amount

Statement of Financial Condition classification

Fair value

Statement of Financial Condition classification

Fair value

Notational or contractual amount

Statement of Financial Condition classification

Fair value

Statement of Financial Condition classification

Fair value

Interest rate swap contracts
$ 72,707
Other assets
$ 3,638
Other liabilties
$ 3,638 $ 94,154
Other assets
$ 2,686
Other liabilties
$ 2,686
Interest rate lock commitments
26,443
Other assets
374 N/A 0 7,837
Other assets
141 N/A -
Total
$ 99,150 $ 4,012 $ 3,638 $ 101,991 $ 2,827 $ 2,686

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

Six Months Ended

Three Months Ended

Six Months Ended

(Unaudited)

June 31,

June 31,

June 30,

(Dollars in thousands)
Statement of Income Classification

2021

2020

2021

2020

Statement of Income Classification

2022

2021

Interest rate swap contracts
Fees and service charges
$ 218 $ 231 $ 231 $ 231
Fees and service charges
$ - $ 218
Interest rate lock commitments
Gain on sale of loans held-for-sale, net
(128 ) 298 (151 ) (220 )
Gain on sale of loans held-for-sale, net
(68 ) (128 )
Total
Total
$ 90 $ 529 $ 80 $ 11
Total
$ (68 ) $ 90

Three Months Ended

June 30,

(Dollars in thousands)
Statement of Income Classification

2022

2021

Interest rate swap contracts
Fees and service charges
$ - $ 231
Interest rate lock commitments
Gain on sale of loans held-for-sale, net
(93 ) (151 )
Total
$ (93 ) $ 80

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

Gross Amounts not Offset in the

Gross Amounts not Offset in the

Statement of Financial Condition

Statement of Financial Condition

(Unaudited)

Gross Amounts Offset in

Net Amounts of Assets
Presented

(Dollars in thousands)

Gross Amounts of
Recognized Assets

the Statement of
Financial Condition

in the Statement of
Financial Condition

Financial Instruments

Cash Collateral
Received

Net Amount

Gross Amounts of Recognized Assets

Gross Amounts Offset in the Statement of Financial Condition

Net Amounts of Assets Presented in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Received

Net Amount

June 30, 2021

June 30, 2022

Interest rate swap contracts
$ 2,938 $ 0 $ 2,938 $ 0 $ 0 $ 2,938 $ 6,696 $ 0 $ 6,696 $ 0 $ 0 $ 6,696
Interest rate lock commitments
246 0 246 0 0 246 73 0 73 0 0 73
Total
$ 3,184 $ 0 $ 3,184 $ 0 $ 0 $ 3,184 $ 6,769 $ 0 $ 6,769 $ 0 $ 0 $ 6,769

Gross Amounts not Offset in the

Statement of Financial Condition

Gross Amounts not Offset in the

Gross Amounts Offset in

Net Amounts of Liabilities
Presented

Statement of Financial Condition

(Dollars in thousands)

Gross Amounts of
Recognized Assets

the Statement of
Financial Condition

in the Statement of
Financial Condition

Financial Instruments

Cash Collateral
Received

Net Amount

Gross Amounts of Recognized Liabilities

Gross Amounts Offset in the Statement of Financial Condition

Net Amounts of Liabilities Presented in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Received

Net Amount

December 31, 2020

December 31, 2021

Interest rate swap contracts
$ 3,638 $ 0 $ 3,638 $ 0 $ 0 $ 3,638 $ 2,686 $ - $ 2,686 $ - $ - $ 2,686
Interest rate lock commitments
374 0 374 0 0 374 141 - 141 - - 141
Total
$ 4,012 $ 0 $ 4,012 $ 0 $ 0 $ 4,012 $ 2,827 $ - $ 2,827 $ - $ - $ 2,827

2423

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

Gross Amounts not Offset in the

Gross Amounts not Offset in the

Statement of Financial Condition

Statement of Financial Condition

(Unaudited)

Gross Amounts Offset in

Net Amounts of Liabilities Presented

(Dollars in thousands)

Gross Amounts of
Recognized Liabilities

the Statement of
Financial Condition

in the Statement of
Financial Condition

Financial Instruments

Cash Collateral
Pledged

Net Amount

Gross Amounts of Recognized Liabilities

Gross Amounts Offset in the Statement of Financial Condition

Net Amounts of Liabilities Presented in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Pledged

Net Amount

June 30, 2021

June 30, 2022

Interest rate swap contracts
$ 2,938 $ 0 $ 2,938 $ 0 $ 3,930 $ (992 ) $ 6,696 $ 0 $ 6,696 $ 0 $ 3,930 $ 2,766
Total
$ 2,938 $ 0 $ 2,938 $ 0 $ 3,930 $ (992 ) $ 6,696 $ 0 $ 6,696 $ 0 $ 3,930 $ 2,766

Gross Amounts not Offset in the

Statement of Financial Condition

Gross Amounts not Offset in the

Gross Amounts Offset in

Net Amounts of Liabilities
Presented

Statement of Financial Condition

(Dollars in thousands)

Gross Amounts of
Recognized Liabilities

the Statement of
Financial Condition

in the Statement of
Financial Condition

Financial Instruments

Cash Collateral
Pledged

Net Amount

Gross Amounts of Recognized Liabilities

Gross Amounts Offset in the Statement of Financial Condition

Net Amounts of Liabilities Presented in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Pledged

Net Amount

December 31, 2020

December 31, 2021

Interest rate swap contracts
$ 3,638 $ 0 $ 3,638 $ 0 $ 3,930 $ (292 ) $ 2,686 $ - $ 2,686 $ - $ 3,930 $ (1,244 )
Total
$ 3,638 $ 0 $ 3,638 $ 0 $ 3,930 $ (292 ) $ 2,686 $ - $ 2,686 $ - $ 3,930 $ (1,244 )

Note 13 - Fair Value
The Fair Value Measurements Topic establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Topic describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgments and assumptions used in pricing could result in different estimates of value. In certain cases where market data is not readily available because of a lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy.

At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with GAAP. Impairment is other-than-temporary if the decline in the fair value is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received. Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates. The Bancorp considers the following factors when determining 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; an assessment of whether the Bancorp (1) has the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before their anticipated market recovery. If either of these conditions 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.

~~The~~In addition to the impairment evaluation noted above, the Bancorp’s management utilizes a specialist to perform an other-than-temporary impairment analysis for each of its pooled ~~trust preferred securities.~~collateralized debt obligations. The specialist analysis is performed annually ~~during~~in December, or when management deems necessary, and utilizes analytical models used to project future cash flows for the pooled ~~trust preferred securities~~collateralized debt obligations based on current assumptions for prepayments, default and deferral rates, and recoveries. The projected cash flows are then tested for impairment consistent with GAAP. The other-than-temporary impairment testing compares the present value of the cash flows from quarter to quarter to determine if there is a “favorable” or “adverse” change. Other-than-temporary impairment is recorded if the projected present value of cash flows is lower than the book value of the security. To perform the ~~annual~~ other-than-temporary impairment analysis, management utilizes current reports issued by the trustee, which contain principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled ~~trust preferred security.~~collateralized debt obligation. In addition, a detailed review of the performing collateral was performed. Based on current market conditions and a review of the trustee reports, management performed an analysis of the pooled ~~trust preferred securities~~collateralized debt obligations and 0 additional impairment was taken at December 31, ~~2020.~~2021. ~~A specialist will be used to review all pooled trust preferred securities again~~In addition, the collateralized debt obligation portfolio was reviewed in accordance with our quarterly impairment evaluation, as described in the preceding paragraph, noting 0 additional impairment was taken at ~~December 31, 2021.~~June 30, 2022.

2524

The table below shows the credit loss roll forward on a year-to-date basis for the Bancorp’s pooled ~~trust preferred securities~~collateralized debt obligations that have been classified with other-than-temporary impairment:

(Dollars in Thousands)

Collateralized

debt obligations

other-than-temporary

(Dollars in thousands)

impairment

Ending balance, December 31, 2020
$ 173
Additions not previously recognized
0
Ending balance, June 30, 2021
$ 173

(Dollars in thousands)

Collateralized debt obligations

other-than-temporary impairment

Ending balance, December 31, 2021
$ 173
Additions not previously recognized
0
Ending balance, June 30, 2022
$ 173

At June 30, ~~2021,~~2022, ~~trust preferred securities~~collateralized debt obligations with a cost basis of $2.2 million continue to be in “payment in kind” status. These ~~trust preferred securities~~collateralized debt obligations classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For these ~~trust preferred securities~~collateralized debt obligations in “payment in kind” status, management anticipates to receive the unpaid contractual interest payments from the issuer, because of the self-correcting cash flow waterfall provisions within the structure of the securities. When a tranche senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest cash flows are paid to the senior tranche and recorded as a reduction of principal. The coverage test represents an over collateralization target by stating the balance of the performing collateral as a percentage of the balance of the Bancorp’s tranche, plus the balance of all senior tranches. The principal reduction in the senior tranche continues until the appropriate coverage test is passed. As a result of the principal reduction in the senior tranche, more cash is available for future payments to the Bancorp’s tranche. Consistent with GAAP, management considered the failure of the issuer of the security to make scheduled interest payments in determining whether a credit loss existed. Management will not capitalize the “payment in kind” interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume on a consistent basis.

25
Assets and Liabilities Measured at Fair Value on a Recurring Basis
There were no transfers to or from Levels 1 and 2 during the six months ended June 30, ~~2021.~~2022. Assets measured at fair value on a recurring basis are summarized below:

(Dollars in thousands)

Fair Value Measurements at June 30, 2022 Using

Fair Value Measurements at June 30, 2021 Using

(Dollars in thousands)

Estimated
Fair
Value

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Estimated
Fair
Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Assets:

Interest rate swap contracts
$ 6,696 $ 0 $ 6,696 $ 0
Interest rate lock commitments
73 0 73 0
Available-for-sale debt securities:

U.S. government sponsored entities
10,796 0 10,796 0 7,934 0 7,934 0
U.S. treasury securities
401 0 401 0 594 0 594 0
Collateralized mortgage obligations and residential mortgage-backed securities
195,361 0 195,361 0 150,061 0 150,061 0
Municipal securities
266,399 0 266,399 0 240,847 0 240,847 0
Collateralized debt obligations
970 0 0 970 1,030 0 0 1,030
Total securities available-for-sale
$ 473,927 $ 0 $ 472,957 $ 970 $ 400,466 $ 0 $ 399,436 $ 1,030

Liabilities:

Interest rate swap contracts
$ 6,696 $ 0 $ 6,696 $ 0

(Dollars in thousands)

Fair Value Measurements at December 31, 2021 Using

Fair Value Measurements at December 31, 2020 Using

(Dollars in thousands)

Estimated
Fair
Value

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Estimated
Fair
Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Assets:

Interest rate swap contracts
$ 2,686 $ 0 $ 2,686 $ 0
Interest rate lock commitments
141 0 141 0
Available-for-sale debt securities:

Money market fund
$ 52,941 $ 52,941 $ 0 $ 0
U.S. government sponsored entities
7,860 0 7,860 0 8,669 0 8,669 0
U.S. treasury securities
400 0 400 0
Collateralized mortgage obligations and residential mortgage-backed securities
154,736 0 154,736 0 184,701 0 184,701 0
Municipal securities
194,203 0 194,203 0 332,127 0 332,127 0
Collateralized debt obligations
929 0 0 929 992 0 0 992
Total securities available-for-sale
$ 410,669 $ 52,941 $ 356,799 $ 929 $ 526,889 $ 0 $ 525,897 $ 992

Liabilities:

Interest rate swap contracts
$ 2,686 $ 0 $ 2,686 $ 0

26

A roll forward of available-for-sale securities, which require significant adjustment based on unobservable data, are presented in the following table:

(Dollars in thousands)

Estimated Fair Value
Measurements Using
Significant Unobservable
Inputs (Level 3)

Available-for-
sale securities

(Dollars in thousands)

Beginning balance, January 1, 2020
$ 1,076
Principal payments
(20 )
Total unrealized losses, included in other comprehensive income
(127 )
Ending balance, December 31, 2020
$ 929

Estimated Fair Value
Measurements Using
Significant Unobservable
Inputs
(Level 3)

Available-for-
sale securities

Beginning balance, January 1, 2021
$ 929 $ 929
Principal payments
(9 ) (9 )
Total unrealized gains, included in other comprehensive income
50 50
Ending balance, June 30, 2021
$ 970 $ 970

Beginning balance, January 1, 2022
$ 992
Principal payments
0
Total unrealized gains, included in other comprehensive income
38
Ending balance, June 30, 2022
$ 1,030

26
Assets measured at fair value on a non-recurring basis are summarized below:

(Dollars in thousands)

(Dollars in thousands)

Fair Value Measurements at June 30, 2022 Using

Fair Value Measurements at June 30, 2021 Using

(Dollars in thousands)

Estimated
Fair
Value

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Estimated
Fair
Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Impaired loans
$ 10,348 $ 0 $ 0 $ 10,348 $ 1,309 $ 0 $ 0 $ 1,309
Foreclosed real estate
368 0 0 368

(Dollars in thousands)

(Dollars in thousands)

Fair Value Measurements at December 31, 2021 Using

Fair Value Measurements at December 31, 2020 Using

(Dollars in thousands)

Estimated
Fair
Value

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Estimated
Fair
Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Impaired loans
$ 10,046 $ 0 $ 0 $ 10,046 $ 896 $ 0 $ 0 $ 896
Foreclosed real estate
538 0 0 538

The fair value of impaired loans with specific allocations of the allowance for loan losses or loans for which charge-offs have been taken is generally based on a present value of cash flows or, for collateral dependent loans, based on recent real estate appraisals. Appraisals ~~may~~ utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The recorded investment in impaired loans was approximately $12.1 million and the related specific reserves totaled approximately $1.8 million, resulting in a fair value of impaired loans totaling approximately $10.3 million, at ~~June 30, 2021.~~ The recorded investment of impaired loans was approximately $11.8 million and the related specific reserves totaled approximately $1.8 million, resulting in a fair value of impaired loans totaling approximately $10.0 million, at ~~December 31, 2020.~~
Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. The fair value of foreclosed real estate is similarly determined by using the results of recent real estate appraisals. The numerical range of unobservable inputs for these valuation assumptions is not meaningful to this presentation.

27

The following table shows carrying values and related estimated fair values of financial instruments as of the dates indicated. Estimated fair values are further categorized by the inputs used to measure fair value. Items that are not financial instruments are not included.

