What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-31 compared with 2024-03-28 · 155 added, 182 removed, 263 unchanged (56% of the section changed)

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

The Bancorp's earnings are dependent upon the earnings of the Bank.

The Company's earnings are dependent upon the earnings of the Bank.

The Bank's earnings are primarily dependent upon net interest margin.

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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 Bancorp's profitability.

A summary of the Bancorp’s significant accounting policies are detailed in Note 1 to the Bancorp’s consolidated financial statements included in this report.

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.

1 unchanged sentence

Estimates associated with the Allowance for credit losses are particularly susceptible to material change in the near term.

At December 31, 2023, the Bancorp had total assets of $2.1 billion and total deposits of $1.8 billion.

The Bancorp'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, 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.

1 unchanged sentence

The return on average assets was 0.58%, while the return on average stockholders’ equity was 8.06%.

Recent Developments within the Banking Industry

During the first half of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, uninsured deposit concentrations, unrealized securities losses, and eroding consumer confidence in the banking system.

In this regard, in March 2023, Silicon Valley Bank and Signature Bank were closed and taken over by the Federal Deposit Insurance Corporation (FDIC).

In addition, on May 1, 2023, the FDIC was appointed as receiver for First Republic Bank, and on that same date JPMorgan Chase acquired the substantial majority of the assets and assumed the deposits and certain other liabilities of First Republic Bank from the FDIC receivership.

These bank failures were driven principally by rapid withdrawals by depositors with large uninsured balances held at these institutions and losses incurred by these banks in liquidating their bond portfolios to provide liquidity to fund these deposit outflows.

The FDIC determined that Silicon Valley Bank and Signature Bank were systemically important and fully guaranteed their depositor balances above the $250,000 FDIC insurance limit.

Given the sharp increase in market interest rates during 2022 and 2023, most financial institutions’ bond portfolios continue to have significant unrealized loss positions even though some of these unrealized losses were recovered during the latter part of 2023 as the interest rate environment stabilized.

In response to these bank failures and the volatility in the banking industry, on March 12, 2023, the Federal Reserve Board announced the creation of a new Bank Term Funding Program (the “BTFP”).

The BTFP offers loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S.

Treasury securities, agency debt and mortgage-backed securities, and other qualifying assets as collateral.

These assets are valued at par for purposes of the collateral pledge under the BTFP.

The BTFP expired on March 11, 2024, with a one year extension option at the discretion of each participant.

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In connection with these negative industry developments, the Bancorp has proactively managed its liquidity position and balance sheet in order to remain flexible and respond to further economic, industry, and regulatory conditions.

The Bancorp’s total deposits as of December 31, 2023 increased by 2.2% as compared to December 31, 2022, while core deposits as of December 31, 2023 decreased by 9.2% as compared to December 31, 2022.

The increase in deposit balances and decrease in core deposits is related to customer preferences for the Bancorp's higher yielding certificate of deposit products.

The Bancorp’s uninsured deposits represented 29% of total deposits at December 31, 2023 and 2022.

The Bancorp’s funding base also includes public funds in the state of Indiana that are insured by the Indiana Public Deposit Insurance Fund (PDIF).

The funds covered by the PDIF at December 31, 2023 were $217.6 million, compared with $188.6 million at December 31, 2022.

This would further increase the total level of insured deposits at the Bancorp above those funds covered by the FDIC.

The Bancorp also took a number of preemptive actions, which included proactive outreach to clients and actions to maximize its funding sources in response to these recent developments.

In this regard, during 2023 the Bancorp participated in the Federal Reserve BTFP by accessing $100 million of low-cost capital under the program, which was reduced to $80 million by the end of 2023.

Furthermore, the Bancorp’s capital remains in excess of all required thresholds to be considered “well capitalized” under the FDIC’s risk-based capital guidelines, with common equity Tier 1 and total capital ratios of 10.40% and 11.40%, respectively, as of December 31, 2023.

Recent Developments - Allowance for Credit Losses

The allowance for credit losses represents management’s estimate of expected credit losses over the expected contractual life of our existing loan portfolio and the establishment of an allowance that is sufficient to absorb those losses.

As of January 1, 2023, we adopted ASU2016-13 Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as current expected credit losses (CECL).

Determining the appropriateness of the allowance is complex and requires judgement by management about the effect of matters that are inherently uncertain.

In determining an appropriate allowance, management makes numerous judgments, assumptions, and estimates which are inherently subjective, as they require material estimates that may be susceptible to significant change.

