# Finward Bancorp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Finward Bancorp](/companies/fnwd.md) (CIK 919864)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 16:36 ET
- Period: 2023-09-30
- Accession: 0001437749-23-031287
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/919864/000143774923031287/fnwd20230930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/919864/000143774923031287/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $8.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $21.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | −$398.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $21.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $2.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $6.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.51 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.60 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.52 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.60 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 4,260,961 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 4,288,867 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $22.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $784.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $4.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Total assets | at 2023-09-30 | $2.09bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $1.97bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $119.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 82,386 characters.

### Summary

Finward Bancorp (the “Bancorp”) is a financial holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank (the “Bank”), an Indiana commercial bank is a wholly-owned subsidiary of the Bancorp. The Bancorp has no other business activity other than being a holding company for the Bank. The following management’s discussion and analysis presents information concerning our financial condition as of September 30, 2023, as compared to December 31, 2022, and the results of operations for the three and nine months ending September 30, 2023, and September 30, 2022. 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 Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.

At September 30, 2023, the Bancorp had total assets of $2.1 billion, total loans receivable of $1.5 billion and total deposits of $1.8 billion. Stockholders' equity totaled $119.0 million or 5.7% of total assets, with a book value per share of $27.68. Net income for the quarter ended September 30, 2023, was $2.2 million, or $0.51 earnings per common diluted share. For the quarter ended September 30, 2023, the return on average assets (ROA) was 0.42%, while the return on average stockholders’ equity (ROE) was 6.55%. Net income for the nine months ended September 30, 2023, was $6.9 million, or $1.60 earnings per diluted common share. For the nine months ended September 30, 2023, the ROA was 0.44%, while the ROE was 6.68%.

### Recent Developments within the Banking Industry

During the first half of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, uninsured deposit concentrations, unrealized securities losses, and eroding consumer confidence in the banking system. In this regard, in March 2023, Silicon Valley Bank and Signature Bank were closed and taken over by the Federal Deposit Insurance Corporation (FDIC). In addition, on May 1, 2023, the FDIC was appointed as receiver for First Republic Bank, and on that same date JPMorgan Chase acquired the substantial majority of the assets and assumed the deposits and certain other liabilities of First Republic Bank from the FDIC receivership. These bank failures were driven principally by rapid withdrawals by depositors with large uninsured balances held at these institutions and losses incurred by these banks in liquidating their bond portfolios to provide liquidity to fund these deposit outflows. The FDIC determined that Silicon Valley Bank and Signature Bank were systemically important and fully guaranteed their depositor balances above the $250,000 FDIC insurance limit. Given the sharp increase in market interest rates during 2022 and the first nine months of 2023, most financial institutions’ bond portfolios have significant unrealized loss positions, which has continued into the third quarter of 2023 with the higher bond yields at the long end of the yield curve when compared to December 31, 2022.

In response to these bank failures and the volatility in the banking industry, on March 12, 2023, the Federal Reserve Board announced the creation of a new Bank Term Funding Program (the “BTFP”). The BTFP offers loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasury securities, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets are valued at par for purposes of the collateral pledge under the BTFP. The BTFP expires on March 11, 2024.

In connection with these negative industry developments, the Bancorp has proactively managed its liquidity position and balance sheet in order to remain flexible and respond to further economic, industry, and regulatory conditions. The Bancorp’s total deposits as of September 30, 2023 increased by 0.5% as compared to December 31, 2022, while core deposits as of September 30, 2023 decreased by 12.1% as compared to December 31, 2022. The increase in deposit balances and decrease in core deposits is related to customer preferences for the Bancorp's higher yielding certificate of deposit products. The Bancorp’s uninsured deposits represented 27% of total deposits at September 30, 2023 compared to 29% of total deposits at December 31, 2022. The Bancorp also took a number of preemptive actions, which included proactive outreach to clients and actions to maximize its funding sources in response to these recent developments. In this regard, during the first nine months of 2023 the Bancorp participated in the BTFP by accessing $100 million of low-cost capital under the program. Furthermore, the Bancorp’s capital remains in excess of all required thresholds to be considered “well capitalized” under the FDIC’s risk-based capital guidelines, with common equity Tier 1 and total capital ratios of 10.20% and 11.20%, respectively, as of September 30, 2023.

### Recent Developments - Allowance for Credit Losses

The allowance for credit losses represents management’s estimate of expected credit losses over the expected contractual life of our existing loan portfolio and the establishment of an allowance that is sufficient to absorb those losses. As of January 1, 2023, we adopted ASU2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as current expected credit losses (CECL). Determining the appropriateness of the allowance is complex and requires judgement by management about the effect of matters that are inherently uncertain. In determining an appropriate allowance, management makes numerous judgments, assumptions, and estimates which are inherently subjective, as they require material estimates that may be susceptible to significant change. These estimates are derived based on continuous review of the loan portfolio, assessments of client performance, movement through delinquency stages, probability of default, losses given default, collateral values, and disposition, as well as expected cash flows, economic forecasts, and qualitative factors, such as changes in current economic conditions. As stated in Note 7 to our unaudited condensed consolidated financial statements set forth herein, we segment our loan portfolios based on similar risk characteristics for collective evaluation using a non-discounted cash flow approach to estimate expected losses. We use a PD/LGD (probability of default/loss given default) model which aligns well with our internal risk rating system. Actual losses may differ from estimated amounts due to model inefficiencies or management’s inability to adequately determine appropriate model adjustment factors. The new accounting standard further requires management to use forecasts about future economic conditions to determine the expected credit losses over the remaining life of the asset. Forecast adjustments are fundamentally difficult to establish and, in the current environment, due to uncertainty given the potential recession and political environment, the task is even more formidable. We use a two-year reasonable and supportable period across all loan segments to forecast economic conditions. We believe the two-year time horizon aligns with available industry guidance and various forecasting sources. In assessing the factors used to derive an appropriate allowance, management benefits from a lengthy organizational history and experience with credit decisions and related outcomes but is new to the application of CECL. We have been diligent in our efforts to gain a thorough understanding of the accounting standard, and have reviewed our portfolios, loan segmentations, methodologies and models and believe we have made appropriate and prudent decisions. Nonetheless, if management’s underlying assumptions prove to be inaccurate, the allowance for loan losses would have to be adjusted. Our accounting policies related to the allowance for credit losses is disclosed in the section titled “Critical Accounting Policies” under the heading “Allowance for Credit Losses.”

### Regulatory Developments Regarding the Bancorp and the Bank

#### Consent Order

On November 7, 2023, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order (the “Stipulation”) with the FDIC and the Indiana Department of Financial Institutions (“DFI”), consenting to the issuance of a consent order (the “Order”) relating to the Bank’s compliance with the Bank Secrecy Act and its implementing regulations (collectively, the “BSA”). In consenting to the issuance of the Order, the Bank did not admit or deny any charges of unsafe or unsound banking practices or violations of law or regulation relating to its BSA compliance. The Order is based on findings of the FDIC and DFI during their joint examination commencing in February 2023 (the “Examination”). Since the completion of the Examination, the board of directors and management of the Bancorp and the Bank have aggressively taken an active role in working to address the findings contained in the Examination and have proactively taken steps to comply with the requirements of the Order prior to its effectiveness, as further discussed below.

