Finward Bancorp

Previous wording

Finward Bancorp (the “Bancorp”) is a financial holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank (“the Bank”), an Indiana commercial bank, is a wholly-owned subsidiary of the Bancorp. The Bancorp has no other business activity other than being a holding company for the Bank. The following management’s discussion and analysis presents information concerning our financial condition as of March 31, 2024, as compared to December 31, 2023, and the results of operations for the quarter ending March 31, 2024, and March 31, 2023. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2023.

Current wording

Finward Bancorp (the “Bancorp”) is a financial holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank (“the Bank”), an Indiana commercial bank, is a wholly-owned subsidiary of the Bancorp. The Bancorp has no other business activity other than being a holding company for the Bank. The following management’s discussion and analysis presents information concerning our financial condition as of June 30, 2024 and December 31, 2023, and the results of operations for the three and six months ending June 30, 2024, and June 30, 2023. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2023.

Previous wording

At March 31, 2024, the Bancorp had total assets of $2.1 billion, loans receivable, net of deferred fees and costs, of $1.5 billion and total deposits of $1.7 billion. Stockholders' equity totaled $151.6 million or 7.3% of total assets, with a book value per share of $35.17. Net income for the quarter ended March 31, 2024, was $9.3 million, or $2.17 earnings per common diluted share. For the quarter ended March 31, 2024, the return on average assets (ROA) was 1.77%, while the return on average stockholders’ equity (ROE) was 24.97%.

Current wording

At June 30, 2024, the Bancorp had total assets of $2.1 billion, loans receivable, net of deferred fees and costs, of $1.5 billion and total deposits of $1.8 billion. Stockholders' equity totaled $148.6 million or 7.2% of total assets, with a book value per share of $34.45. Net income for the quarter ended June 30, 2024, was $143 thousand, or $0.03 earnings per common diluted share. For the quarter ended June 30, 2024, the return on average assets (ROA) was 0.03%, while the return on average stockholders’ equity (ROE) was 0.39%.Net income for the six months ended June 30, 2024, was $9.4 million, or $2.21 earnings per diluted common share. For the six months ended June 30, 2024, the ROA was 0.91%, while the ROE was 12.81%.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

On August 9, 2024, the Bank entered into a memorandum of understanding (“MOU”) with the FDIC and DFI, which supersedes and replaces the MOU the Bank previously entered into with the FDIC and DFI on November 7, 2023. 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.

Previous wording

During the quarter ended March 31, 2024, total assets decreased by $36.5 million (1.7%), with interest-earning assets decreasing by $41.9 million (2.1%). At March 31, 2024, interest-earning assets totaled $1.92 billion compared to $1.96 billion at December 31, 2023. Earning assets represented 92.5% of total assets at March 31, 2024 and 92.9% of total assets at December 31, 2023.

Current wording

During the six months ended June 30, 2024, total assets decreased by $31.2 million (1.5%), with interest-earning assets decreasing by $41.9 million (2.1%). At June 30, 2024, interest-earning assets totaled $1.92 billion compared to $1.96 billion at December 31, 2023. Earning assets represented 92.3% of total assets at June 30, 2024 and 92.9% of total assets at December 31, 2023.

Previous wording

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 $518.2 million as of March 31, 2024, compared to $503.2 million as of December 31, 2023. Given prevailing market conditions such as rising interest rates, reduced occupancy as a result of the increase in hybrid work arrangements, and lower commercial real estate valuations, we are carefully monitoring these loans for signs of deterioration in credit quality.

Current wording

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 $529.4 million as of June 30, 2024, compared to $503.2 million as of December 31, 2023. Given prevailing market conditions such as higher interest rates, reduced occupancy as a result of the increase in hybrid work arrangements, and lower commercial real estate valuations, we are carefully monitoring these loans for signs of deterioration in credit quality.