These estimates are derived based on continuous review of the loan portfolio, assessments of client performance, movement through delinquency stages, probability of default, losses given default, collateral values, and disposition, as well as expected cash flows, economic forecasts, and qualitative factors, such as changes in current economic conditions.

As stated in Note 4 to our consolidated financial statements set forth herein, we segment our loan portfolios based on similar risk characteristics for collective evaluation using a non-discounted cash flow approach to estimate expected losses.

We use a PD/LGD (probability of default/loss given default) model which aligns well with our internal risk rating system.

Actual losses may differ from estimated amounts due to model inefficiencies or management’s inability to adequately determine appropriate model adjustment factors.

The new accounting standard further requires management to use forecasts about future economic conditions to determine the expected credit losses over the remaining life of the asset.

Forecast adjustments are fundamentally difficult to establish and, in the current environment, due to uncertainty given the potential recession and political environment, the task is even more formidable.

We use a two-year reasonable and supportable period across all loan segments to forecast economic conditions.

We believe the two-year time horizon aligns with available industry guidance and various forecasting sources.

In assessing the factors used to derive an appropriate allowance, management benefits from a lengthy organizational history and experience with credit decisions and related outcomes but is new to the application of CECL.

We have been diligent in our efforts to gain a thorough understanding of the accounting standard, and have reviewed our portfolios, loan segmentations, methodologies and models and believe we have made appropriate and prudent decisions.

Nonetheless, if management’s underlying assumptions prove to be inaccurate, the Allowance for credit losses would have to be adjusted.

Our accounting policies related to the allowance for credit losses is disclosed in the section titled “Critical Accounting Policies” under the heading “Allowance for Credit Losses.”

Regulatory Developments Regarding the Bancorp and the Bank

Regulatory Developments Regarding the Company and the Bank

Consent Order

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The Order is based on findings of the FDIC and DFI during their joint examination commencing in February 2023 (the “Examination”).

The board of directors and management of the Bancorp and the Bank have aggressively taken an active role in working to address the findings contained in the Examination and have proactively taken steps to comply with the requirements of the Order prior to its effectiveness, as further discussed below.

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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.

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The Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and DFI.

Numerous actions have already been taken or commenced by the Bank to strengthen its BSA and anti-money laundering compliance practices, policies, procedures, and controls.

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.

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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 Bancorp and Bank also appointed David J.

Kwait as Senior Vice President, General Counsel, Corporate Secretary, and Chief Risk Officer, overseeing the Bank’s enhanced risk management infrastructure, including BSA compliance.

The Bank will incur additional non-interest expenses associated with the implementation of the corrective actions set forth in the Order.

However, these expenses are not expected to have a material impact on the results of operations or financial condition of the Bancorp or the Bank.

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 November 7, 2023, the Bank entered into a memorandum of understanding (“MOU”) with the FDIC and DFI.

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.

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The MOU will remain in effect until modified or terminated by the FDIC and DFI.

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

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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.

Financial Condition

During the year ended December 31, 2023, total assets increased by $37.9 million (1.8%), to $2.1 billion, with interest-earning assets increasing by $52.5 million (2.8%).

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 Bancorp’s largest asset, is a significant source of both interest and fee income.

The loan portfolio, which is the Company’s largest asset, is a significant source of both interest and fee income.

(Dollars in thousands)

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Construction and land development

Manufactured Homes

Commercial business

Loans receivable

Manufactured Homes

Gross loans receivable

Net deferred loans origination costs

Undisbursed loan funds

Loan clearing funds

Loans receivable, net of deferred fees and costs

Adjustable rate loans / loans receivable

Loans receivable to total assets

Loans receivable to earning assets

Loans receivable to total deposits

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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, 2023 is shown in the table below:

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:

Commercial Real Estate (CRE)*

% of Total Net Loans

(Dollars in thousands)

December 31, 2024

December 31, 2023

CRE Owner Occupied (CRE OO)

Food Services & Drinking Places

Ambulatory Health Care Services

Gasoline Stations & Fuel Dealers

Ambulatory Health Care Services

Repair and Maintenance

Specialty Trade Contractors

Merchant Wholesalers, Durable Goods

Personal and Laundry Services

Truck Transportation

Professional, Scientific, and Technical Services

Total CRE Owner Occupied (CRE OO)

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Strip Centers - Lessors

Office Properties - Lessors

Industrial Properties - Lessors

Office Properties - Lessors

Special Use - Lessors

Big Box Retail - Lessors

Mini Warehouses - Lessors

MiniWarehouses - Lessors

Total CRE Non Owner Occupied (CRE NOO)

Total Commercial Real Estate (OO & NOO)

Total Net Loans

*North American Industry Classification System (NAICS) classification coding for CRE loans began in 2023, similar NAICS 2022 proforma was not available to report

The Bancorp is primarily a portfolio lender.