Under the terms of the Order, the Bank or its board of directors is required to take certain affirmative actions to comply with the Bank’s obligations under the BSA. These affirmative actions include, but are not limited to, the following: strengthening the board of directors’ oversight of the Bank’s BSA activities; developing, adopting, and implementing a revised BSA compliance program; developing a revised system of internal controls designed to ensure full compliance with the BSA; retaining management qualified to oversee the Bank’s BSA compliance program, including retaining a qualified BSA officer; assessing BSA staffing needs and identifying staff positions and personnel for BSA compliance; developing, adopting, and implementing a revised BSA training program; developing, adopting, and implementing a revised suspicious activity reporting program; implementing a board-approved customer due diligence program, and reviewing and enforcing enhanced customer due diligence and risk assessment procedures; eliminating or correcting certain violations of BSA law and regulations, and correcting BSA program weaknesses; ensuring that all reports required by the BSA are accurately and properly filed; and developing and implementing a written plan to review past account and transaction activity to determine whether suspicious activity was properly identified and reported.

Prior to implementation, certain of the actions required by the Order are subject to review by, and approval or non-objection from, the FDIC and the DFI. The Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and DFI.

Numerous actions have already been taken or commenced by the Bank to strengthen its BSA and anti-money laundering compliance practices, policies, procedures, and controls. In this regard, the Bank began developing corrective actions prior to the entry of the Order and expects that it will be able to undertake and implement all required actions within the time periods specified in the Order. These actions include, without limitation, the formation of a Risk Management and Compliance Committee of the board of directors, consisting solely of independent directors, to assist the board in overseeing compliance efforts; enhancing the Bank’s risk management and compliance programs through restructuring reporting lines; improving technology and increasing BSA compliance staff, including hiring senior personnel; making additional investments into processes and system upgrades to strengthen anti-money laundering controls; enhancing education and training of the Bank’s employees responsible for BSA and anti-money laundering compliance; and conducting a look-back review of accounts and transaction activity covering the time periods from February 1, 2022, to March 31, 2023, to identify and properly report suspicious activity. In this regard, and as previously announced, a recent addition to senior staff includes the appointment of David J. Kwait as Senior Vice President, General Counsel, Corporate Secretary, and Chief Risk Officer of the Bancorp and the Bank, overseeing the Bank’s enhanced risk management infrastructure, including BSA compliance.

The Bank will incur additional non-interest expenses associated with the implementation of the corrective actions set forth in the Order. However, these expenses are not expected to have a material impact on the results of operations or financial condition of the Bancorp or the Bank.

#### Memorandum of Understanding

On November 7, 2023, the Bank entered into a memorandum of understanding (“MOU”) with the FDIC and DFI. The MOU is an informal administrative agreement pursuant to which the Bank has agreed to take various actions and comply with certain requirements to enhance certain areas of the Bank’s operations. The MOU documents an understanding among the Bank, the FDIC, and DFI that, among other things, the Bank will: refrain from paying cash dividends without prior regulatory approval, and develop and implement certain plans regarding the Bank’s operations, capital, and strategy. The Bank will submit written quarterly progress reports to the FDIC and DFI detailing compliance with the MOU. The MOU will remain in effect until modified or terminated by the FDIC and DFI.

Management does not expect the actions called for by these regulatory actions to have a substantial impact on the Bancorp’s or the Bank’s ongoing day-to-day operations, although they may have the effect of limiting or delaying the Bancorp’s or the Bank’s ability or plans to expand and engage in business combinations.

### Financial Condition

#### General

During the nine months ended September 30, 2023, total assets increased by $17.1 million (0.8%), with interest-earning assets increasing by $20.9 million (1.1%). At September 30, 2023, interest-earning assets totaled $1.93 billion compared to $1.91 billion at December 31, 2022. Earning assets represented 92.3% of total assets at September 30, 2023 and 92.1% of total assets at December 31, 2022.

#### Loan Portfolio

Net loans receivable totaled $1.53 billion at September 30, 2023, compared to $1.51 billion at December 31, 2022. 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’s end-of-period loan balances were as follows:

*(Dollars in thousands)*

|  | September 30, 2023 Balance | % Loans | December 31, 2022 Balance | % Loans |
| --- | ---: | ---: | ---: | ---: |
| Residential real estate | $487,659 | 32.0% | $484,595 | 32.1% |
| Home equity | 47,339 | 3.1% | 38,978 | 2.6% |
| Commercial real estate | 498,513 | 32.8% | 486,431 | 32.2% |
| Construction and land development | 121,547 | 8.0% | 108,926 | 7.2% |
| Multifamily | 225,469 | 14.8% | 251,014 | 16.6% |
| Consumer | 747 | 0.0% | 918 | 0.1% |
| Manufactured Homes | 31,661 | 2.1% | 34,882 | 2.3% |
| Commercial business | 98,723 | 6.5% | 93,278 | 6.2% |
| Government | 10,021 | 0.7% | 9,549 | 0.7% |
| Loans receivable | 1,521,679 | 100.0% | 1,508,571 | 100.0% |
| Plus: |  |  |  |  |
| Net deferred loans origination costs | 4,070 |  | 5,083 |  |
| Undisbursed loan funds | (89) |  | (23) |  |
| Loans receivable, net of deferred fees and costs | $1,525,660 |  | $1,513,631 |  |
| Adjustable rate loans / loans receivable | $741,196 | 48.7% | $698,842 | 46.3% |

|  | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Loans receivable to total assets | 73.1% | 73.1% |
| Loans receivable to earning assets | 79.2% | 79.4% |
| Loans receivable to total deposits | 85.5% | 85.3% |

Our total commercial real estate portfolio (which is comprised of loans secured by office space, medical office space, and mixed-use retail/office space) totaled $498.5 million as of September 30, 2023, compared to $486.4 million as of December 31, 2022. Given prevailing market conditions such as rising interest rates, reduced occupancy as a result of the increase in hybrid work arrangements, and lower commercial real estate valuations, we are carefully monitoring these loans for signs of deterioration in credit quality.

The following table sets forth certain information at September 30, 2023, regarding the dollar amount of loans in the Bancorp’s portfolio based on their contractual terms to maturity. Demand loans, loans having no schedule of 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).

| September 30, 2023 | Maturing within one year | After one but within five years | After five but within fifteen years | After fifteen years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Residential real estate | $5,329 | $27,875 | $99,801 | $354,654 | $487,659 |
| Home equity | 16,886 | 224 | 4,085 | 26,144 | 47,339 |
| Commercial real estate | 27,864 | 112,747 | 357,236 | 666 | 498,513 |
| Construction and land development | 33,876 | 35,641 | 40,197 | 11,833 | 121,547 |
| Multifamily | 11,474 | 85,535 | 127,224 | 1,236 | 225,469 |
| Consumer | 224 | 465 | 58 | - | 747 |
| Manufactured Homes | - | 64 | 8,399 | 23,198 | 31,661 |
| Commercial business | 36,518 | 45,948 | 15,767 | 490 | 98,723 |
| Government | 2,265 | 3,842 | 3,914 | - | 10,021 |
| Total loans receivable | $134,436 | $312,341 | $656,681 | $418,221 | $1,521,679 |

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 nine months ended September 30, 2023, the Bancorp originated $30.4 million in new fixed rate mortgage loans for sale, compared to $40.8 million during the nine months ended September 30, 2022. At September 30, 2023, the Bancorp had $2.1 million in loans that were classified as held for sale, compared to $1.5 million at December 31, 2022.