June 30, 2021

Estimated Fair Value Measurements at March 31, 2021 Using

June 30, 2022

Estimated Fair Value Measurements at June 30, 2022 Using

(Dollars in thousands)

Carrying
Value

Estimated
Fair Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Carrying
Value

Estimated
Fair Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Financial assets:

Cash and cash equivalents
$ 68,625 $ 68,625 $ 68,625 $ 0 $ 0 $ 79,302 $ 79,302 $ 79,302 $ 0 $ 0
Certificates of deposit in other financial institutions
1,471 1,526 0 1,526 0 1,482 1,453 0 1,453 0
Securities available-for-sale
473,927 473,927 0 472,957 970
Loans held-for-sale
5,878 6,030 6,030 0 0 1,525 1,552 0 1,552 0
Loans receivable, net
955,852 960,652 0 0 960,652 1,460,975 1,418,593 0 0 1,418,593
Federal Home Loan Bank stock
3,247 3,247 0 3,247 0 3,038 3,038 0 3,038 0
Interest rate swap agreements
2,938 2,938 0 2,938 0
Accrued interest receivable
4,803 4,803 0 4,803 0 6,892 6,892 0 6,892 0

Financial liabilities:

Non-interest bearing deposits
275,819 275,819 275,819 0 0 370,567 370,567 370,567 0 0
Interest bearing deposits
1,119,277 1,119,535 838,519 281,016 0 1,546,648 1,547,211 1,148,252 398,959 0
Repurchase agreements
24,399 24,415 22,661 1,754 0 24,536 24,311 16,273 8,038 0
Interest rate swap agreements
2,938 2,938 0 2,938 0
Accrued interest payable
36 36 0 36 0 56 56 0 56 0

December 31, 2020

Estimated Fair Value Measurements at December 31, 2020 Using

(Dollars in thousands)

Carrying
Value

Estimated
Fair Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Financial assets:

Cash and cash equivalents
$ 19,922 $ 19,922 $ 19,922 $ 0 $ 0
Certificates of deposit in other financial institutions
1,897 1,868 0 1,868 0
Securities available-for-sale
410,669 410,669 52,941 356,799 929
Loans held-for-sale
11,329 11,660 11,660 0 0
Loans receivable, net
952,688 982,793 0 0 982,793
Federal Home Loan Bank stock
3,918 3,918 0 3,918 0
Interest rate swap agreements
3,638 3,638 0 3,638 0
Accrued interest receivable
4,713 4,713 0 4,713 0

Financial liabilities:

Non-interest bearing deposits
241,620 241,620 241,620 0 0
Interest bearing deposits
1,060,719 1,061,294 775,891 285,403 0
Repurchase agreements
13,711 13,713 11,976 1,737 0
Borrowed funds
6,149 6,018 0 6,018 0
Interest rate swap agreements
3,638 3,638 0 3,638 0
Accrued interest payable
54 54 0 54 0

December 31, 2021

Estimated Fair Value Measurements at December 31, 2021 Using

(Dollars in thousands)

Carrying
Value

Estimated
Fair Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Financial assets:

Cash and cash equivalents
$ 33,176 $ 33,176 $ 33,176 $ 0 $ 0
Certificates of deposit in other financial institutions
1,709 1,737 0 1,737 0
Loans held-for-sale
4,987 5,065 0 5,065 0
Loans receivable, net
953,377 951,744 0 0 951,744
Federal Home Loan Bank stock
3,247 3,247 0 3,247 0
Accrued interest receivable
5,444 5,444 0 5,444 0

Financial liabilities:

Non-interest bearing deposits
295,294 295,294 295,294 0 0
Interest bearing deposits
1,138,907 1,139,126 899,690 239,436 0
Repurchase agreements
14,581 14,579 12,842 1,737 0
Accrued interest payable
22 22 0 22 0

The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

Cash and cash equivalent carrying amounts approximate fair value. Certificates of deposits in other financial institutions carrying amounts approximate fair value (Level 2). The fair values of securities available-for-sale are obtained from broker pricing (Level 2), with the exception of collateralized debt obligations, which are valued by a third-party specialist (Level 3). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 1). The estimated fair value for net loans receivable is based on the exit price notion which is the exchange price that would be received to transfer the loans at the most advantageous market price in an orderly transaction between market participants on the measurement date (Level 3). Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer of the security. Interest rate swap agreements, both assets and liabilities, are valued by a third-party pricing agent using an income approach (Level 2). Fair values of accrued interest receivable and payable approximate book value, as the carrying values are determined using the observable interest rate, balance, and last payment date.

28

Non-interest and interest bearing deposits, which include checking, savings, and money market deposits, are estimated to have fair values based on the amount payable as of the reporting date (Level 1). The fair value of fixed-maturity certificates of deposit (included in interest bearing deposits) are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Estimated fair values for short-term repurchase agreements, which represent sweeps from demand deposits to accounts secured by pledged securities, are estimated based on the amount payable as of the reporting date (Level 1). Longer-term repurchase agreements, with contractual maturity dates of three months or more, are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Short-term borrowings are generally only held overnight, therefore, their carrying amount is a reasonable estimate of fair value (Level 1). The fair value of FHLB Advances are estimated by discounting the future cash flows using quoted rates from the FHLB for similar advances with similar maturities (Level 2). The estimated fair value of other financial instruments, and off-balance sheet loan commitments, approximate cost and are not considered significant to this presentation.
28

~~Note~~ 14 ~~- Acquisition Activity~~

On ~~July 28, 2021,~~ Finward Bancorp (“Finward”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Royal Financial, Inc., a Delaware corporation (“RYFL”). Pursuant to the Merger Agreement, RYFL will merge with and into Finward, with Finward as the surviving corporation (the “Merger”). At a time to be determined at or following the Merger, Royal Savings Bank, an Illinois state chartered savings bank and wholly-owned subsidiary of RYFL (“Royal Bank”), will merge with and into Peoples Bank, the wholly-owned Indiana state chartered commercial bank subsidiary of Finward (“Peoples Bank”), with Peoples Bank as the surviving bank.
The boards of directors of each of Finward and RYFL have approved the Merger and the Merger Agreement. Subject to the approval of the Merger by Finward’s and RYFL’s respective stockholders, regulatory approvals, and other customary closing conditions, the parties anticipate completing the Merger during the ~~first~~ ~~quarter of~~ ~~2022.~~
Upon completion of the Merger, each RYFL stockholder will have the right to receive, at the stockholder’s election, 0.4609 shares of Finward common stock or $20.14 in cash, or a combination of both, for each share of RYFL’s common stock, subject to allocation provisions and adjustment, as described below. Stockholders holding less than 101 shares of RYFL common stock will only have the right to receive fixed consideration of $20.14 in cash and will ~~not~~ ~~be entitled to make an election with respect to the merger consideration. Based on Finward’s closing stock price of $44.00 as of~~ ~~July 28, 2021,~~ ~~the transaction has an implied valuation of approximately $52.9 million.~~
A current director or executive officer of RYFL, as mutually agreed upon prior to closing by Finward and RYFL, will be appointed to the boards of directors of Finward and Peoples Bank effective as of the closing of the Merger.
~~RYFL has a home office and~~ ~~eight~~ ~~branch offices in Cook County, Illinois. As of~~ ~~June 30, 2021,~~ RYFL reported total assets of $533.7 million, total loans of $464.2 million, and total deposits of $466.3 million. The combined bank is expected to have approximately $2.1 billion in total assets, $1.4 billion in total loans, and $1.9 billion in deposits. The acquisition will further expand the Bank’s banking center network in Cook County, Illinois.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Summary
Finward Bancorp (the “Bancorp” or “Finward”) is a financial holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank (“the Bank”), an Indiana commercial bank, and NWIN Risk Management, Inc., a captive insurance company, are wholly-owned subsidiaries of the Bancorp. The Bancorp has no other business activity other than being a holding company for the Bank and NWIN Risk Management, Inc. The following management’s discussion and analysis presents information concerning our financial condition as of June 30, ~~2021,~~2022, as compared to December 31, ~~2020,~~2021, and the results of operations for the quarter and six months ending June 30, ~~2021,~~2022, and June 30, ~~2020.~~2021. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

At June 30, ~~2021,~~2022, the Bancorp had total assets of ~~$1.6~~$2.1 billion, total loans receivable of ~~$969.5 million~~$1.5 billion and total deposits of ~~$1.4~~$1.9 billion. Stockholders' equity totaled ~~$155.6~~$136.7 million or ~~9.7%~~6.5% of total assets, with a book value per share of ~~$44.71.~~$31.80. Net income for the quarter ended June 30, ~~2021,~~2022, was ~~$3.6~~$4.4 million, or ~~$1.03~~$1.04 earnings per common ~~share for both basic and~~ diluted ~~calculations.~~share. For the quarter ended June 30, ~~2021,~~2022, the return on average assets (ROA) was ~~0.90%~~0.85%, while the return on average stockholders’ equity (ROE) was ~~9.17%~~12.45%. Net income for the six months ended June 30, ~~2021,~~2022, was ~~$8.1~~$6.6 million, or ~~$2.33~~$1.59 earnings per diluted common ~~share for both basic and diluted calculations.~~share. For the six months ended June 30, ~~2021,~~2022, the ROA was ~~1.04%~~0.65%, while the ROE was ~~10.54%~~8.40%.
29

~~Revision of Previously Issued Financial Statements~~
This information should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in “Part I, Item 1” of this Quarterly Report. We have revised our prior period financial statements to reflect the correction of immaterial errors as described in this Quarterly Report in Notes to Condensed Consolidated Financial Statements, Note 1 – Basis of Presentation, “Revision of Previously Issued Financial Statements”.

Recent Developments
~~Merger Agreement with~~Acquisition of Royal Financial, Inc.On ~~July 28, 2021, Finward~~January 31, 2022, the Bancorp completed its acquisition of Royal Financial, Inc. (“~~Finward”~~RYFL”) ~~entered into~~pursuant to an Agreement and Plan of Merger dated July 28, 2021 (the “Merger Agreement”) ~~with Royal Financial, Inc., a Delaware corporation (“RYFL”).~~between the Bancorp and RYFL. Pursuant to the terms of the Merger Agreement, RYFL ~~will merge~~merged with and into ~~Finward,~~the Bancorp, with ~~Finward~~the Bancorp as the surviving corporation (the ~~“Merger”~~“RYFL Merger”). ~~At a time to be determined at or following~~Simultaneous with the RYFL Merger, Royal Savings Bank, an Illinois ~~state chartered~~state-chartered savings bank and wholly-owned subsidiary of RYFL, ~~(“Royal Bank”), will merge~~merged with and into ~~Peoples~~the Bank, ~~the wholly-owned Indiana state chartered commercial bank subsidiary of Finward (“Peoples Bank”),~~ with ~~Peoples~~the Bank as the surviving ~~bank.~~institution.

~~The boards of directors of each of Finward and RYFL have approved~~Under the ~~Merger and the Merger Agreement. Subject to the approval~~terms of the Merger ~~by Finward’s and RYFL’s respective~~Agreement, RYFL stockholders ~~regulatory approvals, and other customary closing conditions, the parties anticipate completing the Merger during the first quarter~~who owned 101 or more shares of ~~2022.~~
~~Upon completion of the Merger, each~~ RYFL ~~stockholder will have the right~~common stock were permitted to elect to receive ~~at the stockholder’s election,~~either 0.4609 shares of Finward common stock or $20.14 in cash, or a combination of both, for each share of ~~RYFL’s~~RYFL common stock owned, subject to proration and allocation provisions ~~and adjustment, as described below. Stockholders holding less than 101~~such that 65% of the shares of RYFL common stock ~~will only have the right to receive fixed consideration of $20.14 in cash and will not be entitled to make an election with respect~~outstanding immediately prior to the ~~merger consideration. The Merger Agreement provides that, in the aggregate, 65%~~closing of the ~~outstanding shares of RYFL common stock will be~~merger were converted into the right to receive shares of Finward common stock and the remaining 35% of the outstanding RYFL shares ~~of RYFL common stock will be~~were converted into the right to receive cash. ~~All outstanding options to purchase~~Stockholders holding less than 101 shares of RYFL common stock ~~whether or not vested, will be converted into the right to receive at the effective time~~received fixed consideration of ~~the Merger, an amount of~~$20.14 in cash ~~equal to $20.14 minus the per share exercise price~~and no stock consideration for each share of RYFL common stock subject to an option, less applicable tax withholdings. In addition, at the effective time of the Merger, each award of RYFL restricted stock, whether or not vested, that is outstanding immediately prior to the effective time will fully vest and be cancelled and converted into the right to receive the merger consideration, less applicable tax withholdings. Based on Finward’s closing stock price of $44.00 as of July 28, 2021, the transaction has an implied valuation of approximately $52.9 million.stock.
A current director or executive officer of RYFL, as mutually agreed upon prior to closing by Finward and RYFL, will be appointed to the boards of directors of Finward and Peoples Bank effective as of the closing of the Merger.
~~COVID-19~~
In December 2019, COVID-19 was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments ordered non-essential businesses to close and residents to shelter in place at home. While many of these measures have been lifted or eased since the beginning of the pandemic and economic growth is beginning to recover, the pandemic resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, the stock markets have experienced high levels of volatility at times and, in particular, many bank stocks have declined in value. In response to the COVID-19 outbreak, the FRB has reduced the benchmark federal funds rate to a target range of 0% to 0.25%, and the yields on 10- and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are encouraging lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality, restaurant, and retail industries.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be fully reopened in our market areas.
30

As a result of ~~the COVID-19 pandemic~~RYFL stockholder stock and cash elections and the related ~~adverse local~~allocation and ~~national economic consequences, we could be subject to any~~proration provisions of the ~~following risks, any~~Merger Agreement, Finward issued 795,423 shares of ~~which could have a significant effect on our business, financial condition, liquidity,~~its common stock and ~~results~~paid cash consideration of ~~operations:~~
●
~~Demand for our products and services may decline, making it difficult to grow assets and income.~~
●
If the economies in the Bank’s market areas are unable to fully reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased provisions for loan losses, charge-offs, and reduced income.
●
~~Collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase.~~
●
~~The Bank’s allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income.~~
●
~~The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to the Bank.~~
●
As a result of the decline in the FRB’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread, and correspondingly reducing our net income.
●
~~A material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend.~~
●
~~Our wealth management revenues may decline with continuing market volatility.~~
●
~~We rely on third party vendors for certain critical services, and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on the Bank.~~
●
~~FDIC premiums may increase if the agency experiences additional resolution costs.~~
~~Moreover, our future success and profitability substantially depends~~approximately $18.7 million in the RYFL Merger. Based on the ~~management skills~~January 28, 2022 closing price of ~~our executive officers~~$47.75 per share of Finward common stock, the transaction had an implied valuation of approximately $56.7 million. The acquisition further expanded the Bank’s banking center network in Cook County and ~~directors, many of whom have held officer and director positions with~~DuPage County, Illinois, expanding the Bancorp and the Bank for many years. The Bancorp has put in place measures such as remote work to protect the health and safety of our employees. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. However, the Bancorp has an appropriate emergency succession plan in place, which is reviewed and approved annually by the Bancorp’s board of directors.Bank’s full-service retail banking network.
Any one or a combination of the factors identified above may remain prevalent for a significant period of time and could negatively impact our business, financial condition, and results of operations and prospects even after the COVID-19 outbreak has subsided.
The extent to which the COVID-19 outbreak impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can fully resume. Even after the COVID-19 outbreak has subsided, we may continue to experience significant impacts to our business as a result of the virus’s regional, national, and global economic impact, including the availability of credit, adverse impacts on our liquidity, and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. That being said, we believe the Bancorp and the Bank are well prepared for the economic and social consequences of the COVID-19 global pandemic.
31

