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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2023

OR

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 000-56602

Graphic

PFS Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

92-2956265

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification Number)

1730 Fourth Street, Peru, Illinois

61354

(Address of Principal Executive Offices)

(Zip Code)

(815) 223-4300

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

Title of each class

    

Trading symbol(s)

    

Name of each exchange on which registered

Common Stock     

PFSB

OTC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES NO

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

1,725,000 shares of the registrant’s common stock, par value $0.01 per share, were issued and outstanding as of November 8, 2023.

Table of Contents

PFS Bancorp, Inc.

Form 10-Q

Index

    

    

Page

Part I. – Financial Information

F-1

Item 1.

Financial Statements

F-1

Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022

F-1

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)

F-2

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)

F-3

Consolidated Statements of Equity Capital for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)

F-4

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (unaudited)

F-5

Notes to Consolidated Financial Statements (unaudited)

F-6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

3

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

15

Item 4.

Controls and Procedures

15

Part II. – Other Information

15

Item 1.

Legal Proceedings

15

Item 1A.

Risk Factors

15

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

15

Item 3.

Defaults upon Senior Securities

15

Item 4.

Mine Safety Disclosures

15

Item 5.

Other Information

15

Item 6.

Exhibits

16

Signature Page

17

1

Table of Contents

EXPLANATORY NOTE

PFS Bancorp, Inc. (the “Company,” “we” or “us”) was incorporated on February 23, 2023, to serve as the savings and loan holding company for Peru Federal Savings Bank (“Peru Federal” or the “Bank”) in connection with the Bank’s proposed conversion from the mutual form of organization to the stock form of organization. As of September 30, 2023, the conversion had not been completed and the Company had no assets or liabilities and had not conducted any business activities other than organizational activities. Accordingly, financial statements, and related notes, and other financial information included in this report relates primarily to the Bank.

The unaudited consolidated financial statements and other financial information contained in this report should be read in conjunction with the audited consolidated financial statements, and related notes, of the Bank as of and for each of the years ended December 31, 2022 and 2021, contained in the Company’s definitive prospectus dated August 11, 2023, as filed with the Securities and Exchange Commission on August 21, 2023.

2

Table of Contents

Part I. – Financial Information

Item 1.

Financial Statements

Peru Federal Savings Bank

Consolidated Balance Sheets

September 30, 2023 (Unaudited) and December 31, 2022

(In thousands)

    

September 30, 

December 31, 

 

2023

    

2022

Assets

Cash and cash equivalents — cash and due from bank

$

35,776

$

12,651

Available-for-sale debt securities

 

56,309

 

63,329

Held-to-maturity debt securities

 

9,457

 

3,146

Equity securities

 

100

 

88

Loans, net of allowance for credit/loan losses of $651 and $543 at September 30, 2023 and December 31, 2022

 

88,582

 

84,916

Premises and equipment, net of accumulated depreciation of $2,716 and $2,608 at September 30, 2023 and December 31, 2022

 

2,066

 

2,150

Federal Home Loan Bank stock

 

347

 

347

Interest receivable

 

511

 

592

Cash surrender value of bank-owned life insurance

 

3,852

 

3,783

Deferred income taxes

 

2,392

 

1,956

Mortgage servicing rights

 

315

 

315

Income tax receivable

 

30

 

98

Other

 

2,204

 

763

Total assets

$

201,941

$

174,134

Liabilities and Equity Capital

 

 

Liabilities

 

  

 

  

Deposits

 

  

 

  

Demand

$

40,358

$

17,248

Savings, NOW and money market

 

76,555

 

87,120

Time

 

63,367

 

48,339

Total deposits

 

180,280

 

152,707

Deferred compensation

 

890

 

687

Income tax payable

 

201

 

Interest payable and other liabilities

 

677

 

601

Total liabilities

 

182,048

 

153,995

Equity Capital

 

  

 

  

Retained earnings

 

24,510

 

23,828

Accumulated other comprehensive income (loss)

 

(4,617)

 

(3,689)

Total equity capital

 

19,893

 

20,139

Total liabilities and equity capital

$

201,941

$

174,134

See Notes to Consolidated Financial Statements

F-1

Table of Contents

Peru Federal Savings Bank

Consolidated Statements of Income

For the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)

(In Thousands)

    

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

 

September 30, 2023

    

September 30, 2022

September 30, 2023

    

September 30, 2022

Interest and Dividend Income

Loans, including fees

$

963

$

833

$

2,733

$

2,430

Debt securities

 

  

 

 

 

Taxable

 

241

 

220

 

747

 

539

Tax-exempt

 

124

 

133

 

371

 

367

Dividends

 

5

 

3

 

14

 

10

Other

 

345

 

70

 

811

 

123

Total interest and dividend income

 

1,678

 

1,259

 

4,676

 

3,469

Interest Expense

 

  

 

  

 

  

 

  

Deposits

 

517

 

164

 

1,276

 

403

Net Interest Income

 

1,161

 

1,095

 

3,400

 

3,066

Provision for Credit Losses

 

71

 

65

 

83

 

71

Net Interest Income After Provision for Credit Losses

 

1,090

 

1,030

 

3,317

 

2,995

Noninterest Income

 

  

 

  

 

  

 

  

Commission income

 

5

 

12

 

14

 

24

Customer service fees

 

108

 

94

 

300

 

268

Net realized gain on loan sales

 

2

 

2

 

6

 

22

Loan servicing fees

 

19

 

20

 

56

 

59

Other

 

49

 

24

 

113

 

84

Total noninterest income

 

183

 

152

 

489

 

457

Noninterest Expense

 

  

 

  

 

  

 

  

Salaries and employee benefits

 

510

 

482

 

1,683

 

1,440

Occupancy

 

64

 

60

 

195

 

180

Depreciation

 

38

 

36

 

112

 

109

Data processing

 

137

 

124

 

401

 

365

Professional fees

 

34

 

25

 

143

 

74

Marketing

 

37

 

33

 

123

 

105

Printing and office supplies

 

17

 

16

 

55

 

49

Foreclosed assets, net

 

3

 

 

4

 

Deposit insurance premiums

 

36

 

34

 

103

 

104

Other

 

27

 

35

 

109

 

104

Total noninterest expense

 

903

 

845

 

2,928

 

2,530

Income Before Income Taxes

 

370

 

337

 

878

 

922

Provision for Income Taxes

 

70

 

78

 

156

 

187

Net Income

$

300

$

259

$

722

$

735

See Notes to Consolidated Financial Statements

F-2

Table of Contents

Peru Federal Savings Bank

Consolidated Statements of Comprehensive Income (Loss)

For the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)

(In Thousands)

    

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

September 30, 2023

    

September 30, 2022

September 30, 2023

    

September 30, 2022

Net Income

$

300

$

259

$

722

$

735

Other Comprehensive Income (Loss)

 

  

 

  

 

  

 

  

Unrealized losses on available-for-sale debt securities, net of taxes of $(293) and $(277) the three months ended September 30, 2023 and 2022, respectively and $(371) and $(1,933) for the nine months ended September 30, 2023 and 2022, respectively

 

(734)

 

(695)

 

(928)

 

(4,850)

Other comprehensive income (loss)

 

(734)

 

(695)

 

(928)

 

(4,850)

Comprehensive Income (Loss)

$

(434)

$

(436)

$

(206)

$

(4,115)

See Notes to Consolidated Financial Statements

F-3

Table of Contents

Peru Federal Savings Bank

Consolidated Statements of Equity Capital

For the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)

(In Thousands)

For the three months ended September 30:

    

    

Accumulated 

    

Other 

Retained 

Comprehensive 

Earnings

Income (loss)

Total

Balance, June 30, 2022

$

23,473

$

(3,712)

$

19,761

Net income

 

259

 

 

259

Other comprehensive loss

 

 

(695)

 

(695)

Balance, September 30, 2022

 

23,732

 

(4,407)

 

19,325

Balance, June 30, 2023

$

24,210

$

(3,883)

$

20,327

Net income

 

300

 

 

300

Other comprehensive loss

 

 

(734)

 

(734)

Balance, September 30, 2023

$

24,510

$

(4,617)

$

19,893

For the nine months ended September 30, 2023

    

    

Accumulated 

    

Other 

Retained 

Comprehensive 

Earnings

Income (loss)

Total

Balance, December 31, 2021

$

22,997

$

443

$

23,440

Net income

 

735

 

 

735

Other comprehensive loss

 

 

(4,850)

 

(4,850)

Balance, September 30, 2022

 

23,732

 

(4,407)

 

19,325

Balance, December 31, 2022

$

23,828

$

(3,689)

$

20,139

Net income

 

722

 

 

722

Adoption of ASC No. 2016-13, Financial Instruments-Credit Losses (Topic 326), net of taxes of $15.

(40)

(40)

Other comprehensive loss

 

 

(928)

 

(928)

Balance, September 30, 2023

$

24,510

$

(4,617)

$

19,893

See Notes to Consolidated Financial Statements

F-4

Table of Contents

Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2023 and 2022 (Unaudited)
(In Thousands)

    

2023

    

2022

Operating Activities

  

  

Net income

$

722

$

735

Items not requiring (providing) cash

  

  

Depreciation

112

109

Provision for credit losses

83

71

Amortization of premiums and discounts on available-for-sale debt securities

352

743

Deferred income taxes

(51)

(23)

Change in fair value of equity securities

(12)

(9)

Net realized gain on loan sales

(6)

Loss on sale of premises and equipment

4

Earnings on cash surrender value of life insurance

(69)

(65)

Changes in

  

Interest receivable

81

(13)

Other assets and income tax receivable

(1,377)

(58)

Interest payable and other liabilities

480

41

Net cash provided by operating activities

319

1,531

Investing Activities

  

  

Purchases of available-for-sale debt securities

(12,433)

Proceeds from maturities of available-for-sale debt securities

5,378

10,835

Purchase of held-to-maturity debt securities

(6,850)

(494)

Proceeds from maturities of held-to-maturity debt securities

535

811

Net change in loans

(3,798)

(4,028)

Purchase of premises and equipment

(32)

(24)

Purchase of FHLB stock

(17)

Net cash used in investing activities

(4,767)

(5,350)

Financing Activities

  

  

Net increase (decrease) in demand deposits, money market,

  

  

NOW and savings accounts

15,028

(932)

Net decrease in certificates of deposit

12,545

566

Repayment of Federal Home Loan Bank advance

(5,000)

Net cash provided by (used in) financing activities

27,573

(5,366)

Increase (Decrease) in Cash and Cash Equivalents

23,125

(9,185)

Cash and Cash Equivalents, Beginning of Year

12,651

21,542

Cash and Cash Equivalents, End of Year

$

35,776

$

12,357

Supplemental Cash Flows Information

  

  

Interest paid

$

1,295

$

388

Income taxes paid

$

(24)

$

231

See Notes to Consolidated Financial Statements

F-5

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Peru Federal Savings Bank (“Bank”) is a federal chartered mutual savings bank. The Bank is primarily engaged in providing a full range of banking and financial services to individual and corporate customers in northern Illinois, primarily LaSalle County, from its two facilities located in Peru, Illinois. The Bank is subject to competition from other financial institutions. The Bank is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

Principles of Consolidation

The consolidated financial statements include the accounts of the Bank and its wholly-owned subsidiary, PFSB Financial Services Inc. (“PFSB”). PFSB was inactive in 2021, 2022 and 2023. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses, mortgage servicing rights, and fair values of financial instruments.

Cash Equivalents

The Bank considers all liquid investments with original maturities of three months or less to be cash equivalents. At September 30, 2023 and December 31, 2022, cash equivalents consisted of due from bank accounts.

At September 30, 2023 and December 31, 2022, the Bank’s cash accounts exceeded federally insured limits by $2,790 and $1,869, respectively.