Previous wording

Commercial real estate loans remained our largest loan segment and accounted for 34.4% of the total loan portfolio at March 31, 2024 and 33.4% at December 31, 2023. A further breakdown of the composition of the commercial real estate loan portfolio as of March 31, 2024 and December 31, 2023 is shown in the table below:

Current wording

Commercial real estate loans remained our largest loan segment and accounted for 35.2% of the total loan portfolio at June 30, 2024 and 33.4% at December 31, 2023. A further breakdown of the composition of the commercial real estate loan portfolio as of June 30, 2024 and December 31, 2023 is shown in the table below:

Previous wording

The Bancorp is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Bancorp will also retain mortgage loans with a fixed rate. During the quarter ended March 31, 2024, the Bancorp originated $3.8 million in new fixed rate mortgage loans for sale, compared to $8.9 million during the quarter ended March 31, 2023. Net gains realized from the mortgage loan sales totaled $152 thousand for the quarter ended March 31, 2024, compared to $263 thousand for the quarter ended March 31, 2023. The decrease in net gains realized from mortgage loan sales for the quarter ended March 31, 2024, compared to the prior year period is primarily due to lower demand for fixed rate mortgage loans as a result of increases in mortgage rates, which also slowed mortgage applications. At March 31, 2024, the Bancorp had $667 thousand in loans that were classified as held for sale, compared to $340 thousand at December 31, 2023.

Current wording

The Bancorp is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities of 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Bancorp will also retain mortgage loans with a fixed rate. During the six months ended June 30, 2024, the Bancorp originated $10.6 million in new fixed rate mortgage loans for sale, compared to $19.3 million during the six months ended June 30, 2023. Net gains realized from the mortgage loan sales totaled $472 thousand for the six months ended June 30, 2024, compared to $537 thousand for the six months ended June 30, 2023. The decrease in originations and net gains realized from mortgage loan sales for the six months ended June 30, 2024, compared to the prior year period is primarily due to lower demand for fixed rate mortgage loans as a result of increases in mortgage rates and continued low levels of housing inventory, which also slowed mortgage applications. At June 30, 2024, the Bancorp had $1.2 million in loans that were classified as held for sale, compared to $340 thousand at December 31, 2023.

Previous wording

Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status. At March 31, 2024, non-performing loans that remained accruing and more than 90 days past due include one multifamily loan totaling $215 thousand. The Bancorp will at times maintain certain loans on accrual status, despite being over 90 days past due, for short periods of time when management has reason to believe payments are in the process of being received.

Current wording

Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status. At June 30, 2024, non-performing loans that remained accruing and more than 90 days past due include one multifamily loan totaling $294 thousand. The Bancorp will at times maintain certain loans on accrual status, despite being over 90 days past due, for short periods of time when management has reason to believe payments are in the process of being received.

Previous wording

The primary objective of the Bancorp’s investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest bearing balances in other financial institutions, U.S. government securities, federal agency obligations, obligations of state and local municipalities, and corporate securities. The securities portfolio, all of which is designated as available-for-sale, totaled $346.2 million at March 31, 2024, compared to $371.4 million at December 31, 2023, a decrease of $25.1 million (6.8%). The decrease is attributable to a sale of $15.1 million in securities executed by the Bancorp resulting in a $531 thousand realized loss during the quarter ending March 31, 2024. This transaction was executed to improve future profitability, deleverage the balance sheet through a reduction in borrowings outstanding, and further benefit regulatory capital ratios in subsequent periods. Accumulated other comprehensive losses were $56.3 million as of March 31, 2024, compared to $51.6 million on December 31, 2023, an increase of $4.7 million or 9.1%. The yield on the securities portfolio decreased to 2.37% for the quarter ended March 31, 2024, down from 2.39% for the quarter ended March 31, 2023. Management will continue to monitor the securities portfolio for additional restructuring opportunities. At March 31, 2024, the securities portfolio represented 18.1% of interest-earning assets and 16.7% of total assets compared to 19.0% of interest-earning assets and 17.6% of total assets at December 31, 2023.

