# Finward Bancorp (FNWD) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Finward Bancorp's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/919864/000143774925010182/fnwd20241231d_10k.htm
Accession: 0001437749-25-010182
Filing date: 2025-03-31
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FNWD/
All MD&A years: /company/FNWD/mda/
Previous year: /company/FNWD/mda/fy2023/ (FY 2023)
Next year: /company/FNWD/mda/fy2025/ (FY 2025)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

The Company's earnings are dependent upon the earnings of the Bank. The Bank's earnings are primarily dependent upon net interest margin. The net interest margin is the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowings stated as a percentage of average interest earning assets. The net interest margin is perhaps the clearest indicator of a financial institution's ability to generate core earnings. Fees and service charges, wealth management operations income, gains and losses from the sale of assets, provisions for credit losses, income taxes and operating expenses also affect the Company's profitability.

A summary of the Company’s significant accounting policies are detailed in Note 1 to the Company’s consolidated financial statements included in this report. Preparing 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, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the Allowance for credit losses are particularly susceptible to material change in the near term.

At December 31, 2024, the Company had total assets of $2.1 billion and total deposits of $1.8 billion. The Company's deposit accounts are insured up to applicable limits by the Deposit Insurance Fund (DIF) that is administered by the Federal Deposit Insurance Corporation (FDIC), an agency of the federal government. At December 31, 2024, stockholders' equity totaled $151.4 million, with book value per share at $35.10. Net income for 2024 was $12.1 million, or $2.84 diluted earnings per common share. The return on average assets was 0.58%, while the return on average stockholders’ equity was 8.06%.

Regulatory Developments Regarding the Company and the Bank

Consent Order

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

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

47

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

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

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

Memorandum of Understanding

On August 9, 2024, the Bank entered into a memorandum of understanding (“MOU”) with the FDIC and DFI. The MOU is an informal administrative agreement pursuant to which the Bank has agreed to take various actions and comply with certain requirements to enhance certain areas of the Bank’s operations. The MOU documents an understanding among the Bank, the FDIC, and DFI that, among other things, the Bank will: refrain from paying cash dividends without prior regulatory approval and develop and implement certain plans regarding the Bank’s operations, capital, and strategy. The Bank will submit written quarterly progress reports to the FDIC and DFI detailing compliance with the MOU. The MOU will remain in effect until modified or terminated by the FDIC and DFI.

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

48

Financial Condition

During the year ended December 31, 2024, total assets decreased by $47.6 million (2.3%), to $2.1 billion, with interest-earning assets decreasing by $55.8 million (2.9%). At December 31, 2024, interest-earning assets totaled $2.0 billion and represented 92.3% of total assets. Loans totaled $1.5 billion and represented 79.3% of interest-earning assets, 73.2% of total assets and 85.7% of total deposits. The loan portfolio, which is the Company’s largest asset, is a significant source of both interest and fee income.

[[GREPCENT_TABLE]]
[["","","December 31,","","","December 31,"],["(Dollars in thousands)","","2024","","","2023"],["","","Balance","","","% Loans","","","Balance","","","% Loans"],["Residential real estate","","$","467,293","","","","31.0","%","","$","484,948","","","","32.1","%"],["Home equity","","","49,758","","","","3.3","","","","46,599","","","","3.1"],["Commercial real estate","","","551,674","","","","36.6","","","","503,202","","","","33.4"],["Construction and land development","","","82,874","","","","5.5","","","","115,227","","","","7.6"],["Multifamily","","","212,455","","","","14.1","","","","219,917","","","","14.6"],["Commercial business","","","104,246","","","","6.9","","","","97,386","","","","6.5"],["Consumer","","","551","","","","-","","","","610","","","","-"],["Manufactured Homes","","","26,708","","","","1.8","","","","30,845","","","","2.0"],["Government","","","11,024","","","","0.7","","","","10,021","","","","0.7"],["Gross loans receivable","","","1,506,583","","","","100.0","%","","","1,508,755","","","","100.0","%"],["Plus:"],["Net deferred loans origination costs","","","2,439","","","","","","","","3,705"],["Loan clearing funds","","","(46",")","","","","","","","135"],["Loans receivable, net of deferred fees and costs","","$","1,508,976","","","","","","","$","1,512,595"],["Adjustable rate loans / loans receivable","","$","793,920","","","","52.7","%","","$","745,635","","","","49.4","%"]]
[[/GREPCENT_TABLE]]

49

Our total commercial real estate portfolio (which is comprised of loans secured by office space, medical office space, and mixed-use retail/office space) totaled $551.7 million as of December 31, 2024, compared to $503.2 million as of December 31, 2023. Given prevailing market conditions such as continued elevated interest rate levels, reduced occupancy as a result of the increase in hybrid work arrangements, and lower commercial real estate valuations, we are carefully monitoring these loans for signs of deterioration in credit quality.