Debt Securities

Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

For debt securities with fair value below amortized cost when the Bank does not intend to sell a debt security, and it is more likely than not the Bank will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income (loss). For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income (loss) for the noncredit portion of a previous other-than- temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

F-6

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Equity Securities

The Bank measures equity securities at fair value with changes in fair value recognized in net income. Gains and losses on the sale of equity securities are recorded on the trade date and are determined using the specific identification method.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded on the statements of income.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, and for loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of direct origination costs are recognized as income or expensed when received or incurred since capitalization of these fees and costs would not have a significant impact on the consolidated financial statements.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The Bank maintains lending policies and procedures designed to focus lending efforts on the type, location, and duration of loans most appropriate for its business model and markets. The Bank’s principal lending activity is the origination of residential and commercial real estate loans, commercial loans, and consumer loans. The primary lending market is in LaSalle County, Illinois. Generally, loans are collateralized by assets of the borrower and guaranteed by the principals of the borrowing entity.

The Board of Directors reviews and approves the Bank’s lending policy on an annual basis. Quarterly, the Board Loan Committee reviews the allowance for loan losses and reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans.

Allowance for Loan Losses

The allowance for loan losses (“allowance”) represents management’s estimate of the reserve necessary to adequately account for probable losses that could ultimately be realized from current loan exposures. In determining the adequacy of the allowance, management relies predominately on a disciplined credit review and approval process. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

F-7

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Residential 1-4 Family Real Estate: The residential 1-4 family real estate are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial Real Estate: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Construction and Land Development Real Estate: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate

F-8

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

changes, general economic conditions, and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. Commercial business loans also include Small Business Administration (SBA) Paycheck Protection Program (PPP) loans which are covered by a 100% government guaranty. As of September 30, 2023 and December 31, 2022, the Bank had PPP loans outstanding that totaled $0 and $0, respectively.

Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.

Premises and Equipment

Land is carried at cost. Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets.

The estimated useful lives for each major depreciable classification of premises and equipment are as follows:

Buildings and improvements

    

5-50 years

 

Equipment 

   3-7 years

Federal Home Loan Bank Stock

Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.

Bank-owned Life Insurance

The Bank has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Mortgage Servicing Rights

Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale or securitization of loans originated by the Bank are initially measured at fair value at the date of transfer. The Bank has elected to initially and subsequently measure the mortgage servicing rights for consumer mortgage loans using the fair value method. Under the fair value method, the servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in earnings in the period in which the changes occur.

Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to

F-9

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change and may have an adverse impact on the value of the mortgage servicing right and may result in a reduction to noninterest income.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned in loan servicing fees in non-interest income.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Income Taxes

The Bank accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Bank determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to the management’s judgment. With a few exceptions, the Bank is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2019.

The Bank recognizes interest and penalties on income taxes as a component of income tax expense.

The Bank files consolidated income tax returns with its subsidiary.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on available-for-sale securities and reclassification adjustment for realized losses included in net income.

F-10

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Revenue Recognition

The majority of the Bank’s revenues come from interest income and other sources, including loans and securities, which are outside the scope of Financial Accounting Standards Board Accounting Standards Update 2014-09, Revenues from Contracts with Customers (Topic 606). The Bank’s services that fall within the scope of Topic 606 are presented within noninterest income in the accompanying consolidated statements of income and are recognized as revenue as the Bank satisfies its obligation to the customer.

A description of the Bank’s revenue streams accounted for under Topic 606 are as follows:

Customer service fees. The Bank generates revenues through fees charged to depositors related to deposit account maintenance fees, overdrafts, interchange income, wire transfers and additional miscellaneous services provided at the request of the depositor. For deposit-related services, revenue is recognized when performance obligations are satisfied, which is, generally, at a point in time.

Commission Income. Brokerage commissions and fees primarily relate to investment advisory and brokerage activities as well as the sale of other non-deposit investment products to customers of the Bank. The Banks’s performance obligation for investment advisory services is generally satisfied, and related revenue recognized, over the period in which the services are provided. Fees earned for brokerage activities, such as facilitating securities transactions, are generally recognized at the time of transaction execution. Commissions or fees earned on the sale of other non-deposit investment products are primarily recognized on a monthly basis based on the executed sales dates. Payment for these services is generally received shortly after month end.

Gains/Losses on Sales of Foreclosed Assets. The Bank records a gain or loss from the sale of foreclosed assets when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Bank finances the sale of foreclosed assets to the buyer, the Bank assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Bank adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

Rate Lock Commitments

The Bank enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitment). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Rate lock commitments are recorded only to the extent of fees received since recording the estimated fair value of these commitments would not have a significant impact on the financial statements.

Off-Balance-Sheet Instruments

In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments, including commitments to extend credit, unfunded commitments under lines of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.

Legal Contingencies

Various legal claims arise from time to time in the normal course of business. In the opinion of management, any liability resulting from such proceedings would not have a material impact on the financial statements of the Bank.

F-11

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Advertising

Advertising costs are expensed as incurred.

Recently Adopted Accounting Standards

The Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The ASU introduces a new credit loss model, the current expected credit loss model (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk.

The CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities, and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. For available for-sale securities where fair value is less than cost, credit-related impairment, if any, will be recognized in an allowance for credit losses and adjusted each period for changes in expected credit risk. This model replaces the multiple existing impairment models, which generally require that a loss be incurred before it is recognized. The new standard is effective for interim and annual periods beginning after December 15, 2022.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for troubled debt restructurings by creditors, while enhancing disclosure requirements by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses. The Bank adopted ASU 2016-13 and ASU 2022-02 as of January 1, 2023 using the weighted-average remaining maturity (WARM) method. The adoption of ASU 2016-13 resulted in an initial increase of $55 to the allowance for credit losses for loans. The cumulative effect adjustment, net of taxes of $15, of $40 was recorded in retained earnings as of January 1, 2023.

Note 2:  Restriction on Cash and Due From Banks

Effective March 12, 2021, the Federal Reserve’s board of directors approved the final rule reducing the required reserve requirement ratios to zero percent, effectively eliminating the requirement to maintain reserve balances in cash or on deposit with the Federal Reserve Bank. This reduction in the required reserves does not have a defined timeframe and may be revised by the Federal Reserve’s board in the future.

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Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Note 3:  Debt Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of debt securities are as follows:

Gross 

Gross  

Amortized  

Unrealized 

Unrealized  

    

Cost

    

Gains

    

Losses

    

Fair Value

Available-for-sale Debt Securities:

  

  

  

  

September 30, 2023:

  

  

  

  

U.S Government and federal agencies

$

5,574

$

$

(338)

$

5,236

Mortgage-backed:

 

  

 

  

 

  

 

  

Government sponsored enterprises (GSEs)- residential

 

36,813

 

10

 

(4,679)

 

32,144

State and political subdivisions

 

20,378

 

2

 

(1,451)

 

18,929

$

62,765

$

12

$

(6,468)

$

56,309

Gross 

Gross  

Amortized  

Unrealized 

Unrealized  

    

Cost

    

Gains

    

Losses

    

Fair Value

Available-for-sale Debt Securities:

  

  

  

  

December 31, 2022:

  

  

  

  

U.S Government and federal agencies

$

5,532

$

$

(205)

$

5,327

Mortgage-backed:

 

  

 

  

 

  

 

  

Government sponsored enterprises (GSEs)- residential

 

42,224

 

4

 

(4,004)

 

38,224

State and political subdivisions

 

20,730

 

12

 

(964)

 

19,778

$

68,486

$

16

$

(5,173)

$

63,329

Gross 

Gross  

Amortized  

Unrealized 

Unrealized 

    

Cost

    

Gains

    

 Losses

    

Fair Value

Held-to-maturity Debt Securities:

September 30, 2023

  

  

  

  

U.S Government and Federal agencies

$

881

$

$

(164)

$

717

Mortgage-backed:

 

  

 

  

 

  

 

  

GSE residential

 

 

 

 

Certificates of Deposit

 

8,576

 

29

(30)

 

8,575

$

9,457

$

29

$

(194)

$

9,292

Held-to-maturity Debt Securities:

 

  

 

  

 

  

 

  

December 31, 2022

 

  

 

  

 

  

 

  

U.S Government and Federal agencies

$

917

$

$

(143)

$

774

Mortgage-backed:

 

  

 

  

 

  

 

  

GSE residential

 

5

 

 

 

5

Certificates of Deposit

 

2,224

 

 

(31)

 

2,193

$

3,146

$

$

(174)

$

2,972

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Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

The amortized cost and fair value of available-for-sale securities and held-to-maturity debt securities at September 30, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Available-for-sale

Held-to-maturity

Amortized

Fair

Amortized

Fair

    

 Cost

    

 Value

    

 Cost

    

 Value

Within one year

$

435

$

433

$

1,228

$

1,221

One to five years

 

7,686

 

7,255

 

7,348

 

7,354

Five to ten years

 

9,275

 

8,616

 

 

After ten years

 

8,556

 

7,861

 

 

 

25,952

 

24,165

 

8,576

 

8,575

Mortgage-backed securities

 

36,813

 

32,144

 

881

 

717

Totals

$

62,765

$

56,309

$

9,457

$

9,292

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $11,774 at September 30, 2023 and $11,580 at December 31, 2022.

There were no sales of securities for the three and nine months ended September 30, 2023 and 2022.

Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2023 and December 31, 2022, was $55,486 and $58,764. At September 30, 2023, 259 debt securities have unrealized losses with aggregate depreciation of 9.5% from the Bank’s amortized cost basis. At December 31, 2022, 243 debt securities have unrealized losses with aggregate depreciation of 8.2% from the Bank’s amortized cost basis. These unrealized losses relate principally to the changes in interest rates and are not due to changes in the financial condition of the issuer, the quality of the underlying assets, or applicable credit enhancements. In analyzing whether unrealized losses on debt securities are other than temporary, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, the financial condition and performance of the issuer, and the quality of any underlying assets or credit enhancements. Since management has the ability to hold debt securities for the foreseeable future, no declines are deemed to be other than temporary.

Management has evaluated the Bank’s held-to-maturities securities unrealized losses and have concluded that no anticipated credit losses are expected and therefore no reserve for losses related to held-to-maturity securities has been included in the banks allowance for credit losses.

The following table shows the Bank’s investments’ gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment class and length of

F-14

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

time that individual securities have been in a continuous unrealized loss position at September 30, 2023 and December 31, 2022:

September 30, 2023

Less than 12 Months

    

12 Months or More

    

Total

Fair

Unrealized

Fair 

Unrealized

Fair 

Unrealized

    

 Value

    

 Losses

    

Value

    

 Losses

    

Value

    

 Losses

Available-for-sale Debt Securities:

  

  

  

  

  

  

U.S. Government and federal agencies

$

2,127

$

(106)

$

3,109

$

(232)

$

5,236

$

(338)

State and political subdivisions

 

9,540

 

(309)

 

9,254

 

(1,142)

 

18,794

 

(1,451)

Mortgage backed securities-GSE  residential

 

937

 

(14)

 

30,519

 

(4,665)

 

31,456

 

(4,679)

Total temporarily impaired AFS securities

$

12,604

$

(429)

$

42,882

$

(6,039)

$

55,486

$

(6,468)

Held-to-maturity Debt

 

  

 

  

 

  

 

  

 

  

 

  

(HTM) Securities:

 

  

 

  

 

  

 

  

 

  

 

  

Certificates of Deposit

$

2,923

$

(16)

 

1,219

 

(14)

$

4,142

$

(30)

U.S. Government and federal agencies

 

 

$

717

$

(164)

$

717

$

(164)

Total temporarily impaired HTM securities

$

2,923

$

(16)

$

1,936

$

(178)

$

4,859

$

(194)

Total temporarily impaired securities

$

15,527

$

(445)

$

44,818

$

(6,217)

$

60,345

$

(6,662)

    

December 31, 2022

Less than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair 

Unrealized

Fair

Unrealized

    

  Value

    

 Losses

    

Value

    

 Losses

    

 Value

    

 Losses

Available-for-sale Debt Securities:

  

  

  

  

  

  

U.S. Government and federal agencies

$

5,327

$

(205)

$

$

$

5,327

$

(205)

State and political subdivisions

 

14,182

 

(720)

 

1,522

 

(244)

 

15,704

 

(964)

Mortgage backed securities-GSE residential

 

17,308

 

(1,155)

 

20,425

 

(2,849)

 

37,733

 

(4,004)

Total temporarily impaired AFS securities

$

36,817

$

(2,080)

$

21,947

$

(3,093)

$

58,764

$

(5,173)

Held-to-maturity Debt

 

  

 

  

 

  

 

  

 

 

  

(HTM) Securities:

 

  

 

  

 

  

 

  

 

  

 

  

Certificates of Deposit

$

1,700

$

(31)

 

 

$

1,700

$

(31)

U.S. Government and federal agencies

 

 

$

774

$

(143)

$

774

$

(143)

Total temporarily impaired HTM securities

$

1,700

$

(31)

$

774

$

(143)

$

2,474

$

(174)

Total temporarily impaired securities

$

38,517

$

(2,111)

$

22,721

$

(3,236)

$

61,238

$

(5,347)

Note 4:    Equity Securities

Equity securities comprised the following as of September 30, 2023 and December 31, 2022 and are included in the consolidated balance sheet:

    

September 30, 

December 31, 

2023

    

2022

Community Development Corp. Stock

$

50

$

50

FHLMC Preferred Stock

 

50

 

38

Total

$

100

$

88

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Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Community Development Corp. Stock is considered an equity security without a readily determinable fair value. The FHLMC Preferred Stock is presented on the balance sheet at fair value. The table below details changes in the carrying amount of the FHLMC Preferred Stock for the nine months ended September 30, 2023 and year ended December 31, 2022.