Current wording

The primary objective of the Bancorp’s investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest bearing balances in other financial institutions, U.S. government securities, federal agency obligations, obligations of state and local municipalities, and corporate securities. The securities portfolio, all of which is designated as available-for-sale, totaled $339.6 million at June 30, 2024, compared to $371.4 million at December 31, 2023, a decrease of $31.8 million (8.6%). The decrease in securities available for sale on a year to date basis was due to a combination of a sale of $15.1 million in securities, portfolio runoff and an increase in gross unrealized losses. Unrealized losses were $77.4 million as of June 30, 2024, compared to $68.0 million on December 31, 2023, an increase of $9.5 million or 13.9%. The yield on the securities portfolio increased to 2.43% for the three months ended June 30, 2024, up from 2.36% for the three months ended June 30, 2023. Management did not execute any securities sale transactions during the quarter but will continue to monitor the securities portfolio for additional restructuring opportunities. At June 30, 2024, the securities portfolio represented 17.7% of interest-earning assets and 16.3% of total assets compared to 19.0% of interest-earning assets and 17.6% of total assets at December 31, 2023.

Previous wording

The contractual maturities and weighted average yields for the U.S. government agency securities, municipal securities, and collateralized debt obligations at March 31, 2024, are summarized in the table below. Securities not due at a single maturity date, such as mortgage-backed securities and collateralized mortgage obligations are not included in the following table. The carrying values are stated in thousands (000’s).

Current wording

The contractual maturities and weighted average yields for the U.S. government agency securities, municipal securities, and collateralized debt obligations at June 30, 2024, are summarized in the table below. Securities not due at a single maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are shown separately. The carrying values are stated in thousands (000’s).

Previous wording

Deposits totaled $1.7 billion on March 31, 2024, compared to $1.8 billion on December 31, 2023, a decrease of $65.9 million or 3.6%. As of March 31, 2024, core deposits totaled $1.2 billion, compared to $1.3 billion on December 31, 2023, a decrease of $65.2 million or 5.1%. Core deposits include checking, savings, and money market accounts and represented 69.6% of the Bancorp’s total deposits at March 31, 2024. On March 31, 2024, balances for certificates of deposit totaled $531.3 million, compared to $532.1 million on December 31, 2023, a decrease of $793 thousand or 0.1%. The decrease in core deposits is primarily related to cyclical inflows and outflows related to certain of the Bank’s municipality depositors and planned reduction in deposit pricing.

Current wording

As of June 30, 2024, deposits totaled $1.8 billion, compared to $1.8 billion on December 31, 2023 a decrease of $56.7 million or 3.1%. Core deposits totaled $1.2 billion at June 30, 2024 compared to $1.3 billion on December 31, 2023, a decrease of $65.7 million or 5.1%. Core deposits include checking, savings, and money market accounts and represented 69.2% of the Bancorp’s total deposits at June 30, 2024. On June 30, 2024, balances for certificates of deposit totaled $541.2 million, compared to $532.1 million on December 31, 2023, an increase of $9.0 million or 1.7%. The overall deposit balance decrease is primarily related to cyclical inflows and outflows related to a number of municipality depositors and planned adjustments to deposit pricing.

Previous wording

Non-interest checking account balances decreased $45.5 million and Interest bearing savings account balances decreased $4.7 million in the first quarter of 2024 as municipal and business customers deployed their excess cash balances. Money market account balances decreased by $15.0 million during the first quarter of 2024 due to consumer preferences. Certificates of deposits decreased by $793 thousand in the first quarter of 2024 reflecting our decreases in offered interest rates. We strive to maintain balances of personal and business checking and savings accounts through our focus on quality customer service, the desire of customers to deal with a local bank, the convenience of our branch network and the breadth and depth of our sophisticated product line.

Current wording

Non-interest checking account balances decreased $49.8 million and interest bearing savings account balances decreased $13.9 million in the first six months of 2024 as municipal and business customers deployed their excess cash balances. Money market account balances decreased by $2.1 million during the first six months of 2024 due to consumer preferences. Certificates of deposits increased by $9.0 million in the first six months of 2024 reflecting our increases in offered interest rates. We strive to maintain balances of personal and business checking and savings accounts through our focus on quality customer service, the desire of customers to deal with a local bank, the convenience of our branch network and the breadth and depth of our product line.