Commercial real estate loans remained our largest loan segment and accounted for 36.6% of the total loan portfolio at December 31, 2024 and 33.4% at December 31, 2023. A further breakdown of the composition of the commercial real estate loan portfolio as of December 31, 2024 and December 31, 2023 is shown in the table below:

[[GREPCENT_TABLE]]
[["Commercial Real Estate (CRE)*"],["(Dollars in thousands)","","December 31, 2024","","","December 31, 2023"],["","","# Loans","","","$ Amount","","","% of Total Net Loans","","","# Loans","","","$ Amount","","","% of Total Net Loans"],["CRE Owner Occupied (CRE OO)"],["Food Services & Drinking Places","","","65","","","$","30,481","","","","2.0","%","","","67","","","$","31,171","","","","2.1","%"],["Gasoline Stations & Fuel Dealers","","","28","","","","28,957","","","","1.9","","","","34","","","","28,346","","","","1.9"],["Ambulatory Health Care Services","","","33","","","","28,891","","","","1.9","","","","23","","","","25,673","","","","1.7"],["Repair and Maintenance","","","34","","","","16,050","","","","1.1","","","","32","","","","11,135","","","","0.7"],["Specialty Trade Contractors","","","31","","","","13,265","","","","0.9","","","","16","","","","13,412","","","","0.9"],["Merchant Wholesalers, Durable Goods","","","13","","","","12,332","","","","0.8","","","","28","","","","8,527","","","","0.6"],["Personal and Laundry Services","","","31","","","","10,673","","","","0.7","","","","32","","","","11,352","","","","0.8"],["Truck Transportation","","","12","","","","10,350","","","","0.7","","","","30","","","","11,461","","","","0.8"],["Professional, Scientific, and Technical Services","","","26","","","","10,266","","","","0.7","","","","10","","","","10,499","","","","0.7"],["Other","","","195","","","","85,344","","","","5.7","","","","183","","","","68,385","","","","4.5"],["Total CRE Owner Occupied (CRE OO)","","","468","","","$","246,609","","","","16.4","%","","","455","","","$","219,961","","","","14.6","%"],["CRE Non Owner Occupied (CRE NOO)"],["Strip Centers - Lessors","","","165","","","$","140,360","","","","9.3","%","","","157","","","$","124,096","","","","8.2","%"],["Hotels","","","18","","","","48,659","","","","3.2","","","","16","","","","42,527","","","","2.8"],["Industrial Properties - Lessors","","","60","","","","43,581","","","","2.9","","","","54","","","","41,208","","","","2.7"],["Office Properties - Lessors","","","57","","","","38,472","","","","2.6","","","","59","","","","38,895","","","","2.6"],["Special Use - Lessors","","","10","","","","11,527","","","","0.8","","","","12","","","","10,863","","","","0.7"],["Big Box Retail - Lessors","","","2","","","","8,201","","","","0.5","","","","2","","","","8,538","","","","0.6"],["MiniWarehouses - Lessors","","","17","","","","8,011","","","","0.5","","","","16","","","","7,934","","","","0.5"],["Other","","","14","","","","6,254","","","","0.4","","","","14","","","","9,180","","","","0.6"],["Total CRE Non Owner Occupied (CRE NOO)","","","343","","","$","305,065","","","","20.2","%","","","330","","","$","283,241","","","","18.8","%"],["Total Commercial Real Estate (OO & NOO)","","","811","","","$","551,674","","","","36.6","%","","","785","","","$","503,202","","","","33.4","%"],["Total Gross Loans","","","","","","$","1,506,583","","","","","","","","","","","$","1,508,755"]]
[[/GREPCENT_TABLE]]

* North American Industry Classification System (NAICS) classification coding for CRE loans began in 2023.

The Bank’s Appraisal Policy and Procedures is Board approved annually and reflects current regulatory guidelines and recommendations. As one of the primary factors in commercial loan underwriting is the quality of the asset being pledged as collateral, it is imperative that the appraisal process receive appropriate attention. Appraisals must be prepared in accordance with high professional standards, by appraisers who have the necessary training, experience and knowledge for them to provide an accurate estimate of value. With few exceptions, appraisals are assigned to fee appraisers named in the Board approved appraiser list, which includes the tracking of all required certifications, licenses and insurance. The Bank has engaged with one of the nation’s longest-standing third-party appraisal management companies for ordering, management, fulfillment and review of real estate appraisals and other valuation-related services for the properties securing the Bank’s commercial real estate loans.