    

September 30, 

December 31, 

2023

    

2022

Net gain and losses recognized during the period on equity securities

$

12

$

(24)

Less: Net gains and losses recognized during the period on equity securities sold during the period

 

 

Unrealized gains and losses recognized during the period on equity securities still held at the reporting date

$

12

$

(24)

Note 5:    Loans and Allowance for Credit/Loan Losses

Classes of loans at September 30, 2023 and December 31, 2022 include:

    

September 30, 

December 31, 

2023

    

2022

Mortgage loans on real estate

 

  

 

  

Residential 1-4 family

$

62,802

$

61,125

Commercial

 

17,296

 

17,897

Construction and land development

 

1,625

 

1,518

Total mortgage loans on real estate

 

81,723

 

80,540

Commercial loans

 

4,582

 

2,116

Consumer

 

2,928

 

2,803

 

89,233

 

85,459

Less

 

  

 

  

Allowance for credit/loan losses

 

651

 

543

Net loans

$

88,582

$

84,916

Accrued interest on loans totaled $201 and $258 at September 30, 2023 and December 31, 2022, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

The bank participates in the U.S. Department of Agriculture’s Rural Development Section 502 Guaranteed Loan Program. This program assists approved lenders in providing low- and moderate-income households the opportunity to own adequate, modest, decent, safe and sanitary dwellings as their primary residence in eligible rural areas. Eligible applicants may, purchase, build, rehabilitate, or relocate a dwelling in an eligible rural area with 100% financing. The program provides a 90% loan note guarantee to approved lenders in order to reduce the risk of extending 100% loans to eligible rural homebuyers. As of September 30, 2023 and December 31, 2022, the bank held $2.6 million and $2.5 million respectively, of USDA Guaranteed loans in the Residential 1-4 Family portfolio of loans.

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Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

The following tables present the balance in the allowance for credit/loan losses and the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2023 and December 31, 2022:

For the Three Months Ended

September 30, 2023

Mortgage Loans on Real Estate

Construction 

Residential  

and Land 

    

1-4 Family

    

Commercial

    

Development

    

Commercial

Allowance for credit losses:

Balance, beginning of period

$

237

$

287

$

9

$

39

Provision charged to expense

 

7

 

33

 

3

 

20

CECL Adoption Adjustment

Losses charged off

 

 

 

 

Recoveries

 

 

 

 

Balance, end of period

$

244

$

320

$

12

$

59

Allowance for credit losses for unfunded loan commitments

Balance, beginning of period

$

2

$

10

$

8

$

3

Provision charged to expense

 

(1)

8

 

CECL Adoption Adjustment

Losses charged off

Recoveries

Balance, end of period

$

1

$

10

$

16

$

3

    

For the Three Months Ended

September 30, 2023 (Continued)

    

Consumer

    

Total

Allowance for credit losses:

 

  

 

  

Balance, beginning of period

$

15

$

587

Provision charged to expense

 

1

 

64

CECL Adoption Adjustment

Losses charged off

 

 

Recoveries

 

 

Balance, end of year

$

16

$

651

Allowance for credit losses for unfunded loan commitments

Balance, beginning of year

$

$

23

Provision charged to expense

 

 

7

CECL Adoption Adjustment

Losses charged off

 

 

Recoveries

 

 

Balance, end of year

$

$

30

F-17

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

For the Nine Months Ended

September 30, 2023

Mortgage Loans on Real Estate

Construction 

Residential  

and Land 

    

1-4 Family

    

Commercial

    

Development

    

Commercial

Allowance for credit losses:

Balance, beginning of year

$

262

$

218

$

11

$

36

Provision charged to expense

 

1

 

28

 

(5)

 

28

CECL Adoption Adjustment

(19)

74

6

(5)

Losses charged off

 

 

 

 

Recoveries

 

 

 

 

Balance, end of year

$

244

$

320

$

12

$

59

Allowance for credit losses for unfunded loan commitments

Balance, beginning of year

$

$

$

$

Provision charged to expense

 

1

 

10

 

16

 

3

CECL Adoption Adjustment

Losses charged off

Recoveries

Balance, end of year

$

1

$

10

$

16

$

3

For the Nine Months Ended

September 30, 2023 (Continued)

    

Consumer

    

Total

Allowance for credit losses:

 

  

 

  

Balance, beginning of year

$

16

$

543

Provision charged to expense

 

1

 

53

CECL Adoption Adjustment

(1)

55

Losses charged off

 

 

Recoveries

 

 

Balance, end of year

$

16

$

651

Allowance for credit losses for unfunded loan commitments

Balance, beginning of year

$

$

Provision charged to expense

 

 

30

CECL Adoption Adjustment

Losses charged off

 

 

Recoveries

 

 

Balance, end of year

$

$

30

F-18

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

    

For the Three Months Ended

September 30, 2022

Mortgage Loans on Real Estate

Construction  

Residential  

and Land  

    

1-4 Family

    

Commercial

    

Development

    

Commercial

Allowance for loan losses:

Balance, beginning of period

$

258

$

247

$

14

$

37

Provision charged to expense

 

1

 

(16)

 

(2)

 

83

Losses charged off

 

 

 

 

(83)

Recoveries

 

 

 

 

Balance, end of year

$

259

$

231

$

12

$

37

Ending balance: individually evaluated for impairment

$

$

$

$

Ending balance: collectively evaluated for impairment

$

259

$

231

$

12

$

37

Loans:

 

  

 

  

 

  

 

  

Ending balance

$

60,655

$

18,834

$

1,190

$

2,079

Ending balance: individually evaluated for impairment

$

746

$

$

$

Ending balance: collectively evaluated for impairment

$

59,909

$

18,834

$

1,190

$

2,079

    

For the Three Months Ended

September 30, 2022 (Continued)

    

Consumer

    

Total

Allowance for loan losses:

 

  

 

  

Balance, beginning of period

$

16

$

572

Provision charged to expense

 

(1)

 

65

Losses charged off

 

 

(83)

Recoveries

 

 

Balance, end of year

$

15

$

554

Ending balance: individually evaluated for impairment

$

$

Ending balance: collectively evaluated for impairment

$

15

$

554

Loans:

 

  

 

  

Ending balance

$

2,602

$

85,360

Ending balance: individually evaluated for impairment

$

$

746

Ending balance: collectively evaluated for impairment

$

2,602

$

84,614

F-19

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

For the Nine Months Ended

September 30, 2022

Mortgage Loans on Real Estate

Construction  

Residential  

and Land  

    

1-4 Family

    

Commercial

    

Development

    

Commercial

Allowance for loan losses:

Balance, beginning of year

$

252

$

218

$

14

$

67

Provision charged to expense

 

8

 

13

 

(2)

 

53

Losses charged off

 

(1)

 

 

 

(83)

Recoveries

 

 

 

 

Balance, end of year

$

259

$

231

$

12

$

37

Ending balance: individually evaluated for impairment

$

$

$

$

Ending balance: collectively evaluated for impairment

$

259

$

231

$

12

$

37

Loans:

 

  

 

  

 

  

 

  

Ending balance

$

60,655

$

18,834

$

1,190

$

2,079

Ending balance: individually evaluated for impairment

$

746

$

$

$

Ending balance: collectively evaluated for impairment

$

59,909

$

18,834

$

1,190

$

2,079

For the Nine Months Ended

September 30, 2022 (Continued)

    

Consumer

    

Total

Allowance for loan losses:

 

  

 

  

Balance, beginning of year

$

16

$

567

Provision charged to expense

 

(1)

 

71

Losses charged off

 

 

(84)

Recoveries

 

 

Balance, end of year

$

15

$

554

Ending balance: individually evaluated for impairment

$

$

Ending balance: collectively evaluated for impairment

$

15

$

554

Loans:

 

  

 

  

Ending balance

$

2,602

$

85,360

Ending balance: individually evaluated for impairment

$

$

746

Ending balance: collectively evaluated for impairment

$

2,602

$

84,614

The provision for credit losses is determined by the Bank as the amount that is added to ACL accounts to bring the ACL to that, in management's judgement, is necessary to absorb expected credit losses over the lives of the respective financial instruments. The following table presents the components of the provision for credit losses:

Three months ended September 30, 

Nine months ended September 30, 

2023

2022

2023

2022

Provision for credit losses:

Loans

$

64

$

65

$

53

$

71

Unfunded loan commitments

7

-

30

-

Total

$

71

$

65

$

83

$

71

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Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

Credit Quality Indicators

The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. All commercial and land development loans are graded at inception of the loan. Subsequently, analyses are performed on an annual basis and grade changes are made, as necessary. Interim grade reviews may take place if circumstances of the borrower warrant a timelier review. The Bank utilizes an internal asset classification system as a means of reporting problem and potential problem loans. The Bank uses the following definitions for risk ratings:

Pass — Loans classified as pass are well protected by the ability of the borrower to pay or by the value of the asset or underlying collateral.

Special Mention — Loans classified as watch represent loans with the minimum level of acceptable credit risk and servicing requirements and the borrower has the capacity to perform according to the terms and repayment is expected. However, one or more elements of uncertainty exist.

Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified 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.

Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified as 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.

Loss — Loans classified as loss are the portion of the loan that is considered uncollectible so that its continuance as an asset is not warranted. The amount of the loss determined will be charged-off.

F-21

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

The following tables present the amortized cost basis of our loans by credit quality indicator and origination year, at September 30, 2023:

September 30, 2023

Revolving

Lines of

    

2023

    

2022

    

2021

    

2020

    

2019

    

Prior

    

Credit

    

Total

Pass

Residential 1-4 Family

$

5,017

$

10,015

$

8,358

$

16,115

$

6,322

$

15,551

$

801

$

62,179

Commercial Real Estate

2,458

4,200

3,698

1,451

1,593

2,506

15,906

Construction and Land Development

 

1,435

50

140

1,625

Commercial

 

2,976

679

396

118

269

144

4,582

Consumer

 

1,107

733

645

279

115

45

4

2,928

Total Pass

$

12,993

$

15,627

$

13,097

$

18,013

$

8,299

$

18,386

$

805

$

87,220

Special Mention

Residential 1-4 Family

$

$

$

$

$

$

$

$

Commercial Real Estate

670

547

1,217

Construction and Land Development

 

Commercial

 

Consumer

 

Total Special Mention

$

670

$

$

$

$

$

547

$

$

1,217

Substandard

Residential 1-4 Family

$

$

$

$

$

40

$

583

$

$

623

Commercial Real Estate

173

173

Construction and Land Development

 

Commercial

 

Consumer

 

Total Substandard

$

$

$

$

$

40

$

756

$

$

796

Total

$

13,663

$

15,627

$

13,097

$

18,013

$

8,339

$

19,689

$

805

$

89,233

The following table presents the credit risk profile of the Bank’s loan portfolio based on internal rating category and payment activity prior to the adoption of CECL:

December 31, 2022

    

    

Construction  

    

    

Commercial  

and Land  

Real Estate

Development

Commercial

Total

Pass

$

16,905

$

1,518

$

1,868

$

20,291

Special Mention

992

248

1,240

Substandard

 

 

 

 

Doubtful

 

 

 

 

Loss

 

 

 

 

Total

$

17,897

$

1,518

$

2,116

$

21,531

A summary of credit quality indicators, at amortized cost, prior to the adoption of CECL is presented below:

December 31, 2022

    

Residential

    

Consumer

Total

    

Performing

$

60,502

$

2,803

$

63,305

Non-Performing

 

623

 

 

623

Total

$

61,125

$

2,803

$

63,928

F-22

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

The following tables presents gross charge-offs of our loans for each portfolio class, by origination year, that occurred during the nine months ended September 30, 2023. Refer to Note 1 for additional information on our charge-off policy.