~~Impacts of COVID-19~~
The COVID-19 pandemic began to impact the Bancorp’s operations during March 2020, and as of the date of this report, continues to influence operating decisions. In response to the pandemic, the Bancorp’s management implemented the following policy actions:
●
Participating in the U.S. Small Business Administration’s Paycheck Protection Program (“PPP”), a program initiated to help small businesses maintain their workforces during the pandemic. As of June 30, 2021, the Bancorp approved 782 applications totaling $91.5 million for the first round, with an average loan size of approximately $117 thousand. These loans helped local business owners retain 10,758 employees based on the borrowers’ applications. The Bancorp’s SBA lender fee is averaging approximately 3.80% for the first round of the program, and fees will be earned over the life of the associated loans. The first round of PPP closed in August of 2020. On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, which included provisions for a second round of PPP funding in 2021. As of June 30, 2021, the Bancorp approved 420 applications totaling $37.5 million for the second round, with an average loan size of approximately $89 thousand. These loans will help local business owners retain 4,410 employees based on the borrowers’ applications. The Bancorp’s SBA lender fee is averaging approximately 5.32% for this program, and fees will be earned over the life of the associated loans. As of June 30, 2021, the Bancorp had remaining loan balances under the Paycheck Protection Program totaling $50.3 million.
●
Prudently helping borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. Consistent with regulatory guidance, the Bancorp will consider deferring or modifying a loan customer’s repayment obligation if the customer’s cash flow has been negatively impacted by the pandemic. The Bancorp’s management anticipates that additional borrower deferral and modification requests will continue in 2021 at a reduced pace. Loans modified to interest only payment or full payment deferral as part of the effects of COVID-19 as of June 30, 2021, are as follows:
(Dollars in thousands)

(Unaudited)

As of June 30, 2021

Mortgage loans

Commercial Loans

Number of Loans

Recorded Investment

Number of Loans

Recorded Investment

Interest only
15 $ 1,656 1 $ 2,973
Full interest, partial principal
- - 2 1,021
Full payment deferral
1 98 - -
Total $
16 $ 1,754 3 $ 3,994
●
As the Bancorp continues to monitor the borrowers that are in and outside of deferral status, some loan relationships may be deemed non-performing. As of June 30, 2021, a single large commercial real estate loan relationship, which operates a hotel, with a carrying balance of $5.0 million, came out of deferral status and was deemed non-performing after COVID-19 pandemic stresses negatively impacted weak operating performance which occurred prior to the pandemic. Through management’s review of the loan relationship, a specific reserve within the allowance for loan losses was allocated as of June 30, 2021. As of June 30, 2021, the customer has opened a payment reserve account with the Bancorp to be used for future contractual payments and is currently in compliance with all modified loan terms. No other material COVID-19 impacted loans that are in deferral status have been deemed non-performing at this time. As of June 30, 2021, a total of 211 loans have come out of COVID-19 related deferral status with carrying balances of $81.6 million. All of these loans continue to be performing, except one commercial real estate loan with a carrying balance of $835 thousand and one residential real estate loan with a carrying balances of $108 thousand.
~~SBA Loan Subsidy Program~~
Pursuant to the CARES Act, Section 1112, Congress has determined that all existing borrowers under the SBA Section 7(a) program are adversely affected by COVID-19, and are therefore entitled to a subsidy in the form of relief payments. Specifically, the CARES Act provides that the SBA will pay the principal and interest on any existing and current SBA 7(a) loan for a period of nine months. These principal and interest payments will be made by the SBA directly to the SBA 7(a) lender and will begin with the next payment due. The Bancorp is a qualified SBA Section 7(a) lender, and is participating in the Section 1112 program. As of June 30, 2021, the Bancorp had 16 loans eligible for the program, with an aggregate principal amount of $1.1 million. Payments under the program will not constitute new loans for the Bancorp, but simply payments of principal and interest on loans that already exist in the Bancorp’s SBA 7(a) loan portfolio and are current on borrower payments.
32

Financial Condition
During the six months ended June 30, ~~2021,~~2022, total assets increased by ~~$107.2~~$480.7 million ~~(7.2%~~(29.7%), with interest-earning assets increasing by ~~$106.2~~$415.3 million ~~(7.6%~~(27.3%). At June 30, ~~2021,~~2022, interest-earning assets totaled ~~$1.5~~$1.9 billion compared to ~~$1.4~~$1.5 billion at December 31, ~~2020.~~2021. Earning assets represented ~~93.9%~~92.3% of total assets at June 30, ~~2021~~2022 and ~~93.5%~~94.0% of total assets at December 31, ~~2020.~~2021. The increase in total assets and interest earning assets for the six months was primarily the result of ~~increased cash balances related to strong core deposit growth.~~the acquisition of RYFL.

~~Loans~~Net loans receivable totaled ~~$969.5 million~~$1.5 billion at June 30, ~~2021,~~2022, compared to ~~$965.1~~$953.4 million at December 31, ~~2020.~~2021. The loan portfolio, which is the Bancorp’s largest asset, is the primary source of both interest and fee income. The Bancorp’s lending strategy emphasizes quality loan growth, product diversification, and competitive and profitable pricing. The Bancorp continues to review its loan pipelines and credit product specifications in connection with the effects on economic activity and employment stemming from the COVID-19 global pandemic. As a result of this review, management believes the Bancorp’s loan portfolio and current pipelines are well-positioned to withstand the current effects of the pandemic and address the needs of the Bancorp’s customers.
29

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

June 30,

(unaudited)

2021

December 31,

June 30,

December 31,

(Dollars in thousands)

(unaudited)

2020

2022

2021

Balance

% Loans

Balance

% Loans

Balance

% Loans

Balance

% Loans

Residential real estate
$ 268,649 27.8 % $ 286,048 29.8 % $ 459,151 31.3 % 260,134 33.0 %
Home equity
36,684 3.8 % 39,233 4.1 % 35,672 2.4 % 34,612 5.4 %
Commercial real estate
315,087 32.6 % 298,257 31.0 % 420,735 28.6 % 317,145 31.2 %
Construction and land development
104,154 10.8 % 93,562 9.7 % 153,422 10.4 % 123,822 9.7 %
Multifamily
53,639 5.6 % 50,571 5.3 % 248,495 16.9 % 61,194 5.7 %
Farmland
309 0.0 % 215 0.0 %
Consumer
1,673 0.1 % 582 0.1 %
Manufactured Homes
37,693 2.6 % 37,887 1.8 %
Commercial business
149,414 15.5 % 158,140 16.4 % 103,649 7.1 % 115,772 11.4 %
Consumer
544 0.1 % 1,025 0.1 %
Manufactured homes
28,135 2.9 % 24,232 2.5 %
Government
8,462 0.9 % 10,142 1.1 % 8,081 0.6 % 8,991 1.7 %
Loans receivable
$ 965,077 100.0 % $ 961,425 100.0 % 1,468,571 100.0 % 960,139 100.0 %
Plus:

Net deferred loans origination costs
6,482 6,810
Undisbursed loan funds
(672 ) (229 )
Loans receivable, net of deferred fees and costs
$ 1,474,381 $ 966,720

Adjustable rate loans / loans receivable
$ 534,824 55.4 % $ 491,860 51.2 % $ 636,956 43.4 % $ 542,975 56.6 %

June 30,

2021

December 31,

(unaudited)

2020

Loans receivable to total assets
60.5 % 64.5 %
Loans receivable to earning assets
64.5 % 69.0 %
Loans receivable to total deposits
69.6 % 74.2 %

(unaudited)

June 30,

December 31,

2022

2021

Loans receivable to total assets
70.2 % 59.6 %
Loans receivable to earning assets
76.0 % 63.4 %
Loans receivable to total deposits
76.9 % 67.4 %
The following table sets forth certain information at June 30, 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 repayment and no stated maturity, and overdrafts are reported as due in one year or less. Contractual principal repayments of loans do not necessarily reflect the actual term of the loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Bancorp the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the property subject to the mortgage. The amounts are stated in thousands (000’s).

Maturing

After one

After five

within

but within

but within

After

one year

five years

fifteen years

fifteen years

Total

Residential real estate
$ 14,161 $ 28,807 $ 106,023 $ 310,160 459,151
Home equity
4,598 21,818 8,979 277 35,672
Commercial real estate
24,809 106,633 287,314 1,979 420,735
Construction and land development
33,355 42,343 58,097 19,627 153,422
Multifamily
20,093 101,066 124,754 2,582 248,495
Consumer
30 731 912 - 1,673
Manufactured Homes
- 61 10,190 27,442 37,693
Commercial business
43,699 42,507 16,948 495 103,649
Government
100 3,211 4,770 - 8,081
Total loans receivable
$ 140,845 $ 347,177 $ 617,987 $ 362,562 $ 1,468,571

The Bancorp is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the six months ended June 30, ~~2021,~~2022, the Bancorp originated ~~$85.9~~$33.5 million in new fixed rate mortgage loans for sale, compared to ~~$114.2~~$94.2 million during the six months ended June 30, ~~2020. The decrease in originations of these fixed rate mortgage loans is due to significant refinance activity in the prior year due to the low interest rate environment.~~2021. Net gains realized from the mortgage loan sales totaled $898 thousand for the six months ended June 30, 2022, compared to $3.2 million for the six months ended June 30, ~~2021, compared to $3.6 million~~2021. The decrease in net gains realized from mortgage loan sales for the six months ended June 30, ~~2020.~~2022 compared to the prior year period is primarily due to lower demand for fixed rate mortgage loans as a result of increases in mortgage rates, which in-turn has resulted in a slowing in the sale of these mortgage loans. At June 30, ~~2021,~~2022, the Bancorp had ~~$5.9~~$1.5 million in loans that were classified as held for sale, compared to ~~$11.3~~$5.0 million at December 31, ~~2020.~~2021.
30

Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status. At June 30, ~~2021,~~2022, non-performing loans that remained accruing and more than 90 days past due include ~~one~~four residential real estate loans totaling $610 thousand, three commercial real estate ~~loan~~loans totaling ~~$95 thousand, one residential real estate loan totaling $79 thousand, one construction and land development loan totaling $42~~$517 thousand, and ~~one~~two commercial business ~~loan~~loans totaling ~~$33~~$81 thousand. The Bancorp will at times ~~leave notes accruing,~~maintain certain loans on accrual status, despite being over 90 days past due, for short periods of time when management has reason to believe payments are in process of being received.

33

The Bancorp's nonperforming loans are summarized below:

The Bancorp's nonperforming loans are summarized below:

(Dollars in thousands)

(unaudited)

Loan Segment

June 30, 2021

December 31,
2020

June 30, 2022

December 31, 2021

Residential real estate
$ 4,259 $ 6,470 $ 5,585 $ 4,682
Home equity
495 505 610 657
Commercial real estate
6,616 5,827 3,111 1,031
Construction and land development
41 20 - -
Multifamily
400 504 369 455
Farmland
- -
Commercial business
462 1,039 346 436
Consumer
- - - -
Manufactured homes
- - - -
Government
- - - -
Total
$ 12,273 $ 14,365 $ 10,021 $ 7,261
Nonperforming loans to total loans
1.26 % 1.49 % 0.68 % 0.75 %
Nonperforming loans to total assets
0.76 % 0.96 % 0.48 % 0.45 %

Substandard loans include potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. No loans were internally classified as doubtful or loss at June 30, ~~2021~~2022 or December 31, ~~2020.~~2021.

The Bancorp's substandard loans are summarized below:

The Bancorp's substandard loans are summarized below:

(Dollars in thousands)

(unaudited)

Loan Segment

June 30, 2021

December 31,
2020

June 30, 2022

December 31, 2021

Residential real estate
$ 4,113 $ 6,387 $ 6,019 $ 3,722
Home equity
512 495 624 632
Commercial real estate
8,398 8,180 6,845 3,562
Construction and land development
- - - -
Multifamily
400 504 2,901 384
Farmland
- -
Commercial business
916 1,061 279 387
Consumer
- - - -
Manufactured homes
- - - -
Government
- - - -
Total
$ 14,339 $ 16,627 $ 16,668 $ 8,687
The increase in substandard loans is the result of loans acquired pursuant to the RYFL acquisition.

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

The Bancorp's special mention loans are summarized below:

(Dollars in thousands)

Loan Segment

June 30, 2021

December 31,
2020

Residential real estate
$ 3,969 $ 3,539
Home equity
560 761
Commercial real estate
13,801 11,983
Construction and land development
3,662 3,652
Multifamily
1,377 1,408
Farmland
- -
Commercial business
1,162 1,341
Consumer
- -
Manufactured homes
60 -
Government
- -
Total
$ 24,591 $ 22,684
The Bancorp's special mention loans are summarized below:
(Dollars in thousands)

(unaudited)

Loan Segment

June 30, 2022

December 31, 2021

Residential real estate
$ 2,055 $ 2,940
Home equity
400 415
Commercial real estate
10,890 12,011
Construction and land development
800 3,630
Multifamily
1,541 153
Commercial business
3,057 1,915
Consumer
- -
Manufactured homes
- 59
Government
- -
Total
$ 18,743 $ 21,123
31

A loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. Typically, management does not individually classify smaller-balance homogeneous loans, such as residential mortgages or consumer loans, as impaired, unless they are troubled debt restructurings.
34

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

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

(Dollars in thousands)

Loan Segment

June 30, 2021

December 31,
2020

Residential real estate
$ 1,732 $ 2,165
Home equity
293 353
Commercial real estate
7,406 6,341
Construction and land development
- -
Multifamily
596 716
Farmland
- -
Commercial business
2,091 2,246
Consumer
- -
Manufactured homes
- -
Government
- -
Total
$ 12,118 $ 11,821
The Bancorp's impaired loans, including purchased credit impaired loans, are summarized below:
(Dollars in thousands)

(unaudited)

Loan Segment

June 30, 2022

December 31, 2021

Residential real estate
$ 2,347 $ 1,771
Home equity
154 284
Commercial real estate
3,816 1,600
Construction and land development
800 -
Multifamily
2,940 556
Commercial business
1,330 1,597
Consumer
20 -
Manufactured homes
- -
Government
- -
Total
$ 11,407 $ 5,808
The increase in impaired loans is the result of purchase credit impaired loans acquired pursuant to the RYFL acquisition.

