our green...building stronger communities. | 1 our green for over a century, fcn bank has been...

2019 Annual Report

OUR GREEN

TABLE OF CONTENTSOur Green ..................................................... 1Our Customers ............................................ 2Our Communities ........................................ 3Our Crew ....................................................... 4Our FCN Bank ............................................. 5Board of Directors ...................................... 6Highlights ...................................................... 7Graphs ........................................................... 8Independent Auditors’ Report .................. 9Financial Statements ................................10

Building Stronger Communities. | 1

OUR GREENFor over a century, FCN Bank has been faithfully serving the people of Brookville and surrounding areas. Since our inception, we have sought to provide products and services that facilitate the financial goals of each and every FCN customer.

Today, our green FCN logo stands as a monument to our proud heritage, and a vision of a promising future. OUR GREEN means our commitment to our customers, to our communities, and to our crew.

Thank you for being part of OUR GREEN.

2 | FCN Banc Corp. 2019 Annual Report

OUR CUSTOMERSThey are the reason we exist. Their financial needs and goals give us the drive to give a little bit more every day – a little more attention, a little more time, a little more heart – to what we do. In an industry that is quickly becoming increasingly commoditized and digitized, our commitment to our customers is truly a differentiating point for FCN. We are thankful for them every day.

Our customers are OUR GREEN.


OUR COMMUNITIESWe live where we work. Which means our customers’ communities are our communities. Constantly improving and enriching those communities is a long-lasting commitment of FCN Bank as well as its people. We lovingly give our time and resources to improve Brookville, Connersville, Batesville, Sunman, and Harrison, OH.

In May 2020 we will be welcoming the community of Lawrenceburg, Indiana to the FCN family.

Our communities are OUR GREEN.


OUR CREWOur people are the reason for our success. Every day they come to work ready to help customers with the best financial solutions. They are personally invested in the lives and success of our customers, which is why they work hard to make FCN a better bank. At the end of the day, this crew of talented, compassionate professionals is what lifts FCN above and beyond other banks.

Our crew are OUR GREEN.

BrookvilleNicole AllphinBrianna BackPaula BallingerApril BerneTerri BishopLuAnn BradleySherry BurkhartTim BurtonKaren CampbellKevin CampbellSandra CatesJames ClarkJimmy ClarkEmma CouchKatherine DeatonElizabeth EgglestonGrant GardnerDavid HamptonJulianne HodgeNikki HoferTom HorningerAshley HuntCathy HuntKaren JohnsonKim JohnsonStacey JohnsonCheryl KaiserAndy KobsMildred KoehneKris LacyBrandon Lake

Julie LeeBreanna LindnerJake LinkelVicki LintzJaclyn LudwickRachel McGeeTenia McIintyreShannon MeyerJackie MillsGinney MofieldJennifer MohrMelody MontagBecky NobleJohn NunierNancy PflumNick PflumKaren PhelpsRoger PotraffkeVickie PrybylaMarian RatzNicholas RauchDonald RiffleDawn RosenbergerHeather SackstederSharon SchneiderFaye SchollGene SchollMary ShepardBeth SiebertAlicia SimonsKaren SteinerAnnette Stinger

Rebecca StutzValerie TaylorKaren ViethKay WeberNicole WilsonTony WindleRita WrayBrent Young

ConnersvilleMary BosseKarley CavinsEthan EgglestonLinda FinchRebecca FoxCarol HunterTara KeysDebbie SpannManda Wolf

BatesvilleAnita AligJoe AligTheresa BoyceRenee DefossettShelly FischerStephanie GunterWendy HavensKathy HayesKyra KeetonRita MaupinMeg Noble-Rauch

Lila NuhringMargaret ReidyAnn RoellKimberly Stock

SunmanWilliam CraigCarla HackerRachel HocklMichelle HuberMelissa KleiChelsea LovinsBonnie MillsChristine MontiniJennifer RobertsSabrina Wesseler

Harrison Rebecca CoffeyJenna DipuccioMartin EiseleJennifer FogelmanStacy GrimmeissenKarmen HallonDebra HuffmanJill HundleySusan HyleLynn MingesTricia MooreEllen RauenDeborah WesleyCynthia Wuestefeld

OUR FCN BANKDear Shareholders,

Our FCN family extends a warm welcome to the employees and customers of Dearborn Savings Bank (“DSB”) in Lawrenceburg. On February 29, 2020, FCN Banc Corp completed its merger with DSB’s parent company, DSA Financial Corporation. The final consolidation and integration of FCN Bank and DSB is scheduled for May 18th of this year. We are honored to work with the Dearborn Saving’s bank employees to continue their long tradition of serving their customers and the Dearborn County community.

The U.S. banking industry in 2019 faced the challenges of declining interest rates and an inverted yield curve. These factors pressured earnings and net interest margins industry-wide. FCN Bank was no exception, fortunately, a healthy regional economy allowed FCN to help offset this compression in margins by focusing on growth in its core banking operations. As a result, the Company grew total assets during the year 6.8% to $474 million. Specifically, gross loans increased 4.8% year over year. Driving this growth were the Bank’s agricultural, commercial and commercial real estate lending activities. Deposits in 2019 grew 3.8% to $395.6 million. Additional pressure on the net interest margin was caused by a shift in our interest-bearing deposit accounts as many of our customers moved their short-term money market and NOW accounts into longer-term, higher-yielding Certificates of Deposit. Certificates of Deposits grew 16.1% in 2019 to $115.6 million. This contributed to the increase in interest expense of over $839 thousand. The combination of these factors helped FCN outperform the industry by maintaining a relatively consistent net interest margin of 3.63% in 2019 compared to 3.65% in 2018. Profitability was impacted by the increase in non-interest expense. Employee costs were up 7% due to additional hires and transitional expenses related to a number of retirements. Additionally, the holding company in the second half of the year began to absorb some of the fees and expenses related to the DSA Financial merger. Merger-related expenses in 2019 totaled $160,000. For the year FCN Banc Corp posted a net income of $5.72 million ($3.83/share) compared to $5.77 million ($3.84/share) in 2018. Dividends paid in 2019 totaled $1.35/share compared to $1.22/share in 2018. With the growth experienced in 2019 and flat year over year earnings, Return on Average Assets decreased from 1.30% in 2018 to 1.25% in 2019. Likewise, Return on Average Equity decreased from 11.99% to 10.81%.

Unfortunately, the challenges that are now before us in 2020 far surpass the challenges of 2019. As of this writing, our country is gripped by the struggles posed by the outbreak of the COVID-19 pandemic. In a matter of a few short weeks, its impact has wiped-out trillions of dollars of wealth in the equity markets, plunged domestic interest rates to historical low levels, threatened the employment and livelihood of millions of Americans and has changed the way we are living our daily lives. There have many changes implemented at FCN in reaction to these threats. All of our decisions are made keeping two very important goals in mind: (i) the protection of our employees, our customers and our communities and (ii) maintaining our customers’ access to their accounts and the bank’s products and services. While we realize some of these actions have created temporary inconveniences for you, we are grateful for your understanding and patience. These times can also create anxiety and worry too. On behalf of the Board of Directors and the senior management at FCN, we hope that you stay safe, healthy and calm during this time.