50

Criteria that may require the Bank to obtain a new appraisal or update the existing value for an existing credit include but are not limited to a change in the discount or capitalization rates for a particular location or property type; occupancy or absorption levels; market trends; and/or expense structure. Regarding the necessity of updated valuations for construction financing, factors considered are material changes in construction delays; cost overruns; or reductions in sales prices / rents. This may be done as a part of a renewal, loan workout or as a part of the usual and customary real estate review process that monitors the risks associated with the Bank’s loan portfolios.

The Company is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Company will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the year ended December 31, 2024, the Bank originated $36.8 million in new fixed rate mortgage loans for sale, compared to $38.0 million during the year ended December 31, 2023. During the year ended December 31, 2024, the Bank originated $27.4 million in new 1-4 family loans retained in its portfolio, compared to $41.6 million during the year ended December 31, 2023. These retained loans are primarily construction loans and adjustable-rate loans with a fixed-rate period of 7 years or less, and the Bank continues to sell longer-duration fixed rate mortgages into the secondary market. Net gains realized from the mortgage loan sales totaled $1.1 million for the year ended December 31, 2024, and 2023. At December 31, 2024, the Company had $1.3 million in loans that were classified as held for sale, compared to $340 thousand at December 31, 2023.

Non-performing loans include those loans that are 90 days or more past due and accruing and those loans that have been placed on non-accrual status. At December 31, 2024, all non-performing loans are also accounted for on a non-accrual basis, except for twenty-nine residential real estate loans totaling $8 thousand which represent loans serviced by third parties that remained accruing and more than 90 days past due.

The Bancorp's nonperforming loans are summarized below:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)"],["Loan Segment","","December 31, 2024","","","December 31, 2023"],["Residential real estate","","$","4,665","","","$","2,824"],["Home equity","","","483","","","","468"],["Commercial real estate","","","1,280","","","","1,545"],["Construction and land development","","","658","","","","-"],["Multifamily","","","3,362","","","","3,715"],["Commercial business","","","3,290","","","","2,897"],["Consumer","","","-","","","","2"],["Total","","$","13,738","","","$","11,451"],["Nonperforming loans to total loans","","","0.91","%","","","0.76","%"],["Nonperforming loans to total assets","","","0.67","%","","","0.54","%"]]
[[/GREPCENT_TABLE]]

51

Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. No loans were internally classified as doubtful or loss at December 31, 2024 or December 31, 2023.

The Bancorp's substandard loans are summarized below:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)"],["Loan Segment","","December 31, 2024","","","December 31, 2023"],["Residential real estate","","$","4,754","","","$","2,098"],["Home equity","","","490","","","","479"],["Commercial real estate","","","1,598","","","","2,544"],["Construction and land development","","","2,285","","","","-"],["Multifamily","","","3,550","","","","4,245"],["Commercial business","","","3,290","","","","2,896"],["Consumer","","","-","","","","2"],["Manufactured homes","","","54","","","","-"],["Total","","$","16,021","","","$","12,264"]]
[[/GREPCENT_TABLE]]

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

The Bancorp's special mention loans are summarized below:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)"],["Loan Segment","","December 31, 2024","","","December 31, 2023"],["Residential real estate","","$","4,291","","","$","3,084"],["Home equity","","","459","","","","168"],["Commercial real estate","","","8,008","","","","7,434"],["Construction and land development","","","3,675","","","","6,902"],["Multifamily","","","5,329","","","","-"],["Commercial business","","","3,528","","","","1,610"],["Total","","$","25,290","","","$","19,198"]]
[[/GREPCENT_TABLE]]

A loan is considered collateral dependent when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement.

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

At times, the Company will modify the terms of a loan to forego a portion of interest or principal or reduce the interest rate on the loan to a rate materially less than market rates, or materially extend the maturity date of a loan as part of a concession to a borrower experiencing financial difficulty. The valuation basis for these modified loans is based on the present value of expected future cash flows; unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

52

The following table shows the amortized cost of loans at December 31, 2024, that were both experiencing financial difficulty and modified during the year ended December 31, 2024, segregated by portfolio segment and type of modification. The percentage of the amortized cost of loans that were modified to borrowers in financial distress as compared to the amortized cost of each segment of financial receivable is also presented below.