#### Asset Quality

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 September 30, 2023, non-performing loans that remained accruing and more than 90 days past due include one commercial real estate loan totaling $222 thousand and one residential real estate loan totaling $11 thousand. The Bancorp will at times 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 the process of being received.

*The Bancorp's nonperforming loans are summarized below:*

*(Dollars in thousands)*

| Loan Segment | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Residential real estate | $5,825 | $5,513 |
| Home equity | 613 | 594 |
| Commercial real estate | 1,220 | 3,242 |
| Construction and land development | - | - |
| Multifamily | 948 | 7,064 |
| Commercial business | 1,465 | 1,881 |
| Consumer | 2 | - |
| Manufactured homes | - | 82 |
| Government | - | - |
| Total | $10,073 | $18,376 |
| Nonperforming loans to total loans | 0.66% | 1.21% |
| Nonperforming loans to total assets | 0.48% | 0.89% |

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 September 30, 2023 or December 31, 2022.

*The Bancorp's substandard loans are summarized below:*

*(Dollars in thousands)*

| Loan Segment | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Residential real estate | $6,344 | $6,035 |
| Home equity | 625 | 612 |
| Commercial real estate | 2,444 | 7,421 |
| Construction and land development | - | - |
| Multifamily | 1,484 | 7,064 |
| Commercial business | 1,464 | 1,881 |
| Consumer | 2 | - |
| Manufactured homes | - | - |
| Government | - | - |
| Total | $12,363 | $23,013 |

35

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 | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Residential real estate | $1,934 | $1,338 |
| Home equity | 181 | 385 |
| Commercial real estate | 5,883 | 4,955 |
| Construction and land development | 6,026 | 2,346 |
| Multifamily | 130 | 1,859 |
| Commercial business | 676 | 703 |
| Consumer | - | - |
| Manufactured homes | - | - |
| Government | - | - |
| Total | $14,830 | $11,586 |

At September 30, 2023, management is of the opinion that there are no loans 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 or non-accrual. Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources.

The allowance for credit losses (ACL) is a valuation allowance for probable incurred credit losses, increased by the provision for credit 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 ACL and provisions for credit losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability as of the reporting date. The appropriateness of the current period provision and the overall adequacy of the ACL are determined through a disciplined and consistently applied quarterly process that reviews the Bancorp’s current credit risk within the loan portfolio and identifies the required allowance for loan losses given the current risk estimates.

*The Bancorp's provision for credit losses for the period ended are summarized below:*

*(Dollars in thousands)*

| Loan Segment | Three months ended, September 30, 2023 | Nine months ended, September 30, 2023 |
| --- | ---: | ---: |
| Residential real estate | $(154) | $(607) |
| Home equity | 41 | 183 |
| Commercial real estate | 426 | 598 |
| Construction and land development | (195) | 416 |
| Multifamily | (115) | (329) |
| Commercial business | 463 | 1,118 |
| Consumer | 18 | 30 |
| Manufactured homes | (12) | 42 |
| Government | 16 | 11 |
| Total | $488 | $1,462 |

*The Bancorp's provision for loan losses for the period ended are summarized below:*

*(Dollars in thousands)*

| Loan Segment | Three months ended, September 30, 2022 | Nine months ended, September 30, 2022 |
| --- | ---: | ---: |
| Residential real estate | $246 | $472 |
| Home equity | 22 | 38 |
| Commercial real estate | (27) | (15) |
| Construction and land development | (229) | (604) |
| Multifamily | 108 | 388 |
| Farmland | - | - |
| Commercial business | (100) | (339) |
| Consumer | (20) | 60 |
| Manufactured homes | - | - |
| Government | - | - |
| Total | $- | $- |

36

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

*(Dollars in thousands)*

*(unaudited)*

| Loan Segment | As of the three months ended September 30, 2023 Charge-off | Recoveries | Net Charge-offs |
| --- | ---: | ---: | ---: |
| Residential real estate | $- | $11 | $11 |
| Home equity | - | - | - |
| Commercial real estate | 1 | 1 | 2 |
| Construction and land development | - | - | - |
| Multifamily | - | 45 | 45 |
| Farmland | - | - | - |
| Commercial business | (622) | 18 | (604) |
| Consumer | (20) | 1 | (19) |
| Manufactured homes | - | - |  |
| Government | - | - | - |
| Total | $(641) | $76 | $(565) |

*(Dollars in thousands)*

*(unaudited)*

| Loan Segment | As of the three months ended September 30, 2022 Charge-off | Recoveries | Net Recoveries |
| --- | ---: | ---: | ---: |
| Residential real estate | $- | $8 | $8 |
| Home equity | - | - | - |
| Commercial real estate | - | - | - |
| Construction and land development | - | - | - |
| Multifamily | - | - | - |
| Farmland | - | - | - |
| Commercial business | (57) | 50 | (7) |
| Consumer | (13) | 4 | (9) |
| Manufactured homes | - | - |  |
| Government | - | - | - |
| Total | $(70) | $62 | $(8) |

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

*(Dollars in thousands)*

*(unaudited)*

| Loan Segment | As of the nine months ended September 30, 2023 Charge-off | Recoveries | Net Charge-offs |
| --- | ---: | ---: | ---: |
| Residential real estate | $- | $74 | $74 |
| Home equity | - | - | - |
| Commercial real estate | (371) | 2 | (369) |
| Construction and land development | - | - | - |
| Multifamily | - | 131 | 131 |
| Commercial business | (1,065) | 166 | (899) |
| Consumer | (60) | 7 | (53) |
| Manufactured homes | - | - |  |
| Government | - | - | - |
| Total | $(1,496) | $380 | $(1,116) |

*(Dollars in thousands)*

*(unaudited)*

| Loan Segment | As of the nine months ended September 30, 2022 Charge-off | Recoveries | Net Recoveries |
| --- | ---: | ---: | ---: |
| Residential real estate | $- | $58 | $58 |
| Home equity | - | - | - |
| Commercial real estate | - | - | - |
| Construction and land development | - | - | - |
| Multifamily | - | - | - |
| Farmland | - | - | - |
| Commercial business | (57) | 88 | 31 |
| Consumer | (50) | 16 | (34) |
| Manufactured homes | - | - |  |
| Government | - | - | - |
| Total | $(107) | $162 | $55 |

37

The ACL provisions take into consideration management’s current judgments about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio mix, and local economic conditions.