As this issue is so dynamic, we have not yet made a final decision on holding FCN’s Annual Shareholder Meeting currently scheduled for May 12th at the Schilling Center in Brookville. We would encourage you to promptly complete and return your proxy upon receipt. The only shareholder action contemplated at this time is the election of Directors for the coming year. We will continue to monitor the situation closely and we will quickly communicate any news that may impact the Shareholder Meeting.

All of us at FCN thank you for your continued support.

Kenneth T. WanstrathChairman, Board of Directors

Thomas D. HorningerPresident & CEO


BOARD OF DIRECTORS

FRONT ROWThomas D. Horninger President & CEO, FCN Bank, N.A.Kenneth R. Wanstrath President, New Point StoneArthur K. Hildebrand President of FCN Banc Corp. and President & CEO, FCN Bank, N.A. – Retired

BACK ROWDr. K. Andrew Yaryan Owner, Yaryan Eye Care CentersBrad M. Tebbe Owner, Brad M. Tebbe CPA, LLCKevin D. Lyons President & Partner, Hawk Insurance AgencyRonald J. Knueven CPA & Shareholder, RSBK Partners, PCDevin W. Listerman CEO, AmeriClean Distributors LLC

FCN BANC CORP OFFICERSKenneth T. Wanstrath, ChairmanThomas D. Horninger, PresidentJames R. Clark, IV, SecretaryApril A. Berne, Treasurer

DIRECTORS EMERITUSFred ChappelowJames A. HydeRandall W. ListermanJane C. LudwigDonald R. SmithKeith L. Tebbe


HIGHLIGHTSFCN Banc Corp. Financial Highlights

For the years ended December 31, 2019 and 2018 (in thousands, except per share data)

Earnings & DividendsNet IncomeCash Dividends Declared

Per ShareEarningsCash Dividends DeclaredYear-End Book ValueYear-End Market Price

At Year-EndAssetsLoans and LeasesDeposits Shareholders’ Equity

Key RatiosReturn on Average Assets (ROA)Return on Average Equity (ROE)Net Interest MarginEfficiency RatioAverage Shareholders’ Equity to Average Assets

ActualsNumber of Shares

2019 5,720

2,018

3.831.35

37.68 40.20

474,066 262,563 395,608

56,321

1.25%10.81%

3.63%62.03%11.53%

1,494,614

2018 5,765

1,831

3.841.22

33.08 30.50

443,581 249,338 380,925

49,470

1.30%11.99%

3.65%59.73%10.85%

1,495,274

% Change-0.79%10.21%

-0.26%10.66%13.90%31.80%

6.87%5.30%3.85%

13.85%

-4.21%-9.81%-0.38%3.85%6.21%

-0.04%



GRAPHS

2015 2016 2017 2018 2019

EARNINGS PER SHARE

$3.8

3

2015 2016 2017 2018 2019

NET LOANS(in Thousands)

262,

563

225,

791

232,

193

238,

952

249,

338

2015 2016 2017 2018 2019

TOTAL ASSETS(in Thousands)

474,

066

442,

379

415,

478

423,

343

443,

581

2015 2016 2017 2018 2019

TOTAL DEPOSITS(in Thousands)

395,

608

359,

830

377,

186

384,

049

380,

925

SHAREHOLDERS’ EQUITY(in Thousands)

2015 2016 2017 2018 2019

56,3

21

43,3

16

44,0

95

46,6

97

49,4

70

$2.3

6

$2.6

3

$2.6

6

$3.8

4

One East Fourth Street, Suite 1200, Cincinnati, Ohio 45202P. 513.241.3111 | F. 513.241.1212 | cshco.com

INDEPENDENT AUDITORS’ REPORT Board of Directors FCN Banc Corp. We have audited the accompanying consolidated financial statements of FCN Banc Corp. which comprise the consolidated statements of financial condition as of December 31, 2019 and 2018, and the related consolidated statements of earnings, comprehensive income, shareholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FCN Banc Corp. as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Clark, Schaefer, Hackett & Co. Cincinnati, Ohio March 17, 2020



CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONDecember 31, 2019 and 2018

(in thousands, except per share data)ASSETS 2019 2018Cash and due from banks $ 6,530 $ 5,078Interest-bearing deposits in other financial institutions 24,673 14,688Federal funds sold - 89

Cash and cash equivalents 31,203 19,855

Investment securities designated as available for sale - at market 69,306 62,295Investment securities designated as held to maturity - at amortized cost 197 2,906Mortgage-backed securities designated as available for sale - at market 82,415 81,758Loans held for sale - at lower of cost or fair value 2,183 1,921Loans receivable - net 262,563 249,338Office premises and equipment - at depreciated cost 5,801 5,536Right-of-use asset 1,086 -Federal Reserve and Federal Home Loan Bank stock - at cost 1,104 1,104Accrued interest receivable on loans 1,293 1,058Accrued interest receivable on investments and interest-bearing deposits 669 644Accrued interest receivable on mortgage-backed securities 216 206Bank owned life insurance 12,090 11,809Prepaid expenses and other assets 1,821 1,725Goodwill 2,119 2,119Prepaid income taxes - 18Deferred income taxes - 889

Total assets $474,066 $443,581

LIABILITIES AND SHAREHOLDERS’ EQUITYDeposits Non-interest bearing $ 84,593 $ 77,464 Interest bearing 311,015 303,461

Total deposits 395,608 380,925

Short-term borrowings 12,857 10,601Advances from the Federal Home Loan Bank 5,000 -Accrued interest payable 764 456Investments payable 16 17Dividends payable 508 479Accrued income taxes 8 -Deferred income taxes 310 -Operating lease liability 1,086 -Other liabilities 1,588 1,633

Total liabilities 417,745 394,111

Shareholders’ equity Common stock - $6.25 par value, 10,000,000 shares authorized; 1,576,960 shares issued 9,856 9,856 Additional paid-in capital 623 623 Retained earnings - restricted 44,935 41,233 Treasury shares - at cost, 82,346 and 81,686 shares at December 31, 2019 and 2018, respectively (1,509) (1,486)

Accumulated other comprehensive income (loss) 2,416 (756)Total shareholders’ equity 56,321 49,470

Total liabilities and shareholders’ equity $474,066 $443,581The accompanying notes are an integral part of these statements.