For the nine months ended September 30, 2023

    

2023

    

2022

2021

2020

2019

Prior

Revolving Lines of Credit

Total Loans

Residential 1-4 Family

$

$

$

$

$

$

$

$

Commercial Real Estate

 

 

 

Construction and Land Development

Commercial

Consumer

Total current period charge-offs

$

$

$

$

$

$

$

$

The Bank evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during the past year.

The following tables present the Bank’s loan portfolio aging analysis as of September 30, 2023 and December 31, 2022:

    

    

    

Greater 

    

2023

    

    

Total 

    

Total Loans  

30-59 Days 

60-89 Days 

Than 

Total Past 

Loans 

> 90 Days & 

    

Past Due

    

Past Due

    

90 Days

    

Due

    

Current

    

Receivable

    

Accruing

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1-4 family

$

328

$

955

$

191

$

1,474

$

61,328

$

62,802

$

Commercial

 

 

 

 

 

17,296

 

17,296

 

Construction and land development

 

 

 

 

 

1,625

 

1,625

 

Total real estate loans

 

328

 

955

 

191

 

1,474

 

80,249

 

81,723

 

Commercial

 

41

 

 

 

41

 

4,541

 

4,582

 

Consumer

 

31

 

 

3

 

34

 

2,894

 

2,928

 

Total

$

400

$

955

$

194

$

1,549

$

87,684

$

89,233

$

F-23

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

    

    

    

    

    

    

    

Total 

Loans 

2022

Total 

> 90 

30-59 Days 

60-89 Days 

Greater Than 

Total Past 

Loans 

 

Days & 

    

Past Due

    

Past Due

    

90 Days

    

Due

    

Current

    

Receivable

    

Accounting

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1-4 family

$

1,141

$

308

$

75

$

1,524

$

59,601

$

61,125

$

Commercial

 

46

 

 

 

46

 

17,851

 

17,897

 

Construction and land development

 

 

 

 

 

1,518

 

1,518

 

Total real estate loans

 

1,187

 

308

 

75

 

1,570

 

78,970

 

80,540

 

Commercial

 

 

 

 

 

2,116

 

2,116

 

Consumer

 

 

 

 

 

2,803

 

2,803

 

Total

$

1,187

$

308

$

75

$

1,570

$

83,889

$

85,459

$

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings.

Collateral-Dependent Loans

At September 30, 2023, The Bank held loans that were individually evaluated for impairment due to financial difficulties experienced by the borrower and for which the repayment, on the basis of our assessment, is expected to be provided substantially through the sale or operations of the collateral. The ACL for these collateral dependent loans is primarily based on the fair value of the underlying collateral at the reporting date. The following describes the types of collateral that secure collateral dependent loans:

One-to-four family mortgages are primarily secured by first liens on residential real estate.
Commercial real estate loans are primarily secured by office and industrial buildings.
Commercial and industrial loans are primarily secured by accounts receivables, inventory, and equipment.
Home equity loans are primarily secured by titles on automobiles and recreational vehicles.

The table below summarizes collateral dependent loans and the related ACL at September 30, 2023 for which the borrower is experiencing financial difficulty:

Loans

ACL

Residential Real Estate

$ 622

$ -

Commercial Real Estate

156

-

Construction and Land Development

-

-

Commercial

-

-

Consumer

-

-

Total

$ 778

$ -

F-24

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

The following table presents impaired loans, including troubled debt restructurings of $506 as of December 31, 2022, prior to the adoption of CECL:

December 31, 2022

Average

Investment

Interest

Unpaid

in

Interest

Income

Recorded

Principal

Specific

Impaired

Income

Recognized

    

Balance

    

Balance

    

Allowance

    

Loans

    

Recognized

    

Cash Basis

Loans without a specific allowance

  

  

  

  

  

  

Mortgage loans on real estate:

  

  

  

  

  

  

Residential 1-4 family

$

623

$

623

$

$

632

$

23

$

29

Commercial

 

 

 

 

 

 

Construction and land development

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

Loans with a specific allowance

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1-4 family

$

$

$

$

$

$

Commercial

 

 

 

 

 

 

Construction and land development

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

Total

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1-4 family

$

623

$

623

$

$

632

$

23

$

29

Commercial

 

 

 

 

 

 

Construction and land development

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

Total loans

$

623

$

623

$

$

632

$

23

$

29

The following table presents the Bank’s nonaccrual loans at September 30, 2023 and December 31, 2022. This table excludes performing troubled debt restructurings.

    

September 30, 

December 31, 

2023

    

2022

Residential 1-4 family

$

231

$

117

Commercial real estate

 

156

 

Construction and land development

 

 

Commercial

 

 

Consumer

 

 

Total

$

387

$

117

The adoption of ASU 2022-02 eliminated troubled debt restructuring (TDR’s) recognition and measurement guidance, as well as all TDR related disclosures. Refer to Note 1 for additional information. TDRs were loan modifications where concessions were granted to borrowers experiencing financial difficulties. The Company did not modify any loans for

F-25

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

borrowers that are experiencing financial difficulty and did not have any previous modifications that were made during the past 12 months that experienced a payment default during the three and nine months ended September 30, 2023.

At December 31, 2022, the Bank had loans $506,000 of TDRs, of which $0 was on nonaccrual status. There were no loan modifications that were classified as a TDR during the year ended December 31, 2022.

As of September 30, 2023 and December 31, 2022 the Bank did not have any recorded investment of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process.

Note 6: Premises and Equipment

Major classifications of premises and equipment, stated at cost, are as follows:

    

September 30, 

December 31, 

2023

    

2022

Land

$

732

$

732

Buildings and improvements

 

3,021

 

3,015

Equipment

 

1,029

 

1,011

 

4,782

 

4,758

Less accumulated depreciation

 

(2,716)

 

(2,608)

Net premises and equipment

$

2,066

$

2,150

Note 7: Mortgage Servicing Rights

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others was $24,514 and $26,519 at September 30, 2023 and December 31, 2022, respectively.

The following summarizes the activity in mortgage servicing rights measured using the fair value method for the period ended September 30, 2023 and December 31, 2022:

September 30, 

December 31, 

    

2023

    

2022

Fair value as of the beginning of year

$

315

$

199

Additions

 

  

 

  

Servicing obligations that result from asset transfers

 

 

7

Less loans refinanced

 

 

(18)

Changes in fair value due to changes in valuation inputs or assumptions

 

 

127

Fair value at the end of year

$

315

$

315

The estimated fair value of mortgage servicing rights is determined using a valuation model that calculates the present value of expected future servicing and ancillary income, net of expected servicing costs. The model incorporates various assumptions, such as discount rates and prepayment speeds based on market data from independent organizations.

F-26

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Information about the estimated fair value of mortgage servicing rights at September 30, 2023 and December 31, 2022 follows:

    

September 30, 

December 31, 

2023

    

2022

Range of discount rates

 

9.0-11.5

%

9.0-11.5

%

Range of prepayment speeds

 

104-356

104-356

Weighted average default rate

 

1.23

%

1.23

%

Management did not utilize a valuation model to calculate the fair value of mortgage servicing rights at September 30, 2023 but utilized market information to determine fair value.

Note 8:   Time Deposits

Time deposits in denominations of $250 or more were $13,722 on September 30, 2023 and $7,908 on December 31, 2022.

At September 30, 2023, the scheduled maturities of time deposits are as follows:

2023

    

$

18,354

2024

 

32,510

2025

 

5,278

2026

 

5,344

2027

1,472

Thereafter

 

409

$

63,367

Note 9:   Borrowings

Borrowed funds consist of the following at September 30, 2023 and December 31, 2022:

    

September 30, 2023

    

December 31, 2022

Rates

    

Amount

Rates

Amount

Federal Home Loan Bank (FHLB)

 

  

 

  

 

  

 

  

Fixed Rate, fixed term advances

 

0.00

$

 

0.00

%  

$

Total

$

 

$

The Bank has a master contract agreement with the Federal Home Loan Bank that provides for borrowing up to the maximum range of 60-80% of the book value of the Bank’s qualifying loans based on the pledged loan class and range of 90-98% of qualifying investment securities pledged. The FHLB provides both fixed and floating rate advances. Floating rates are based on, but not directly tied to, short-term market rates of interest, such as Secured Overnight Financing Rate (SOFR), federal funds, or treasury bill rates. Advances with call provisions permit the FHLB to request payment beginning on the call date and quarterly thereafter. FHLB advances are subject to a prepayment penalty if they are repaid prior to maturity.

At September 30, 2023, the Bank’s available and unused portion of this borrowing agreement totaled approximately $44.8 million. At December 31, 2022, the Bank’s available and unused portion of this borrowing agreement totaled approximately $46.2 million.

F-27

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

At September 30, 2023, the Bank’s available and unused unsecured line of credit with Banker’s Bank of Wisconsin totaled $4.0 million. At December 31, 2022, the Bank’s available and unused unsecured line of credit with Banker’s Bank of Wisconsin totaled $4.0 million.

Note 10:  Income Taxes

The Bank files income tax returns in the U.S. federal jurisdiction and the State of Illinois. During the years ended December 31, 2022 and 2021, the Bank recognized no interest or penalties.

The provision for income taxes includes these components:

    

September 30, 

    

September 30, 

2023

    

2022

Taxes currently payable

$

221

$

210

Deferred income taxes

 

(65)

 

(23)

Income tax expense

$

156

$

187

A reconciliation of income tax expense at the statutory rate to the Bank’s actual income tax expense is shown below:

   

September 30, 

   

September 30, 

2023

   

2022

Computed at the statutory rate (21%)

$

184

$

205

Increase (decrease) resulting from

 

  

 

  

Tax exempt interest

 

(72)

 

(75)

State tax expense

 

21

 

20

Increase in cash surrender value

 

(14)

 

(14)

Other

 

37

 

51

Actual tax expense

$

156

$

187

The tax effects of temporary differences related to deferred taxes shown on the consolidated balance sheets were:

    

September 30, 

December 31, 

2023

    

2022

Deferred tax assets

 

  

 

  

Allowance for loan losses

$

194

$

155

Deferred compensation

 

254

 

196

Other-than-temporary impairment losses

 

205

 

205

Unrealized loss on available-for-sale securities

 

1,839

 

1,468

Other

 

79

 

87

 

2,571

 

2,111

Deferred tax liabilities

 

  

 

  

Depreciation

 

(73)

 

(49)

FHLB stock dividend

 

(16)

 

(16)

Unrealized gain on available-for-sale securities

 

 

Mortgage servicing rights

 

(90)

 

(90)

 

(179)

 

(155)

Net deferred tax asset (liability)

$

2,392

$

1,956

F-28

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Note 11:  Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), included in equity capital, are as follows:

   

September 30, 

December 31, 

2023

    

2022

Net unrealized gain (loss) on available-for-sale debt securities

$

(6,456)

$

(5,157)

Tax effect

 

1,839

 

1,468

Net-of-tax amount

$

(4,617)

$

(3,689)

Note 12:  Changes in Accumulated Other Comprehensive Income (AOCI) by Component

Amounts reclassified from AOCI and the affected line items in the consolidated statements of income during the nine months ended September 30, 2023 and year ended December 31, 2022 were as follows:

Amounts

Amounts

    

  

Reclassified

Reclassified

from AOCI

from AOCI

Affected Line Item in the

   

September 30, 2023

   

December 31, 2022

   

Statements of Income

Realized losses on available-for-sale debt securities

$

$

(221)

 

Realized loss on sale of

available-for-sale debt securities

Tax effect

 

 

(63)

 

Tax expense

Net reclassification out of AOCI

$

$

(158)

 

Net reclassified amount

Note 13:  Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under U.S. GAAP, regulatory reporting requirements and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustment to regulatory capital not reflected in these consolidated financial statements.