*The Bancorp's allowance to total loans and non-performing loans are summarized below:*

*(Dollars in thousands)*

|  | 9/30/2023 | 12/31/2022 |
| --- | ---: | ---: |
| Allowance for credit losses | $19,430 | $12,897 |
| Total loans | $1,525,660 | $1,513,631 |
| Non-performing loans | $10,073 | $18,376 |
| ACL-to-total loans | 1.27% | 0.85% |
| ACL-to-non-performing loans (coverage ratio) | 192.9% | 70.2% |

#### Investment Portfolio

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 $339.3 million at September 30, 2023, compared to $370.9 million at December 31, 2022, a decrease of $31.6 million (8.5%). The decrease is attributable to the decrease in fair value of the securities. 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 September 30, 2023, the securities portfolio represented 17.6% of interest-earning assets and 16.3% of total assets compared to 19.5% of interest-earning assets and 17.9% of total assets at December 31, 2022.

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

*(Dollars in thousands)*

|  | September 30, 2023 Balance | % Securities | December 31, 2022 Balance | % Securities |
| --- | ---: | ---: | ---: | ---: |
| U.S. government sponsored entities | $7,550 | 2.2% | $7,625 | 2.1% |
| U.S. treasury securities | - | 0.0% | 389 | 0.1% |
| Collateralized mortgage obligations and residential mortgage-backed securities | 119,096 | 35.1% | 134,116 | 36.2% |
| Municipal securities | 211,479 | 62.4% | 227,718 | 61.3% |
| Collateralized debt obligations | 1,155 | 0.3% | 1,048 | 0.3% |
| Total securities available-for-sale | $339,280 | 100.0% | $370,896 | 100.0% |

*(Dollars in thousands)*

|  | September 30, 2023 Balance | December 31, 2022 Balance | YTD Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Interest bearing deposits in other financial institutions | $52,875 | $11,210 | $41,665 | 371.7% |
| Fed funds sold | 851 | 107 | 744 | 695.3% |
| Certificates of deposit in other financial institutions | - | 2,456 | (2,456) | -100.0% |
| Federal Home Loan Bank stock | 6,547 | 6,547 | - | 0.0% |

The net increase in interest bearing deposits in other financial institutions and fed funds sold is the result of the timing of cash flows and an increase in borrowings and deposits.

The contractual maturities and weighted average yields for the U.S. government securities, agency securities, municipal securities, and collateralized debt obligations at September 30, 2023, 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 Amount | Yield | 1 - 5 Years Amount | Yield | 5 - 10 Years Amount | Yield | After 10 Years Amount | Yield | Total Amount |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| U.S. government sponsored entities: | $- | 0.00% | $7,550 | 1.00% | $- | 0.00% | $- | 0.00% | $7,550 |
| AFS |  |  |  |  |  |  |  |  |  |
| Municipal Securities: |  |  |  |  |  |  |  |  |  |
| AFS | 688 | 3.65% | 1,303 | 3.11% | 19,048 | 3.35% | 190,440 | 2.71% | 211,479 |
| Trust Preferred Securities: |  |  |  |  |  |  |  |  |  |
| AFS | - | 0.00% | - | 0.00% | - | 0.00% | 1,155 | 6.41% | 1,155 |
| Totals | $688 | 3.65% | $8,853 | 1.31% | $19,048 | 3.35% | $191,595 | 2.73% | $220,184 |

38

#### Deposits

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:

*(Dollars in thousands)*

|  | September 30, 2023 | December 31, 2022 | YTD Change |  |
| --- | ---: | ---: | ---: | ---: |
| Checking | $626,880 | $755,377 | $(128,497) | -17.0% |
| Savings | 320,130 | 402,365 | (82,235) | -20.4% |
| Money market | 294,015 | 254,157 | 39,858 | 15.7% |
| Certificates of deposit | 543,012 | 363,118 | 179,894 | 49.5% |
| Total deposits | $1,784,037 | $1,775,017 | $9,020 | 0.5% |

Total deposits increased $9.0 million to $1.784 billion at September 30, 2023 compared to $1.775 billion at December 31, 2022. The increase in overall deposits is the result of customer demand for high yielding products such as money market deposit accounts (MMDA) and certificate of deposit accounts. The increase in total deposits was mainly attributable to an increase in certificates of deposit and money market accounts, partially offset by decreases in checking and savings account deposit balances. Money market account balances increased by $39.9 million during the first nine months of 2023 due to consumer preferences to reprice cash holdings into higher yielding deposit products. Certificates of deposits increased by $179.9 million in the first nine months of 2023, reflecting our increases in offered interest rates, particularly in the 7-11 month term. Non-interest checking account balances decreased $46.5 million during the first nine months of 2023. Interest bearing savings account balances decreased $82.0 million in the first nine months of 2023 as municipal and business customers deployed their excess cash balances, including stimulus funding. The Bancorp experienced little change in its overall deposit balances, following the recent high profile bank failures and banking system disruption in March and April 2023. Our core deposits, which we define as our checking, savings, and money market accounts, represented 69.6% of our total deposits as of September 30, 2023.

Noninterest bearing demand accounts comprised 17.5% of total deposits at September 30, 2023 and 20.2% of total deposits at December 31, 2022. In recent years, because of the generally low rates paid on interest bearing account alternatives, many of our business customers chose to keep their balances in these more liquid noninterest bearing demand account types. We have begun to see some of these balances move to higher earning deposit types. Interest bearing demand accounts, including money market and savings accounts, comprised 52.0% of total deposits at September 30, 2023 and 59.3% at December 31, 2022. Time deposit accounts as a percentage of total deposits were 30.4% at September 30, 2023 and 20.5% at December 31, 2022.

At September 30, 2023, scheduled maturities of certificate of deposits were as follows:

*(Dollars in thousands)*

|  |  |
| --- | ---: |
| Remainder 2023 | $197,239 |
| 2024 | 305,872 |
| 2025 | 32,501 |
| 2026 | 3,975 |
| 2027 | 3,165 |
| Thereafter | 260 |
| Total | $543,012 |

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

|  | September 30, 2023 Amount | Rate % | December 31, 2022 Amount | Rate % |
| --- | ---: | ---: | ---: | ---: |
| Noninterest bearing demand deposits | $326,431 | - | $377,408 | - |
| Interest bearing demand deposits | 350,687 | 0.94 | 374,815 | 0.36 |
| MMDA accounts | 277,652 | 2.53 | 286,155 | 0.37 |
| Savings accounts | 353,954 | 0.05 | 416,898 | 0.05 |
| Certificates of deposit | 473,117 | 2.64 | 368,322 | 0.26 |
| Total deposits | $1,781,841 | 1.29 | $1,823,598 | 0.20 |

39

As of September 30, 2023, and December 31, 2022, approximately $480.7 or 27.0% of total deposits, and $516.1 million or 29.1% of total deposits, 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.

#### Borrowed Funds

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:

*(Dollars in thousands)*

|  | September 30, 2023 Balance | December 31, 2022 Balance | YTD Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Repurchase agreements | $48,310 | $15,503 | $32,807 | 211.6% |
| Borrowed funds | 100,000 | 120,000 | (20,000) | -16.7% |
| Total borrowed funds | $148,310 | $135,503 | $12,807 | 9.5% |

The increase in repurchase agreements is attributable to customer demand for collateral protection for their deposits. The decrease in borrowed funds is attributable to the payoff of $120 million in fixed rate advances, offset against $100 million of fixed rate advance draws taken during the nine months ended September 30, 2023.