CONSOLIDATED STATEMENTS OF EARNINGSDecember 31, 2019 and 2018

(in thousands, except per share data) 2019 2018

Interest incomeLoans $13,861 $12,524Investment securities 1,847 1,827Mortgage-backed securities 1,987 1,736Interest-bearing deposits and other 521 492

Total interest income 18,216 16,579Interest expense

Deposits 2,656 1,941FHLB advances 57 15Short-term borrowings 201 119

Total interest expense 2,914 2,075

Net interest income 15,302 14,504

Provision for losses on loans 100 -

Net interest income after provision for losses on loans 15,202 14,504

Noninterest income (expense)Service charges on deposit accounts 420 418Loss on sale of investments and mortgage-backed securities (12) (13) Gain on sale of loans 366 347Service charges on sold loans 372 345Loss on sale of real estate acquired through foreclosure - (40)ATM/Interchange fees 772 718Increase in cash surrender value of bank owned life insurance 281 257Other operating 704 736

Total noninterest income 2,903 2,768

Noninterest expenseEmployee compensation and benefits 6,478 6,041Occupancy and equipment 600 596Equipment expense 446 405Audit and examination fees 406 195Software maintenance fees 646 454FDIC premium 59 125Marketing 329 388Other operating 2,328 2,112

Total noninterest expense 11,292 10,316

Earnings before income taxes 6,813 6,956

Income taxes Current 749 1,099Deferred 344 92

Total income taxes 1,093 1,191

NET EARNINGS $ 5,720 $ 5,765

Basic earnings per share $3.83 $3.84

Weighted-average shares outstanding 1,494,975 1,501,516

The accompanying notes are an integral part of these statements.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEDecember 31, 2019 and 2018

(in thousands) 2019 2018

Net earnings $5,720 $5,765

Other comprehensive income (loss), net of tax:Unrealized holding gains (losses) on securities during the year,net of taxes (benefits) of $858 and $(256) for the yearsended December 31, 2019 and 2018, respectively 3,163 (939)

Reclassification adjustment for realized losses included in earnings, net of tax benefit of $(3) for each of the years ended December 31, 2019 and 2018, respectively 9 10

Other comprehensive income (loss) 3,172 (929)

Comprehensive income $8,892 $4,836



CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYDecember 31, 2019 and 2018

(in thousands, except per share data)

Accumulated Common Additional other shares Common paid-in Retained Treasury comprehensive outstanding stock capital earnings stock income (loss) Total

Balance at December 31, 2017 1,502,740 $9,856 $620 $37,299 $(1,251) $173 $44,697

Net earnings for the year ended December 31, 2018 - - - 5,765 - - 5,765Purchase of treasury shares (7,680) - - - (238) - (238)Sale of treasury shares 214 - 3 - 3 - 6Unrealized losses on securities

designated as available for sale, net of recognized sales and relatedtax effects - - - - - (929) (929)

Cash dividends of $1.22 per share - - - (1,831) - - (1,831)

Balance at December 31, 2018 1,495,274 $9,856 $623 $41,233 $(1,486) $(756) $49,470

Net earnings for the year ended December 31, 2019 - - - 5,720 - - 5,720Purchase of treasury shares (660) - - - (23) - (23)Sale of treasury shares - - - - - - -Unrealized gains on securities

designated as available for sale, net of recognized sales and relatedtax effects - - - - - 3,172 3,172

Cash dividends of $1.35 per share - - - (2,018) - - (2,018)

Balance at December 31, 2019 1,494,614 $9,856 $623 $44,935 $(1,509) $2,416 $56,321



CONSOLIDATED STATEMENTS OF CASH FLOWSDecember 31, 2019 and 2018


Cash flows from operating activities:Net earnings for the year $ 5,720 $ 5,765Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation 436 397Amortization 251 243Amortization of premiums on investments and mortgage-backed securities, net 927 855Amortization of deferred loan origination fees (198) (139)Amortization of right-of-use asset 123 -Change in lease liability (123) -Loss on sale of investments and mortgage-backed securities 12 13Loans originated for sale in the secondary market (27,108) (22,082)Proceeds from sale of loans in the secondary market 27,212 23,898Gain on sale of loans (366) (347)Earnings on cash surrender value of life insurance (281) (257) Provision for losses on loans 100 -Loss on sale of real estate acquired through foreclosure - 40Effects of change in operating assets and liabilities:

Accrued interest receivable on loans (235) (204)Accrued interest receivable on investments (25) 56Accrued interest receivable on mortgage-backed securities (10) (40)Prepaid expenses and other assets (350) (323)Accrued interest payable 308 91Other liabilities (45) 181Income taxes

Current 26 (87)Deferred 344 92

Net cash provided by operating activities $ 6,718 $ 8,152

Cash flows from investing activities:Purchase of investment securities designated as available for sale (12,998) (14,185)Purchase of investment securities designated as held to maturity (1) (2)Proceeds from sale of investment securities designated as available for sale 2,999 13,881Maturities of investment securities designated as available for sale 7,709 9,058Maturities of investment securities designated as held to maturity 326 437Purchase of mortgage-backed securities designated as available for sale (22,896) (23,398)Proceeds from sale of mortgage-backed securities designated as available for sale 4,429 827 Principal repayments on mortgage-backed securities 18,960 13,889Loan disbursements (113,788) (87,702)Principal repayments on loans 100,664 77,400Purchases of and additions to office premises and equipment (701) (480)Proceeds from sale of real estate acquired through foreclosure - 171Purchase of bank owned life insurance - (1,000)

Net cash used in investing activities $(15,297) $(11,104)

Net cash used in operating and investing activities(subtotal carried forward) $(8,579) $(2,952)



CONSOLIDATED STATEMENTS OF CASH FLOWSDecember 31, 2019 and 2018


Net cash used in operating and investing activities(subtotal brought forward) $ (8,579) $ (2,952)

Cash flows from financing activities:Net increase (decrease) in deposit accounts 14,683 (3,124)Net increase in short-term borrowings 2,256 1,294Proceeds from Federal Home Loan Bank advances 5,000 7,500Repayment of Federal Home Loan Bank advances - (7,500)Dividends on common stock (1,989) (1,773)Proceeds from sale of treasury shares - 6Purchase of treasury shares (23) (238)

Net cash provided by (used in) financing activities 19,927 (3,835)

Net increase (decrease) in cash and cash equivalents 11,348 (6,787)

Cash and cash equivalents at beginning of year 19,855 26,642

Cash and cash equivalents at end of year $ 31,203 $ 19,855

Supplemental disclosure of cash flow information:Cash paid during the year for:

Income taxes $ 735 $ 1,199

Interest on deposits and borrowings $ 2,606 $ 1,984

Supplemental disclosure of noncash investing and financing activities:Transfers from loans to real estate acquired through foreclosure $ - $ 47

Recognition of mortgage servicing rights in accordance withAccounting standards $ 271 $ 234

Dividends declared but unpaid $ 508 $ 479

Change of security classification from held to maturity to available for sale $ 2,370 $ -

Land acquired under operating lease $ 1,209 $ -


NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2019 and 2018

NOTE A - SUMMARY OF ACCOUNTING POLICIES

FCN Banc Corp. (the “Corporation”) is a bank holding company whose activities are primarily limited to holding the common shares of FCN Bank, NA, a nationally-chartered bank (the “Bank”). The Bank conducts a general banking business in southeast Indiana and southwest Ohio which consists of attracting deposits from the general public and applying those funds to the origination of loans for residential, consumer and commercial purposes. The Bank’s wholly-owned subsidiary, FCN Holdings, Inc., was incorporated in 2002 for the primary purpose of managing a significant portion of the Bank’s investment portfolio. In 2016, FCN Risk Management, Inc. was created as a wholly-owned subsidiary of the Corporation in order to provide property, casualty and liability insurance coverage to the Corporation.

The Bank’s profitability is significantly dependent on its net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Bank can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management’s control.

The financial information presented herein has been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In preparing consolidated financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. A significant estimate is the allowance for loan losses. Actual results could differ from such estimates.

The following is a summary of the Corporation’s significant accounting policies, which have been consistently applied in the preparation of the accompanying consolidated financial statements.