[[GREPCENT_TABLE]]
[["","","For the year ended December 31, 2024"],["(Dollars in thousands)","","Payment Delay","","","Term Extension","","","Interest Rate Reduction","","","Combination Term Extension and Interest Rate Reduction","","","% of Total Segment Financing Receivables"],["Residential Real Estate","","$","528","","","$","1,115","","","$","-","","","$","-","","","","0.35","%"],["Home Equity","","","41","","","","-","","","","-","","","","-","","","","0.01","%"],["Total","","$","569","","","$","1,115","","","$","-","","","$","-","","","","0.11","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","For the year ended December 31, 2023"],["(Dollars in thousands)","","Payment Delay","","","Term Extension","","","Interest Rate Reduction","","","Combination Term Extension and Interest Rate Reduction","","","% of Total Segment Financing Receivables"],["Residential Real Estate","","$","-","","","$","868","","","$","-","","","$","-","","","","0.18","%"],["Total","","$","-","","","$","868","","","$","-","","","$","-","","","","0.06","%"]]
[[/GREPCENT_TABLE]]

There were no commitments to lend additional amounts to the borrowers included in the previous table.

The Company closely monitors the performance of loans and leases that have been modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of such modified loans is presented below.

[[GREPCENT_TABLE]]
[["","","For the year ended December 31, 2024"],["(Dollars in thousands)","","Current","","","30-59 Days Past Due","","","60-89 Days Past Due","","","Greater Than 90 Days Past Due"],["Residential Real Estate","","$","545","","","$","570","","","$","-","","","$","528"],["Home Equity","","","-","","","","-","","","","-","","","","41"],["Total","","$","545","","","$","570","","","$","-","","","$","569"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","For the year ended December 31, 2023"],["(Dollars in thousands)","","Current","","","30-59 Days Past Due","","","60-89 Days Past Due","","","Greater Than 90 Days Past Due"],["Residential Real Estate","","$","868","","","$","-","","","$","-","","","$","-"],["Total","","$","868","","","$","-","","","$","-","","","$","-"]]
[[/GREPCENT_TABLE]]

The borrowers with term extensions have had their maturity dates extended and as a result their monthly payments were reduced.

[[GREPCENT_TABLE]]
[["","","For the year ended December 31, 2024"],["(Dollars in thousands)","","Principal forgiveness","","","Weighted average interest rate reduction","","","Weighted average term extention","","","Payment delay"],["Residential Real Estate","","$","-","","","","-","%","","7 months","","","","6 months"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","For the year ended December 31, 2023"],["(Dollars in thousands)","","Principal forgiveness","","","Weighted average interest rate reduction","","","Weighted average term extention","","","Payment delay"],["Residential Real Estate","","$","-","","","","-","%","","89 months","","","","-"]]
[[/GREPCENT_TABLE]]

Upon the Company’s determination that a modified loan has subsequently been deemed uncollectible, the loan or lease is written off. Therefore, the amortized cost of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

At December 31, 2024, management is of the opinion that there are no loans, except certain of those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled loan modification. Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources.

The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management’s evaluation, is appropriate to provide coverage for current expected credit losses in the loan and lease portfolio. The allowance for credit losses is increased by the provision for credit losses and is decreased by charge-offs, net of recoveries on prior charge-offs. The determination of the amounts of the ACL and provisions for credit losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability as of the reporting date. The appropriateness of the current period provision and the overall adequacy of the ACL are determined through a disciplined and consistently applied quarterly process that reviews the Company’s current credit risk within the loan portfolio and identifies the required allowance for credit losses given the current risk estimates.

53

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

A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased. This reserve is available for use for manufactured home loan nonperformance and costs associated with nonperformance. If the segment performs in line with expectations, the deferred cost reserve is paid as a premium to the third party originator of the loan. The unamortized balance of the deferred cost reserve totaled $2.9 million and $3.5 million as of December 31, 2024, and 2023, respectively, and is included in net deferred loan origination cost.

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

[[GREPCENT_TABLE]]
[["(Dollars in thousands)"],["","","December 31, 2024","","","December 31, 2023"],["Allowance for credit losses","","$","16,911","","","$","18,768"],["Total loans","","$","1,508,976","","","$","1,512,595"],["Non-performing loans","","$","13,738","","","$","11,451"],["ACL-to-total loans","","","1.12","%","","","1.24","%"],["ACL-to-non-performing loans (coverage ratio)","","","123.1","%","","","163.9","%"]]
[[/GREPCENT_TABLE]]

The December 31, 2024, balance in the ACL account is considered adequate by management after evaluation of the loan portfolio, past experience and current economic and market conditions. While management may periodically allocate portions of the allowance for specific problem loans, the whole allowance is available for any loan charge offs that occur. The allocation of the ACL reflects performance and growth trends within the various loan categories, as well as consideration of the facts and circumstances that affect the repayment of individual loans, and loans which have been pooled as of the evaluation date, with particular attention given to non-performing loans and loans which have been classified as substandard, doubtful or loss. Management has allocated reserves to both performing and non-performing loans based on current information available.