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

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

(Dollars in thousands)

Loan Segment

June 30, 2021

December 31,
2020

Residential real estate
$ 315 $ 614
Home equity
102 187
Commercial real estate 1,646 872
Construction and land development
- -
Multifamily
- -
Farmland
- -
Commercial business
388 448
Consumer - -
Manufactured homes
- -
Government
- -
Total
$ 2,451 $ 2,121
The Bancorp's troubled debt restructured loans are summarized below:

The decrease in nonperforming and substandard loans as of June 30, 2021, is the result of the removal of residential real estate loans totaling $2.2 million, which was offset by the addition of two commercial real estate customers with loans totaling $1,253 thousand to nonaccrual. The increase in special mention loans as of June 30, 2021, is the result of the addition of five commercial real estate customers with loans totaling $3.1 million, which was offset by the movement of one commercial real estate customer with loans totaling $835 thousand to substandard and one commercial real estate customer with loans totaling $189 thousand to a pass rating. The increase in impaired loans as of June 30, 2021, is the result of the addition of two commercial real estate customers with loans totaling $1,253 thousand.
(Dollars in thousands)

(unaudited)

Loan Segment

June 30, 2022

December 31, 2021

Residential real estate
$ 1,230 $ 342
Home equity
84 83
Commercial real estate
617 747
Construction and land development
- -
Multifamily
- -
Commercial business
518 694
Consumer
- -
Manufactured homes
- -
Government
- -
Total
$ 2,449 $ 1,866

At June 30, ~~2021,~~2022, management is of the opinion that there are no loans, ~~except certain of those discussed above or as part of credit risk impacts of COVID-19,~~ where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure. Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources.

3532

The allowance for loan losses (ALL) is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses, and decreased by charge-offs net of recoveries. A loan is charged‑off against the allowance by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. The determination of the amounts of the ALL and provisions for loan losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability as of the reporting date. The appropriateness of the current period provision and the overall adequacy of the ALL are determined through a disciplined and consistently applied quarterly process that reviews the Bancorp’s current credit risk within the loan portfolio and identifies the required allowance for loan losses given the current risk estimates.

The Bancorp's provision for loan losses for the six months ended are

summarized below:

(Dollars in thousands)

Loan Segment

June 30, 2021

June 30, 2020

Residential real estate
$ 62 $ (112 )
Home equity
96 8
Commercial real estate
533 19
Construction and land development
393 120
Multifamily
114 80
Farmland
- -
Commercial business
(53 ) 932
Consumer
9 (8 )
Manufactured homes
- -
Government
- (17 )
Total
$ 1,154 $ 1,022
The Bancorp's provision for loan losses for the six months ended are summarized below:

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

(Dollars in thousands)

(unaudited)

As of June 30, 2021

(unaudited)

Loan Segment

Charge-off

Recoveries

Net Recoveries

June 30, 2022

June 30, 2021

Residential real estate
$ (4 ) $ 25 $ 21 $ 226 $ 62
Home equity
(1 ) - (1 ) 16 96
Commercial real estate
- - - 12 533
Construction and land development
- - - (375 ) 393
Multifamily
- - - 280 114
Farmland
- - -
Commercial business
- 19 19 (239 ) (53 )
Consumer
(17 ) 5 (12 ) 80 9
Manufactured homes
- - - -
Government
- - - - -
Total $ (22 ) $ 49 $ 27 $ - $ 1,154

(Dollars in thousands)

(unaudited)

As of June 30, 2020

Loan Segment

Charge-off

Recoveries

Net Recoveries

Residential real estate
$ (2 ) $ 10 $ 8
Home equity
- - -
Commercial real estate
(80 ) - (80 )
Construction and land development
(17 ) - (17 )
Multifamily
- - -
Farmland
- - -
Commercial business
(78 ) 17 (61 )
Consumer
(13 ) 8 (5 )
Manufactured homes
- -
Government
- - -
Total
$ (190 ) $ 35 $ (155 )
The Bancorp's charge-off and recovery information is summarized below:
(Dollars in thousands)

(unaudited)

As of June 30, 2022

Loan Segment

Charge-off

Recoveries

Net Charge-offs

Residential real estate
$ - $ 50 $ 50
Home equity
- - -
Commercial real estate
- - -
Construction and land development
- - -
Multifamily
- - -
Commercial business
- 38 38
Consumer
(37 ) 12 (25 )
Manufactured homes
- -
Government
- - -
Total
$ (37 ) $ 100 $ 63
The Bancorp's charge-off and recovery information is summarized below:
(Dollars in thousands)

(unaudited)

As of the six months ended June 30, 2021

Loan Segment

Charge-off

Recoveries

Net Charge-offs

Residential real estate
$ (4 ) $ 25 $ 21
Home equity
(1 ) - (1 )
Commercial real estate
- - -
Construction and land development
- - -
Multifamily
- - -
Farmland
- - -
Commercial business
- 19 19
Consumer
(17 ) 5 (12 )
Manufactured homes
- -
Government
- - -
Total
$ (22 ) $ 49 $ 27

The ALL provisions take into consideration management’s current judgments about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio mix, and local economic conditions. In determining the provision for loan losses for the current period, management has considered risks associated with the local economy, changes in loan balances and mix, and asset quality.

3633

The Bancorp's allowance to total loans and non-performing loans are summarized below:
(Dollars in thousands)

(unaudited)

June 30, 2022

December 31, 2021

Allowance for loan losses
$ 13,406 $ 13,343
Total loans
$ 1,474,381 $ 966,720
Non-performing loans
$ 10,021 $ 7,261
ALL-to-total loans
0.91 % 1.38 %
ALL-to-non-performing loans (coverage ratio)
133.8 % 183.8 %

In addition, management considers reserves that are not part of the ALL that have been established from acquisition activity. The Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At June 30, ~~2021,~~2022, total purchased credit impaired loans reserves totaled $2.0 million compared to ~~$2.1~~$1.4 million at December 31, ~~2020.~~2021. Additionally, the Bancorp has acquired loans where there was not evidence of credit quality deterioration since origination and has marked these loans to their fair values. As part of the fair value of loans receivable, a net fair value discount was established for loans acquired of ~~$1.4~~$6.0 million at June 30, ~~2021,~~2022, compared to ~~$2.0~~$1.1 million at December 31, ~~2020.~~2021. Details on these fair value marks and the additional reserves created can be found in Note 5, Loans Receivable.
The Bancorp's allowance to total loans and non-performing loans are summarized below:

(Dollars in thousands)

June 30, 2021

December 31, 2020

Allowance for loan losses
$ 13,639 $ 12,458
Total loans
$ 969,491 $ 965,146
Non-performing loans
$ 12,273 $ 14,365
ALL-to-total loans
1.41 % 1.29 %
ALL-to-non-performing loans (coverage ratio)
111.1 % 86.7 %
The June 30, 2021, balance in the ALL account is considered adequate by management after evaluation of the loan portfolio, past experience, current economic and market conditions, and additional reserves from acquisition accounting as described in the immediately preceding paragraph. While management may periodically allocate portions of the allowance for specific problem loans, the whole allowance is available for any loan charge offs that occur. The allocation of the ALL reflects performance and growth trends within the various loan categories, as well as consideration of the facts and circumstances that affect the repayment of individual loans, and loans which have been pooled as of the evaluation date, with particular attention given to non-performing loans and loans which have been classified as substandard, doubtful or loss. Management has allocated reserves to both performing and non-performing loans based on current information available.
At June 30, 2021, foreclosed real estate totaled $368 thousand, which was comprised of five properties, compared to $538 thousand and ten properties at December 31, 2020. Net gains from the sale of foreclosed real estate totaled $27 thousand for the six months ended June 30, 2021. At the end of June 2021, all of the Bancorp’s foreclosed real estate is located within its primary market area.

The primary objective of the Bancorp’s investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest bearing balances in other financial institutions, U.S. government securities, federal agency obligations, obligations of state and local municipalities, and corporate securities. The securities portfolio, all of which is designated as available-for-sale, totaled ~~$473.9~~$400.5 million at June 30, ~~2021,~~2022, compared to ~~$410.7~~$526.9 million at December 31, ~~2020, an increase~~2021, a decrease of ~~$63.3~~$126.4 million ~~(15.4%~~(24.0%). The ~~increase in~~decrease is attributable to increased unrealized losses within the portfolio and the use of cashflows from the securities portfolio to fund loan growth. The acute increase in interest rates during the ~~year is a result of investment~~six months ended June 30, 2022, including an increase by the Federal Reserve in the ~~security~~federal funds target rate from 0.25% as of December 31, 2021 to 1.75% as of June 30, 2022, was the primary cause of the increase in unrealized losses on available-for-sale securities within the Bancorp’s investment portfolio. Management continues to actively monitor the securities portfolio and does not currently anticipate the need to realize losses from the securities portfolio, and it is unlikely the Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity. At June 30, ~~2021,~~2022, the securities portfolio represented ~~31.5%~~20.6% of interest-earning assets and ~~29.5%~~19.1% of total assets compared to ~~29.3%~~34.6% of interest-earning assets and ~~27.4%~~32.5% of total assets at December 31, ~~2020.~~2021.

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

June 30,

(unaudited)

2021

December 31,

June 30,

December 31,

(Dollars in thousands)

(unaudited)

2020

2022

2021

Balance

% Securities

Balance

% Securities

Balance

% Securities

Balance

% Securities

Money market fund
$ - 0.0 % $ 52,941 12.9 %
U.S. government sponsored entities
10,796 2.3 % 7,860 1.9 % $ 7,934 2.0 % $ 8,669 1.6 %
U.S. treasury securities
401 0.1 % - 0.0 % 594 0.2 % 400 0.1 %
Collateralized mortgage obligations and residential mortgage-backed securities
195,361 41.2 % 154,736 37.7 % 150,061 37.5 % 184,701 35.1 %
Municipal securities
266,399 56.2 % 194,203 47.3 % 240,847 60.0 % 332,127 63.0 %
Collateralized debt obligations
970 0.2 % 929 0.2 % 1,030 0.3 % 992 0.2 %
Total securities available-for-sale
$ 473,927 100.0 % $ 410,669 100.0 % $ 400,466 100.0 % $ 526,889 100.0 %

June 30,

(unaudited)

2021

December 31,

YTD

June 30,

December 31,

YTD

(Dollars in thousands)

(unaudited)

2020

Change

2022

2021

Change

Balance

Balance
$
%

Balance

Balance
  $
%

Interest bearing deposits in other financial institutions
$ 50,406 $ 5,908 $ 44,498 753.2 % $ 55,602 $ 19,987 $ 35,615 178.2 %
Fed funds sold
649 - 649 100.0 % 2,856 464 2,392 515.5 %
Certificates of deposit in other financial institutions
1,471 1,897 (426 ) -22.5 % 1,482 1,709 (227 ) -13.3 %
Federal Home Loan Bank stock
3,247 3,918 (671 ) -17.1 % 3,038 3,247 (209 ) -6.4 %

37

The net increase in interest bearing deposits in other financial institutions and fed funds sold is ~~primarily~~ the result of ~~deposit growth.~~the timing of cash flows and public fund deposits.
34
The contractual maturities and weighted average yields for the U.S. government securities, agency securities, municipal securities, and collateralized debt obligations at June 30, 2022, are summarized in the table below. Securities not due at a single maturity date, such as mortgage-backed securities and collateralized mortgage obligations are not included in the following table. The carrying values are stated in thousands (000’s).
The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields presented are not on a tax-equivalent basis.

Within 1 Year

1 - 5 Years

5 - 10 Years

After 10 Years

Total

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

U.S. government sponsored entities:
$ - 0.00 % $ - 0.00 % $ 7,934 1.00 % $ - 0.00 % $ 7,934
AFS

U.S. treasury securities:

AFS
199 0.13 % 395 2.38 % - 0.00 % - 0.00 % 594
Municipal Securities:

AFS
296 5.14 % 1,561 3.93 % 16,935 3.43 % 222,055 2.76 % 240,847
Trust Preferred Securities:

AFS
- 0.00 % - 0.00 % - 0.00 % 1,030 2.57 % 1,030
Totals
$ 495 3.12 % $ 1,956 3.62 % $ 24,869 2.65 % $ 223,085 2.76 % $ 250,405

Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes. The Bancorp offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships.

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

June 30,

(unaudited)

2021

December 31,

YTD

June 30,

December 31,

YTD

(Dollars in thousands)

(unaudited)

2020

Change

2022

2021

Change

Balance

Balance
$
%

Balance

Balance
$
%

Checking
$ 582,967 $ 516,487 $ 66,480 12.9 % $ 755,256 $ 629,038 $ 126,218 20.1 %
Savings
277,944 254,108 23,836 9.4 % 436,203 293,976 142,227 48.4 %
Money market
253,427 246,916 6,511 2.6 % 327,360 271,970 55,390 20.4 %
Certificates of deposit
280,758 284,828 (4,070 ) -1.4 % 398,396 239,217 159,179 66.5 %
Total deposits
$ 1,395,096 $ 1,302,339 $ 92,757 7.1 % $ 1,917,215 $ 1,434,201 $ 483,014 33.7 %

The ~~overall~~following table presents the average daily amount of deposits and average rates paid on such deposits for the periods indicated. The amounts are stated inthousands (000’s).

June 30, 2022

(unaudited)

December 31, 2021

Amount

Rate %

Amount

Rate %

Noninterest bearing demand deposits
$ 361,252 - $ 280,900 -
Interest bearing demand deposits
347,983 0.07 297,012 0.08
MMDA accounts
306,827 0.05 253,468 0.13
Savings accounts
409,210 0.14 277,839 0.06
Certificates of deposit
387,982 0.15 271,882 0.46
Total deposits
$ 1,813,254 0.08 $ 1,381,101 0.18
As of June 30, 2022, and December 31, 2021, approximately $631.5 million and $452.0 million, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.
The increase in ~~total~~overall deposits is ~~primarily a~~the result of ~~management’s sales~~the RYFL acquisition, as well as the Bancorp’s efforts ~~along with customer preferences for competitively priced short-term liquid investments.~~to maintain and grow core deposits.

The Bancorp’s borrowed funds are primarily used to fund asset growth not supported by deposit generation. The Bancorp’s end-of-period borrowing balances were as follows:

June 30,

(unaudited)

2021

December 31,

YTD

June 30,

December 31,

YTD

(Dollars in thousands)

(unaudited)

2020

Change

2022

2021

Change

Balance

Balance
$
%

Balance

Balance
$
%

Repurchase agreements
$ 24,399 $ 13,711 $ 10,688 78.0 % $ 24,536 $ 14,581 $ 9,955 68.3 %
Borrowed funds
- 6,149 (6,149 ) -100.0 %
Total borrowed funds
$ 24,399 $ 19,860 $ 4,539 22.9 % $ 24,536 $ 14,581 $ 9,955 68.3 %

Repurchase agreements increased as part of normal account fluctuations within that product line.
Other assets totaled $42.0 million at June 30, 2022, compared to $14.9 million at December 31, 2021. The ~~decrease~~increase in ~~borrowings was~~other assets is primarily related to increased deferred tax assets as result of increased unrealized losses within the securities portfolio. Other liabilities totaled $23.1 million at June 30, 2022, compared to $15.3 milllion at December 31, 2021. The increase in other liabilities is primarily the result of ~~paydowns on the Bancorp’s outstanding borrowed funds.~~increased fair value of interest rate swap contracts and ACH prefunding liabilities.