1. Principles of Consolidation

The consolidated financial statements of the Corporation include the accounts of both wholly-owned subsidiaries, the Bank and FCN Risk Management, Inc. The Bank’s consolidated financial statements include its wholly-owned subsidiary, FCN Holdings, Inc. All significant intercompany balances and transactions have been eliminated.

2. Investment and Mortgage-Backed Securities

The Corporation accounts for investment and mortgage-backed securities in accordance with Standards for “Accounting for Investments in Debt Securities,” which requires that investments be classified as held to maturity, trading, or available for sale. These classifications are to be reassessed at each reporting date. Securities classified as held-to-maturity are carried at cost only if the Corporation has the positive intent and ability to hold these securities to maturity. Securities designated as available for sale are carried at fair value with resulting unrealized gains or losses recorded to shareholders’ equity. At December 31, 2019 and 2018, substantially all of the Bank’s securities were classified as available for sale. Premiums or discounts associated with the purchase of investment securities are amortized or accreted using the interest method to arrive at periodic interest income at a constant effective yield on the net investment.



NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

3. Loans Receivable

Loans held in portfolio are stated at the principal amount outstanding, adjusted for net deferred loan origination fees and the allowance for loan losses. Interest is accrued as earned, unless the collectability of the loan is in doubt. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management’s periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management’s judgment, the borrower’s ability to make periodic interest and principal payments has returned to normal, in which case the loan is returned to accrual status. If the ultimate collectability of the loan is in doubt, in whole or in part, all payments received on nonaccrual loans are applied to reduce principal until such doubt is eliminated.

Loans held for sale are carried at the lower of cost or fair value, determined in the aggregate. In computing cost, deferred loan origination fees are deducted from the principal balances of the related loans. Fair value is determined by reference to price quotations of government-sponsored enterprises in the secondary mortgage market. There were approximately $2,183,000 and $1,921,000 in loans held for sale at December 31, 2019 and 2018, respectively. These loans were settled within 30 days of these consolidated financial statements without fluctuation in their fair value.

The Bank accounts for mortgage servicing rights in accordance with the provisions of “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” which requires the Bank recognize as separate assets, rights to service mortgage loans for others, regardless of how those servicing rights are acquired. These standards require an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities. The Bank has chosen to measure servicing assets using the amortization method.

The Bank added new mortgage servicing rights of approximately $270,000 and $234,000 and recorded amortization related to mortgage servicing rights totaling approximately $254,000 and $235,000 for the years ended December 31, 2019 and 2018, respectively. The carrying value of the Bank’s mortgage servicing rights totaled approximately $718,000 and $702,000 at December 31, 2019 and 2018, respectively. The fair value of the Bank’s mortgage servicing rights totaled approximately $1,070,000 and $1,420,000 as of December 31, 2019 and 2018, respectively.

4. Loan Origination Fees

The Bank accounts for loan origination fees in accordance with U.S. GAAP whereas origination fees received from loans, net of certain direct origination costs, are deferred and amortized to interest income using the interest method, giving effect to actual loan prepayments. Additionally, this standard generally limits the definition of loan origination costs to the direct costs attributable to originating a loan, i.e. principally actual personnel costs. Fees received for loan commitments that are expected to be drawn upon, based on the Bank’s experience with similar commitments, are deferred and amortized over the life of the loan using the level-yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis.




5. Allowance for Loan Losses

It is the Bank’s policy to provide valuation allowances for estimated losses on loans based on past loss experience, trends in the level of delinquent and problem loans, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions in the primary lending area. When the collection of a loan becomes doubtful, or otherwise troubled, the Bank records a loan loss provision equal to the difference between the present value of expected future cash flows or fair value of the property securing the loan and the loan’s carrying value. Major loans and major lending areas are reviewed periodically to determine potential problems. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs (net of recoveries).

The Bank accounts for impaired loans in accordance with ASC 320. These standards require that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an alternative, at the loan’s observable market price or fair value of the collateral for collateral dependent loans. The Bank’s current procedures for evaluating impaired loans result in carrying such loans at the lower of cost or fair value.

A loan is defined as impaired when, based on current information and events, it is probable that the bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of this standard, the Bank considers its investment in one-to-four-family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. With respect to the Bank’s investment in nonresidential and multi-family residential real estate loans and commercial loans, and its evaluation of impairment thereof, such loans are generally collateral dependent and, as a result, are carried as a practical expedient at the lower of cost or fair value of the underlying collateral.

Loans which are more than 90 days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under these standards at that time. Loans more than 90 days delinquent are generally classified as non-accrual.

The allowance for impaired loans is included in the Bank’s general allowance for credit losses. The provision necessary to increase this allowance is included in the Bank’s overall provision for losses on loans.

6. Investment in Federal Home Loan Bank Stock

The Bank is required, as a condition of membership in the Federal Home Loan Bank of Indianapolis (FHLB), to maintain an investment in FHLB common stock. The stock is redeemable at par and, therefore, its cost is equivalent to its redemption value. The Bank’s ability to redeem FHLB shares is dependent on the redemption practices of the FHLB of Indianapolis. At December 31, 2019, the FHLB of Indianapolis placed no restrictions on redemption of shares in excess of a member’s required investment in the stock.

7. Office Premises and Equipment

Office premises and equipment are carried at cost and include expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as incurred. For financial reporting, depreciation and amortization are provided on the straight-line and accelerated methods over the useful lives of the assets, estimated to be twenty-five to forty years for buildings, five to thirty-nine years for building improvements, five to fifteen years for furniture and equipment and three years for software. An accelerated depreciation method is used for tax reporting purposes.




8. Goodwill and Intangible Assets

The Bank recorded goodwill resulting from a branch purchase transaction completed in December 2003, totaling $2.1 million. Pursuant to accounting standards for “Goodwill and Intangible Assets” goodwill is subject to an impairment evaluation. Management has determined that no impairment charge related to goodwill was necessary for the years ended December 31, 2019 and 2018. The Bank has fully amortized the goodwill for tax purposes.

9. Income Taxes

The Corporation accounts for income taxes pursuant to standards for “Accounting for Income Taxes.” In accordance with these standards, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in net taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carry forward attributes may be utilized against current period earnings, carried back against prior years’ earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management’s estimate of future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future.

Deferral of income taxes results primarily from the different methods of accounting for certain retirement plans, mortgage servicing rights, general loan loss allowances and goodwill. Additional temporary differences result from depreciation computed using accelerated methods for tax purposes.

The Corporation’s policy with regard to interest and penalty is to recognize interest through interest expense and penalties through other expense. In evaluating the Corporation’s tax provisions and accruals, future taxable income, and the reversal of temporary differences, interpretations and tax planning strategies are considered. The Corporation believes their estimates are appropriate based on current facts and circumstances, and no interest or penalties relating to income taxes were incurred for the years ended December 31, 2019 or 2018.

10. Benefit Plans

The Corporation sponsors a postretirement plan (the “Plan”) covering certain directors of the Bank. Based upon calculations received from the benefit plan administrators, the Bank recorded expense of approximately $63,000 for the year ended December 31, 2019 and $49,000 for the year ended December 31, 2018.