Previous wording

Noninterest bearing demand accounts comprised 17.9% of total deposits at March 31, 2024 and 16.8% of total deposits at December 31, 2023. Interest bearing demand accounts, including money market and savings accounts, comprised 51.6% of total deposits at March 31, 2024 and 53.8% at December 31, 2023. Time accounts as a percentage of total deposits were 30.4% at March 31, 2024 and 29.3% at December 31, 2023.

Current wording

Noninterest bearing demand accounts comprised 17.8% of total deposits at June 30, 2024 and 16.8% of total deposits at December 31, 2023. Interest bearing demand accounts, including money market and savings accounts, comprised 51.4% of total deposits at June 30, 2024 and 53.8% at December 31, 2023. Time accounts as a percentage of total deposits were 30.8% at June 30, 2024 and 29.3% at December 31, 2023.

Previous wording

The increase in deposit rates in the first quarter ended March 31, 2024 as compared to full year ending December 31, 2023 is primarily the result of the increase in short-term market interest rates and deposit product migration experienced throughout 2023.

Current wording

The increase in deposit rates in the six months ended June 30, 2024 as compared to full year ending December 31, 2023 is primarily the result of the increase in short-term market interest rates and deposit product migration experienced throughout 2023 and continuing in the first six months of 2024.

Previous wording

Borrowings and repurchase agreements totaled $131.1 million at March 31, 2024, compared to $118.1 million at December 31, 2023, an increase of $13.0 million or 11.0%. The increase in short-term borrowings was the result of cyclical inflows and outflows of interest-earning assets and interest-bearing liabilities. During the quarter, the Bancorp repaid an additional $15 million of its outstanding BTFP balance, resulting in a $65 million balance as of March 31, 2024. The Federal Reserve ceased making loans under the BTFP on March 11, 2024. As of March 31, 2024, 72% of our deposits are fully FDIC insured, and another 7% are further backed by the Indiana Public Deposit Insurance Fund, an overall decrease of 4% from the amount as of December 31, 2023, of 71% of deposits being fully FDIC insured, and 11% backed by the Indiana Public Deposit Insurance Fund. The Bancorp’s liquidity position remains strong with solid core deposit customer relationships, excess cash, debt securities, and access to diversified borrowing sources. As of March 31, 2024, the Bancorp had available liquidity of $516.4 million including borrowing capacity from the FHLB and Federal Reserve facilities and other sources.

Current wording

Borrowings and repurchase agreements totaled $128.0 million compared to $118.1 million at December 31, 2023, an increase of $9.8 million or 8.3%. The change in short-term borrowings from December 31, 2023 was the result of cyclical inflows and outflows of interest-earning assets and interest-bearing liabilities. Furthermore, during the current quarter, the Bancorp repaid an additional $5 million of its outstanding BTFP balance, resulting in a $60 million balance as of June 30, 2024. As of June 30, 2024, 71% of our deposits are fully FDIC insured, and another 8% are further backed by the Indiana Public Deposit Insurance Fund. The Bancorp’s liquidity position remains strong with solid core deposit customer relationships, excess cash, debt securities, and access to diversified borrowing sources. As of June 30, 2024, the Bancorp had available liquidity of $574.3 million including borrowing capacity from the FHLB and Federal Reserve facilities

Previous wording

Other assets totaled $43.5 million at March 31, 2024, compared to $45.3 million at December 31, 2023. The decrease in other assets is primarily related to decreased fair value of the Bancorp’s interest rate swap contract derivative. Other liabilities totaled $41.6 million at March 31, 2024, compared to $29.4 million at December 31, 2023. The increase in other liabilities is primarily related to the sale-leaseback transaction executed on February 22, 2024 with MountainSeed Real Estate Services, LLC (the “Buyer”). Under the Sale Agreement, the Bank also entered into lease agreements (the “Lease Agreements”) with the Buyer under which the Bank leases each of the Properties. Each of the Lease Agreements became effective upon the closing of the sale-leaseback transaction and have an initial term of 15 years.