Liquidity and Capital Resources
For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, and pay dividends and operating expenses. Because profit and liquidity are often conflicting objectives, management attempts to maximize the Bank’s net interest margin by making adequate, but not excessive, liquidity provisions. Furthermore, funds are managed so that future profits will not be significantly impacted as funding costs increase.

Changes in the liquidity position result from operating, investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. The primary investing activities include loan originations, loan repayments, investments in interest bearing balances in other financial institutions, and the purchase, sale, and maturity of investment securities. Financing activities focus almost entirely on the generation of customer deposits. In addition, the Bancorp utilizes borrowings (i.e., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds.

35
During the six months ended June 30, ~~2021,~~2022, cash and cash equivalents increased by ~~$48.7~~$46.1 million compared to a ~~$50.0~~$48.7 million increase for the six months ended June 30, ~~2020.~~2021. The primary sources of cash and cash equivalents were cash and cash equivalents from acquisition activity, the sale of loans originated for sale, proceeds from the sale of securities, proceeds from the maturity and paydown of securities, ~~proceeds from the sale of securities,~~change in deposits, and ~~growth of deposits.~~change in repurchase agreements and other borrowed funds. The primary uses of cash and cash equivalents were ~~origination of loans for sale and~~the purchase of ~~securities.~~securities, and loan originations. Cash provided by operating activities totaled ~~$13.5~~$5.9 million for the six months ended June 30, ~~2021,~~2022, compared to cash provided of ~~$10.9~~$13.6 million for the six month period ended June 30, ~~2020.~~2021. 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.~~sale and net change in accrued expenses and other liabilites. Cash ~~outflows~~provided from investing activities totaled ~~$60.0~~$24.8 million for the current period, compared to cash outflows of ~~$85.6~~$60.0 million for the six months ended June 30, ~~2020.~~2021. Cash ~~outflows~~provided from investing activities for the current six months were primarily related to the ~~purchase of securities~~cash and ~~loans receivable, offset against proceeds~~cash equivalents from ~~sales of securities,~~acquisition activity, net, and proceeds from the sales and maturities of securities, offset against the net change in loans receivable and ~~paydowns~~purchase of ~~securities.~~securites. Cash provided from financing activities totaled ~~$95.1~~$15.4 million during the current period compared to net cash provided of ~~$124.8~~$95.0 million for the six months ended June 30, ~~2020.~~2021. The net cash ~~inflows~~provided from financing activities were primarily a result of net change in deposits and the change in other borrowed ~~funds, offset against repayment of FHLB advances and payment of quarterly dividends.~~funds. On a cash basis, the Bancorp paid dividends on common stock of $2.4 million for the six months ended June 30, 2022, and $2.2 million for the six months ended June 30, ~~2021, and $2.1 million for the six months ended June 30, 2020.~~2021.
38

At June 30, ~~2021,~~2022, outstanding commitments to fund loans totaled ~~$219.9~~$276.1 million. Approximately ~~52.1%~~54.1% of the commitments were at variable rates. Standby letters of credit, which are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party, totaled ~~$11.2~~$13.6 million at June 30, ~~2021.~~2022. Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity.

Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the six months ended June 30, ~~2021,~~2022, stockholders' equity ~~increased~~decreased by ~~$3.9~~$20.0 million ~~(2.6%~~(12.7%). During the six months ended June 30, ~~2021,~~2022, stockholders’ equity was primarily decreased by other comprehensive losses as the result of market value changes within the securities portfolio of $62.1 million and dividends declared of $2.7 million, offset by increased byadditional paid in capital related to the RYFL acquisition of $38.0 million and net income of ~~$8.1~~$6.6 million. ~~Decreasing stockholders’ equity was decreased unrealized gains on available securities of $2.2 million and the declaration of $2.2 million in cash dividends.~~ On April 24, 2014 the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. 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 under the program during the first six months of ~~2021~~2022 or ~~2020.~~2021. During ~~2021, 13,493~~2022, 11,158 restricted stock shares vested under the Incentive Plan outlined in Note 9 of the financial statements, of which ~~3,115~~2,449 of these shares were withheld in the form of a net surrender to cover the withholding tax obligations of the vesting employees. The repurchase of these surrendered shares is considered outside of the scope of the formal board approved stock repurchase program.

The ~~Bancorp is subject to risk-based capital guidelines adopted by the Board of Governors of the Federal Reserve System (the “FRB”), and the~~ Bank is subject to risk-based capital guidelines adopted by the FDIC. ~~As applied to the Bancorp and the Bank, the FRB and FDIC capital requirements are substantially the same. These~~The regulations divide capital into multiple tiers. The first tier (Common Equity Tier 1 Capital) includes common shareholders’ equity, after deductions for various items including goodwill and certain other intangible assets, and after certain other adjustments. Common Equity Tier 1 Capital also includes accumulated other comprehensive income (for organizations that do not make opt-out elections). The next tier (Tier 1 Capital) is comprised of Common Equity Tier 1 Capital plus other qualifying capital instruments such as perpetual noncumulative preferred stock and junior subordinated debt issued to trusts, and other adjustments. The third tier (Tier 2 Capital) includes instruments such as subordinated debt that have a minimum original maturity of at least five years and are subordinated to the claims of depositors and general creditors, total capital minority interest not included in Tier 1 Capital, and limited amounts of the allowance for loan losses, less applicable regulatory adjustments and deductions. The ~~Bancorp and the~~ Bank ~~are~~is required to maintain a Common Equity Tier 1 Capital ratio of 4.5%, a Tier 1 Capital ratio of 6%, and a Total Capital ratio (comprised of Tier 1 Capital plus Tier 2 Capital) of 8%. In addition, the capital regulations provide for a minimum leverage ratio (Tier 1 capital to adjusted average assets) of 4%.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions by the institution and certain discretionary bonus payments to management if an institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased each year until the buffer requirement became fully effective on January 1, 2019.
36

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the FRB to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries. However, under the FRB’s “Small Bank Holding Company” exemption from consolidated bank holding company capital requirements, bank holding companies and savings and loan holding companies with less than $3 billion in consolidated assets, such as the Bancorp, are exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases.

39

During the six months ended June 30, ~~2021,~~2022, the Bancorp’s and Bank’s ~~regulatory capital ratios~~risk weighted assets continued to be negatively impacted by regulatory requirements regarding collateralized debt obligations. The regulatory requirements state that for collateralized debt obligations that have been downgraded below investment grade by the rating agencies, increased risk based asset weightings are required. The Bancorp currently holds pooled ~~trust preferred securities~~collateralized debt obligations with a cost basis of $2.2 million. These investments currently have ratings that are below investment grade. As a result, approximately ~~$9.3~~$8.6 million of risk-based assets are generated by the ~~trust preferred securities~~collateralized debt obligations in the Bancorp’s and Bank’s total risk based capital calculation.

~~The following table shows that, at June 30, 2021, and December 31, 2020, the Bancorp’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.~~
(Dollars in millions)

Minimum Required To Be

Minimum Required For

Well Capitalized Under Prompt

Actual

Capital Adequacy Purposes

Corrective Action Regulations

At June 30, 2021

Amount

Ratio

Amount

Ratio

Amount

Ratio

Common equity tier 1 capital to risk-weighted assets
$ 130.7 13.0 % $ 45.4 4.5 % N/A N/A
Tier 1 capital to risk-weighted assets
$ 130.7 13.0 % $ 60.6 6.0 % N/A N/A
Total capital to risk-weighted assets
$ 143.4 14.2 % $ 80.8 8.0 % N/A N/A
Tier 1 capital to adjusted average assets
$ 130.7 8.3 % $ 64.0 4.0 % N/A N/A
(Dollars in millions)

Minimum Required To Be

Minimum Required For

Well Capitalized Under Prompt

Actual

Capital Adequacy Purposes

Corrective Action Regulations

At December 31, 2020

Amount

Ratio

Amount

Ratio

Amount

Ratio

Common equity tier 1 capital to risk-weighted assets
$ 124.0 12.7 % $ 43.9 4.5 % N/A N/A
Tier 1 capital to risk-weighted assets
$ 124.0 12.7 % $ 58.6 6.0 % N/A N/A
Total capital to risk-weighted assets
$ 136.2 14.0 % $ 78.1 8.0 % N/A N/A
Tier 1 capital to adjusted average assets
$ 125.3 8.4 % $ 59.2 4.0 % N/A N/A
In addition, the following table shows that, at June 30, ~~2021,~~2022, and December 31, ~~2020,~~2021, the Bank’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.

(Dollars in millions)

Minimum Required To Be

Minimum Required To Be

Minimum Required For

Well Capitalized Under Prompt

Minimum Required For

Well Capitalized Under Prompt

Actual

Capital Adequacy Purposes

Corrective Action Regulations

Actual

Capital Adequacy Purposes

Corrective Action Regulations

At June 30, 2021

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2022

Amount

Ratio

Amount

Ratio

Amount

Ratio

Common equity tier 1 capital to risk-weighted assets
$ 128.0 12.7 % $ 45.3 4.5 % $ 65.4 6.5 % $ 155.5 10.5 % $ 66.6 4.5 % $ 96.2 6.5 %
Tier 1 capital to risk-weighted assets
$ 128.0 12.7 % $ 60.3 6.0 % $ 80.5 8.0 % $ 155.5 10.5 % $ 88.8 6.0 % $ 118.3 8.0 %
Total capital to risk-weighted assets
$ 140.6 14.0 % $ 80.5 8.0 % $ 100.6 10.0 % $ 168.9 11.4 % $ 118.3 8.0 % $ 147.9 10.0 %
Tier 1 capital to adjusted average assets
$ 128.0 8.1 % $ 63.9 4.0 % $ 79.9 5.0 % $ 155.5 7.8 % $ 81.0 4.0 % $ 101.2 5.0 %

(Dollars in millions)

Minimum Required To Be

Minimum Required To Be

Minimum Required For

Well Capitalized Under Prompt

Minimum Required For

Well Capitalized Under Prompt

Actual

Capital Adequacy Purposes

Corrective Action Regulations

Actual

Capital Adequacy Purposes

Corrective Action Regulations

At December 31, 2020

Amount

Ratio

Amount

Ratio

Amount

Ratio

At December 31, 2021

Amount

Ratio

Amount

Ratio

Amount

Ratio

Common equity tier 1 capital to risk-weighted assets
$ 122.0 12.6 % $ 43.8 4.5 % $ 63.2 6.5 % $ 136.6 13.0 % $ 47.4 4.5 % N/A N/A
Tier 1 capital to risk-weighted assets
$ 122.0 12.6 % $ 58.4 6.0 % $ 77.8 8.0 % $ 136.6 13.0 % $ 63.3 6.0 % N/A N/A
Total capital to risk-weighted assets
$ 134.2 13.8 % $ 77.8 8.0 % $ 97.3 10.0 % $ 149.8 14.2 % $ 84.3 8.0 % N/A N/A
Tier 1 capital to adjusted average assets
$ 122.0 8.3 % $ 59.1 4.0 % $ 73.9 5.0 % $ 136.6 8.6 % $ 64.2 4.0 % N/A N/A

The Bancorp’s ability to pay dividends to its shareholders is entirely dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. The aggregate amount of dividends that may be declared by the Bank in ~~2021,~~2022, without the need for qualifying for an exemption or prior DFI approval, is its ~~2021~~2022 net profits plus ~~$4.7~~$21.4 million. Moreover, the FDIC and the ~~FRB~~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 ~~June 25, 2021,~~May 20, 2022, the Board of Directors of the Bancorp declared a second quarter dividend of $0.31 per share. The Bancorp’s second quarter dividend was paid to shareholders on July 7, ~~2021.~~2022.
40

Results of Operations - Comparison of the ~~Quarter~~Three Months Ended June 30, ~~2021~~2022 to the ~~Quarter~~Three Months Ended June 30, ~~2020~~2021
For the ~~quarter~~three months ended June 30, ~~2021,~~2022, the Bancorp reported net income of ~~$3.6~~$4.4 million, compared to net income of ~~$4.9~~$3.6 million for the ~~quarter ended June 30, 2020, a decrease of $1.3 million (26.4%). For the quarter, the ROA was 0.90%, compared to 1.36% for the quarter ended June 30, 2020. The ROE was 9.17% for the quarter~~three months ended June 30, 2021, an increase of $860 thousand (24.1%). For the three months, the ROA was 0.85%, compared to ~~13.72%~~0.90% for the ~~quarter~~three months ended June 30, ~~2020.~~2021. The ROE was 12.45% for the three months ended June 30, 2022, compared to 9.17% for the three months ended June 30, 2021.
37

Net interest income for the ~~quarter~~three months ended June 30, ~~2021~~2022 was ~~$11.9~~$17.3 million, an increase of ~~$457 thousand (4.0%~~$5.4 million (45.7%), compared to ~~$11.4~~$11.9 million for the ~~quarter~~three months ended June 30, ~~2020.~~2021. The weighted-average yield on interest-earning assets was 3.68% for the three months ended June 30, 2022, compared to 3.38% for the ~~quarter~~three months ended June 30, ~~2021, compared to 3.93% for the quarter ended June 30, 2020.~~2021. The weighted-average cost of funds for the ~~quarter~~three months ended June 30, ~~2021~~2022 was ~~0.16%~~0.09% compared to ~~0.47%~~0.16% for the ~~quarter~~three months ended June 30, ~~2020.~~2021. The impact of the ~~3.38%~~3.68% return on interest earning assets and the ~~0.16%~~0.09% cost of funds resulted in an interest rate spread and margin of ~~3.22%~~3.59% for the current ~~quarter,~~three months, a ~~decrease~~increase from the ~~3.46%~~3.22% spread for the ~~quarter~~three months ended June 30, ~~2020.~~2021. The ~~net interest margin on earning assets was 3.22% for the quarter ended June 30, 2021 and 3.48% for the quarter ended June 30, 2020. On a tax equivalent basis, the~~ Bancorp’s ~~net interest margin was 3.42% for the quarter ended June 30, 2021, compared to 3.63% for the quarter ended June 30, 2020. Comparing the~~ net interest margin on a ~~tax~~tax-adjusted basis was 3.78% for the three months ended June 30, 2022, compared to 3.42% for the three months ended June 30, 2021. The Bancorp believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, ~~more accurately compares~~as these measures provide useful information to make peer comparisons. Tax adjusted net interest margin represents a non-GAAP financial measure. See the ~~returns on tax-exempt loans~~non-GAAP reconciliation table immediately below and ~~securities to those on taxable interest-earning assets.~~the section captioned “Non-GAAP Financial Measures” for further disclosure regarding non-GAAP financial measures.
(Dollars in thousands)

Three Months Ended

(unaudited)

June 30, 2022

June 30, 2021

Calculation of tax adjusted net interest margin

Net interest income
$ 17,298 $ 11,872
Tax adjusted interest on securities and loans
930 745
Adjusted net interest income
18,228 12,617
Total average earning assets
1,927,664 1,473,625
Tax adjusted net interest margin
3.78 % 3.42 %

Information relating to the average consolidated balance sheet and the yield on average earning assets and cost of average liabilities for the periods indicated are in the following table. Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities drives the disclosed rates. Average balances are derived from daily balances.