Other assets totaled $56.5 million at September 30, 2023, compared to $50.1 million at December 31, 2022. The increase in other assets is primarily related to increased deferred tax assets due to the decrease in the fair market value of available for sale securities. Other liabilities totaled $36.1 million at September 30, 2023, compared to $23.4 million at December 31, 2022. The increase in other liabilities is primarily the result of increased amounts due to our counterparty related to our swap portfolio along with increased reserves for unfunded commitments.

### Market Risk and Interest Rate Sensitivity

#### General

Market risk represents the risk of loss due to changes in market values of assets and liabilities. The Bancorp incurs market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. As of September 30, 2023, the Bancorp has identified interest rate risk as our primary source of market risk.

#### Interest Rate Risk

Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries.

The Bancorp’s Board of Directors establishes broad policy limits with respect to interest rate risk. As part of this policy, the asset liability committee, or ALCO, establishes specific operating guidelines within the parameters of the Board of Directors’ policies. In general, the ALCO focuses on ensuring a stable and steadily increasing flow of net interest income through managing the size and mix of the balance sheet. The management of interest rate risk is an active process which encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

#### Evaluation of Interest Rate Risk

We use income simulations, an analysis of core funding utilization, and economic value of equity (EVE) simulations as our primary tools in measuring and managing interest rate risk. These tools are utilized to quantify the potential earnings impact of changing interest rates over a 12-month simulation horizon (income simulations) as well as identify expected earnings trends given longer term rate cycles (long term simulations, core funding utilizations, and EVE simulation). A standard gap report and funding matrix will also be utilized to provide supporting detailed information on the expected timing of cashflow and repricing opportunities.

There are an infinite number of potential interest rate scenarios, each of which can be accompanied by differing economic, political, and regulatory climates; can generate multiple differing behavior patterns by markets, borrowers, depositors, and other market participants; and can last for varying degrees of time. Therefore, by definition, interest rate risk sensitivity cannot be predicted with certainty. Accordingly, the Bancorp’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between theoretical and practical scenarios; especially given the primary objective of the Bancorp’s overall asset/liability management process is to facilitate meaningful strategy development and implementation.

Therefore, we model a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios, the collective impact of which will enable the Bancorp to clearly understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined.

We utilize a simulation model as our primary tool to assess the direction and magnitude of variations in net interest income and EVE resulting from potential changes in market interest rates. Key assumptions in the model, which we believe are reasonable but which may have a significant impact on results, include: (i) the timing of changes in interest rates; (ii) shifts or rotations in the yield curve; (iii) re-pricing characteristics for market-rate-sensitive instruments; (iv) varying loan prepayment speeds for different interest rate scenarios; and (v) the overall growth and mix of assets and liabilities.

We forecast the next twelve months of net interest income under an assumed environment of gradual changes in market interest rates under various scenarios. The resulting change in net interest income is an indication of the sensitivity of our earnings to directional changes in market interest rates. The simulation also measures the change in EVE, or the net present value of our assets and liabilities, under an immediate shift, or shock, in interest rates under various scenarios, as calculated by discounting the estimated future cash flows using market-based discount rates.

The following table shows the impact of changes in interest rates on net interest income over the next twelve months and EVE based on our balance sheet as of September 30, 2023 (dollars in millions):

| Interest Rate Scenario | EVE | Percent Change | Net interest income | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| +200 Bps | $273.9 | -12.7% | $53.0 | 0.2% |
| +100 Bps | $298.4 | -4.8% | $53.2 | 0.6% |
| No change | $313.6 | 0.0% | $52.9 | 0.0% |
| -100 Bps | $322.3 | 2.8% | $51.7 | -2.3% |
| -200 Bps | $323.7 | 3.2% | $50.7 | -4.2% |

If interest rates were to increase, this analysis suggests that we are positioned for an improvement in net interest income over the next twelve months. If interest rates were to decrease, this analysis suggests we would experience a reduction in net interest income over the next twelve months.

We also forecast the impact of immediate and parallel interest rate shocks on net interest income under various scenarios to measure the sensitivity of our earnings under extreme conditions.

In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; economic and competitive conditions; potential changes in lending, investing and deposit gathering strategies; and client preferences.

### 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, we seek to manage funds so that future profits will not be significantly impacted as funding costs increase. We seek to maintain diversified sources of liquidity that may be used during the ordinary course of business as well as on a contingency basis.

Our primary sources of liquidity are deposits, principal and interest payments on loans and securities, and proceeds from calls, maturities, and sales of securities, subject to market conditions. While maturities and scheduled amortization of loans and securities are predictable sources of liquidity, deposit flows and loan and securities prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are unencumbered cash and due from banks and securities classified as available for sale, which could be liquidated, subject to market conditions. In the future, our liquidity position will be affected by the level of customer deposits and payments, as well as acquisitions, dividends, and share repurchases in which we may engage. For the next twelve months, we believe that our existing cash resources will be sufficient to meet the liquidity and capital requirements of our operations.

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.

Although customer deposits remain our preferred funding source, maintaining additional sources of liquidity is part of our prudent liquidity risk management practices. At September 30, 2023, cash and cash equivalents were $71.6 million.

The following tables shows the Bancorp’s sources of liquidity as of September 30, 2023 and December 31, 2022:

|  | Sources of Liquidity As of September 30, 2023 Outstanding | Additional Capacity | As of December 31, 2022 Outstanding | Additional Capacity |
| --- | ---: | ---: | ---: | ---: |
| FHLB Advances | $- | $556,898 | $120,000 | $391,150 |
| Fed Discount Window | 100,000 | 165,823 | - | 171,899 |
| Fed Funds Lines | - | 26,000 | - | 26,000 |
| Total | $100,000 | $748,721 | $120,000 | $589,049 |

These liquidity sources along with our cash and cash equivalents provided 170.6% coverage of all customer uninsured deposits, which totaled $480.7 million or 27.0% of total deposits, as of September 30, 2023.

During the nine months ended September 30, 2023, cash and cash equivalents increased by $40.4 million compared to a $5.1 million increase for the nine months ended September 30, 2022. The primary sources of cash and cash equivalents were proceeds from other borrowings, sales of loans originated for sale, change in repurchase agreements, and change in deposits. The primary uses of cash and cash equivalents were repayment of advances and loan originations. Cash provided by operating activities totaled $22.4 million for the nine months ended September 30, 2023, compared to cash provided of $11.6 million for the nine month period ended September 30, 2022. Cash provided from operating activities was primarily a result of net income, sale of loans originated for sale, and change in accrued expense, offset by loans originated for sale. Cash provided by investing activities totaled $363 thousand for the current period, compared to cash provided of $10.1 million for the nine months ended September 30, 2022. Cash provided by investing activities for the current nine months was primarily related to the proceeds from the sales and maturities of securities and proceeds from maturities of certificates of deposit in other financial institution, offset against the net change in loans receivable. Cash provided from financing activities totaled $17.6 million during the current period compared to net cash used in financing activities of $16.6 million for the nine months ended September 30, 2022. The net cash provided from financing activities was primarily the result of proceeds from other borrowings, net change in repurchase agreements, and change in deposits, offset against the repayment of advances. On a cash basis, the Bancorp paid dividends on common stock of $4.0 million for the nine months ended September 30, 2023, and $3.7 million for the nine months ended September 30, 2022.