Quantitative measures established by regulatory reporting standards ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined) to risk weighted assets (as defined), common equity Tier I capital (as defined) to total risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).

Management believes, as of September 30, 2023 and December 31, 2022, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2022, the most recent notification from regulatory agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum capital ratios as set forth in the able below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

F-29

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

The Bank’s actual capital amounts and ratios are also presented in the table.

    

    

  

    

  

    

  

    

Minimum to Be Well

 

Capitalized Under

 

Prompt

Minimum Capital

Corrective Action

 

   

Actual

   

Requirement

   

Provisions

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

As of September 30, 2023:

  

  

  

  

  

  

 

Leverage ratio (to average assets)

$

24,510

 

13.3

%  

$

7,372

 

4.0

%  

$

9,215

 

5.0

%

Common Equity Tier 1 (to risk weighted assets)

$

24,510

 

26.2

%  

$

4,206

 

4.5

%  

$

6,076

 

6.5

%

Tier 1 Capital ratio (to risk weighted assets)

$

24,510

 

26.2

%  

$

5,608

 

6.0

%  

$

7,478

 

8.0

%

Total Capital (to risk-weighted assets)

$

25,191

 

26.9

%  

$

7,478

 

8.0

%  

$

9,347

 

10.0

%

As of December 31, 2022:

 

  

 

  

 

  

 

  

 

  

 

  

Leverage ratio (to average assets)

$

23,828

 

13.8

%  

$

6,902

 

4.0

%  

$

8,627

 

5.0

%

Common Equity Tier 1 (to risk weighted assets)

$

23,828

 

28.1

%  

$

3,820

 

4.5

%  

$

5,518

 

6.5

%

Tier 1Capital ratio (to risk-weighted assets)

$

23,828

 

28.1

%  

$

5,093

 

6.0

%  

$

6,791

 

8.0

%

Total Capital (to risk-weighted assets)

$

24,371

 

28.7

%  

$

6,791

 

8.0

%  

$

8,489

 

10.0

%

The net unrealized gain or loss on available-for-sale securities, net of tax is not included in computing regulatory capital.

Note 14: Related Party Transactions

At September 30, 2023 and December 31, 2022, the Bank had loans outstanding to executive officers, directors, significant shareholders, and their affiliates (related parties), in the amount of $1,086 and $1,195, respectively.

Deposits from related parties held by the Bank at September 30, 2023 and December 31, 2022 totaled $1,006 and $934, respectively.

In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features.

A summary of loans to directors, executive officers, and their affiliates as of September 30, 2023 and December 31, 2022 is as follows:

    

September 30, 

December 31, 

2023

    

2022

Beginning balance

$

1,195

$

1,431

New Loans

 

 

Repayments

 

(109)

 

(236)

Ending balance

$

1,086

$

1,195

The Bank’s board approved law firm is Duncan & Brandt, P.C, which is solely owned by the bank’s Vice Chairman Jonathan Brandt. The Bank pays an annual retainer to Duncan & Brandt of $15 and $13 for the three months ended September 30, 2023 and 2022, respectively and $42 and $38 for the nine months ended September 30, 2023 and 2022. In addition to the annual retainer, the firm received various fees for legal services rendered in the normal course of business of

F-30

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

$7 and $4 for the three months ended September 30, 2023 and 2022, respectively and $11 and $14 for the nine months ended September 30, 2023 and 2022.

Note 15: Employee Benefits

The Bank has a retirement savings 401(k) plan covering substantially all employees. Employees may contribute a percentage of their compensation, up to the maximum allowable by the IRS, with the Bank matching 50 percent of the employee’s contribution on the first 5 percent of the employee’s compensation. Employer contributions charged to expense for the three months ended September 30, 2023 and 2022 were $22 and $20, respectively, and for the nine months ended September 30, 2023 and 2022 were $64 and $58, respectively.

Also, the Bank has deferred compensation agreements with directors. The agreements provide for the payment of benefits at termination or retirement. The charge to expense for the agreements was $9 and $3 for the three months ended September 30, 2023 and 2022, respectively, and $24 and $11 for the nine months ended September 30, 2023 and 2022, respectively. The liability accrued for these plans totaled $890 and $687 at September 30, 2023 and December 31, 2022, respectively.

Note 16: Disclosures About Fair Value of Assets

ASC Topic 820, Fair value Measurements and Disclosures defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This accounting standard also emphasizes that fair value (i.e., the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. When considering the assumptions that market participants would use in pricing an asset or liability, this accounting standard establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels:

Level 1

In general, fair values determined by Level 1 inputs use quoted market prices for identical assets or liabilities that the entity can access at measurement date.

 

 

Level 2

Fair Values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in markets, quoted prices for identical or similar assets or liabilities in markets where there are few transactions and inputs other than quoted prices that observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

 

 

Level 3

Unobservable inputs for the asset or liability and included situations where there is little, if any, market activity for the asset or liability.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Bank’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgement and considers factors specific to the asset or liability.

F-31

Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Some assets and liabilities, such as securities available for sale, are measured at fair value on a recurring basis under accounting principles generally accepted in the United States. Other assets and liabilities, such as impaired loans, may be measured at fair value on a nonrecurring basis.

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the nine months ended September 30, 2023 or year ended December 31, 2022.

Equity Securities

Equity securities with a readily determinable fair value are measured at fair value on a recurring basis. The fair value measurement of equity securities with a readily determinable fair value are based on the quoted price of the security and is considered a Level 1 fair value measurement. Equity securities without a readily determinable fair value are measured at fair value on a nonrecurring basis when transaction prices for identical or similar securities are identified. Fair value measurements on equity securities without a readily determinable fair value are generally considered a Level 2 fair value measurement.

Available-for-sale Debt Securities

Securities available for sale may be classified as Level 1, Level 2, or Level 3 measurements within the fair value hierarchy. Level 1 securities included debt securities traded on a national exchange. The fair value measurement of a Level 1 security is based on the quoted price of the security. Level 2 securities include U.S. government and agency securities, obligations of states and political subdivisions, corporate debt securities, and mortgage related securities. The fair value measurement of a Level 2 security is obtained from an independent pricing service and is based on recent sales of similar securities and other observable market data. Level 3 securities include trust preferred securities that are not traded in a market. The fair value measurement of Level 3 securities are determined by the Bank’s Chief Financial Officer (CFO) and reported to the Bank’s board of directors. Fair values are calculated using discounted cash flow models that incorporate various assumptions, including expected cash flows and market credit spreads. When comparable sales are available, these are used to validate the models used. Other available industry data, such as information regarding defaults and deferrals, are incorporated into the expected cash flows.

Mortgage Servicing Rights

Management measures mortgage servicing rights through the completion of a proprietary model. Inputs to the model are developed by the accounting staff and are reviewed by management. The model is tested annually using baseline data to check its accuracy.

Mortgage servicing rights are measured at fair value on a recurring basis. Serviced loan pools are stratified by year of origination, and a fair value measurement is obtained for each stratum from an independent firm. The measurement is based on recent sales of mortgage servicing rights with similar characteristics. Since the fair value measurement is based on observable market data, it is considered a Level 2 measurement.

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Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2023 and December 31, 2022.

Fair Value Measurements Using

Quoted Prices

in

Active

Significant

Markets for

Other

Significant

Identical 

Observable 

Unobservable

Assets

Inputs

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

September 30, 2023:

    

  

    

  

    

  

    

  

Available-for Sale debt securities:

  

  

  

  

U.S. Government and federal agencies

$

5,236

$

1,525

$

3,711

$

Mortgage-backed: GSE - residential

 

32,144

 

 

32,144

 

State and political Subdivision

 

18,929

 

 

18,929

 

Total Available-For-sale debt securities

$

56,309

$

1,525

$

54,784

$

Equity securities:

 

  

 

  

 

  

 

  

FHLMC stock

$

50

$

50

$

$

Mortgage servicing rights

 

315

 

 

315

 

Total

$

56,674

$

1,575

$

55,099

$

December 31, 2022:

 

  

 

  

 

  

 

  

Available-for Sale debt securities:

 

  

 

  

 

  

 

  

U.S. Government and federal agency

$

5,327

$

1,523

$

3,804

$

Mortgage-backed: GSE - residential

38,224

 

 

38,224

 

State and political subdivision

19,778

 

 

19,778

 

Total Available-for-sale debt securities

$

63,329

$

1,523

$

61,806

$

Equity securities:

 

  

 

  

 

  

 

  

FHLMC Stock

$

38

$

38

$

$

Mortgage servicing rights

 

315

 

 

315

 

Total

$

63,682

$

1,561

$

62,121

$

The Bank estimates the fair value of all financial instruments regardless of whether such instruments are measured at fair value. The following methods and assumptions were used by the Bank to estimate fair value of financials instruments not previously discussed.

Cash and cash equivalents — Fair value approximates the carrying value.

Loans — Fair value of variable rate loans that reprice frequently is based on carrying values. Fair value of other loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. Fair value of impaired and other non-performing loans is estimated using discounted expected cash flows or fair value of the underlying collateral, if applicable.

FHLB stock — Fair value is the redeemable (carrying) value based on the redemption provisions of the Federal Home Loan Bank.

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Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Accrued interest receivable and payable — Fair value approximates the carrying value.

Cash surrender value of bank-owned life insurance — Fair value is based on reported values of the assets.

Deposits— Fair value of deposits with no state maturity, such as demand deposits, savings, and money market accounts, by definition, is the amount payable on demand on the reporting date. Fair value of fixed rate time deposits is estimated using discounted cash flows applying interest rates currently being offered on similar time deposits.

The carrying value and estimated fair value of financial instruments follow:

September 30, 2023

    

Carrying Value  

    

Level 1  

    

Level 2  

    

Level 3  

Financial assets:

Cash and cash equivalents

$

35,776

$

35,776

$

$

Available-for-sale securities

 

56,309

 

1,525

 

54,784

 

  

Held-to-maturity securities

 

9,457

 

  

 

9,292

 

  

Equity securities

 

100

 

50

 

50

 

  

Loans

 

88,582

 

  

 

  

 

80,435

Interest receivable

 

511

 

511

 

  

 

  

Federal Home Loan Bank Stock

 

347

 

  

 

  

 

347

Cash surrender value of bank-owned life insurance

 

3,852

 

  

 

  

 

3,852

Financial liabilities:

 

  

 

  

 

  

 

  

Deposits

 

180,280

 

  

 

  

 

147,663

Interest payable

 

2

 

2

 

  

 

  

December 31, 2022

    

Carrying Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

  

 

  

 

  

  

Cash and cash equivalents

$

12,651

$

12,651

$

$

Available-for-sale securities

 

63,329

 

1,523

 

61,806

 

  

Held-to-maturity securities

 

3,146

 

  

 

2,972

 

  

Equity securities

 

88

 

38

 

50

 

  

Loans

 

84,916

 

  

 

  

 

78,986

Interest receivable

 

592

 

592

 

  

 

  

Federal Home Loan Bank Stock

 

347

 

  

 

  

 

347

Cash surrender value of bank-owned life insurance

 

3,783

 

  

 

  

 

3,783

Financial liabilities:

 

  

 

  

 

  

 

  

Deposits

 

152,707

 

  

 

  

 

128,989

Interest payable

 

19

 

19

 

  

 

  

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Table of Contents

Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2023 and December 31, 2022.