Current wording

Other assets totaled $44.0 million at June 30, 2024, compared to $45.3 million at December 31, 2023. The decrease in other assets is primarily related to decreased fair value of the Bancorp’s interest rate swap contract derivative. Other liabilities totaled $43.7 million at June 30, 2024, compared to $29.4 million at December 31, 2023. The increase in other liabilities is primarily related to the sale-leaseback transaction executed on February 22, 2024 with MountainSeed Real Estate Services, LLC (the “Buyer”). Under the Sale Agreement, the Bank also entered into lease agreements (the “Lease Agreements”) with the Buyer under which the Bank leases each of the Properties. Each of the Lease Agreements became effective upon the closing of the sale-leaseback transaction and have an initial term of 15 years.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

Although customer deposits remain our preferred funding source, maintaining additional sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the FHLB. At March 31, 2024, we had two outstanding advances totaling $25 million and the ability to borrow up to $289.3 million from the FHLB. We also have the ability to borrow from the Federal Reserve Bank of Chicago. At March 31, 2024, we had a $65 million in collateralized advances from the Federal Reserve Bank of Chicago through the BTFP. At March 31, 2024, cash and cash equivalents were $71.8 million and secured borrowing capacity at the Federal Reserve Bank totaled $211.1 million, providing total liquidity sources of $516.4 million.

Current wording

Although customer deposits remain our preferred funding source, maintaining additional sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the FHLB. At June 30, 2024, we had two outstanding advances totaling $25 million and the ability to borrow up to $363.1 million from the FHLB. We also have the ability to borrow from the Federal Reserve Bank of Chicago. At June 30, 2024, we had $60 million in outstanding collateralized advances from the Federal Reserve Bank of Chicago through the BTFP, which matures March 11, 2025. We plan to utilize existing sources of liquidity and deposits balances on an opportunistic bases to replace remaining BTFP balance prior to March 11, 2025. At June 30, 2024, cash and cash equivalents were $83.2 million and secured borrowing capacity at the Federal Reserve Bank totaled $170.2 million, providing total liquidity sources of $574.3 million.

Previous wording

The following tables shows the Bancorp’s sources of liquidity as of March 31, 2024 and December 31, 2024:

Current wording

The following table shows the Bancorp’s sources of liquidity as of June 30, 2024 and December 31, 2023:

Previous wording

During the quarter ended March 31, 2024, cash and cash equivalents decreased by $14.2 million compared to a $23.5 million increase for the quarter ended March 31, 2023. The primary sources of cash and cash equivalents were change in other borrowings, sales of loans originated for sale, proceeds from the maturity and paydown of securities, and change in repurchase agreements. The primary uses of cash and cash equivalents were loan originations. Cash used in operating activities totaled $25 thousand for the quarter ended March 31, 2024, compared to cash provided of $4.0 million for the three month period ended March 31, 2023. Cash provided from operating activities was primarily a result of net income and sale of loans originated for sale, offset by loans originated for sale and net change in accrued expenses and other liabilities. Cash provided by investing activities totaled $39.2 million for the current period, compared to cash used in investing activities of $3.0 million for the quarter ended March 31, 2023. Cash provided by investing activities for the current quarter was primarily related to net change in loans receivable, proceeds from security sales, and proceeds from sale leaseback transaction. Cash used in financing activities totaled $53.4 million during the current period compared to net cash provided by financing activities of $22.5 million for the quarter ended March 31, 2023. The net cash used in financing activities was primarily the result of net change in deposits and change in other borrowed funds, offset against borrowings of FHLB advances. On a cash basis, the Bancorp paid dividends on common stock of $515 thousand for the quarter ended March 31, 2024, and $1.3 million for the quarter ended March 31, 2023.