At September 30, 2023, outstanding commitments to fund loans totaled $257.4 million. Approximately 56.2% 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 $17.2 million at September 30, 2023. 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 nine months ended September 30, 2023, stockholders' equity decreased by $17.4 million (12.7%). During the nine months ended September 30, 2023, stockholders’ equity was primarily decreased by other comprehensive losses net of tax of $14.5 million, the impact of adoption of ASU No. 2016-13 of $6.1 million and dividends declared of $4.0 million, offset against net income of $6.9 million. 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 nine months of 2023 or 2022. During the first nine months of 2023, 17,549 restricted stock shares vested under the Incentive Plan outlined in Note 12 of the financial statements, of which 5,684 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 Bank is subject to risk-based capital guidelines adopted by the FDIC. 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 Bank 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 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.

During the nine months ended September 30, 2023, the Bancorp’s and Bank’s 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 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 $8.5 million of risk-based assets are generated by the collateralized debt obligations in the Bancorp’s and Bank’s total risk based capital calculation.

In addition, the following table shows that, at September 30, 2023, and December 31, 2022, the Bank’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.

*(Dollars in millions)*

| September 30, 2023 | Actual Amount | Ratio | Minimum Required For Capital Adequacy Purposes Amount | Ratio | Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Common equity tier 1 capital to risk-weighted assets | $166.5 | 10.2% | $67.9 | 4.5% | $98.1 | 6.5% |
| Tier 1 capital to risk-weighted assets | $166.5 | 10.2% | $90.6 | 6.0% | $120.8 | 8.0% |
| Total capital to risk-weighted assets | $182.1 | 11.2% | $120.8 | 8.0% | $151.0 | 10.0% |
| Tier 1 capital to adjusted average assets | $166.5 | 7.8% | $85.6 | 4.0% | $107.0 | 5.0% |

*(Dollars in millions)*

| December 31, 2022 | Actual Amount | Ratio | Minimum Required For Capital Adequacy Purposes Amount | Ratio | Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Common equity tier 1 capital to risk-weighted assets | $161.3 | 10.1% | $71.6 | 4.5% | $103.4 | 6.5% |
| Tier 1 capital to risk-weighted assets | $161.3 | 10.1% | $95.5 | 6.0% | $127.3 | 8.0% |
| Total capital to risk-weighted assets | $174.2 | 10.9% | $127.3 | 8.0% | $159.1 | 10.0% |
| Tier 1 capital to adjusted average assets | $161.3 | 7.7% | $84.3 | 4.0% | $105.4 | 5.0% |

The Bancorp’s ability to pay dividends to its shareholders is entirely dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. The aggregate amount of dividends that may be declared by the Bank in 2023, without the need for qualifying for an exemption or prior DFI approval, is its 2023 net profits. Moreover, the FDIC and the Federal Reserve Board may prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. Additionally, as noted in the “Regulatory Developments Regarding the Bancorp and the Bank” section of the Management Discussion and Analysis, on November 7, 2023, the Bank entered into MOU with the FDIC which noted the Bank will refrain from paying cash dividends without prior regulatory approval. On August 21, 2023, the Board of Directors of the Bancorp declared a third quarter dividend of $0.31 per share. The Bancorp’s second quarter dividend was paid to shareholders on October 5, 2023.

### Results of Operations - Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022

For the three months ended September 30, 2023, the Bancorp reported net income of $2.2 million, compared to net income of $4.6 million for the three months ended September 30, 2022, a decrease of $2.4 million (51.9%). For the three months ended September 30, 2023, the ROA was 0.42%, compared to 0.88% for the three months ended September 30, 2022. The ROE was 6.55% for the three months ended September 30, 2023, compared to 13.65% for the three months ended September 30, 2022.

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.

*(Dollars in thousands)*

*(unaudited)*

| Quarter Ended ASSETS | Average Balances, Interest, and Rates September 30, 2023 Average Balance | Interest | Rate (%) | September 30, 2022 Average Balance | Interest | Rate (%) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest bearing deposits in other financial institutions | $33,201 | $347 | 4.18 | $24,732 | $110 | 1.78 |
| Federal funds sold | 930 | 11 | 4.73 | 1,579 | 6 | 1.52 |
| Certificates of deposit in other financial institutions | - | 13 | - | 1,899 | 9 | 1.90 |
| Securities available-for-sale | 362,981 | 2,191 | 2.41 | 394,796 | 2,271 | 2.30 |
| Loans receivable\* | 1,526,459 | 19,161 | 5.02 | 1,484,678 | 16,122 | 4.34 |
| Federal Home Loan Bank stock | 6,547 | 55 | 3.36 | 3,038 | 21 | 2.76 |
| Total interest earning assets | 1,930,118 | $21,778 | 4.51 | 1,910,722 | $18,539 | 3.88 |
| Cash and non-interest bearing deposits in other financial institutions | 19,116 |  |  | 21,954 |  |  |
| Allowance for credit losses | (19,684) |  |  | (13,487) |  |  |
| Other noninterest bearing assets | 154,221 |  |  | 149,950 |  |  |
| Total assets | $2,083,771 |  |  | $2,069,139 |  |  |
| LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |
| Interest-bearing deposits | $1,451,820 | $7,066 | 1.95 | $1,487,630 | $871 | 0.23 |
| Repurchase agreements | 46,025 | 441 | 3.83 | 20,781 | 51 | 0.98 |
| Borrowed funds | 101,683 | 1,138 | 4.48 | 17,456 | 110 | 2.52 |
| Total interest bearing liabilities | 1,599,528 | $8,645 | 2.16 | 1,525,867 | $1,032 | 0.27 |
| Non-interest bearing deposits | 316,084 |  |  | 386,332 |  |  |
| Other noninterest bearing liabilities | 34,332 |  |  | 23,458 |  |  |
| Total liabilities | 1,949,944 |  |  | 1,935,657 |  |  |
| Total stockholders' equity | 133,827 |  |  | 133,482 |  |  |
| Total liabilities and stockholders' equity | $2,083,771 |  |  | $2,069,139 |  |  |
| Net interest spread | 2.35% |  |  | 3.61% |  |  |
| Net interest margin\*\* | 2.72% |  |  | 3.67% |  |  |
| Ratio of interest-earning assets to interest-bearing liabilities | 1.21x |  |  | 1.25x |  |  |

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

Net interest income for the three months ended September 30, 2023, was $13.1 million, a decrease of $4.4 million (25.0%), compared to $17.5 million for the three months ended September 30, 2022. The weighted-average yield on interest-earning assets was 4.51% for the three months ended September 30, 2023, compared to 3.88% for the three months ended September 30, 2022. The weighted-average cost of funds for the three months ended September 30, 2023, was 2.16% compared to 0.27% for the three months ended September 30, 2022. The impact of the 4.51% return on interest-earning assets and the 2.16% cost of funds resulted in an interest rate spread of 2.35% for the current quarter, a decrease from the 3.61% spread for the three months ended September 30, 2022. On a tax adjusted basis, the Bancorp’s net interest margin was 2.87% for the three months ended September 30, 2023, compared to 3.84% for the three months ended September 30, 2022. 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, as these measures provide useful information to make peer comparisons. Tax adjusted net interest margin represents a non-GAAP financial measure. See the non-GAAP reconciliation table immediately below and the section captioned “Non-GAAP Financial Measures” for further disclosure regarding non-GAAP financial measures.