During 2024, net sales of foreclosed real estate totaled $72 thousand and net gain from the 2024 sales totaled $1 thousand.

The primary objective of the Company’s investment portfolio is to provide for the liquidity needs of the Company and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest bearing balances in other financial institutions, U.S. government securities, U.S. treasury securities, federal agency obligations, obligations of state and local municipalities and corporate securities. The securities portfolio totaled $333.6 million at December 31, 2024, compared to $371.4 million at December 31, 2023, an decrease of $37.8 thousand or 10.2%. The decrease is attributable to increased unrealized losses within the portfolio and a sale of $15.1 million in securities during the quarter ended March 31, 2024. At December 31, 2024, the securities portfolio represented 17.5% of interest-earning assets and 16.2% of total assets compared to 19.0% of interest-earning assets and 17.6% of total assets at December 31, 2023.

As of December 31, 2024, the Company’s two investments in collateralized debt obligations were in “payment in kind” status. Payment in kind status results in a temporary delay in the payment of interest. As a result of a delay in the collection of the interest payments, management placed these securities on non-accrual status. At December 31, 2024, the cost basis of the two collateralized debt obligations on non-accrual status totaled $2.2 million.

54

The carrying value of the Company’s investment portfolio and other short-term investments and stock balances at December 31, 2024 and 2023 were as follows:

[[GREPCENT_TABLE]]
[["","","December 31,","","","December 31,"],["(Dollars in thousands)","","2024","","","2023"],["","","Balance","","","% Securities","","","Balance","","","% Securities"],["U.S. government sponsored entities","","$","8,061","","","","2.4","%","","$","7,883","","","","2.1","%"],["Collateralized mortgage obligations and residential mortgage-backed securities","","","109,325","","","","32.8","","","","123,464","","","","33.2"],["Municipal securities","","","214,749","","","","64.4","","","","238,670","","","","64.3"],["Collateralized debt obligations","","","1,419","","","","0.4","","","","1,357","","","","0.4"],["Total securities available-for-sale","","$","333,554","","","","100.0","%","","$","371,374","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","","","","","","YTD"],["(Dollars in thousands)","","December 31,","","","December 31,","","","Change"],["","","2024","","","2023","","","$","","","%"],["Interest bearing deposits in other financial institutions","","$","52,047","","","$","67,647","","","$","(15,600",")","","","-23.1","%"],["Fed funds sold","","","654","","","","419","","","","235","","","","56.1","%"],["Federal Home Loan Bank stock","","","6,547","","","","6,547","","","","-","","","","-"]]
[[/GREPCENT_TABLE]]

The net decrease in interest bearing deposits in other financial institutions is primarily the result of the timing of investments in interest earning assets relative to the inflow and outflow of deposits, repurchase agreements and borrowed funds.

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

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

[[GREPCENT_TABLE]]
[["","","","","","","","","","","YTD"],["(Dollars in thousands)","","December 31,","","","December 31,","","","Change"],["","","2024","","","2023","","","$","","","%"],["Checking","","$","591,487","","","$","653,529","","","$","(62,042",")","","","-9.5","%"],["Savings","","","275,121","","","","302,782","","","","(27,661",")","","","-9.1"],["Money market","","","333,705","","","","324,993","","","","8,712","","","","2.7"],["Certificates of deposit","","","560,253","","","","532,117","","","","28,136","","","","5.3"],["Total deposits","","$","1,760,566","","","$","1,813,421","","","$","(52,855",")","","","-2.9","%"]]
[[/GREPCENT_TABLE]]

On December 31, 2024, balances for certificates of deposit totaled $560.3 million, compared to $532.1 million on December 31, 2023, an increase of $28.1 million or 5.3%. The decrease in core deposits and increase in certificate of deposit balances is generally related to customer preferences for higher yielding deposits.

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

[[GREPCENT_TABLE]]
[["","","December 31,","","","December 31,","","","YTD"],["(Dollars in thousands)","","2024","","","2023","","","Change"],["","","Balance","","","Balance","","","$","","","%"],["Repurchase agreements","","$","40,116","","","$","38,124","","","$","1,992","","","","5.2","%"],["Borrowed funds","","","65,000","","","","80,000","","","","(15,000",")","","","-18.8"],["Total borrowed funds","","$","105,116","","","$","118,124","","","$","(13,008",")","","","-11.0","%"]]
[[/GREPCENT_TABLE]]

Repurchase agreements increased as part of normal account fluctuations within that product line. Borrowed funds decreased due to cyclical inflows and outflows of interest-earning assets and interest-bearing liabilities.