Quarter-to-Date

Three Months Ended

(Dollars in thousands)

Average Balances, Interest, and Rates

Average Balances, Interest, and Rates

(unaudited)

June 30, 2021

June 30, 2020

June 30, 2022

June 30, 2021

Average
Balance

Interest

Rate (%)

Average
Balance

Interest

Rate (%)

Average
Balance

Interest

Rate (%)

Average
Balance

Interest

Rate (%)

ASSETS

Interest bearing deposits in other financial institutions
$ 57,543 $ 9 0.06 $ 39,325 $ 15 0.15 $ 25,679 $ 45 0.70 $ 57,543 $ 9 0.06
Federal funds sold
1,288 - - 1,738 18 4.14 1,388 2 0.58 1,288 - -
Certificates of deposit in other financial institutions
1,473 7 1.90 1,734 11 2.54 1,625 3 0.74 1,473 7 1.90
Securities available-for-sale
433,355 2,124 1.96 288,330 1,532 2.13 438,309 2,449 2.23 433,355 2,124 1.96
Loans receivable
976,520 10,275 4.21 977,866 11,297 4.62
Loans receivable*
1,457,625 15,221 4.18 976,520 10,275 4.21
Federal Home Loan Bank stock
3,446 20 2.32 3,918 32 3.27 3,038 20 2.63 3,446 20 2.32
Total interest earning assets
1,473,625 $ 12,435 3.38 1,312,911 $ 12,905 3.93 1,927,664 $ 17,740 3.68 1,473,625 $ 12,435 3.38
Cash and non-interest bearing deposits in other financial institutions
36,377 17,713 21,435 36,377
Allowance for loan losses
(13,255 ) (9,553 ) (13,399 ) (13,255 )
Other noninterest bearing assets
97,863 102,964 149,339 97,863
Total assets
$ 1,594,610 $ 1,424,035 $ 2,085,039 $ 1,594,610

LIABILITIES AND STOCKHOLDERS' EQUITY

Total deposits
$ 1,402,398 $ 549 0.16 $ 1,237,241 $ 1,380 0.45 $ 1,884,712 $ 389 0.08 $ 1,402,398 $ 549 0.16
Repurchase agreements
16,855 12 0.28 13,671 17 0.50 22,618 26 0.46 16,855 12 0.28
Borrowed funds
1,720 2 0.47 13,981 93 2.66 9,851 27 1.10 1,720 2 0.47
Total interest bearing liabilities
1,420,973 $ 563 0.16 1,264,893 $ 1,490 0.47 1,917,181 $ 442 0.09 1,420,973 $ 563 0.16
Other noninterest bearing liabilities
17,787 17,741 25,443 17,787
Total liabilities
1,438,760 1,282,634 1,942,624 1,438,760
Total stockholders' equity
155,850 141,401 142,415 155,850
Total liabilities and stockholders' equity
$ 1,594,610 $ 1,424,035 �� $ 2,085,039 $ 1,594,610

Net intrest spread
3.59 % 3.22 %
Net interest margin**
3.59 % 3.22 %
Ratio of interest-earning assets to interest-bearing liabilities

1.01x

1.04x

* Non-accruing loans have been included in the average balances. ** Net interest income divided by average interest-earning assets.

The ~~decrease in~~increased net interest ~~earning asset~~ income and net interest margin for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, is primarily related to continued decreased reinvestment rates in 2021 for loans, securities, and excess cash balances, as a result of the Federal Reserve cuts occurring in March 2020. The decrease in interest bearing liability expense is2022 was primarily the result of the ~~Bancorp adjusting deposit~~increased earning assets acquired through the RYFL acquisition, reallocation of securities cashflows into organic loan growth, and ~~repurchase agreement pricing to align with the current~~maintaining lower interest ~~rate cycle.~~expense.

4138

The following table shows the change in noninterest income for the ~~quarter~~three months ending June 30, ~~2021,~~2022, and June 30, ~~2020.~~2021.

Three Months Ended

(Dollars in thousands)

June 30,

Three Months Ended

Three Months Ended June 30,

6/30/2022
vs. 6/30/2021

2021

2020

$ Change

% Change

(unaudited)
2022

2021

$ Change

% Change

Noninterest income:

Gain on sale of loans held-for-sale, net
$ 1,116 $ 2,464 $ (1,348 ) -54.7 %
Fees and service charges
1,471 1,151 320 162.4 % $ 1,560 $ 1,471 $ 89 6.1 %
Wealth management operations
576 514 62 12.1 % 588 576 12 2.1 %
Gain on sale of loans held-for-sale, net
291 1,116 (825 ) -73.9 %
Gain on sale of securities, net
269 667 (398 ) -59.7 % 258 269 (11 ) -4.1 %
Increase in cash value of bank owned life insurance
188 188 - 0.0 % 193 188 5 2.7 %
Gain on sale of foreclosed real estate, net
36 43 (7 ) -16.3 %
Gain (loss) on sale of foreclosed real estate
- 36 (36 ) -100.0 %
Other
24 19 5 26.3 % 6 24 (18 ) -75.0 %

Total noninterest income
$ 3,680 $ 5,046 $ (1,366 ) -27.1 % $ 2,896 $ 3,680 $ (784 ) -21.3 %

The decrease in gain on sale of loans is the result of significant refinance ~~activity~~ in ~~the prior year~~2021 due to the economic and ~~rate~~low-rate environment, which resulted in more loans originated and sold. 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 increase in fees and service charges is primarily the result of ~~changes~~the acquisition of RYFL and the resultant increase in our customer ~~usage of bank services as our community recovers from the pandemic. The decrease in gains on the sale of securities is a result of current market conditions and actively managing the portfolio.~~base.

The following table shows the change in noninterest expense for the ~~quarter~~three months ending June 30, ~~2021,~~2022, and June 30, ~~2020.~~2021.

Three Months Ended

(Dollars in thousands)

June 30,

Three Months Ended

Three Months Ended June 30,

6/30/2022
vs. 6/30/2021

2021

2020

$ Change

% Change

(Unaudited)

2022

2021

$ Change

% Change

Noninterest expense:

Compensation and benefits
$ 5,897 $ 5,620 $ 277 4.9 % $ 7,538 $ 5,897 $ 1,641 27.8 %
Data processing
1,246 597 649 108.7 %
Occupancy and equipment
1,324 1,295 29 2.2 % 1,729 1,324 405 30.6 %
Data processing
597 532 65 12.2 %
Marketing
195 180 15 8.3 % 385 195 190 97.4 %
Federal deposit insurance premiums
204 159 45 28.3 % 380 204 176 86.3 %
Other
2,793 2,227 566 25.4 % 3,898 2,793 1,105 39.6 %

Total noninterest expense
$ 11,010 $ 10,013 $ 997 10.0 % $ 15,176 $ 11,010 $ 4,166 37.8 %

The increase in compensation and benefits is primarily the result of the RYFL acquisition, management’s continued focus on talent management, and ~~retention.~~wage inflation. The increase in data processing expense is primarily the result of 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 RYFL acquisition and higher operating costs. Marketing expenses have increased to enhance brand recognition in new markets and gain more wallet share. The increase in federal deposit insurance premiums is primarily the result of growth of the bank’s average assets. The increase in other operating expenses is primarily the result of one-time expenses related to the acquisition of RYFL, continued investments in strategic ~~initiatives.~~initiatives focusing on growth of the organization, and inflationary pressures.
For the three months ended June 30, 2022, data processing expense totaled $1.2 million, a decrease of $1.8 million from the three months ended March 31, 2022 total of $3.1 million. The ~~Bancorp’s efficiency ratio was 70.79%~~decrease for the ~~quarter~~three months ended June 30, 2022, is primarily related to $1.9 million in RYFL conversion expense recognized during the three months ended March 31, 2022.
The provision for income taxes was $587 thousand for the three months ended June 30, 2022, as compared to $395 thousand for the three months ended June 30, 2021, ~~compared to 60.83%~~an increase of $192 thousand (48.6%). The effective tax rate was 11.7% for the ~~quarter~~three months ended June 30, 2020. The increase in the efficiency ratio is the result of lower noninterest income and higher noninterest expense. The efficiency ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income2022, as compared to 10.0% for the ~~period.~~
~~Income tax expenses for the quarter~~three months ended June 30, ~~2021, totaled $395 thousand, compared to income tax expense of $1.1 million for the quarter ended June 30, 2020, an decrease of $694 thousand (63.7%).~~2021. The ~~combined effective federal and state tax rates for the Bancorp was 10.0% for the quarter ended June 30, 2021, compared to 18.3% for the quarter ended June 30, 2020. The decrease in the~~Bancorp’s higher current three months effective tax rate ~~for the quarter ended June 30, 2021,~~ is ~~the~~a result of higher earnings relative to tax preferred ~~income relative to earnings.~~income.

Results of Operations - Comparison of the Six Months Ended June 30, ~~2021~~2022 to the Six Months Ended June 30, ~~2020~~2021

For the six months ended June 30, ~~2021,~~2022, the Bancorp reported net income of ~~$8.1~~$6.6 million, compared to net income of ~~$8.0~~$8.1 million for the six months ended June 30, ~~2020, an increase~~2021, a decrease of ~~$150 thousand (1.9%~~$1.5 million (19.1%). For the six months ended, the ROA was ~~1.04%~~0.65%, compared to ~~1.16%~~1.04 % for the six months ended June 30, ~~2020.~~2021. The ROE was 8.40% for the six months ended June 30, 2022, compared to 10.54% for the six months ended June 30, ~~2021, compared to 11.48% for the six months ended June 30, 2020.~~2021.
39

Net interest income for the six months ended June 30, ~~2021,~~2022, was ~~$23.9~~$32.8 million, an increase of ~~$1.8~~$8.9 million ~~(8.3%~~(37.3%), compared to ~~$22.1~~$23.9 million for the six months ended June 30, ~~2020.~~2021. The weighted-average yield on interest-earning assets was 3.59% for the six months ended June 30, 2022, compared to 3.48% for the six months ended June 30, ~~2021, compared to 4.07% for the six months ended June 30, 2020.~~2021. The weighted-average cost of funds for the six months ended June 30, ~~2021,~~2022, was ~~0.18%~~0.09% compared to ~~0.60%~~0.18% for the six months ended June 30, ~~2019.~~2021. The impact of the ~~3.48%~~3.59% return on interest earning assets and the ~~0.18%~~0.09% cost of funds resulted in an interest rate spread of ~~3.30%~~3.50% for the current six months, which is ~~a decrease~~an increase from the spread of ~~3.47%~~3.30% as of June 30, ~~2020. The~~2021. On a tax adjusted basis, the Bancorp’s net interest margin ~~on earning assets~~ was ~~3.31%~~3.70% for the six months ended June 30, ~~2021, and 3.49% for the six months ended June 30, 2020. On a tax equivalent basis, the Bancorp’s net interest margin was~~2022, compared to 3.51% for the six months ended June 30, ~~2021, compared~~2021. The Bancorp believes that it is a standard practice in the banking industry to ~~3.64% for the six months ended June 30, 2020. Comparing the~~present net interest margin and net interest income on a ~~tax~~fully-taxable equivalent basis, ~~more accurately compares~~as these measures provide useful information to make peer comparisons. Tax adjusted net interest margin represents a non-GAAP financial measure. See the ~~returns on tax-exempt loans~~non-GAAP reconciliation table immediately below and ~~securities to those on taxable interest-earning assets.~~the section captioned “Non-GAAP Financial Measures” for further disclosure regarding non-GAAP financial measures.

42

(Dollars in thousands)

Six Months Ended

(unaudited)

June 30, 2022

June 30, 2021

Calculation of tax adjusted net interest margin

Net interest income
$ 32,833 $ 23,918
Tax adjusted interest on securities and loans
1,896 1,422
Adjusted net interest income
34,729 25,340
Total average earning assets
1,874,835 1,445,263
Tax adjusted net interest margin
3.70 % 3.51 %

Information relating to the average consolidated balance sheet and the yield on average earning assets and cost of average liabilities for the periods indicated are in the following table. Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities drives the disclosed rates. Average balances are derived from daily balances.

Year-to-Date

(Dollars in thousands)

Average Balances, Interest, and Rates

Average Balances, Interest, and Rates

June 30, 2021

June 30, 2020

(unaudited)

June 30, 2022

June 30, 2021

Average
Balance

Interest

Rate (%)

Average
Balance

Interest

Rate (%)

Average
Balance

Interest

Rate (%)

Average
Balance

Interest

Rate (%)

ASSETS

`

Interest bearing deposits in other financial institutions
$ 54,195 $ 21 0.08 $ 26,406 $ 69 0.52 $ 24,032 $ 53 0.44 $ 54,195 $ 21 0.08
Federal funds sold
1,040 - - 3,726 85 4.56 4,683 2 0.09 1,040 - -
Certificates of deposit in other financial institutions
1,535 15 1.95 1,851 25 2.70 1,674 6 0.72 1,535 15 1.95
Securities available-for-sale
408,753 4,065 1.99 284,955 3,202 2.25 474,016 5,024 2.12 408,753 4,065 1.99
Loans receivable
976,059 21,021 4.31 945,189 22,326 4.72
Loans receivable*
1,366,900 28,507 4.17 976,059 21,021 4.31
Federal Home Loan Bank stock
3,681 40 2.17 3,915 67 3.42 3,530 42 2.38 3,681 40 2.17
Total interest earning assets
1,445,263 $ 25,162 3.48 1,266,042 $ 25,774 4.07 1,874,835 $ 33,634 3.59 1,445,263 $ 25,162 3.48
Cash and non-interest bearing deposits in other financial institutions
35,055 18,397 20,821 35,055
Allowance for loan losses
(12,960 ) (9,302 ) (13,383 ) (12,960 )
Other noninterest bearing assets
97,967 98,409 138,343 97,967
Total assets
$ 1,565,325 $ 1,373,546 $ 2,020,616 $ 1,565,325

LIABILITIES AND STOCKHOLDERS' EQUITY

Total deposits
$ 1,375,429 $ 1,200 0.17 $ 1,192,482 $ 3,444 0.58 $ 1,813,254 $ 726 0.08 $ 1,375,429 $ 1,200 0.17
Repurchase agreements
15,674 22 0.28 12,803 57 0.89 21,013 42 0.40 15,674 22 0.28
Borrowed funds
1,903 22 2.31 14,087 187 2.65 7,982 33 0.83 1,903 22 2.31
Total interest bearing liabilities
1,393,006 $ 1,244 0.18 1,219,372 $ 3,688 0.60 1,842,249 $ 801 0.09 1,393,006 $ 1,244 0.18
Other noninterest bearing liabilities
18,295 15,380 22,029 18,295
Total liabilities
1,411,301 1,234,752 1,864,278 1,411,301
Total stockholders' equity
154,024 138,794 156,338 154,024
Total liabilities and stockholders' equity
$ 1,565,325 $ 1,373,546 $ 2,020,616 $ 1,565,325

Net intrest spread
3.50 % 3.30 %
Net interest margin**
3.50 % 3.31 %
Ratio of interest-earning assets to interest-bearing liabilities

1.02
x
1.04
x
* Non-accruing loans have been included in the average balances. ** Net interest income divided by average interest-earning assets.