Current wording

During the six months ended June 30, 2024, cash and cash equivalents decreased by $2.8 million compared to a $84.4 million increase for the six months ended June 30, 2023. The primary sources of cash and cash equivalents were change in other borrowings, sales of loans originated for sale, proceeds from the maturity and paydown of securities, and change in repurchase agreements. The primary uses of cash and cash equivalents were loan originations. Cash provided in operating activities totaled $2.7 million for the six months ended June 30, 2024, compared to cash provided of $17.1 million for the six months ended June 30, 2023. Cash provided from operating activities was primarily a result of net income and sale of loans originated for sale, offset by loans originated for sale and net change in accrued expenses and other liabilities. Cash provided by investing activities totaled $42.4 million for the current period, compared to cash used in investing activities of $10.9 million for the six months ended June 30, 2023. Cash provided by investing activities for the current six-month period was primarily related to net change in loans receivable, proceeds from security sales, and proceeds from the sale leaseback transaction. Cash used in financing activities totaled $47.9 million during the current period compared to net cash provided by financing activities of $78.2 million for the six months ended June 30, 2023. The net cash used in financing activities was primarily the result of net change in deposits and change in other borrowed funds, offset against borrowings of FHLB advances. On a cash basis, the Bancorp paid dividends on common stock of $1.0 million for the six months ended June 30, 2024, and $2.7 million for the six months ended June 30, 2023.

Previous wording

At March 31, 2024, outstanding commitments to fund loans totaled $262.5 million. Approximately 55.0% of the commitments were at variable rates. Standby letters of credit, which are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party, totaled $16.4 million at March 31, 2024. Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity.

Current wording

At June 30, 2024, outstanding commitments to fund loans totaled $261.4 million. Approximately 55.4% of the commitments were at variable rates. Standby letters of credit, which are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third-party, totaled $17.0 million at June 30, 2024. Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity.

Previous wording

Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the quarter ended March 31, 2024, stockholders' equity increased by $4.2 million (2.9%). During the quarter ended March 31, 2024, stockholders’ equity was primarily increased by net income of $9.3 million offset by other comprehensive losses as the result of market value changes within the securities portfolio of $4.7 million and dividends declared of $516 thousand. On April 24, 2014, the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased under the program during the first quarter of 2024 or 2023. During 2024, 10,098 restricted stock shares vested under the Incentive Plan outlined in Note 9 of the financial statements, of which 2,816 of these shares were withheld in the form of a net surrender to cover the withholding tax obligations of the vesting employees. The repurchase of these surrendered shares is considered outside of the scope of the formal board approved stock repurchase program.

Current wording

Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the six months ended June 30, 2024, stockholders' equity increased by $1.3 million (0.9%). During the six months ended June 30, 2024, stockholders’ equity was primarily increased by net income of $9.4 million offset by other comprehensive losses as the result of market value changes within the securities portfolio of $7.3 million and dividends declared of $1.0 million. On April 24, 2014, the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased under the program during the first six months of 2024 or 2023. During 2024, 14,713 restricted stock shares vested under the Incentive Plan outlined in Note 10 of the financial statements, of which 3,364 of these shares were withheld in the form of a net surrender to cover the withholding tax obligations of the vesting employees. The repurchase of these surrendered shares is considered outside of the scope of the formal board approved stock repurchase program.

Previous wording

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

Current wording

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

Previous wording

During the quarter ended March 31, 2024, the Bancorp’s and Bank’s risk weighted assets continued to be negatively impacted by regulatory requirements regarding collateralized debt obligations. The regulatory requirements state that for collateralized debt obligations that have been downgraded below investment grade by the rating agencies, increased risk-based asset weightings are required. The Bancorp currently holds pooled collateralized debt obligations with a cost basis of $2.2 million. These investments currently have ratings that are below investment grade. As a result, approximately $8.2 million of risk-based assets are generated by the collateralized debt obligations in the Bancorp’s and Bank’s total risk based capital calculation.

Current wording

During the six months ended June 30, 2024, the Bancorp’s and Bank’s risk weighted assets continued to be negatively impacted by regulatory requirements regarding collateralized debt obligations. The regulatory requirements state that for collateralized debt obligations that have been downgraded below investment grade by the rating agencies, increased risk-based asset weightings are required. The Bancorp currently holds pooled collateralized debt obligations with a cost basis of $2.2 million. These investments currently have ratings that are below investment grade. As a result, approximately $8.2 million of risk-based assets are generated by the collateralized debt obligations in the Bancorp’s and Bank’s total risk based capital calculation.