55

Liquidity and Capital Resources

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

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

During 2024, cash and cash equivalents decreased $15.4 million compared to an increase of $54.7 million for 2023. The primary sources of cash and cash equivalents were proceeds from the sale of loans originated for sale, proceeds from a real estate sale leaseback transaction, proceeds from the sale of securities, proceeds from the maturity and paydown of securities. The primary uses of cash and cash equivalents were the payment of dividends, change in deposits, repayment of borrowed funds, and loan originations. During 2024, net cash from operating activities totaled $10.0 million, compared to $24.2 million for 2023. Cash provided from operating activities was primarily a result of net income, sale of loans originated for sale, proceeds from a real estate sale leaseback transaction, and net change in other assets, accrued expenses, and other liabilities, offset by loans originated for sale and gain on sale of loans held-for-sale. Net cash inflows from investing activities totaled $42.8 million during 2024, compared to outflows of $15.0 million during 2023. Cash inflows from investing activities were primarily related to the net change in loans receivable and purchase of securities, offset against the proceeds from the sales and maturities of securities and certificates of deposit in other financial institutions. Net cash outflows from financing activities totaled $68.0 million in 2024, compared to net cash inflows of $15.5 million in 2023. The net cash flows from financing activities were primarily a result of net change in deposits, repayment of borrowed funds, proceeds from FHLB advances and the net change in repurchase agreements.

Management strongly believes that safety and soundness is enhanced by maintaining a high level of capital. Stockholders' equity totaled $151.4 million at December 31, 2024, compared to $147.3 million at December 31, 2023, an increase of $4.1 million (2.8%). The increase was primarily the result of net income of $12.1 million and a decrease in net unrealized losses on available for sale securities of $6.5 million and cash dividends of $2.1 million. At December 31, 2024, book value per share was $35.10 compared to $34.28 for 2023.

The following table shows that, at December 31, 2024, the Bank’s capital exceeded all applicable regulatory capital requirements set forth in 12 C.F.R. § 324.

[[GREPCENT_TABLE]]
[["Bank Level Capital","","","","","","","","","","","","","","","","","","Minimum Required To Be"],["(Dollars in thousands)","","","","","","","","","","Minimum Required For","","","Well Capitalized Under Prompt"],["","","Actual","","","Capital Adequacy Purposes","","","Corrective Action Regulations"],["December 31, 2024","","Amount","","","Ratio","","","Amount","","","Ratio","","","Amount","","","Ratio"],["Common equity tier 1 capital to risk-weighted assets","","","$179,625","","","","11.26%","","","","$71,771","","","","4.50%","","","","$103,670","","","","6.50%"],["Tier 1 capital to risk-weighted assets","","","$179,625","","","","11.26%","","","","$95,695","","","","6.00%","","","","$127,594","","","","8.00%"],["Total capital to risk-weighted assets","","","$194,499","","","","12.19%","","","","$127,594","","","","8.00%","","","","$159,492","","","","10.00%"],["Tier 1 capital to adjusted average assets","","","$179,625","","","","8.47%","","","","$84,854","","","","4.00%","","","","$106,068","","","","5.00%"]]
[[/GREPCENT_TABLE]]

56

The Company’s ability to pay dividends to its shareholders is largely dependent upon the Bank’s ability to pay dividends to the Company. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. In addition, under the terms of the MOU, the Bank must seek regulatory approval prior to paying cash dividends. See “– Regulatory Developments Regarding the Company and the Bank – Memorandum of Understanding” above. Moreover, the FDIC and the Federal Reserve Board may prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. The aggregate amount of dividends that the Bank was eligible to declare in 2024, without the need for qualifying for an exemption or prior DFI approval, was its 2024 net income. On December 20, 2024, the Board of Directors of the Company declared a fourth quarter dividend of $0.12 per share. The Company’s fourth quarter dividend was paid on February 3, 2025 to shareholders of record as of January 21, 2025.

Results of Operations –

Comparison of 2024 to 2023

Net income for 2024 was $12.1 million, compared to $8.4 million for 2023, an increase of $3.8 million (44.8%). The increase was primarily due to higher noninterest income, which was driven by a one-time gain on the sale-leaseback transaction and a one-time gain on tax credit investment and also a decrease in the provision expense for credit losses.  This earnings increase was offset by lower net interest income and higher non-interest expense. The earnings represent a return on average assets of 0.58% for 2024, compared to 0.40% for 2023. The return on average equity was 8.06% for 2024, compared to 6.28% for 2023.