The Bank has a contributory 401(k) plan covering substantially all employees. Contributions to the plan are voluntary and are subject to matching by the Bank. The Bank’s expense related to the 401(k) plan totaled approximately $140,000 and $124,000 for the years ended December 31, 2019 and 2018, respectively.

The Bank has a profit sharing plan, which provides for additional compensation to employees if the Bank meets certain performance goals. The Bank recorded expense of approximately $286,000 and $330,000 for the profit sharing plan for the years ended December 31, 2019 and 2018, respectively.




11. Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents includes cash and due from banks and interest-bearing deposits in other financial institutions with original maturities of less than 90 days.

12. Fair Value of Financial Instruments

Standards for “Disclosures about Fair Value of Financial Instruments” require disclosures of fair value of financial instruments, both assets and liabilities, whether or not recognized in the consolidated statement of financial condition, for which it is practicable to estimate that value. For financial instruments where quoted market prices are not available, fair values are based on estimates using present value and other valuation methods.

The methods used are greatly affected by the assumptions applied, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in an exchange for certain financial instruments. The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments at December 31, 2019 and 2018:

Cash and cash equivalents: The carrying amounts presented in the consolidated statements of financial condition for cash and cash equivalents are deemed to approximate fair value.

Investment and mortgage-backed securities: For investment and mortgage-backed securities, fair value is deemed to equal the quoted market price. Loans receivable: The loan portfolio has been segregated into categories with similar characteristics, such as 1-4 family residential, multi-family residential, nonresidential real estate and consumer. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality.

Federal Reserve and Federal Home Loan Bank stock: The carrying amounts presented in the consolidated statements of financial condition are deemed to approximate fair value.

Interest Receivable/Payable: The fair values of interest receivable/payable approximate carrying values.

Mortgage Servicing Rights: The Bank accounts for mortgage servicing rights in accordance with the provisions of “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” which requires that the Bank recognize as separate assets, rights to service mortgage loans for others, regardless of how those servicing rights are acquired. An institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained must allocate some of the cost of the loans to mortgage servicing rights.

Deposits: The fair value of non-interest bearing and interest-bearing demand and savings accounts is deemed to approximate the amount payable on demand at December 31, 2019 and 2018. Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities.

Short-term borrowings: The actual interest rates at December 31, 2019 and 2018, approximate market rates and, thus, the carrying value closely approximates fair value.




12. Fair Value of Financial Instruments (continued)

Federal Home Loan Bank advances: The fair value of Federal Home Loan Bank advances has been estimated using discounted cash flow analysis, based on the interest rates currently offered for advances of similar remaining maturities.

Commitments to extend credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At December 31, 2019 and 2018, the fair value of loan commitments was not material.

Based on the foregoing methods and assumptions, the carrying value and fair value of the Corporation’s financial instruments are as follows at December 31:

2019 2018 Carrying Fair Carrying Fair value value value value (In thousands)Financial assets Cash and cash equivalents $ 31,203 $ 31,203 $ 19,855 $ 19,855 Investment and mortgage-backed securities 151,918 151,918 147,359 147,321 Loans receivable, including loans held for sale 264,746 266,827 251,259 253,166 Federal Reserve and Federal Home Loan Bank stock 1,104 1,104 1,104 1,104 Interest receivable 2,178 2,178 1,908 1,908 Mortgage servicing rights 718 1,070 702 1,420

Financial liabilities Interest payable $ 764 $ 764 $ 456 $ 456 Deposits 395,608 395,871 380,925 380,814 Short-term borrowings 12,857 12,857 10,601 10,601 Advances from the Federal Home Loan Bank 5,000 5,000 - -

Accounting Standards for Fair Value Measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities.

Level 2 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 for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.





Fair value methods and assumptions are set forth below for each type of financial instrument. Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investments: Fair value on available for sale securities were based upon a market approach. Securities which are fixed income instruments that are not quoted on an exchange, but are traded in active markets, are valued using prices obtained from our custodian, which used third party data service providers. Available for sale securities includes U.S. agency securities, municipal bonds, corporate investments, student loan-backed securities, and mortgage-backed agency securities.

Impaired Loans: The Bank is predominately an asset based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Corporation considers to be Level 2 inputs.

Fair value measurements for certain assets measured at fair value on a recurring basis:

Fair Value Measurements (In thousands) Quoted prices in active Significant Significant markets for other other identical observable unobservable assets inputs inputs

Total (Level 1) (Level 2) (Level 3)December 31, 2019

Securities available for saleU.S. Government agency obligations $ - - $ - -State and municipal obligations 66,118 - 66,118 -Corporate debt obligations 1,405 - 1,405 -Asset-backed securities 1,741 - 1,741 -U.S. Government agency

participation certificates 26,463 - 26,463 -CMO’s and REMIC’s 55,952 - 55,952Other securities 42 - 42 -


Securities available for saleU.S. Government agency obligations $3,970 - $3,970 -State and municipal obligations 54,609 - 54,609 -Corporate debt obligations 1,773 - 1,773 -Asset-backed securities 2,313 - 2,313 -U.S. Government agency

participation certificates 36,817 - 36,817 -CMO’s and REMIC’s 44,941 - 44,941Other securities 30 - 30 -





Fair value measurements for certain assets measured at fair value on a non recurring basis:

Fair Value Measurements (In thousands) Quoted prices in active Significant Significant markets for other other identical observable unobservable assets inputs inputs


Collateral Dependent Impaired Loans $2,032 - 2,032 -

December 31, 2018 Collateral Dependent Impaired Loans $2,396 - 2,396 -

Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. Goodwill recorded by the Bank in connection with its branch acquisitions relates to the inherent value in the business acquired and this value is dependent upon the Bank’s ability to provide quality, cost-effective services in a competitive market place. As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. Goodwill is not amortized but is tested for impairment when indicators of impairment exist, or at least annually, to determine the reasonableness of the recorded amount. The balance of goodwill at December 31, 2019 and 2018 was $2,119,000.

13. Bank-Owned Life Insurance

The Bank has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

14. Advertising

Advertising costs are expensed when incurred. The Corporation’s advertising expense totaled approximately $329,000 and $388,000 for the years ended December 31, 2019 and 2018, respectively.

15. Earnings Per Share

Basic earnings per share are computed based upon the weighted-average common shares outstanding during the year. Weighted-average common shares outstanding totaled 1,494,975 and 1,501,516 for the years ended December 31, 2019 and 2018, respectively.

Diluted earnings per share are computed by taking into consideration common shares outstanding and dilutive potential common share equivalents. The Corporation had no dilutive or potentially dilutive securities during the years ended December 31, 2019 and 2018.




16. Concentrations

The Corporation may at times maintain deposits in other financial institutions which exceed federally insured limits. The Corporation has not experienced any losses in such accounts and management does not believe it is exposed to significant risk on cash and cash equivalents. No deposit amounts in other financial institutions exceeded federally insured limits at December 31, 2019.

The Bank grants mortgage and other loans to customers located primarily in the south-eastern counties of Indiana and the south-western counties of Ohio. As such, a substantial portion of its debtors’ ability to repay their loans is dependent upon the financial and economic health of the regional economy.