Previous wording

In addition, the following table shows that, at March 31, 2024, and December 31, 2023, the Bank’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.

Current wording

In addition, the following table shows that, at June 30, 2024, and December 31, 2023, the Bank’s capital exceeded all applicable regulatory capital requirements as set forth in 12 C.F.R. § 324. The dollar amounts are in millions.

Previous wording

The Bancorp’s ability to pay dividends to its shareholders is largely dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. In addition, under the terms of the MOU, the Bank must seek regulatory approval prior to paying cash dividends. See “– Regulatory Developments Regarding the Bancorp 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 March 22, 2024, the Board of Directors of the Bancorp declared a first quarter dividend of $0.12 per share. The Bancorp’s first quarter dividend was paid to shareholders on May 6, 2024 to shareholders of record on April 23, 2024.

Current wording

The Bancorp’s ability to pay dividends to its shareholders is largely dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. In addition, under the terms of the MOU, the Bank must seek regulatory approval prior to paying cash dividends. See “– Regulatory Developments Regarding the Bancorp 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. Assuming receipt of regulatory approval for all cash dividends declared by the Bank under the terms of the MOU, the aggregate amount of dividends that the Bank is eligible to declare in 2024, without the need for qualifying for a further exemption or prior DFI approval under the terms of Indiana law described above, is its 2024 net income. On June 21, 2024, the Board of Directors of the Bancorp declared the second quarter dividend of $0.12 per share. The Bancorp’s second quarter dividend was paid to shareholders on August 1, 2024 to shareholders of record on July 19, 2024.

Previous wording

For the quarter ended March 31, 2024, the Bancorp reported net income of $9.3 million, compared to net income of $2.2 million for the quarter ended March 31, 2023, an increase of $7.0 million (314.2%). For the quarter ended March 31, 2024, the ROA was 1.77%, compared to 0.43 % for the quarter ended March 31, 2023. The ROE was 24.97% for the quarter ended March 31, 2024, compared to 6.42% for the quarter ended March 31, 2023.

Current wording

For the quarter ended June 30, 2024, the Bancorp reported net income of $143 thousand, compared to net income of $2.4 million for the quarter ended June 30, 2023, a decrease of $2.3 million (94.1%). For the quarter ended June 30, 2024, the ROA was 0.03%, compared to 0.46 % for the quarter ended June 30, 2023. The ROE was 0.39% for the quarter ended June 30, 2024, compared to 7.05% for the quarter ended June 30, 2023.

Previous wording

Net interest income for the quarter ended March 31, 2024, was $11.8 million, a decrease of $2.9 million (19.7%), compared to $14.7 million for the quarter ended March 31, 2023. The weighted-average yield on interest-earning assets was 4.52% for the quarter ended March 31, 2024, compared to 4.22% for the quarter ended March 31, 2023. The weighted-average cost of funds for the quarter ended March 31, 2024, was 2.53% compared to 1.41% for the quarter ended March 31, 2023. The impact of the 4.52% return on interest-earning assets and the 2.53% cost of funds resulted in an interest rate spread of 1.99% for the current quarter, a decrease from the 2.81% spread for the quarter ended March 31, 2023. On a tax adjusted basis, the Bancorp’s net interest margin was 2.57% for the quarter ended March 31, 2024, compared to 3.23% for the quarter ended March 31, 2023. The Bancorp believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Tax adjusted net interest margin represents a non-GAAP financial measure. See the non-GAAP reconciliation table immediately below and the section captioned “Non-GAAP Financial Measures” for further disclosure regarding non-GAAP financial measures.