Net interest income for 2024, was $48.4 million, a decrease of $6.1 million (11.2%) from $54.6 million for 2023. The decreased net interest margin is primarily the result of elevated short-term interest rates relative to long-term interest rates as part of the Federal Reserve’s response to high inflation and other factors. The compression seen earlier in 2024 has slowed and has begun to reverse in late 2024 due to the Federal Reserve’s actions to reduce Federal Funds rates by 100 basis points, which will reprice our interest-bearing liabilities at lower rates. The weighted-average yield on interest-earning assets was 4.67% for 2024, compared to 4.45% for 2023. The weighted-average cost of funds was 2.56% for 2024, compared to 1.96% for 2023. The impact of the 4.67% return on interest earning assets and the 2.56% cost of funds resulted in a net interest spread of 2.21% for 2024, compared to a net interest spread of 2.49% for 2023. During 2024, total interest income increased by $3.4 million (4.0%) while total interest expense increased by $9.5 million (30.4%). The net interest margin was 2.54% for 2024, compared to 2.83% for 2023. The Company’s tax equivalent net interest margin for 2024, was 2.68% compared to 2.98% for 2023. Comparing the net interest margin on a tax equivalent basis more accurately compares the returns on tax-exempt loans and securities to those on taxable interest-earning assets. The adjusted net interest income and tax-adjusted net interest margin measures recognize the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans are presented using the current federal income tax rate of 21%.

The increase in interest earning asset income for the year ended December 31, 2024, compared to the year ended December 31, 2023, is primarily related to increased reinvestment rates in 2024 for loans, securities, and excess cash balances, as a result of the Federal Reserve’s elevated Federal Funds rate levels and increasing long term market rates throughout most of 2024. The increase in interest bearing liability expense is primarily the result of the Company adjusting deposit and repurchase agreement pricing to align with the current interest rate cycle, along with increased borrowing costs as a result of the Federal Reserve rate increases and long term market rates.

57

The following table shows the change in noninterest income for the year ending December 31, 2024, and December 31, 2023.

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","YTD"],["(Dollars in thousands, except per share data)","","","Year Ended December 31,","","","","12/31/2024 vs. 12/31/2023"],["","","","2024","","","","2023","","","","$ Change","","","","% Change"],["Noninterest income:"],["Fees and service charges","","","5,312","","","","6,024","","","","(712",")","","","-11.8","%"],["Wealth management operations","","","2,855","","","","2,484","","","","371","","","","14.9"],["Gain on tax credit investment","","","1,236","","","","-","","","","1,236","","","","0.0"],["Gain on sale of loans held-for-sale, net","","","1,138","","","","1,081","","","","57","","","","5.3"],["Loss on sale of securities, net","","","(531",")","","","(48",")","","","(483",")","","","1006.3"],["Increase in cash value of bank owned life insurance","","","812","","","","766","","","","46","","","","6.0"],["Gain on real estate","","","11,661","","","","276","","","","11,385","","","","4125.0"],["Gain (Loss) on sale of foreclosed real estate","","","1","","","","(13",")","","","14","","","","-107.7"],["Other","","","163","","","","176","","","","(13",")","","","-7.4"],["Total noninterest income","","","22,647","","","","10,746","","","","11,901","","","","110.7","%"]]
[[/GREPCENT_TABLE]]

The decrease in fees and service charges is primarily the result of decreased FHA mortgage fees, debit card income, and swap fees earned resulting from the current economic and rate environment. The increase in wealth management operations is the result of higher fee income year over year due to customer base growth and market conditions. We expect demand for fixed rate mortgage loans held-for-sale in the secondary market to be lower as borrowing rates on loans remain elevated. The gain on sale of real estate in 2024 was the result of an announced sale leaseback transaction executed on February 22, 2024 involving five of the Bank’s branch locations. The gain on tax credit investment was the result of a long term, non-controlling interest in a partnership established to facilitate tax credit investments. The increase in total noninterest income in 2024 was primarily due to the gain on the sale-leaseback transaction and the gain on tax credit investment.

The following table shows the change in noninterest expense for the year ending December 31, 2024, and December 31, 2023.