17. Recently Adopted Accounting Pronouncement

In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments-Overall (Subtopic 825-10). The amendments in this update affect all entities that hold financial assets or owe financial liabilities. The update’s main provisions applicable to the Corporation are as follows: 1) Require equity investments with readily available fair values (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment 3) Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet 4) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes 5) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and 6) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The Corporation adopted this ASU as of January 1, 2018 and the adoption of these provisions did not have a significant impact on the Corporation’s consolidated financial statements.

On January 1, 2018, the Corporation adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Corporation’s revenues come from interest income and other sources, including loans, leases, securities and derivatives, that are outside the scope of ASC 606. The Corporation’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Corporation satisfies its obligation to the customer. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Refer to Note L Revenue Recognition for further discussion on the Corporation’s accounting policies for revenue sources within the scope of ASC 606. The Corporation adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018. The adoption of ASC 606 did not result in a change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded.

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” This ASU and subsequently issued amendments require lessees to recognize lease assets and liabilities of greater than twelve months on the balance sheet and requires expanded disclosure about leasing arrangements. Refer to Note E Lease for further discussion on the Corporation’s policies for lease accounting within the scope of Topic 842.




18. Upcoming Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the ASU is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2022, and early adoption is permitted for annual and interim periods now at any time. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Corporation will be evaluating the impact of this ASU over the next several years. The Corporation expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

19. Subsequent Events

The Corporation evaluates events and transactions occurring subsequent to the date of the consolidated financial statements for matters requiring recognition or disclosure in the consolidated financial statements. The accompanying consolidated financial statements consider events through March 17, 2020, date the consolidated financial statements were available to be issued. On August 29, 2019, the Corporation and DSA Financial Corporation entered into an Agreement and Plan of Merger pursuant to which the latter would merge with and into FCN Banc Corp. On February 29, 2020, the Plan of Merger was successfully executed. DSA Financial Corporation was a bank holding company whose principal business was conducted by its wholly-owned subsidiary, Dearborn Savings Bank. Total assets of approximately $129 million and total liabilities of approximately $114 million were obtained as a result of the merger. The consideration totaled approximately $18.5 million, which was paid for with 50% cash and 50% stock issuance. In order to cover the cash outflow, the Corporation borrowed $10 million, collateralized by Bank common shares, to be repaid over a 3 year term.



NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investment securities at December 31, 2019 and 2018 are as follows (in thousands):

2019 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands)Available for sale: U.S. Government agency obligations $ - $ - $ - $ - State and municipal obligations 63,731 2,418 31 66,118 Corporate debt obligations 1,500 - 95 1,405 Asset-backed securities 1,762 - 21 1,741 Other securities 40 2 - 42 Total securities available for sale 67,033 2,420 147 69,306

Held to maturity: Investment in Section 42 housing 197 - - 197

Total securities held to maturity 197 - - 197Total investment securities $67,230 $2,420 $147 $69,503

2018 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands)Available for sale: U.S. Government agency obligations $ 4,050 $ - $ 80 $ 3,970 State and municipal obligations 54,619 406 416 54,609 Corporate debt obligations 1,800 14 41 1,773 Asset-backed securities 2,310 6 3 2,313 Other securities 40 - 10 30 Total securities available for sale 62,819 426 550 62,695

Held to maturity: Investment in Section 42 housing 248 - - 248 State and municipal obligations 2,658 5 43 2,620

Total securities held to maturity 2,906 5 43 2,868Total investment securities $65,725 $431 $593 $65,563

As of March 1, 2019, the Corporation determined that there was no longer a positive intent and ability to hold the held to maturity state and municipal obligations to maturity. With that determination, the securities were transferred to available for sale at that point in time. The amortized cost and estimated fair value at the time of transfer were $2,383,000 and $2,365,000, respectively. The net unrealized loss at the time of transfer was $18,000 and is included as a component of other comprehensive income.



NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)

The amortized cost and estimated fair value of investment securities by term to maturity at December 31 are shown below.

2019 2018 Estimated Estimated Amortized fair Amortized fair cost value cost value (In thousands)

Due in one year or less $ 7,174 $ 7,231 $ 4,950 $ 4,949Due after one year to five years 9,230 9,370 18,075 18,098Due after five years to ten years 25,912 26,879 24,311 24,088Due after ten years 24,914 26,023 18,389 18,428 $67,230 $69,503 $65,725 $65,563

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed securities at December 31, 2019 and 2018 are presented below. 2019 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands)Available for sale:

U.S. Government agencyparticipation certificates $26,118 $351 $ 6 $26,463

CMOs and REMICs 55,511 557 116 55,952

Total mortgage-backed securities $81,629 $908 $ 122 $82,415

2018 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands)Available for sale:

U.S. Government agencyparticipation certificates $37,274 $189 $ 646 $36,817

CMOs and REMICs 45,328 133 520 44,941

Total mortgage-backed securities $82,602 $322 $1,166 $81,758




The amortized cost and estimated fair value of mortgage-backed securities at December 31, by contractual terms to maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties.

2019 2018 Estimated Estimated Amortized fair Amortized fair cost value cost value (In thousands)

Due within one year $12,463 $12,662 $ 219 $ 219Due after one year to five years 63,400 63,948 72,726 71,990Due after five years to ten years 5,743 5,781 9,152 9,032Due after ten years 23 24 505 517

Total mortgage-backed securities $81,629 $82,415 $82,602 $81,758

The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at December 31, 2019 and 2018:

Less than 12 months 12 months or longer TotalDescription of Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealizedsecurities investments value losses investments value losses investments value losses (Dollars in thousands)December 31, 2019:U.S. Governmentagency obligations - $ - $ - - $ - $ - - $ - $ -

State and municipalobligations 8 3,207 31 - - - 8 3,207 31

Corporate debt obligations 3 1,405 95 - - - 3 1,405 95Asset-backed securities - - - 2 1,436 21 2 1,436 21Other securities - - - - - - - - -Mortgage backed securities 21 21,489 115 2 1,073 7 23 22,562 122Total temporarilyimpaired securities 32 $26,101 $241 4 $2,509 $28 36 $28,610 $269

December 31, 2018:U.S. Governmentagency obligations - $ - $ - 9 $3,970 $80 9 $3,970 $80

State and municipalobligations 13 3,407 18 54 21,045 441 67 24,452 459

Corporate debt obligations - - - 2 959 41 2 959 41Asset-backed securities 1 375 3 - - - 1 375 3Other securities 1 30 10 - - - 1 30 10Mortgage backed securities 6 1,818 6 69 49,994 1,160 75 51,812 1,166Total temporarilyimpaired securities 21 $5,630 $37 134 $75,968 $1,722 155 $81,598 $1,759




Proceeds from sales of securities available for sale were $3.0 million and $13.9 million during 2019 and 2018, respectively. Gross gains of $22,000 and $92,000 were realized in 2019 and 2018 for sales of investment securities. Gross losses of $34,000 and $105,000 were realized in 2019 and 2018, respectively, for sales of investment securities.

Management does not intend to sell debt securities with an unrealized loss and does not believe that it will be required to sell a security in an unrealized loss position prior to recovery in value. The fair values are expected to recover as securities approach their maturity dates. The Corporation has evaluated these securities and has determined that the decline in their values is temporary due to the change in market interest rates.