*(Dollars in thousands)*

*(unaudited)*

| Calculation of tax adjusted net interest margin | Three Months Ended, September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: |
| Net interest income | $13,133 | $17,507 |
| Tax adjusted interest on securities and loans | 730 | 817 |
| Adjusted net interest income | 13,863 | 18,324 |
| Total average earning assets | 1,930,118 | 1,910,722 |
| Tax adjusted net interest margin | 2.87% | 3.84% |

The decreased net interest income and net interest margin for the three months ended September 30, 2023, was primarily the result of higher cost of funds resulting from the higher rate environment year over year. We anticipate the compression seen in the third quarter of the year to continue, unless target rates decrease, and our interest-bearing liabilities are able to be repriced at those lower rates.

The following table shows the change in noninterest income for the three months ending September 30, 2023, and September 30, 2022.

*(Dollars in thousands)*

*(Unaudited)*

| Noninterest income: | Quarter Ended September 30, 2023 | 2022 | 9/30/2023 vs. 9/30/2022 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Fees and service charges | 1,374 | 1,570 | (196) | -12.5% |
| Wealth management operations | 572 | 407 | 165 | 40.5% |
| Gain on sale of loans held-for-sale, net | 192 | 344 | (152) | -44.2% |
| Increase in cash value of bank owned life insurance | 193 | 183 | 10 | 5.5% |
| (Loss) gain on sale of foreclosed real estate | 2 | - | 2 | 0.0% |
| (Loss) gain on sale of securities, net | - | 23 | (23) | -100.0% |
| Other | 64 | 103 | (39) | -37.9% |
| Total noninterest income | 2,397 | 2,630 | (233) | -8.9% |

The decrease in fees and service charges for the three month period is primarily the result of decreased loan fee and debit card income along with decreased interest rate swap transactions. The increase in wealth management income is the result of market conditions and increased assets under management. The decrease in gains on the sale of loans, for the three-month period, is a result of current market conditions.

The following table shows the change in noninterest expense for the three months ending September 30, 2023, and September 30, 2022.

*(Dollars in thousands)*

*(Unaudited)*

| Noninterest expense: | Quarter Ended September 30, 2023 | 2022 | 9/30/2023 vs. 9/30/2022 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Compensation and benefits | 6,729 | 7,498 | (769) | -10.3% |
| Occupancy and equipment | 1,711 | 1,804 | (93) | -5.2% |
| Data processing | 1,085 | 1,212 | (127) | -10.5% |
| Federal deposit insurance premiums | 474 | 350 | 124 | 35.4% |
| Marketing | 235 | 587 | (352) | -60.0% |
| Impairment charge on assets held for sale | - | 254 | (254) | -100.0% |
| Other | 3,259 | 3,305 | (46) | -1.4% |
| Total noninterest expense | 13,493 | 15,010 | (1,517) | -10.1% |

The decrease in compensation and benefits, for the three months ended September 30, 2023, is primarily the result of management’s focus on efficiency in personnel and has netted a reduction of 17 full time equivalents since December 31, 2022. The decrease in data processing expense, for the three months ended September 30, 2023, is primarily the result of decreased system utilization. The increase in federal deposit insurance premiums, for the three-month period, is primarily the result of growth of the Bank’s average assets and higher assessment rate. The decrease in marketing expenses, for the three-month period ended September 30, 2023, is the result of timing of marketing campaigns and increased marketing in the prior year related to the RYFL acquisition.

The benefit for income taxes was $398 thousand for the three months ended September 30, 2023, as compared to a provision for income taxes of $571 thousand for the three months ended September 30, 2022. The effective tax rate was -22.2% for the three months ended September 30, 2023, as compared to 11.1% for the three months ended September 30, 2022. The Bancorp’s lower current effective tax rate for the three months ended September, 2023, is a result of higher tax preferred income relative to taxable income.

### Results of Operations - Comparison of the Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022

For the nine months ended September 30, 2023, the Bancorp reported net income of $6.9 million, compared to net income of $11.1 million for the nine months ended September 30, 2022, a decrease of $4.2 million (38.2%). For the nine months ended, the ROA was 0.44%, compared to 0.73% for the nine months ended September 30, 2022. The ROE was 6.68% for the nine months ended September 30, 2023, compared to 9.98% for the nine months ended September 30, 2022.

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.

*(Dollars in thousands)*

*(unaudited)*

| Year-to-Date ASSETS | Average Balances, Interest, and Rates September 30, 2023 Average Balance | Interest \` | Rate (%) | September 30, 2022 Average Balance | Interest \` | Rate (%) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest bearing deposits in other financial institutions | $31,171 | $1,112 | 4.76 | $24,268 | $163 | 0.90 |
| Federal funds sold | 1,158 | 38 | 4.38 | 3,561 | 8 | 0.30 |
| Certificates of deposit in other financial institutions | 1,169 | 44 | 5.02 | 1,750 | 15 | 1.14 |
| Securities available-for-sale | 369,897 | 6,631 | 2.39 | 447,319 | 7,295 | 2.17 |
| Loans receivable\* | 1,519,981 | 55,481 | 4.87 | 1,406,591 | 44,629 | 4.23 |
| Federal Home Loan Bank stock | 6,547 | 221 | 4.50 | 3,364 | 63 | 2.50 |
| Total interest earning assets | 1,929,923 | $63,527 | 4.39 | 1,886,853 | $52,173 | 3.69 |
| Cash and non-interest bearing deposits in other financial institutions | 18,723 |  |  | 21,279 |  |  |
| Allowance for loan losses | (17,619) |  |  | (13,418) |  |  |
| Other noninterest bearing assets | 154,227 |  |  | 142,254 |  |  |
| Total assets | $2,085,254 |  |  | $2,036,968 |  |  |
| LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |
| Interest-bearing deposits | $1,455,410 | $17,258 | 1.58 | $1,464,008 | $1,597 | 0.15 |
| Repurchase agreements | 33,170 | 892 | 3.59 | 20,935 | 93 | 0.59 |
| Borrowed funds | 102,864 | 3,537 | 4.58 | 11,175 | 143 | 1.71 |
| Total interest bearing liabilities | 1,591,444 | 21,687 | 1.82 | 1,496,118 | $1,833 | 0.16 |
| Non-interest bearing deposits | 326,431 |  |  | 369,704 |  |  |
| Other noninterest bearing liabilities | 30,178 |  |  | 22,510 |  |  |
| Total liabilities | 1,948,053 |  |  | 1,888,332 |  |  |
| Total stockholders' equity | 137,201 |  |  | 148,636 |  |  |
| Total liabilities and stockholders' equity | $2,085,254 |  |  | $2,036,968 |  |  |
| Net interest spread | 2.57% |  |  | 3.52% |  |  |
| Net interest margin\*\* | 2.89% |  |  | 3.56% |  |  |
| Ratio of interest-earning assets to interest-bearing liabilities | 1.21x |  |  | 1.26x |  |  |