[[GREPCENT_TABLE]]
[["","","","","","","","","","","YTD"],["(Dollars in thousands, except per share data)","","Year Ended December 31,","","","12/31/2024 vs. 12/31/2023"],["","","2024","","","2023","","","$ Change","","","% Change"],["Noninterest expense:"],["Compensation and benefits","","","27,737","","","","27,655","","","","82","","","","0.3","%"],["Occupancy and equipment","","","8,250","","","","6,382","","","","1,868","","","","29.3"],["Data processing","","","4,672","","","","4,734","","","","(62",")","","","-1.3"],["Marketing","","","799","","","","840","","","","(41",")","","","-4.9"],["Federal deposit insurance premiums","","","1,790","","","","2,003","","","","(213",")","","","-10.6"],["Professional and outside services","","","5,405","","","","4,279","","","","1,126","","","","26.3"],["Technology","","","2,243","","","","1,654","","","","589","","","","35.6"],["Other","","","7,246","","","","7,684","","","","(438",")","","","-5.7"],["Total noninterest expense","","","58,142","","","","55,231","","","","2,911","","","","5.3","%"]]
[[/GREPCENT_TABLE]]

The increase in noninterest expense is primarily the result of increased occupancy and equipment driven by the Bank’s sale leaseback transaction and professional and outside service expenses associated with BSA resolution and other ongoing improvements made to ongoing bank operations.

Income tax expense for the year ended December 31, 2024, totaled $1.3 million, compared to income tax benefit of $335 thousand for the year ended December 31, 2023, an increase of $1.7 million (495.5%). The combined effective federal and state tax rates for the Company was 9.85% for the year ended December 31, 2024, compared to (4.16%) for the year ended December 31, 2023. The Company's higher current effective tax rate is a result of higher earnings relative to tax preferred income.

Critical Accounting Policies

Critical accounting policies are those accounting policies that management believes are most important to the portrayal of the Company’s financial condition and that require management’s most difficult, subjective or complex judgments. The Company’s most critical accounting policies are summarized below. Other accounting policies, including those related to the fair values of financial instruments and the status of contingencies, are summarized in Note 1 to the Company’s consolidated financial statements.

58

Allowance for credit losses – The Company maintains an Allowance for credit losses (“ACL”) to absorb probable incurred credit losses that arise from the loan portfolio. The ACL is increased by the provision for credit losses, and decreased by charge-offs net of recoveries. The determination of the amounts of the ACL and provisions for loan losses is based upon management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability. The methodology used to determine the current year provision and the overall adequacy of the ACL includes a disciplined and consistently applied quarterly process that combines a review of the current position with a risk assessment worksheet. Factors that are taken into consideration in the analysis include an assessment of national and local economic trends, a review of current year loan portfolio growth and changes in portfolio mix, and an assessment of trends for loan delinquencies and loan charge-off activity. Particular attention is given to non-accruing loans and accruing loans past due 90 days or more, and loans that have been classified as substandard, doubtful, or loss. Changes in the provision are directionally consistent with changes in observable data.

Commercial and industrial, and commercial real estate loans that exhibit credit weaknesses and loans that have been classified as impaired are subject to an individual review. Where appropriate, ACL allocations are made to these loans based on management’s assessment of financial position, current cash flows, collateral values, financial strength of guarantors, industry trends, and economic conditions. ACL allocations for homogeneous loans, such as residential mortgage loans and consumer loans, are based on historical charge-off activity and current delinquency trends. Management has allocated general reserves to both performing and non- performing loans based on historical data and current information available.

Risk factors for non-performing and internally classified loans are based on an analysis of either the projected discounted cash flows or the estimated collateral liquidation value for individual loans defined as substandard or doubtful. Estimated collateral liquidation values are based on established loan underwriting standards and adjusted for current mitigating factors on a loan-by-loan basis. Aggregate substandard loan collateral deficiencies are determined for residential, commercial real estate, commercial business, and consumer loan portfolios. These deficiencies are then stated as a percentage of the total substandard balances to determine the appropriate risk factors.

59

Risk factors for performing and non-classified loans are based on a weighted average of net charge-offs for the most recent three years, which are then stated as a percentage of average loans for the same period. Historical risk factors are calculated for residential, commercial real estate, commercial business, and consumer loans. The three year weighted average historical factors are then adjusted for current subjective risks attributable to: regional and national economic factors; loan growth and changes in loan composition; organizational structure; composition of loan staff; loan concentrations; policy changes and out of market lending activity.

The risk factors are applied to these types of loans to determine the appropriate level for the ACL. Adjustments may be made to these allocations that reflect management’s judgment on current conditions, delinquency trends, and charge-off activity. Based on the above discussion, management believes that the ACL is currently adequate, but not excessive, given the risk inherent in the loan portfolio.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services.