The ~~decrease in~~increased net interest ~~earning asset~~ income and net interest margin for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, is primarily related to continued decreased reinvestment rates in 2021 for loans, securities, and excess cash balances, as a result of the Federal Reserve cuts occurring in March 2020. The decrease in interest bearing liability expense is2022 was primarily the result of the ~~Bancorp adjusting deposit~~increased earning assets acquired through the RYFL acquisition, reallocation of securities cashflows into organic loan growth, and ~~repurchase agreement pricing to align with the current~~maintaining lower interest ~~rate cycle.~~expense.
40

The following table shows the change in noninterest income for the six months ending June 30, ~~2021,~~2022, and June 30, ~~2020.~~2021.

Six Months Ended

(Dollars in thousands)

June 30,

Six Months Ended

Six Months Ended June 30,

6/30/2022
vs. 6/30/2021

2021

2020

$ Change

% Change

(unadited)
2022

2021

$ Change

% Change

Noninterest income:

Gain on sale of loans held-for-sale, net
$ 3,165 $ 3,617 $ (452 ) -12.5 %
Fees and service charges
2,537 2,200 337 15.3 % $ 2,864 $ 2,537 $ 327 12.9 %
Wealth management operations
1,183 1,068 115 10.8 % 1,183 1,183 0 0.0 %
Gain on sale of loans held-for-sale, net
898 3,165 (2,267 ) -71.6 %
Gain on sale of securities, net
686 1,177 (491 ) -41.7 % 639 686 (47 ) -6.9 %
Increase in cash value of bank owned life insurance
357 357 - 0.0 % 445 357 88 24.6 %
Gain on sale of foreclosed real estate, net
27 103 (76 ) -73.8 %
Gain (loss) on sale of foreclosed real estate
- 27 (27 ) -100.0 %
Other
38 70 (32 ) -45.7 % 11 38 (27 ) -71.1 %

Total noninterest income
$ 7,993 $ 8,592 $ (599 ) -7.0 % $ 6,040 $ 7,993 $ (1,953 ) -24.4 %

The decrease in gain on sale of loans is the result of significant refinance activity in ~~the prior year~~2021 due to the economic and ~~rate~~low-rate environment, which resulted in more loans originated and sold. 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 increase in fees and service charges is primarily the result of ~~changes in customer usage~~the acquisition of ~~bank services as our community recovers from~~RYFL and the ~~pandemic. The~~resultant increase in wealth management income is the result of the Bancorp’s continued focus on expanding its wealth management line of business. The decrease in gains on the sale of securities is a result of current market conditions and actively managing the portfolio.our customer base.
43

The following table shows the change in noninterest expense for the six months ending June 30, ~~2021,~~2022, and June 30, ~~2020.~~2021.

Six Months Ended

(Dollars in thousands)

June 30,

Six Months Ended

Six Months Ended June 30,

6/30/2022
vs. 6/30/2021

2021

2020

$ Change

% Change

(unaudited)
2022

2021

$ Change

% Change

Noninterest expense:

Compensation and benefits
$ 11,582 $ 10,930 $ 652 6.0 % $ 14,905 $ 11,582 $ 3,323 28.7 %
Data processing
4,300 1,125 3,175 282.2 %
Occupancy and equipment
2,696 2,704 (8 ) -0.3 % 3,229 2,696 533 19.8 %
Data processing
1,125 1,088 37 3.4 %
Marketing
394 388 6 1.5 % 1,036 394 642 162.9 %
Federal deposit insurance premiums
384 355 29 8.2 % 599 384 215 56.0 %
Other
5,322 4,640 682 14.7 % 7,376 5,322 2,054 38.6 %

Total noninterest expense
$ 21,503 $ 20,105 $ 1,398 7.0 % $ 31,445 $ 21,503 $ 9,942 46.2 %

The increase in compensation and benefits is primarily the result of the RYFL acquisition, management’s continued focus on talent management, and ~~retention.~~wage inflation. The increase in occupancy and equipment expense is primarily related to the RYFL acquisition and higher operating costs. Marketing expenses have increased to enhance brand recognition in new markets and gain more wallet share. The increase in federal deposit insurance premiums is primarily the result of growth of the bank’s average assets. The increase in data processing expense is primarily the result of data conversion expenses related to the acquisition of RYFL, increased system utilization due to growth of the Bank, and continued investment in technological advancements such as Salesforce and nCino. The increase in other operating expenses is primarily the result of one-time expenses related to the acquisition of RYFL, continued investments in strategic ~~initiatives.~~ initiatives focusing on growth of the organization, and inflationary pressures.
The ~~Bancorp’s efficiency ratio~~provision for income taxes was ~~67.38%~~$862 thousand for the six months ended June 30, 2022, as compared to $1.1 million for the six months ended June 30, 2021, ~~compared to 65.54%~~a decrease of $278 thousand (24.4%). The effective tax rate was 11.6% for the six months ended June 30, 2020. The increase in the efficiency ratio is the result of lower noninterest income and higher noninterest expense. The efficiency ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period.
~~Income tax expenses for the six months ended June 30, 2021 totaled $1.1 million,~~2022, as compared to ~~income tax expense of $1.6 million for the six months ended June 30, 2020, a decrease of $447 thousand (28.2%). The combined effective federal and state tax rates for the Bancorp was~~ 12.3% for the six months ended June 30, ~~2021, compared to 16.6% for the six months ended June 30, 2020.~~2021. The Bancorp’s lower current period effective tax rate is a result of ana greater increase in tax preferred income ~~in relation~~relative to ~~income.~~
~~Non-GAAP Financial Measures~~
This filing includes certain financial measures that are identified as non-GAAP. However, certain non-GAAP performance measures are used by management to evaluate and measure the Bancorp’s performance. Although these non-GAAP financial measures are frequently used by investors to evaluate a financial institution, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. This supplemental information should not be considered in isolation or as a substitute for the related GAAP measures.earnings.

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 critical accounting policies from December 31, ~~2020,~~2021, remain unchanged.

Forward-Looking Statements
Statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are also intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. The Bancorp cautions readers that forward-looking statements, including without limitation those relating to the Bancorp’s future business prospects, merger and acquisition activities, interest income and expense, net income, liquidity, and capital needs are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this report, including those identified in the Bancorp’s ~~2020~~2021 Form 10-K.
41
Non-GAAP Financial Measures
This filing includes certain financial measures that are identified as non-GAAP, including adjusted net interest income and tax adjusted net interest margin. The Bancorp provides these non-GAAP performance measures because they are used by management to evaluate and measure the Bancorp’s performance, which the Bancorp believes also is useful to assist investors in assessing the Bancorp’s operating performance. Where non-GAAP financial measures are used in this report, the most comparable GAAP measure, as well as the reconciliation to the most comparable GAAP measure, can be found in the tables referenced herein.
The adjusted net interest income and tax-adjusted net interest margin measures recognize the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans are presented using the current federal income tax rate of 21%. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes.
Although these non-GAAP financial measures are frequently used by investors to evaluate a financial institution’s business and performance, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business operations and performance.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.

Item 4. Controls and Procedures

(a)
Evaluation of Disclosure Controls and Procedures.
The Bancorp maintains disclosure controls and procedures (as defined in Sections 13a – 15(e) and 15d – 15(e)) of regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bancorp's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The Bancorp's Chief Executive Officer and Chief Financial Officer evaluate the effectiveness of the Bancorp's disclosure controls and procedures as of the end of each quarter. Based on that evaluation as of June 30, ~~2021,~~2022, the Bancorp’s Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective as of that date in ensuring that information required to be disclosed by the Bancorp under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b)
Changes in Internal Control Over Financial Reporting.
There was no change in the Bancorp's internal control over financial reporting identified in connection with the Bancorp’s evaluation of controls that occurred during the six months ended June 30, ~~2021,~~2022, that has materially affected, or is reasonably likely to materially affect, the Bancorp's internal control over financial reporting.

PART II ‑ Other Information
Item 1.
~~Item 1.~~         Legal Proceedings
The Bancorp and its subsidiaries, from time to time, are involved in legal proceedings in the ordinary course of business against its debtors and are defendants in legal actions arising from normal business activities. Management, after consultation with legal counsel believes that the ultimate liabilities, if any, resulting from these actions will not have a material adverse effect on the financial position of the Bank or on the consolidated financial position of the Bancorp.
Item 1A.~~Risk Factors~~
Risk Factors
Not Applicable.
Item 2.~~Unregistered Sales of Equity Securities and Use of Proceeds~~
Unregistered Sales of Equity Securities and Use of Proceeds
On April 24, 2014 the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. 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 six months ended June 30, ~~2021~~2022 under the stock repurchase program.

Period

Total Number
of Shares Purchased

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, ~~2021~~2022 – January 31, ~~2021~~2022
- N/A - 48,828
February 1, ~~2021~~2022 – February 28, ~~2021~~2022
- N/A - 48,828
March 1, ~~2021~~2022 – March 31, ~~2021~~2022
- N/A - 48,828
April 1, ~~2021~~2022 – April 30, ~~2021~~2022
- N/A - 48,828
May 1, ~~2021~~2022 – May 31, ~~2021~~2022
- N/A - 48,828
June 1, ~~2021~~2022 – June 30, ~~2021~~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. There is no express expiration date for this program.
Item 3.
~~Item 3.~~         Defaults Upon Senior Securities
There are no matters reportable under this item.
Item 4.
~~Item 4.~~         Mine Safety Disclosures
Not Applicable
Item 5.
Other Information
None

~~Item 5.~~         ~~Other Information~~
~~None~~
~~Item 6.~~         ~~Exhibits~~
Item 6.
Exhibits
Exhibit
Number
Description
~~31.1~~
10.1
Employment Agreement between Finward Bancorp, Peoples Bank and Todd M. Scheub dated as of April 27, 2022 (incorporated herein by reference to Exhibit 10.1 to the Bancorp’s Form 8-K dated April 28, 2022).
10.2
Extension Agreement between Finward Bancorp, Peoples Bank and David A. Bochnowski effective as of June 28, 2022 (incorporated herein by reference to Exhibit 10.1 to the Bancorp’s Form 8-K dated May 23, 2022).
10.3
Post 2004 Deferred Compensation Plan for the Directors of Peoples Bank, Amended and Restated Effective May 20, 2022 (incorporated herein by reference to Exhibit 10.2 to the Bancorp’s Form 8-K dated May 23, 2022).
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
~~31.2~~
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
~~32.1~~
32.1
Section 1350 Certifications.
~~101~~
101
The following materials from the Bancorp’s Form 10-Q for the quarterly period ended June 30, ~~2021,~~2022, formatted in an ~~Inline~~ XBRL Interactive Data File: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Changes in Stockholders’ Equity; (iv) Consolidated Statement of Comprehensive Income; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements, with detailed tagging of notes and financial statement schedules.
~~104~~
104
Cover Page Interactive Data File ~~(embedded within the~~(formatted as Inline XBRL and contained in Exhibit 101).

4543

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FINWARD BANCORP

Date: August ~~16, 2021~~15, 2022
/s/ Benjamin J. Bochnowski

Benjamin J. Bochnowski
President and Chief Executive Officer

Date: August ~~16, 2021~~15, 2022
/s/ Peymon S. Torabi

Peymon S. Torabi
Executive Vice President, Chief Financial
Officer and Treasurer

4644

Consolidated Balance Sheet

As of December 31, 2020	As Reported		Adjustment			As Revised
Loans receivable	$	966,578	$	(1,432	)	$	965,146
Net loans receivable		954,120		(1,432	)		952,688
Other assets		13,681		199			13,880
Total assets		1,497,525		(1,233	)		1,496,292
Retained earnings		112,494		(1,233	)		111,261
Total shareholders' equity		152,922		(1,233	)		151,689
Total liabilities and Stockholders' equity		1,497,525		(1,233	)		1,496,292

Consolidated Statement of Operations

Three months ended June 30, 2020	As Reported		Adjustment			As Revised
Compensation and benefits	$	5,371	$	249		$	5,620
Total noninterest expense		9,764		249			10,013
Income before income tax expense		6,189		(249	)		5,940
Income tax expenses		1,126		(37	)		1,089
Net income		5,063		(212	)		4,851
Earnings per common share:
Basic		1.46		(0.06	)		1.40
Diluted		1.46		(0.06	)		1.40

Six months ended June 30, 2020	As Reported		Adjustment			As Revised
Compensation and benefits	$	10,588	$	342		$	10,930
Total noninterest expense		19,763		342			20,105
Income before income tax expense		9,893		(342	)		9,551
Income tax expenses		1,638		(51	)		1,587
Net income		8,255		(291	)		7,964
Earnings per common share:
Basic		2.39		(0.09	)		2.30
Diluted		2.39		(0.09	)		2.30

Consolidated Statements of Changes in Stockholders' Equity

Balance at January 1, 2020	As Reported		Adjustment			As Revised
Retained earnings	$	100,185	$	(561	)	$	99,624
Total equity		134,103		(561	)		133,542

For the quarter ending March 31, 2020
Net income		3,192		(79	)		3,113
Retained earnings		102,303		(640	)		101,663
Total equity		140,655		(640	)		140,015

For the quarter ending June 30, 2020
Net income		5,063		(212	)		4,851
Retained earnings		106,293		(852	)		105,441
Total equity		145,181		(852	)		144,329

Balance at January 1, 2021
Retained earnings		112,494		(1,233	)		111,261
Total equity		152,922		(1,233	)		151,689

For the quarter ending March 31, 2021
Net income		4,679		(136	)		4,543
Retained earnings		116,094		(1,369	)		114,725
Total equity		150,139		(1,369	)		148,770

	(Dollars in thousands)
	Unrealized gain/(loss)
Ending balance, December 31, 2020	$	10,441
Current period change		(2,232	)
Ending balance, June 30, 2021	$	8,209

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2020:

Residential real estate	$	173	$	2,038	$	286,048	$	868	$	1,297	$	283,883
Home equity		1		275		39,233		216		137		38,880
Commercial real estate		1,089		4,317		298,257		6,190		151		291,916
Construction and land development		0		1,405		93,562		0		0		93,562
Multifamily		0		626		50,571		95		621		49,855
Farmland		0		0		215		0		0		215
Commercial business		512		1,996		158,140		1,086		1,160		155,894
Consumer		0		26		1,025		0		0		1,025
Manufactured homes		0		0		24,232		0		0		24,232
Government		0		0		10,142		0		0		10,142
Total	$	1,775	$	10,683	$	961,425	$	8,455	$	3,366	$	949,604

The Bancorp's credit quality indicators are summarized below at June 30, 2021 and December 31, 2020:

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
	June 30, 2021
(Dollars in thousands)	1-5		6		7		8