Fair Value Measurements Using

Quoted

Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Inputs

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

September 30, 2023:

  

  

  

  

Impaired loans (collateral dependent)

$

$

$

$

December 31, 2022:

 

  

 

  

 

  

 

  

Impaired loans (collateral dependent)

$

$

$

$

During the nine months ended September 30, 2023 and 2022, there were no loans that were considered impaired where a specific valuation allowance was needed.

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Impaired Loans (Collateral Dependent)

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Bank considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the management by comparison to historical results.

Note 17: Commitments, Credit Risk and Contingencies

The Bank grants commercial, residential and consumer loans to customers located primarily in LaSalle County, Illinois. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon economic conditions in this county.

Lines of Credit

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is

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Peru Federal Savings Bank

Notes to the Unaudited Consolidated Financial Statements

(dollar amounts in thousands)

evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate, and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

At September 30, 2023, the Bank had granted unused lines of credit to borrowers aggregating approximately $1,655 and $815 for commercial lines and open-end consumer lines, respectively. At December 31, 2022, the Bank had granted unused lines of credit to borrowers aggregating approximately $2,008 and $931 for commercial lines and open-end consumer lines, respectively.

Note 18: Government Assistance

On October 31, 2012 the Bank entered into a settlement agreement on the foreclosure of the Country Aire Subdivision in LaSalle, IL whereby the Bank assumed the rights and responsibility as the developer of this subdivision. This subdivision was granted a Tax Incremental Financing (TIF) district by the City of LaSalle in 2004. The previous developer did not complete the terms of the TIF agreement, thus the Bank entered into an agreement with the City of LaSalle to meet the requirements of the TIF agreement and then receive the incentives upon completion of all terms of the agreement. The City of LaSalle accepted the subdivision on October 25, 2016. Because the incentives are based on the incremental taxes generated from the sale of the lots and the building of homes the Bank continued to market and sell lots with the final contract in 2019. At December 31, 2019 the Bank had met all the requirements and had all lots sold therefore a TIF receivable was recorded for the estimated value of funds to be received from the City of Lasalle over the remaining term of the TIF district. Each year end the Bank evaluates the TIF receivable based on the 3rd party TIF administrator’s estimated value of homes, their incremental taxes and the developer’s share of the incremental taxes. The receivable for these funds are included in Other Assets on the Consolidated Balance Sheets and changes to the valuation are adjusted through Other Non-interest Income on the Consolidated Statements of Income.

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Table of Contents

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

General

Management’s discussion and analysis is intended to enhance your understanding of our financial condition and results of operations. The financial information in this section is derived from the accompanying consolidated financial statements. You should read the financial information in this section in conjunction with the business and financial information contained in this report and in the Company’s definitive prospectus dated August 11, 2023, as filed with the Securities and Exchange Commission on August 21, 2023.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan portfolio; and
estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not undertake any obligation to update any forward-looking statements after the date of this report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

general economic conditions, either nationally or in our market area, which are worse than expected;
changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan and lease losses;
our ability to access cost-effective funding;
fluctuations in real estate values and in the conditions of the residential real estate, commercial real estate, and agricultural real estate markets;
demand for loans and deposits in our market area;
our ability to implement and change our business strategies;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of our financial instruments, or our level of loan originations, or increase the level of defaults, losses and prepayments within our loan portfolio;

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Table of Contents

adverse changes in the securities markets;
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;
changes in the quality or composition of our loan or investment portfolios;
technological changes that may be more difficult or expensive than expected;
the inability of third-party providers to perform as expected;
a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
our ability to manage market risk, credit risk and operational risk;
our ability to enter new markets successfully and capitalize on growth opportunities;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
our ability to retain key employees; and
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

Summary of Significant Accounting Policies

A summary of our accounting policies is described in Note 1 of the Notes to the Consolidated Financial Statements included in the Company’s S-1, filed March 10, 2023, for the years ended December 31, 2023 and 2022. There have been no material changes to our significant policies described in the Company’s S-1 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Comparison of Financial Condition at September 30, 2023 and December 31, 2022

Total Assets. Total assets increased $27.8 million, or 16.0%, from $174.1 million at December 31, 2022 to $201.9 million at September 30, 2023. The increase was primarily comprised of an increase in cash and cash equivalents of $23.1 million, an increase of $3.7 million in net loans and a $1.4 million increase in other assets related to stock conversion costs.

Cash and Due from Banks. Cash and due from banks increased by $23.1 million, or 183.3%, to $35.8 million at September 30, 2023 compared to $12.7 million at December 31, 2022. This increase was primarily due to funds received from the stock conversion offering.

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Table of Contents

Available-for-Sale Investment Securities. Available-for-sale investment securities decreased by $7.0 million, or 11.1%, to $56.3 million at September 30, 2023 from $63.3 million at December 31, 2022. The decline was a result of principal payments on mortgage-backed securities and collateralized mortgage obligation securities and maturities. There were no purchases of available-for-sale securities during the quarter ended September 30, 2023. The market value adjustment on available-for-sale investment securities decreased by $1.3 million during the nine months ended September 30, 2023 due to rising market interest rates.

Held-to-Maturity Investment Securities. Held-to-maturity investment securities increased by $6.4 million, or 200.6%, from $3.1 million at December 31, 2022 to $9.5 million at September 30, 2023, due to purchases of certificates of deposits during the nine months ended September 30, 2023, with an average yield of 4.92% and a duration of 3.25 years.

Loans, Net. Loans, net, increased $3.7 million, or 4.3%, to $88.6 million at September 30, 2023 compared to $84.9 million at December 31, 2022. One- to four-family residential mortgage loans increased $1.7 million, or 2.7%, from $61.1 million at December 31, 2022 to $62.8 million at September 30, 2023. Commercial real estate loans decreased $2.7 million, or 16.5%, from $16.4 million at December 31, 2022 to $13.7 million at September 30, 2023. Multifamily real estate loans increased $600,000, or 40.0%, from $1.5 million at December 31, 2022 to $2.1 million at September 30, 2023. Farmland loans decreased $118,000, or 7.2%, from $1.6 million at December 31, 2022 to $1.5 million at September 30, 2023. Construction and land development loans increased by $107,000, or 6.7%, from $1.5 million at December 31, 2022 to $1.6 million at September 30, 2023. Commercial loans increased $2.5 million, or 116.5%, from $2.1 million at December 31, 2022 to $4.6 million at September 30, 2023. Consumer loans increased $136,000, or 4.4%, from $2.8 million at December 31, 2022 to $2.9 million at September 30, 2023.

During the nine months ended September 30, 2023, Peru Federal originated $16.0 million in loans represented by $5.9 million in one- to four-family residential mortgage loans, $2.8 million in commercial real estate loans, $3.4 million in construction and land development loans, $2.5 million in commercial loans and $1.4 million in consumer loans.

Deposits. Deposits increased $27.6 million, or 18.1%, from $152.7 million at December 31, 2022 to $180.3 million at September 30, 2023. Non-maturity deposits increased $12.5 million due to the receipt of funds to PFS Bancorp, Inc. during the stock offering. Time deposits increased by $15.0 million as a result of increased market interest rates. The majority of the time deposit increase were into certificates of deposit with maturities of less than one year.

Total Equity Capital. Total equity capital was $19.9 million at September 30, 2023, a decrease of $246,000 or 1.2%, from $20.1 million at December 31, 2022. The decrease is due to the negative change in accumulated other comprehensive income of $928,000 partially offset by a net income from operations of $722,000. Effective January 1, 2023, Peru Federal adopted the ASU 2016-13 Current Expected Credit Losses (CECL) standard resulting in an increase to the allowance for loan losses of $55,000. This adjustment, net of tax, resulted in a negative adjustment of $40,000 to retained earnings.

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Table of Contents

Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects are immaterial. Average balances are daily average balances. Non-accrual loans are included in average balances only. Average yields include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Net deferred loan fees/costs are immaterial.

At 

 

September 30, 

For the Three Months Ended September 30, 

 

2023

2023

2022

 

    

Weighted

    

Average

    

    

    

Average

    

    

 

Average

Outstanding

Average

Outstanding

Average

 

Yield/Rate

Balance

Interest

Yield/Rate

Balance

Interest

Yield/Rate

 

(Dollars in thousands)

Interest-earning assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

 

5.33

%  

$

21,334

$

247

 

4.62

%  

$

12,540

$

57

 

1.83

%

Available-for-sale debt securities

 

2.53

 

58,075

 

360

 

2.48

 

69,070

 

350

 

2.03

Held-to-maturity debt securities

 

4.42

 

9,330

 

103

 

4.41

 

2,735

 

16

 

2.35

Equity securities

 

 

99

 

 

 

122

 

 

Loans, net

 

4.45

 

84,628

 

963

 

4.55

 

84,139

 

833

 

3.96

Federal Home Loan Bank stock

 

 

347

 

5

 

5.30

 

347

 

3

 

3.13

Total interest-earning assets

 

4.04

%  

 

173,813

 

1,678

 

3.86

%  

 

168,953

 

1,259

 

2.98

%  

Noninterest-earning assets

 

  

 

10,537

 

  

 

  

 

9,353

 

  

 

  

Total assets

 

  

$

184,350

 

  

 

  

$

178,306

 

  

 

  

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Regular savings deposits

 

0.09

%  

$

32,501

$

15

 

0.18

%  

$

37,933

$

17

 

0.18

%

NOW savings deposits

 

0.53

 

21,296

 

14

 

0.27

 

26,736

 

8

 

0.12

Money market deposits

 

1.33

 

25,854

 

82

 

1.26

 

30,003

 

49

 

0.66

Time deposits

 

2.84

 

61,397

 

406

 

2.64

 

45,042

 

90

 

0.80

Total interest-bearing deposits

 

1.63

%  

 

141,048

 

517

 

1.46

%  

 

139,714

 

164

 

0.47

%

Federal Home Loan Bank advances

 

 

 

 

 

 

 

Other interest-bearing liabilities

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

1.63

%  

 

141,048

 

517

 

1.46

%  

 

139,714

 

164

 

0.47

%

Noninterest-bearing demand deposits

 

 

21,382

 

  

 

  

 

16,932

 

  

 

  

Other noninterest-bearing liabilities

 

 

1,582

 

  

 

  

 

1,252

 

  

 

  

Total liabilities

 

 

164,012

 

  

 

  

 

157,898

 

  

 

  

Total equity capital

 

 

20,338

 

  

 

  

 

20,408

 

  

 

  

Total liabilities and equity capital

 

$

184,350

 

  

 

  

$

178,306

 

  

 

  

Net interest income

 

  

 

  

$

1,161

 

  

 

  

$

1,095

 

  

Net interest rate spread (1)

 

2.41

%  

 

  

 

  

 

2.40

%  

 

  

 

  

 

2.51

%

Net interest-earning assets (2)

 

  

$

32,765

 

  

 

  

$

29,239

 

  

 

  

Net interest margin (3)

 

  

 

  

 

  

 

2.67%

%  

 

  

 

  

 

2.59%

%

Average interest-earning assets to interest-bearing liabilities

 

  

 

123.23

%  

 

  

 

  

 

120.93

%  

 

  

 

  

(1)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)Net interest margin represents net interest income divided by average total interest-earning assets.

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Table of Contents

Three Months Ended September 30, 2023 vs. 2022

Increase (Decrease) Due to:

Total Increase

    

Volume

    

Rate

    

(Decrease)

(In thousands)

Interest-earning assets:

Cash and cash equivalents

$

41

$

149

$

190

Available-for-sale debt securities

 

(56)

 

66

 

10

Held-to-maturity debt securities

 

39

 

48

 

87

Equity securities

 

 

 

Loans, net

 

5

 

125

 

130

Federal Home Loan Bank stock

 

 

2

 

2

Total interest-earning assets

 

29

 

390

 

419

Interest-bearing liabilities:

 

  

 

  

 

  

Regular savings deposits

 

(2)

 

 

(2)

NOW savings deposits

 

(2)

 

8

 

6

Money market deposits

 

(6)

 

39

 

33

Time deposits

 

33

 

283

 

316

Total deposits

 

23

 

330

 

353

Federal Home Loan Bank advances

 

 

 

Other interest-bearing liabilities

 

 

 

Total interest-bearing liabilities

 

23

 

330

 

353

Change in net interest income

$

6

$

60

$

66

Comparison of Operating Results for the Three Months Ended September 30, 2023 and 2022

General. Net income for the three months ended September 30, 2023 was $300,000, a decrease of $11,000, or 3.5%, compared to $311,000 for the three months ended September 30, 2022.