Securities with a carrying value of $14,617,677 and $13,703,842 were pledged at December 31, 2019 and 2018, respectively to collateralize certain deposits and for other purposes as permitted or required by law.

NOTE C - FINANCING RECEIVABLES

Loans receivable at December 31, 2019 and 2018 consist of the following:

2019 2018Construction $ 13,542 $ 15,167Farmland 30,207 25,3081-4 family residential 88,703 90,780Multi-family residential 9,271 8,502Nonfarm nonresidential 59,716 53,601Commercial 56,552 53,222Consumer 10,512 9,653 268,503 256,233Allowance for loan loss (3,449) (4,708)Deferred loan fees (308) (266)Total net loans $264,746 $251,259

Loans held for sale $ 2,183 $ 1,921Loans receivable – net 262,563 249,338Total net loans $264,746 $251,259

The risk characteristics applicable to each segment of the loan portfolio are described as follows:

Construction Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building having a value which is insufficient to assure full repayment. If we are forced to foreclose on a building before or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.



NOTE C - FINANCING RECEIVABLES (CONTINUED)

Farmland (Agricultural) Loans. Payments on agricultural loans are typically dependent on the profitable operation or management of the related farm property. The success of the farm may be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields, declines in market prices for agricultural products and the impact of government regulations. In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. For large loan relationships, crop insurance is required when the crops are the Bank’s primary collateral.

1-4 Family Residential. Residential real estate loans are secured by 1-4 family residences and are generally owner-occupied. The Bank generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market area, such as unemployment levels. Repayment can also be impacted by changes in property values of residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Multi-Family Real Estate. Loans secured by multi-family and nonresidential real estate generally have larger balances and involve a greater degree of risk than 1-4 family residential mortgage loans. Of primary concern in multi-family and nonresidential real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers, co-borrowers and loan guarantors of large loan relationships to provide annual financial statements and/or tax returns. In reaching a decision on whether to make a multi-family and nonresidential real estate loan, we consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. We have generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.20x. Environmental surveys and inspections are generally required for large loans.

Nonfarm Nonresidential Real Estate. Nonfarm nonresidential real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Nonfarm nonresidential real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The characteristics of properties securing the Bank’s Nonfarm nonresidential real estate portfolio are diverse, but with geographic location almost entirely in the Bank’s market area. Management monitors and evaluates Nonfarm nonresidential real estate loans based on cash flows of borrowers, geography and risk grade criteria.

Commercial. Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrowers to collect amounts due from its customers.

Consumer. Consumer loans consist of two segments - automobile loans and home equity loans. Automobile loans are generally secured by the automobile being financed or other personal assets. Home equity loans are typically secured by a subordinate interest in 1-4 family residences. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market area, such as unemployment levels, and secondarily on the collateral securing the loan. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.




The allowance for credit losses and Recorded Investment in Financing Receivables at December 31, 2019 and December 31, 2018 is as follows:

December 31, 2019

Multi- 1-4 Family family Nonfarm Construction Farmland Residential Residential nonresidential Commercial Consumer TotalAllowance for loan losses: Beginning Balance 56 450 992 62 1,344 1,772 32 4,708Provision (12) 51 (106) - (368) 389 146 100Charge-offs - - (14) - (212) (1,064) (150) (1,440)Recoveries - - 75 - - - 6 81Ending Balance 44 501 947 62 764 1,097 34 3,449

Ending Balance: Individually evaluated for impairment - - 208 - 41 - - 249

Ending Balance: Collectively evaluated for impairment 44 501 739 62 723 1,097 34 3,200 Loans receivable: Ending balance 13,542 30,207 88,703 9,271 59,716 56,552 10,512 268,503

Ending Balance: Individually evaluated for impairment - 640 2,168 - 1,530 3,508 - 7,846

Ending Balance: Collectively evaluated for impairment 13,542 29,567 86,535 9,271 58,186 53,044 10,512 260,657




December 31, 2018

Multi- 1-4 Family family Nonfarm Construction Farmland Residential Residential nonresidential Commercial Consumer TotalAllowance for loan losses: Beginning Balance 100 395 1,129 53 1,135 1,826 111 4,749 Provision (44) 55 (76) 8 206 (70) (79) -Charge-offs - - (88) 1 (1) (17) (7) (112) Recoveries - - 27 - 4 33 7 71Ending Balance 56 450 992 62 1,344 1,772 32 4,708

Ending Balance: Individually evaluated for impairment - - 71 - 4 - - 75

Ending Balance: Collectively evaluated for impairment 56 450 921 62 1,340 1,772 32 4,633 Loans receivable: Ending balance 15,167 25,308 90,780 8,502 53,601 53,222 9,653 256,233

Ending Balance: Individually evaluated for impairment - 281 2,760 - 1,141 2,233 - 6,415

Ending Balance: Collectively evaluated for impairment 15,167 25,027 88,020 8,502 52,460 50,989 9,653 249,818




Credit Risk Profile CategoriesThe Corporation assigns credit risk grades to evaluated loans using grading standards employed by regulatory agencies. The following are the Bank’s internally assigned grades:

Pass. Loans in this category carry lower-risk attributes and currently have a minimal likelihood of loss. These loans represent the Corporation’s standard or average loans that require a normal amount of supervision.

Special mention. Assets in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential 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 the institution to sufficient risk to warrant adverse classification.

Substandard. An asset classified substandard is protected inadequately by the current net worth and paying capacity of the obligor, or by the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Any loan 90 days past due will automatically be classified substandard.

Doubtful. An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.




The following table summarizes the credit risk profile by internally assigned grade at December 31, 2019 and December 31, 2018:

December 31, 2019

Multi- 1-4 Family family Nonfarm Construction Farmland Residential Residential nonresidential Commercial Consumer TotalGrade:

Pass 13,542 28,921 86,815 8,769 55,752 51,452 10,422 255,673 Special mention - 646 1,263 502 3,480 1,950 82 7,923 Substandard - 640 625 - 484 3,150 8 4,907Doubtful - - - - - - - -Total 13,542 30,207 88,703 9,271 59,716 56,552 10,512 268,503

December 31, 2018

Multi- 1-4 Family family Nonfarm Construction Farmland Residential Residential nonresidential Commercial Consumer TotalGrade:

Pass 15,143 23,903 88,526 7,945 50,566 51,353 9,571 247,007Special mention 24 143 1,182 557 2,286 411 80 4,683Substandard - 1,262 1,072 - 749 1,458 2 4,543Doubtful - - - - - - - -Total 15,167 25,308 90,780 8,502 53,601 53,222 9,653 256,233




The following tables summarize loans by delinquency and nonaccrual status at December 31, 2019 and December 31, 2018:

December 31, 2019

Recorded 30-89 Over 90 Investment Days Days Total Total 90 Days and Past Due Past Due Past Due Current Loans Nonaccrual Accruing

Real Estate: Construction 20 - 20 13,522 13,542 - -Farmland - 199 199 30,008 30,207 199 -1-4 family residential 658 209 867 87,836 88,703 162 47Multi-family residential - - - 9,271 9,271 - -Nonfarm nonresidential 293 243 536 59,180 59,716 243 -