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

Net interest income for the nine months ended September 30, 2023, was $41.8 million, a decrease of $8.5 million (16.9%), compared to $50.3 million for the nine months ended September 30, 2022. The weighted-average yield on interest-earning assets was 4.39% for the nine months ended September 30, 2023, compared to 3.69% for the nine months ended September 30, 2022. The weighted-average cost of funds for the nine months ended September 30, 2023, was 1.82% compared to 0.16% for the nine months ended September 30, 2022. The impact of the 4.39% return on interest-earning assets and the 1.82% cost of funds resulted in an interest rate spread of 2.57% for the nine months ended September 30, 2023, a decrease from the 3.52% spread for the nine months ended September 30, 2022. On a tax adjusted basis, the Bancorp’s net interest margin was 3.04% for the nine months ended September 30, 2023, compared to 3.75% for the nine months ended September 30, 2022. 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, as these measures provide useful information to make peer comparisons. Tax adjusted net interest margin represents a non-GAAP financial measure. See the non-GAAP reconciliation table immediately below and the section captioned “Non-GAAP Financial Measures” for further disclosure regarding non-GAAP financial measures.

*(Dollars in thousands)*

*(unaudited)*

| Calculation of tax adjusted net interest margin | Nine months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: |
| Net interest income | $41,840 | $50,340 |
| Tax adjusted interest on securities and loans | 2,234 | 2,713 |
| Adjusted net interest income | 44,074 | 53,053 |
| Total average earning assets | 1,929,923 | 1,886,853 |
| Tax adjusted net interest margin | 3.04% | 3.75% |

The decreased net interest income and net interest margin for the nine months ended September 30, 2023, was primarily the result of higher cost of funds resulting from the higher rate environment year over year. We anticipate the compression seen throughout the year to continue, unless target rates decrease, and our interest-bearing liabilities are able to be repriced at those lower rates.

The following table shows the change in noninterest income for the nine months ending September 30, 2023, and September 30, 2022.

*(Dollars in thousands)*

*(Unaudited)*

| Noninterest income: | Nine months Ended September 30, 2023 | 2022 | 9/30/2023 vs. 9/30/2022 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Fees and service charges | 4,517 | 4,434 | 83 | 1.9% |
| Wealth management operations | 1,812 | 1,590 | 222 | 14.0% |
| Gain on sale of loans held-for-sale, net | 729 | 1,242 | (513) | -41.3% |
| Increase in cash value of bank owned life insurance | 573 | 628 | (55) | -8.8% |
| (Loss) gain on sale of foreclosed real estate | (13) | - | (13) | 0.0% |
| (Loss) gain on sale of securities, net | (48) | 662 | (710) | -107.3% |
| Other | 441 | 114 | 327 | 286.8% |
| Total noninterest income | 8,011 | 8,670 | (659) | -7.6% |

The increase in wealth management operations income is the result of market conditions and increased assets under management. The decrease in gain on sale of loans, for the nine-month period, is the result of lower consumer demand for fixed-rate mortgage products in the higher-rate environment. The decrease in gains on the sale of securities, for the nine-month period, is a result of current market conditions. The increase in other noninterest income for the nine-month period is the result of building sales.

The following table shows the change in noninterest expense for the nine months ending September 30, 2023, and September 30, 2022.

*(Dollars in thousands)*

*(Unaudited)*

| Noninterest expense: | Nine months Ended September 30, 2023 | 2022 | 9/30/2023 vs. 9/30/2022 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Compensation and benefits | 21,365 | 22,403 | (1,038) | -4.6% |
| Occupancy and equipment | 5,037 | 5,033 | 4 | 0.1% |
| Data processing | 3,465 | 5,512 | (2,047) | -37.1% |
| Federal deposit insurance premiums | 1,511 | 949 | 562 | 59.2% |
| Marketing | 649 | 1,623 | (974) | -60.0% |
| Impairment charge on assets held for sale | - | 254 | (254) | -100.0% |
| Other | 9,688 | 10,681 | (993) | -9.3% |
| Total noninterest expense | 41,715 | 46,455 | (4,740) | -10.2% |

The decrease in compensation and benefits, for the nine months ended September 30, 2023, is primarily the result of management’s focus on efficiency in personnel and has netted a reduction of 17 full time equivalents from December 31, 2022. The decrease in data processing expense, for the nine months ended September 30, 2023, is primarily the result of data conversion expenses incurred in the prior year related to the acquisition of RYFL. The increase in federal deposit insurance premiums, for the nine-month periods, is primarily the result of growth of the Bank’s average assets and higher assessment rates. The decrease in marketing expenses, for the nine-month period ended September 30, 2023, is the result of one-time expenses in the prior year relating to the RYFL acquisition. The decrease in other operating expenses for the nine-month period ending September 30, 2023, is primarily the result of one-time expenses incurred in the prior year related to the acquisition of RYFL.

The provision for income taxes was $21 thousand for the nine months ended September 30, 2023, as compared to $1.4 million for the nine months ended September 30, 2022, a decrease of $1.4 million (98.5%). The effective tax rate was 0.3% for the nine months ended September 30, 2023, as compared to 11.4% for the nine months ended September 30, 2022. The Bancorp’s lower current period effective tax rate is a result of a greater increase in tax preferred income relative to earnings.

### Critical Accounting Policies

The notes to the consolidated financial statements included in Item 8 of the Bancorp’s Annual Report on Form 10–K for 2022 contain a summary of the Bancorp’s significant accounting policies. Certain of these policies are important to the portrayal of the Bancorp’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Due to the adoption of ASU 2016-13, the Bancorp’s critical accounting policy changed over the allowance for credit losses, please see the updated critical accounting policy below:

#### Allowance for Credit Losses

The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of the portfolio of loans and leases. Estimating credit losses requires judgment in determining loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as economic forecasts used to determine a reasonable and supportable forecast, prepayment assumptions, the value of underlying collateral, and changes in size composition and risks within the portfolio are also considered. The allowance for credit losses is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The allowance is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast. Loan losses are estimated using the fair value of collateral for collateral–dependent loans, or when the borrower is experiencing financial difficulty such that repayment of the loan is expected to be made through the operation or sale of the collateral. Loan balances considered uncollectible are charged–off against the ACL. Recoveries of amounts previously charged–off are credited to the ACL. Assets purchased with credit deterioration (“PCD”) assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is booked directly to the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses. Management believes that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and leases as of the balance sheet date. Actual losses incurred may differ materially from our estimates.

### 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 2022 Annual Report on Form 10-K.

### 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.

## Controls and procedures

As filed, 1,924 characters.

(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 September 30, 2023, 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 nine months ended September 30, 2023, that has materially affected, or is reasonably likely to materially affect, the Bancorp's internal control over financial reporting.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-031287. Last ingested by Listed: Nov 4, 2026, 19:14 ET. No prices; not investment advice.