Interest Income. Interest income for the three months ended September 30, 2023 increased by $419,000, or 33.3%, from $1.3 million for the three months ended September 30, 2022 to $1.7 million for the three months ended September 30, 2023. This increase is a result of a 15.6% increase in loan interest and fees, a 3.4% increase in interest from investments, and an 330.7% increase in interest on cash and cash equivalents.

The average balance of loans during the three months ended September 30, 2023, increased by $489,000, or 0.6%, from the average balance for the three months ended September 30, 2022, while the average yield on loans increased to 4.55% for the three months ended September 30, 2023, from 3.96% for the three months ended September 30, 2022. The increase in average yield on loans was due to the rising interest rate environment.

The average balance of available-for-sale debt securities decreased by $11.0 million, or 15.9%, to $58.1 million for the three months ended September 30, 2023, from $69.1 million for the three months ended September 30, 2022, while the average yield on available-for-sale debt securities increased to 2.48% for the three months ended September 30, 2023, from 2.03% for the three months ended September 30, 2022. This increase in yield resulted from the rising interest rate environment.

The average balance of held-to-maturity debt securities increased by $6.6 million, or 244.4%, to $9.3 million for the three months ended September 30, 2023, from $2.7 million for the three months ended September 30, 2022, while the average yield on held-to-maturity debt securities increased to 4.41% for the three months ended September 30, 2023, from 2.35% for the three months ended September 30, 2022. This increase in yield resulted from the rising interest rate environment.

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Interest Expense. Interest expense for the three months ended September 30, 2023 increased $353,000, or 215.2%, to $517,000 for the three months ended September 30, 2023 from $164,000 for the three months ended September 30, 2022. This increase is a result of the rising rate environment and consumer shift from transactional accounts to higher cost time deposits.

The average balance of regular savings deposits decreased by $5.4 million, or 14.3%, to $32.5 million for the three months ended September 30, 2023, from $37.9 million for the three months ended September 30, 2022, while the average rate on regular savings deposits remained the same at 0.18% for the three months ended September 30, 2022 and September 30, 2023.

The average balance of NOW savings deposits decreased by $5.4 million, or 20.2%, to $21.3 million for the three months ended September 30, 2023, from $26.7 million for the three months ended September 30, 2022, while the average rate on NOW savings deposits increased to 0.27% for the three months ended September 30, 2023, from 0.12% for the three months ended September 30, 2022. This increase in rate resulted from the rising interest rate environment.

The average balance of money market deposits decreased by $4.1 million, or 13.7%, to $25.9 million for the three months ended September 30, 2023, from $30.0 million for the three months ended September 30, 2022, while the average rate on money market deposits increased to 1.26% for the three months ended September 30, 2023, from 0.66% for the three months ended September 30, 2022. This increase in rate resulted from the rising interest rate environment.

The average balance of time deposits increased by $16.4 million, or 36.4%, to $61.4 million for the three months ended September 30, 2023, from $45.0 million for the three months ended September 30, 2022, while the average rate on time deposits increased to 2.26% for the three months ended September 30, 2023, from 0.80% for the three months ended September 30, 2022. This increase in rate resulted from the rising interest rate environment.

Net Interest Income. Net interest income for the three months ended September 30, 2023 was $1.2 million, an increase of $66,000, or 6.0%, from the $1.1 million for the three months ended September 30, 2022. The increase was due to an increase in average net interest earning assets of $3.6 million, or 12.3%, to $32.8 million for the three months ended September 30, 2023, from $29.2 million for the three months ended September 30, 2022 while the net interest rate spread decreased to 2.40% for the three months ended September 30, 2023, from 2.51% for the three months ended September 30, 2022.

Provision for Credit/Loan Losses. The provision for credit/loan losses for the three months ended September 30, 2023, was $49,000 compared to $13,000 for the three months ended September 30, 2022. The allowance for credit/loan losses was $651,000, or 0.73% of total loans, at September 30, 2023, compared to $554,000, or 0.65% of total loans, at September 30, 2022.

Noninterest Income. Noninterest income increased $9,000, or 5.9%, to $161,000 for the three months ended September 30, 2023, compared to $152,000 for the three months ended September 30, 2022. Customer service fee income increased $14,000, loan servicing income decrease by $1,000 while other noninterest income increased by $3,000.

Noninterest Expense. Noninterest expense increased $58,000, or 6.9%, to $903,000 for the three months ended September 30, 2023, from $845,000 for the three months ended September 30, 2022. During the three months ended September 30, 2023, salaries and benefits increased $28,000, data processing expense increased $13,000 and professional fees increased $9,000.

Provision for Income Taxes. The provision for income taxes decreased $8,000, or 10.3%, to $70,000 for the three months ended September 30, 2023, compared to $78,000 for the three months ended September 30, 2022. The decrease was a primarily due to a $19,000, or 4.9%, decrease in pretax income as well adjustments to deferred taxes related to unrealized losses on available-for-sale securities.

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Average Balances and Yields. The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects are immaterial. Average balances are calculated using daily average balances. Non-accrual loans are included in average balances only. Average yields include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Net deferred loan fees/costs are immaterial.

At 

 

September 30, 

For the Nine Months Ended September 30, 

 

2023

2023

2022

 

    

Weighted

    

Average

    

    

    

Average

    

    

 

Average

Outstanding

Average

Outstanding

Average

 

Yield/Rate

Balance

Interest

Yield/Rate

Balance

Interest

Yield/Rate

 

(Dollars in thousands)

Interest-earning assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

 

5.33

%  

$

19,249

$

629

 

4.36

%  

$

18,058

$

88

 

0.65

%

Available-for-sale debt securities

 

2.53

 

60,263

 

1,115

 

2.47

 

70,675

 

900

 

1.70

Held-to-maturity debt securities

 

4.42

 

6,408

 

185

 

3.86

 

2,782

 

42

 

2.01

Equity securities

 

 

92

 

3

 

3.26

 

116

 

2

 

1.72

Loans, net

 

4.45

 

83,909

 

2,733

 

4.34

 

82,719

 

2,429

 

3.92

Federal Home Loan Bank stock

 

 

347

 

11

 

4.14

 

341

 

8

 

3.13

Total interest-earning assets

 

4.04

%  

 

170,268

 

4,676

 

3.66

%  

 

174,691

 

3,469

 

2.65

%  

Noninterest-earning assets

 

  

 

10,055

 

  

 

  

 

8,875

 

  

 

  

Total assets

 

  

$

180,323

 

  

 

  

$

183,566

 

  

 

  

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Regular savings deposits

 

0.09

%  

$

34,175

$

49

 

0.19

%  

$

37,959

$

53

 

0.19

%

NOW savings deposits

 

0.53

 

22,163

 

35

 

0.21

 

27,473

 

20

 

0.10

Money market deposits

 

1.33

 

26,199

 

226

 

1.15

 

30,097

 

84

 

0.37

Time deposits

 

2.84

 

57,167

 

966

 

2.25

 

45,418

 

246

 

0.72

Total interest-bearing deposits

 

1.63

%  

 

139,704

 

1,276

 

1.22

%  

 

140,947

 

403

 

0.38

%

Federal Home Loan Bank advances

 

 

 

 

 

2,363

 

 

Other interest-bearing liabilities

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

1.63

%  

 

139,704

 

1,276

 

1.22

%  

 

143,310

 

403

 

0.37

%

Noninterest-bearing demand deposits

 

 

18,910

 

  

 

  

 

17,685

 

  

 

  

Other noninterest-bearing liabilities

 

 

1,401

 

  

 

  

 

1,232

 

  

 

  

Total liabilities

 

 

160,015

 

  

 

  

 

162,227

 

  

 

  

Total equity capital

 

 

20,308

 

  

 

  

 

21,339

 

  

 

  

Total liabilities and equity capital

 

$

180,323

 

  

 

  

$

183,566

 

  

 

  

Net interest income

 

  

 

  

$

3,400

 

  

 

  

$

3,066

 

  

Net interest rate spread (1)

 

2.41

%  

 

  

 

  

 

2.44

%  

 

  

 

  

 

2.28

%

Net interest-earning assets (2)

 

  

$

30,564

 

  

 

  

$

32,468

 

  

 

  

Net interest margin (3)

 

  

 

  

 

  

 

2.66%

%  

 

  

 

  

 

2.34%

%

Average interest-earning assets to interest-bearing liabilities

 

  

 

121.88

%  

 

  

 

  

 

121.90

%  

 

  

 

  

(1)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)Net interest margin represents net interest income divided by average total interest-earning assets.

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Nine Months Ended September 30, 2023 vs. 2022

Increase (Decrease) Due to:

Total Increase

    

Volume

    

Rate

    

(Decrease)

(In thousands)

Interest-earning assets:

Cash and cash equivalents

$

6

$

535

$

541

Available-for-sale debt securities

 

(133)

 

348

 

215

Held-to-maturity debt securities

 

55

 

88

 

143

Equity securities

 

 

1

 

1

Loans, net

 

35

 

269

 

304

Federal Home Loan Bank stock

 

 

3

 

3

Total interest-earning assets

 

(37)

 

1,244

 

1,207

Interest-bearing liabilities:

 

  

 

  

 

  

Regular savings deposits

 

(5)

 

1

 

(4)

NOW savings deposits

 

(4)

 

19

 

15

Money market deposits

 

(11)

 

153

 

142

Time deposits

 

64

 

656

 

720

Total deposits

 

44

 

829

 

873

Federal Home Loan Bank advances

 

 

 

Other interest-bearing liabilities

 

 

 

Total interest-bearing liabilities

 

44

 

829

 

873

Change in net interest income

$

(81)

$

415

$

334

Comparison of Operating Results for the Nine Months Ended September 30, 2023 and 2022

General. Net income for the nine months ended September 30, 2023 was $722,000, a decrease of $65,000, or 8.3%, compared to $787,000 for the nine months ended September 30, 2022. Additional one-time noninterest expenses were incurred during the nine months ended September 30, 2023 that we not incurred during the prior year period.

Interest Income. Interest income for the nine months ended September 30, 2023 increased by $1.2 million, or 34.3%, from $3.5 million for the nine months ended September 30, 2022 to $4.7 million for the nine months ended September 30, 2023. This increase is a result of a 12.5% increase in loan interest and fees, a 23.4% increase in interest from investments, and a 616.5% increase in interest on cash and cash equivalents.

The average balance of loans during the nine months ended September 30, 2023, increased by $1.2 million, or 1.4%, from the average balance for the nine months ended September 30, 2022, while the average yield on loans increased to 4.34% for the nine months ended September 30, 2023, from 3.92% for the nine months ended September 30, 2022. The increase in average yield on loans was due to the increasing interest rate environment.

The average balance of available-for-sale debt securities decreased by $10.4 million, or 14.7%, to $60.3 million for the nine months ended September 30, 2023, from $70.7 million for the nine months ended September 30, 2022, while the average yield on available-for-sale debt securities increased to 2.47% for the nine months ended September 30, 2023, from 1.70% for the nine months ended September 30, 2022. This increase in yield resulted from the rising interest rate environment.

The average balance of held-to-maturity debt securities increased by $3.6 million, or 128.6%, to $6.4 million for the nine months ended September 30, 2023, from $2.8 million for the nine months ended September 30, 2022, while the average yield on held-to-maturity debt securities increased to 3.86% for the nine months ended September 30, 2023, from 2.01% for the nine months ended September 30, 2022. This increase in yield resulted from the rising interest rate environment.

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Interest Expense. Interest expense increased $873,000, or 216.6%, to $1.3 million for the nine months ended September 30, 2023, from $403,000 for the nine months ended September 30, 2022. This increase is a result of the rising interest rate environment and consumer shift from transactional accounts to higher cost time deposits.