Current wording

Net interest income for the quarter ended June 30, 2024, was $12.1 million, a decrease of $1.5 million (11.4%), compared to $14.0 million for the quarter ended June 30, 2023. The weighted-average yield on interest-earning assets was 4.64% for the quarter ended June 30, 2024, compared to 4.43% for the quarter ended June 30, 2023. The weighted-average cost of funds for the quarter ended June 30, 2024, was 2.55% compared to 1.87% for the quarter ended June 30, 2023. The impact of the 4.64% return on interest-earning assets and the 2.55% cost of funds resulted in an interest rate spread of 2.09% for the current quarter, a decrease from the 2.56% spread for the quarter ended June 30, 2023. On a tax adjusted basis, the Bancorp’s net interest margin was 2.67% for the quarter ended June 30, 2024, compared to 3.03% for the quarter ended June 30, 2023. The Bancorp believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Tax adjusted net interest margin represents a non-GAAP financial measure. See the non-GAAP reconciliation table immediately below and the section captioned “Non-GAAP Financial Measures” for further disclosure regarding non-GAAP financial measures.

Previous wording

The decreased net interest income and net interest margin for the quarter ended March 31, 2024, was primarily the result of higher cost of funds resulting from the higher rate environment year over year. We anticipate the compression seen in the first quarter of the year to continue, unless target rates decrease, and our interest-bearing liabilities are able to be repriced at those lower rates.

Current wording

The decreased net interest income and net interest margin for the quarter ended June 30, 2024, was primarily the result of higher cost of funds resulting from the higher rate environment year over year. We anticipate the compression seen in the current quarter to continue, unless target rates decrease, and our interest-bearing liabilities are able to be repriced at those lower rates.

Previous wording

The provision for income taxes was $972 thousand for the quarter ended March 31, 2024, as compared to $321 thousand for the quarter ended March 31, 2023. The effective tax rate was 9.5% for the quarter ended March 31, 2024, as compared to 12.5% for the quarter ended March 31, 2023. The Bancorp’s lower current effective tax rate for the quarter ended March 31, 2024, is a result of higher tax preferred income relative to taxable income.

Current wording

The benefit for income taxes was $9 thousand for the quarter ended June 30, 2024, as compared to the provision of $98 thousand for the quarter ended June 30, 2023. The effective tax rate was negative 6.7% for the quarter ended June 30, 2024, as compared to 3.9% for the quarter ended June 30, 2023. The Bancorp’s lower current effective tax rate for the quarter ended June 30, 2024, is a result of higher tax preferred income relative to taxable income.

Previous wording

The increase in other noninterest income was due primarily to the gain on the sale-leaseback transaction executed on February 22, 2024 with MountainSeed, Real Estate Services, LLC (the “Buyer”).The decrease in gain on sale of loans, for the three-month period, is the result of lower consumer demand for fixed-rate mortgage products in the higher-rate environment. The loss on sale of securities in the 2024 quarter resulted from balance sheet management decisions as previously discussed.

Current wording

The increase in other noninterest income was due primarily to the gain on the sale-leaseback transaction executed on February 22, 2024 with MountainSeed, Real Estate Services, LLC (the “Buyer”). The decrease in fees and service charges is primarily the result of decreased fee income from interest rate swap transactions occurring during the six month period. The decrease in gain on sale of loans, for the six-month period, is the result of lower consumer demand for fixed-rate mortgage products in the higher-rate environment. The increase in the loss on the sale of securities, net for the six-month period related to management election to sell certain securities for interest rate risk purposes and redeploy proceeds into higher yielding assets.

Previous wording

Increases in non-interest expenses during the quarter ended March 31, 2024 were primarily attributable to accounting and service fees associated with CECL loan model review and enhancements, together with higher non-recurring consulting and legal expenses supporting our recent sales-leaseback transaction in February and third-party expenses related to operational enhancements. The Bank remains focused on identifying additional operating expense opportunities and expense reductions through the remainder of this year. Management also continues to maintain discipline in staffing. Compensation and benefits expense declined by 5.7% for the quarter ended March 31, 2024, compared to March 31, 2023.

Current wording

Increases in non-interest expenses during the six months ended June 30, 2024, were primarily attributable to accounting and service fees associated with higher non-recurring consulting and legal expenses. The increase in occupancy and equipment expenses for the six months ended June 30, 2024, is primarily related to higher operating costs and additional lease expense associated with sale leaseback transaction. Management also continues to maintain discipline in staffing. Compensation and benefits expense declined by 3.3% for the six months ended June 30, 2024, compared to June 30, 2023.