Commercial 1,622 86 1,708 54,844 56,552 86 -Consumer 32 - 32 10,480 10,512 - -Total 2,625 737 3,362 265,141 268,503 690 47

December 31, 2018

Recorded 30-89 Over 90 Investment Days Days Total Total 90 Days and Past Due Past Due Past Due Current Loans Nonaccrual Accruing

Real Estate: Construction - - - 15,167 15,167 - -Farmland 46 243 289 25,019 25,308 243 -1-4 family residential 329 593 922 89,858 90,780 479 114Multi-family residential - - - 8,502 8,502 - -Nonfarm nonresidential 232 372 604 52,997 53,601 372 -

Commercial 14 - 14 53,208 53,222 - -Consumer - - - 9,653 9,653 - -Total 621 1,208 1,829 254,404 256,233 1,094 114




The following tables summarize impaired loans at December 31, 2019 and December 31, 2018:

December 31, 2019

Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized

Loans with no related allowance recorded:Real Estate:

Construction - - - - -Farmland 640 640 - 460 34 1-4 family residential 597 724 - 814 34Multi-family residential - - - - -Nonfarm nonresidential 820 1,019 - 610 30

Commercial 3,508 4,056 - 2,871 201Consumer - - - - - Total 5,565 6,439 - 4,755 299

Loans with an allowance recorded:Real Estate:

Construction - - - - -Farmland - - - - -1-4 family residential 1,571 1,695 208 1,650 78Multi-family residential - - - - -Nonfarm nonresidential 710 757 41 726 39

Commercial - - - - -Consumer - - - - -Total 2,281 2,452 249 2,376 117

Total impaired loans:Real Estate:

Construction - - - - -Farmland 640 640 - 460 341-4 family residential 2,168 2,419 208 2,464 112Multi-family residential - - - - -Nonfarm nonresidential 1,530 1,776 41 1,336 69

Commercial 3,508 4,056 - 2,871 201Consumer - - - - -Total 7,846 8,891 249 7,131 416




The following tables summarize impaired loans at December 31, 2019 and December 31, 2018:

December 31, 2018

Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized

Loans with no related allowance recorded:Real Estate:

Construction - - - - -Farmland 281 327 - 380 41-4 family residential 1,030 1,226 - 1,283 51Multi-family residential - - - - -Nonfarm nonresidential 400 607 - 432 13

Commercial 2,233 2,233 - 2,724 115Consumer - - - - -Total 3,944 4,393 - 4,819 183

Loans with an allowance recorded:Real Estate:

Construction - - - - -Farmland - - - - -1-4 family residential 1,730 1,790 71 1,761 80Multi-family residential - - - - -Nonfarm nonresidential 741 741 4 781 37

Commercial - - - 723 -Consumer - - - - -Total 2,471 2,531 75 3,265 117

Total impaired loans:Real Estate:

Construction - - - - -Farmland 281 327 - 380 41-4 family residential 2,760 3,016 71 3,044 131Multi-family residential - - - - -Nonfarm nonresidential 1,141 1,348 4 1,213 50

Commercial 2,233 2,233 - 3,447 115Consumer - - - - -Total 6,415 6,924 75 8,084 300




If a borrower is experiencing financial difficulty, the Bank may consider, in certain circumstances, modifying the terms of their loan in a troubled debt restructuring (TDR) to maximize collection of amounts due. Within each of the Bank’s loan classes, TDRs typically involved either a reduction of the stated interest rate of the loan or an extension of the loan’s maturity date(s) with a stated rate lower than the current market rate for a new loan with similar risk. Modifying the terms of loans may result in an increase or decrease in the Allowance for Loan and Lease Losses (ALLL) depending upon the terms modified, the method used to measure the ALLL for a loan prior to modification, and whether any charge-offs were recorded on the loan before or at the time of modification.

At December 31, 2019 and 2018, the Bank had $5.1 million and $6.4 million in TDRs, respectively.

During the year ended December 31, 2019, the Bank had 2 new TDR’s totaling $72,000. The recorded investment totaled $72,000 at the time of restructure and $72,000 at December 31, 2019. Of the 2 new troubled debt restructurings in 2019, both were maturity extensions. During the year ended December 31, 2018, the Bank did not have any new TDR’s.

The Bank considers TDRs that become 90 days past due under the modified terms in the year following restructuring as subsequently defaulted. There were no such instances of subsequently defaulted TDR’s in 2019 or 2018. The Bank’s lending efforts have historically focused on 1-4 family residential and nonfarm nonresidential real estate, which comprised approximately $148.4 million, or 55%, of the total loan portfolio at December 31, 2019, and $144.4 million, or 56%, of the total loan portfolio at December 31, 2018. The vast majority of these loans have been underwritten on the basis of no more than a 90% loan-to-value ratio, which has historically provided the Bank with adequate collateral coverage in the event of default. The Bank, as with any lending institution, is subject to the risk that real estate values could deteriorate in its primary lending area of southeast Indiana, thereby impairing collateral values.

In the normal course of business, the Bank has made loans to its directors, officers and their related business interests. In the opinion of management, such loans are consistent with sound lending practices and are within applicable regulatory lending limitations. Loans to officers and directors totaled approximately $1,100,000 and $1,635,000 at December 31, 2019 and 2018, respectively. Activity regarding loans to officers and directors during the year ended December 31, 2019 consisted of $31,000 in net advances and $566,000 in repayments to the Bank.

The Bank has sold whole loans and participating interests in loans in the secondary market, generally retaining servicing on the loans sold. Loans sold and serviced for others totaled approximately $148.1 million and $142.4 million at December 31, 2019 and 2018, respectively.



NOTE D - OFFICE PREMISES AND EQUIPMENT

Office premises and equipment, including construction in process, is comprised of the following at December 31:

2019 2018 (In thousands)

Land $ 1,864 $ 1,408Buildings and improvements 5,934 5,948Furniture and equipment 3,514 3,330 11,312 10,686Less accumulated depreciation and amortization (5,511) (5,150)

$ 5,801 $ 5,536

NOTE E - LEASE

During 2019, the Corporation adopted ASU No. 2016-02, “Leases (Topic 842),” which requires leases with durations greater than twelve months to be recognized on the balance sheet. The Corporation adopted the standard using the modified retrospective approach with an effective date as of the beginning of 2019. Prior year consolidated financial statements were not recast under the new standard and, therefore, those amounts are not presented below or in the consolidated statement of financial position. The Corporation elected the package of transition provisions available for expired or existing contracts, which allowed the carryforward of historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.

The Bank has an operating lease for a parcel of land upon which a branch office was constructed. As the term is greater than twelve months, the related asset and obligation are recorded at the present value of lease payments over the term. The lease includes a rental escalation clause and a termination option that are factored into the determination of lease payments as appropriate. The lease does not provide a readily determinable implicit rate. Therefore, the incremental borrowing rate is estimated to discount the lease payments based on information available at lease commencement. There are no forms of residual value guarantees with the leased asset or variable interest with the lessor.

The lease agreement has a fixed payment schedule until it expires March 14, 2027. The remaining term is 7.25 years and the discount rate used is 2.25% which is based on the Corporation’s incremental borrowing rate. As of January 1, 2019, a

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