The average balance of regular savings deposits decreased by $3.8 million, or 10.0%, to $34.2 million for the nine months ended September 30, 2023, from $38.0 million for the nine months ended September 30, 2022, while the average rate on regular savings deposits remained the same at 0.19% for the nine months ended September 30, 2022 and September 30, 2023.

The average balance of NOW savings deposits decreased by $5.3 million, or 19.3%, to $22.2 million for the nine months ended September 30, 2023, from $27.5 million for the nine months ended September 30, 2022, while the average rate on NOW savings deposits increased to 0.21% for the nine months ended September 30, 2023, from 0.10% for the nine months ended September 30, 2022. This increase in rate resulted from the rising interest rate environment.

The average balance of money market deposits decreased by $3.9 million, or 13.0%, to $26.2 million for the nine months ended September 30, 2023, from $30.1 million for the nine months ended September 30, 2022, while the average rate on money market deposits increased to 1.15% for the nine months ended September 30, 2023, from 0.37% for the nine months ended September 30, 2022. This increase in rate resulted from the rising interest rate environment.

The average balance of time deposits increased by $11.8 million, or 26.0%, to $57.2 million for the nine months ended September 30, 2023, from $45.4 million for the nine months ended September 30, 2022, while the average rate on time deposits increased to 2.25% for the nine months ended September 30, 2023, from 0.72% for the nine months ended September 30, 2022. This increase in rate resulted from the rising interest rate environment.

Net Interest Income. Net interest income was $3.4 million for the nine months ended September 30, 2023, an increase of $334,000, or 10.9%, from $3.1 million for the nine months ended September 30, 2022. The increase was due to an increase in net interest rate spread to 2.44% for the nine months ended September 30, 2023, from 2.28% for the nine months ended September 30, 2022, while average net interest earning assets decreased by $1.9 million, or 5.9%, to $30.6 million for the nine months ended September 30, 2023, from $32.5 million for the nine months ended September 30, 2022.

Provision for Credit/Loan Losses. The provision for credit/loan losses was $61,000 for the nine months ended September 30, 2023, compared to $19,000 for the nine months ended September 30, 2022. The allowance for credit/loan losses was $651,000, or 0.73% of total loans, at September 30, 2023, compared to $554,000, or 0.65% of total loans, at September 30, 2022.

Noninterest Income. Noninterest income increased $10,000, or 2.2%, to $467,000 for the nine months ended September 30, 2023, compared to $457,000 for the nine months ended September 30, 2022. Customer service fee income increased $32,000 while commission income declined $10,000, loan servicing fees declined $3,000, and realized gain on loan sales declined by $16,000.

Noninterest Expense. Noninterest expense increased $398,000, or 15.7%, to $2.9 million for the nine months ended September 30, 2023, from $2.5 million for the nine months ended September 30, 2022. During the nine months ended September 30, 2023, salaries and benefits increased $243,000, of which $150,000 was paid to executive officers into their deferred compensation plan. Occupancy expense increased $15,000, or 8.3%, due to IT-related costs, data processing costs increased $36,000, or 9.9%, professional fees increased $69,000 due to additional fees incurred as a result of Peru Federal’s audit being completed to meet Public Company Accounting Oversight Board standards, and marketing expenses increased by $18,000.

Provision (Credit) for Income Taxes. The provision for income taxes decreased $31,000, or 16.6%, to $156,000 for the nine months ended September 30, 2023 compared to $187,000 for the nine months ended September 30, 2022. The decrease was a primarily due to a $96,000, or 9.9%, decrease in pretax income as well adjustments to deferred taxes related to unrealized losses on available-for-sale securities.

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Table of Contents

Loan Matter Requiring Attention

Peru Federal has a $905,000 participation loan in which the lead bank notified Peru Federal in February 2023 of the borrowers’ deteriorating financial position and consideration of a Chapter 11 bankruptcy. The $905,000 participation represents a 9.549% participant interest, secured by commercial real estate. Once notified of the borrowers’ deteriorating financial position and the potential for a Chapter 11 bankruptcy, Peru Federal moved the loan to non-accrual status and classified the loan as substandard.

On June 2, 2023 the lead bank determined that the borrower was in default of the it’s forbearance agreement, the lead bank exercised their right of offset of funds held on deposit at the lead bank. The offset was allocated to the participants resulting in a total of $694,000 received by Peru Federal. This amount was subject to a potential claw back of $177,000 (See Claw back below). The borrower closed the facility as of June 16, 2023 and filed Chapter 11 bankruptcy on August 31, 2023,

The value of a new appraisal showed a significant decline in the value of the collateral if the facility closed, Peru Federal’s share of the discounted appraised value of the collateral has been adjusted to $325,000. This loan has been paid down to $171,000 as of September 30, 2023 with the bank balance of $156,000. Given the $156,000 loan balance in relation to Peru Federal’s share of the appraised value of $325,000, Peru Federal has determined that no reserve is warranted for this loan as of September 30, 2023.

Claw back

As part of the funds received from the right of offset an additional $1.85 million was allocated to the master note in which Peru Federal has an interest. These additional funds were to be allocated to another loan of the borrower but the bank’s participating in that loan elected to not have funds applied to that loan as there was a contract for sale on the property that would pay off the loan in full. A claw back provision was put in place in the event that the sale of the property was to fall through. Subsequent to the September quarter end the lead bank notified Peru Federal that the sale of that property did fall through and put the bank on notice that the claw back of the $177,000 could be enforced in the 4th quarter of 2023. Management will continue to evaluate the impact of this situation during the fourth quarter of 2023 and will determine if a reserve adjustment will be needed.

Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of Chicago and from a correspondent bank. At September 30, 2023, we had no borrowings from the Federal Home Loan Bank of Chicago but had the capacity to borrow $44.8 million. At September 30, 2023, we had no borrowings from the correspondent bank but had the capacity to borrow $4.0 million.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments. The levels of these assets depend on our operating, financing, lending, and investing activities during any given period. For further information, see the consolidated statements of cash flows contained in the consolidated financial statements appearing elsewhere in this report.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. For the nine months ended September 30, 2023, cash flows from operations, investing, and financial activities resulted in a net increase in cash and cash equivalents of $23.1 million. Net cash provided from operating activities amounted to $319,000, primarily due to net income of $722,000, $352,000 from net amortization of premiums and discount from available-for-sale debt securities and $480,000 from the increase in interest payable and other liabilities, partially offset by an increase in other assets and income tax receivable of $1.4 million. Net cash provided by financing activities amounted to $27.6 million, primarily due to a net increase in demand deposits, NOW accounts, money market and savings accounts of $12.5 million, and a net increase in certificates of deposit of $15.0 million.

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Table of Contents

Net cash used in investing activities amounted to $4.8 million, primarily due to purchases of held-to-maturity investments of $6.9 million, an increase in loans of 3.8 million, partially offset with proceeds from maturities of available-for-sale investment securities of $5.4 million and proceeds from maturities of held-to-maturity investment securities of $535,000.

We believe we maintain a strong liquidity position and are committed to maintaining it. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

At September 30, 2023, Peru Federal was categorized as well-capitalized under regulatory capital guidelines. Management is not aware of any conditions or events since the most recent notification that would change our category. For further information, see note 13 to the notes to consolidated financial statements appearing elsewhere in this report.

Off-Balance Sheet Arrangements

At September 30, 2023, we had $4.6 million of outstanding commitments to originate loans, $2.0 million of which represents the balance of remaining funds to be disbursed on construction loans in process, $1.7 million in unused commercial line of credit commitments, $769,000 of unfunded home equity loans, $46,000 of unfunded consumer line of credit and $110,000 of commitments to fund new closed-end residential real estate loans. At September 30, 2023, certificates of deposit that are scheduled to mature on or before September 30, 2024 totaled $47.0 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed.

Management of Market Risk

General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. All directors participate in discussions during the regular board meetings evaluating the interest rate risk inherent in our assets and liabilities, and the level of risk that is appropriate. These discussions take into consideration our business strategy, operating environment, capital, liquidity and performance objectives consistent with the policy and guidelines approved by them.

Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we are using to manage interest rate risk are:

maintaining capital levels that exceed the thresholds for well-capitalized status under federal regulations;
maintaining a high level of liquidity;
growing our core deposit accounts;
managing our investment securities portfolio so as to reduce the average maturity and effective life of the portfolio; and
continuing to diversify our loan portfolio by adding more commercial real estate loans and commercial loans, which typically have shorter maturities and/or balloon payments.

By following these strategies, we believe that we are better positioned to react to increases and decreases in market interest rates.

We have not engaged in hedging activities, such as engaging in futures or options. We do not anticipate entering into similar transactions in the future.

Economic Value of Equity. We compute amounts by which the net present value of our assets and liabilities (economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio

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Table of Contents

value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases instantaneously by 100, 200, and 300 basis point increments or decreases instantaneously by 100, 200, and 300 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

The following table sets forth, as of September 30, 2023, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.

At September 30, 2023

Estimated Increase (Decrease) in

EVE as a Percentage of Present 

EVE

Value of Assets (3)

    

    

    

    

    

Increase

Change in Interest

Estimated 

(Decrease) 

Rates (basis points) (1)

EVE (2)

Amount

Percent

EVE Ratio (4)

(basis points)

(Dollars in thousands)

300

 

32,445

 

(10,712)

 

(24.82)

 

18.82

 

(354.00)

200

 

36,217

 

(6,940)

 

(16.08)

 

20.21

 

(215.00)

100

 

39,743

 

(3,414)

 

(7.91)

 

21.40

 

(96.00)

Level

 

43,157

 

 

 

22.36

 

(100)

 

45,037

 

1,880

 

4.360

 

22.59

 

23.00

(200)

 

45,999

 

2,842

 

6.590

 

22.40

 

4.00

(300)

 

44,074

 

917

 

2.120

 

21.09

 

(127.00)

(1)Assumes an immediate uniform change in interest rates at all maturities.
(2)EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)EVE Ratio represents EVE divided by the present value of assets.

Change in Net Interest Income. The following table sets forth, at September 30, 2023, the calculation of the estimated changes in our net interest income (“NII”) that would result from the designated immediate changes in the United States Treasury yield curve.

At September 30, 2023

Change in Interest Rates

    

Net Interest Income Year 1 

    

Year 1 Change from 

 

(basis points) (1)

Forecast

Level

 

(Dollars in thousands)

 

300

$

6,242

 

1.67

%

200

 

6,203

 

1.05

%

100

 

6,167

 

0.46

%

Level

 

6,139

 

%

(100)

 

6,117

 

(0.36)

%

(200)

 

6,271

 

2.14

%

(300)

 

6,095

 

(0.71)

%

(1)Assumes an immediate uniform change in interest rates at all maturities.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurement. Modeling changes in EVE and NII require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. For instance, the EVE and NII tables presented above assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. However, the shape of the yield curve changes constantly and the value and pricing of our assets and liabilities, including our deposits, may not closely correlate with changes in market interest rates. Accordingly, although the EVE and NII tables may provide an indication of our interest rate risk exposure at a particular point in time and in the context of a particular yield curve, such measurements are not intended

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to and do not provide a precise forecast of the effect of changes in market interest rates on EVE and NII and will differ from actual results.

EVE and net interest NII calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information in Item 2 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Management of Market Risk” is incorporated in this Item 3 by reference.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2023. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2023, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

The Company is not subject to any pending legal proceedings. The Bank is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Bank’s or the Company’s financial condition or results of operations.

Item 1A. Risk Factors

Not applicable, as the Company is a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits 

3.1

Articles of Incorporation of PFS Bancorp, Inc. (1)

3.2

Bylaws of PFS Bancorp, Inc. (2)

31

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following materials for the quarter ended September 30, 2023, formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Equity Capital, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements

104

Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)

(1)Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S 1, as amended (Commission File No. 333 270452), initially filed on March 10, 2023.
(2)Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S 1, as amended (Commission File No. 333 270452), initially filed on March 10, 2023.

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SIGNATURES

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

a

r

    

PFS BANCORP, INC.

Date: November 9, 2023

Graphic

Eric J. Heagy

President, Chief Executive Officer

and Chief Financial Officer

17