Loan Segment	Pass		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	224,121	$	36,446	$	3,969	$	4,113	$	268,649
Home equity		34,900		712		560		512		36,684
Commercial real estate		233,022		59,866		13,801		8,398		315,087
Construction and land development		80,521		19,971		3,662		0		104,154
Multifamily		46,911		4,951		1,377		400		53,639
Farmland		101		208		0		0		309
Commercial business		127,244		20,092		1,162		916		149,414
Consumer		544		0		0		0		544
Manufactured homes		27,335		740		60		0		28,135
Government		8,462		0		0		0		8,462
Total	$	783,161	$	142,986	$	24,591	$	14,339	$	965,077

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

							For the six months ended				For the three months ended
	As of June 30, 2021						June 30, 2021				June 30, 2021
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,571	$	2,904	$	-	$	1,735	$	42	$	1,655	$	20
Home equity		271		283		-		317		5		300		1
Commercial real estate		1,538		2,121		-		1,295		26		1,354		14
Construction and land development		0		0		-		0		0		0		0
Multifamily		596		678		-		670		11		648		6
Farmland		0		0		-		0		0		0		0
Commercial business		1,408		1,408		-		1,447		36		1,422		18
Consumer		0		0		-		0		0		0		0
Manufactured homes		0		0		-		0		0		0		0
Government		0		0		-		0		0		0		0

With an allowance recorded:
Residential real estate	$	161	$	161	$	85	$	198	$	5	$	162	$	0
Home equity		22		22		5		15		0		23		0
Commercial real estate		5,868		5,868		1,204		5,655		113		5,901		63
Construction and land development		0		0		0		0		0		0		0
Multifamily		0		0		0		0		0		0		0
Farmland		0		0		0		0		0		0		0
Commercial business		683		683		476		719		22		704		11
Consumer		0		0		0		0		0		0		0
Manufactured homes		0		0		0		0		0		0		0
Government		0		0		0		0		0		0		0

Total:
Residential real estate	$	1,732	$	3,065	$	85	$	1,933	$	47	$	1,817	$	20
Home equity	$	293	$	305	$	5	$	332	$	5	$	323	$	1
Commercial real estate	$	7,406	$	7,989	$	1,204	$	6,950	$	139	$	7,255	$	77
Construction & land development	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Multifamily	$	596	$	678	$	0	$	670	$	11	$	648	$	6
Farmland	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Commercial business	$	2,091	$	2,091	$	476	$	2,166	$	58	$	2,126	$	29
Consumer	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Manufactured homes	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Government	$	0	$	0	$	0	$	0	$	0	$	0	$	0

	(Dollars in thousands)
	June 30, 2021		December 31, 2020
Residential real estate	$	158	$	328
Commercial business		210		210
Total	$	368	$	538

Amortization recorded for the six months ended June 30, 2021 is as follows:

(dollars in thousands)	Total
Current period	$	497

Amortization recorded for the three months ended June 30, 2021 is as follows:

(dollars in thousands)	Total
Current period	$	249

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

(dollars in thousands	Total
Remainder 2021		497
2022		983
2023		962
2024		919
2025		261
Total	$	3,622

(dollars in thousands)	Total
Current year		795
2023		1,522
2024		1,411
2025		688
2026		360
5 years and thereafter		812
Total	$	5,588

	Three Months Ended				Six Months Ended
(Dollars in thousands, except per share data)	June 30,				June 30,
(dollars in thousands except per share data)									Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Basic earnings per common share:
Net income as reported	$	3,571	$	4,851	$	8,114	$	7,964	$	4,431	$	3,571	$	6,566	$	8,114
Weighted average common shares outstanding		3,478,392		3,463,136		3,475,017		3,460,820		4,242,559		3,478,392		4,108,579		3,475,017
Basic earnings per common share	$	1.03	$	1.40	$	2.33	$	2.30	$	1.04	$	1.03	$	1.60	$	2.33

Diluted earnings per common share:						-
Net income as reported	$	3,571	$	4,851	$	8,114	$	7,964	$	4,431	$	3,571	$	6,566	$	8,114
Weighted average common shares outstanding		3,478,392		3,463,136		3,475,017		3,460,820		4,242,559		3,478,392		4,108,579		3,475,017
Add: Dilutive effect of unvested restricted stock awards										15,944		0		16,316		0
Weighted average common and dilutive potential common shares outstanding		3,478,392		3,463,136		3,475,017		3,460,820		4,258,503		3,478,392		4,124,895		3,475,017
Diluted earnings per common share	$	1.03	$	1.40	$	2.33	$	2.30	$	1.04	$	1.03	$	1.59	$	2.33

Non-vested Shares	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Non-vested at January 1, 2020		30,205		$	35.63
Non-vested at January 1, 2022							44,235		$	42.33
Granted		13,243			44.30		22,891			46.42
Vested		(6,400	)		27.50		(11,158	)		41.63
Forfeited		(220	)		43.65		(1,587	)		44.17
Non-vested at December 31, 2020		36,828		$	40.11

Non-vested at January 1, 2021		36,828		$	40.11
Granted		19,693			40.96
Vested		(13,493	)		34.84
Forfeited		(355	)		41.50
Non-vested at June 30, 2021		42,673		$	42.16
Non-vested at June 30, 2022							54,381		$	44.14

June 30, 2022
			Asset derivatives			Liability derivatives
(Dollars in thousands)	Notational or contractual amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification		Fair value
Interest rate swap contracts	$	92,565	Other assets	$	6,696	Other liabilties		$	6,696
Interest rate lock commitments		3,965	Other assets		73		N/A		0
Total	$	96,530		$	6,769			$	6,696

June 30, 2021
(Unaudited)	Notational or contractual		Asset derivatives			Liability derivatives
(Dollars in thousands)	amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification	Fair value
Interest rate swap contracts	$	87,667	Other assets	$	2,938	Other liabilties	$	2,938
Interest rate lock commitments		13,641	Other assets		246	N/A		0
Total	$	101,308		$	3,184		$	2,938

							Gross Amounts not Offset in the												Gross Amounts not Offset in the
							Statement of Financial Condition												Statement of Financial Condition
(Unaudited)			Gross Amounts Offset in		Net Amounts of Assets Presented
(Dollars in thousands)	Gross Amounts of Recognized Assets		the Statement of Financial Condition		in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount		Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
June 30, 2021
June 30, 2022
Interest rate swap contracts	$	2,938	$	0	$	2,938	$	0	$	0	$	2,938	$	6,696	$	0	$	6,696	$	0	$	0	$	6,696
Interest rate lock commitments		246		0		246		0		0		246		73		0		73		0		0		73
Total	$	3,184	$	0	$	3,184	$	0	$	0	$	3,184	$	6,769	$	0	$	6,769	$	0	$	0	$	6,769

	(Dollars in Thousands)
	Collateralized
	debt obligations
	other-than-temporary
(Dollars in thousands)	impairment
Ending balance, December 31, 2020	$	173
Additions not previously recognized		0
Ending balance, June 30, 2021	$	173

	(Dollars in thousands)
	Collateralized debt obligations
	other-than-temporary impairment
Ending balance, December 31, 2021	$	173
Additions not previously recognized		0
Ending balance, June 30, 2022	$	173

											(Dollars in thousands)
											Fair Value Measurements at June 30, 2022 Using
			Fair Value Measurements at June 30, 2021 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Interest rate swap contracts									$	6,696	$	0	$	6,696	$	0
Interest rate lock commitments										73		0		73		0
Available-for-sale debt securities:
U.S. government sponsored entities		10,796		0		10,796		0		7,934		0		7,934		0
U.S. treasury securities		401		0		401		0		594		0		594		0
Collateralized mortgage obligations and residential mortgage-backed securities		195,361		0		195,361		0		150,061		0		150,061		0
Municipal securities		266,399		0		266,399		0		240,847		0		240,847		0
Collateralized debt obligations		970		0		0		970		1,030		0		0		1,030
Total securities available-for-sale	$	473,927	$	0	$	472,957	$	970	$	400,466	$	0	$	399,436	$	1,030

Liabilities:
Interest rate swap contracts									$	6,696	$	0	$	6,696	$	0

											(Dollars in thousands)
											Fair Value Measurements at December 31, 2021 Using
			Fair Value Measurements at December 31, 2020 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Interest rate swap contracts									$	2,686	$	0	$	2,686	$	0
Interest rate lock commitments										141		0		141		0
Available-for-sale debt securities:
Money market fund	$	52,941	$	52,941	$	0	$	0
U.S. government sponsored entities		7,860		0		7,860		0		8,669		0		8,669		0
U.S. treasury securities										400		0		400		0
Collateralized mortgage obligations and residential mortgage-backed securities		154,736		0		154,736		0		184,701		0		184,701		0
Municipal securities		194,203		0		194,203		0		332,127		0		332,127		0
Collateralized debt obligations		929		0		0		929		992		0		0		992
Total securities available-for-sale	$	410,669	$	52,941	$	356,799	$	929	$	526,889	$	0	$	525,897	$	992

Liabilities:
Interest rate swap contracts									$	2,686	$	0	$	2,686	$	0

(Dollars in thousands)	Estimated Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Available-for- sale securities			(Dollars in thousands)
Beginning balance, January 1, 2020	$	1,076
Principal payments		(20	)
Total unrealized losses, included in other comprehensive income		(127	)
Ending balance, December 31, 2020	$	929
				Estimated Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
				Available-for- sale securities
Beginning balance, January 1, 2021	$	929		$	929
Principal payments		(9	)		(9	)
Total unrealized gains, included in other comprehensive income		50			50
Ending balance, June 30, 2021	$	970		$	970

Beginning balance, January 1, 2022				$	992
Principal payments					0
Total unrealized gains, included in other comprehensive income					38
Ending balance, June 30, 2022				$	1,030

	June 30, 2021				Estimated Fair Value Measurements at March 31, 2021 Using						June 30, 2022				Estimated Fair Value Measurements at June 30, 2022 Using
(Dollars in thousands)	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	68,625	$	68,625	$	68,625	$	0	$	0	$	79,302	$	79,302	$	79,302	$	0	$	0
Certificates of deposit in other financial institutions		1,471		1,526		0		1,526		0		1,482		1,453		0		1,453		0
Securities available-for-sale		473,927		473,927		0		472,957		970
Loans held-for-sale		5,878		6,030		6,030		0		0		1,525		1,552		0		1,552		0
Loans receivable, net		955,852		960,652		0		0		960,652		1,460,975		1,418,593		0		0		1,418,593
Federal Home Loan Bank stock		3,247		3,247		0		3,247		0		3,038		3,038		0		3,038		0
Interest rate swap agreements		2,938		2,938		0		2,938		0
Accrued interest receivable		4,803		4,803		0		4,803		0		6,892		6,892		0		6,892		0

Financial liabilities:
Non-interest bearing deposits		275,819		275,819		275,819		0		0		370,567		370,567		370,567		0		0
Interest bearing deposits		1,119,277		1,119,535		838,519		281,016		0		1,546,648		1,547,211		1,148,252		398,959		0
Repurchase agreements		24,399		24,415		22,661		1,754		0		24,536		24,311		16,273		8,038		0
Interest rate swap agreements		2,938		2,938		0		2,938		0
Accrued interest payable		36		36		0		36		0		56		56		0		56		0

	December 31, 2020				Estimated Fair Value Measurements at December 31, 2020 Using
(Dollars in thousands)	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	19,922	$	19,922	$	19,922	$	0	$	0
Certificates of deposit in other financial institutions		1,897		1,868		0		1,868		0
Securities available-for-sale		410,669		410,669		52,941		356,799		929
Loans held-for-sale		11,329		11,660		11,660		0		0
Loans receivable, net		952,688		982,793		0		0		982,793
Federal Home Loan Bank stock		3,918		3,918		0		3,918		0
Interest rate swap agreements		3,638		3,638		0		3,638		0
Accrued interest receivable		4,713		4,713		0		4,713		0

Financial liabilities:
Non-interest bearing deposits		241,620		241,620		241,620		0		0
Interest bearing deposits		1,060,719		1,061,294		775,891		285,403		0
Repurchase agreements		13,711		13,713		11,976		1,737		0
Borrowed funds		6,149		6,018		0		6,018		0
Interest rate swap agreements		3,638		3,638		0		3,638		0
Accrued interest payable		54		54		0		54		0

(Dollars in thousands)	(Unaudited)
As of June 30, 2021	Mortgage loans				Commercial Loans
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Interest only		15	$	1,656		1	$	2,973
Full interest, partial principal		-		-		2		1,021
Full payment deferral		1		98		-		-
Total $		16	$	1,754		3	$	3,994

	June 30,
	2021			December 31,
	(unaudited)			2020

Loans receivable to total assets		60.5	%		64.5	%
Loans receivable to earning assets		64.5	%		69.0	%
Loans receivable to total deposits		69.6	%		74.2	%

	Maturing		After one		After five
	within		but within		but within		After
	one year		five years		fifteen years		fifteen years		Total
Residential real estate	$	14,161	$	28,807	$	106,023	$	310,160		459,151
Home equity		4,598		21,818		8,979		277		35,672
Commercial real estate		24,809		106,633		287,314		1,979		420,735
Construction and land development		33,355		42,343		58,097		19,627		153,422
Multifamily		20,093		101,066		124,754		2,582		248,495
Consumer		30		731		912		-		1,673
Manufactured Homes		-		61		10,190		27,442		37,693
Commercial business		43,699		42,507		16,948		495		103,649
Government		100		3,211		4,770		-		8,081
Total loans receivable	$	140,845	$	347,177	$	617,987	$	362,562	$	1,468,571

The Bancorp's nonperforming loans are summarized below:
(Dollars in thousands)							(unaudited)
Loan Segment	June 30, 2021			December 31, 2020			June 30, 2022			December 31, 2021
Residential real estate	$	4,259		$	6,470		$	5,585		$	4,682
Home equity		495			505			610			657
Commercial real estate		6,616			5,827			3,111			1,031
Construction and land development		41			20			-			-
Multifamily		400			504			369			455
Farmland		-			-
Commercial business		462			1,039			346			436
Consumer		-			-			-			-
Manufactured homes		-			-			-			-
Government		-			-			-			-
Total	$	12,273		$	14,365		$	10,021		$	7,261
Nonperforming loans to total loans		1.26	%		1.49	%		0.68	%		0.75	%
Nonperforming loans to total assets		0.76	%		0.96	%		0.48	%		0.45	%

The Bancorp's substandard loans are summarized below:
(Dollars in thousands)					(unaudited)
Loan Segment	June 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Residential real estate	$	4,113	$	6,387	$	6,019	$	3,722
Home equity		512		495		624		632
Commercial real estate		8,398		8,180		6,845		3,562
Construction and land development		-		-		-		-
Multifamily		400		504		2,901		384
Farmland		-		-
Commercial business		916		1,061		279		387
Consumer		-		-		-		-
Manufactured homes		-		-		-		-
Government		-		-		-		-
Total	$	14,339	$	16,627	$	16,668	$	8,687