Total Gross Loans

* 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.

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 Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis.

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.

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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, 2023, compared to $1.4 million for the year ended December 31, 2022.

At December 31, 2023, the Bancorp had $340 thousand in loans that were classified as held for sale, compared to $1.5 million at December 31, 2022.

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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, 2023, all non-performing loans are also accounted for on a non-accrual basis, except for thirty residential real estate loans totaling $1.1 million, and one commercial loan totaling $712 thousand that remained accruing and more than 90 days past due.

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:

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Commercial business

Manufactured homes

Nonperforming loans to total loans

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Manufactured homes

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In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of special mention loans.

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Commercial business

Manufactured homes

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.

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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 Bancorp aggregates these purchased loans into pools of loans by common risk characteristics, such as credit risk rating and loan type.

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 Bancorp 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.

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;

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(Dollars in thousands)

Term Extension

and Interest Rate

Combination Term

Extension and

Interest Rate

Residential Real Estate

For the year ended December 31, 2023

(Dollars in thousands)

Combination Term

Extension and

Interest Rate

Financing Receivables

Residential Real Estate

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

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The Bancorp 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 loans that have been modified during the year ended December 31, 2023.

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.

For the year ended December 31, 2024

(Dollars in thousands)

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Residential Real Estate

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

Upon the Bancorp’s determination that a modified loan has subsequently been deemed uncollectible, the loan or lease is written off.

For the year ended December 31, 2023

(Dollars in thousands)

Greater Than 90

Days Past Due

Residential Real Estate

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

For the year ended December 31, 2024

(Dollars in thousands)

Principal forgiveness

Weighted average interest

rate reduction

Weighted average term

Payment delay

Residential Real Estate

For the year ended December 31, 2023

(Dollars in thousands)

Principal forgiveness

Weighted average interest

rate reduction

Weighted average term

Payment delay

Residential Real Estate

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.

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The determination of the amounts of the ACL and provisions for credit losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability as of the reporting date.

The appropriateness of the current period provision and the overall adequacy of the ACL are determined through a disciplined and consistently applied quarterly process that reviews the Bancorp’s current credit risk within the loan portfolio and identifies the required allowance for credit losses given the current risk estimates.

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.

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.

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A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased.

4 unchanged sentences

(Dollars in thousands)

December 31, 2024

December 31, 2023

Allowance for credit losses

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ACL-to-non-performing loans (coverage ratio)

The December 31, 2023, balance in the ACL account is considered adequate by management after extensive analysis performed in accordance with the provisions of the current expected credit loss model.

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.

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Management has allocated reserves to both performing and non-performing loans based on current information available.

During 2023, net sales of foreclosed real estate totaled $77 thousand and net losses from the 2023 sales totaled $13 thousand.

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.

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.

1 unchanged sentence

treasury securities, federal agency obligations, obligations of state and local municipalities and corporate securities.

The securities portfolio totaled $371.4 million at December 31, 2023, compared to $370.9 million at December 31, 2022, an increase of $478 thousand or 0.1%.

The increase is attributable to decreased unrealized losses within the portfolio.

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, 2023, the Bancorp’s two investments in trust preferred securities were in “payment in kind” status.

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, 2023, the cost basis of the two trust preferred securities on non-accrual status totaled $2.2 million.

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The carrying value of the Bancorp’s investment portfolio and other short-term investments and stock balances at December 31, 2023 and 2022 were as follows:

At December 31, 2024, the cost basis of the two collateralized debt obligations on non-accrual status totaled $2.2 million.

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:

(Dollars in thousands)

government sponsored entities

treasury securities

Collateralized mortgage obligations and residential mortgage-backed securities

5 unchanged sentences

Fed funds sold

Certificates of deposit in other financial institutions

Federal Home Loan Bank stock

The net increase 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 and repurchase agreements.

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 Bancorp offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships.

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

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:

(Dollars in thousands)

2 unchanged sentences

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 related to customer preferences for higher yielding deposits.

The Bancorp’s borrowed funds are primarily used to fund asset growth not supported by deposit generation.

The Bancorp’s end-of-period borrowing balances were as follows:

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:

(Dollars in thousands)

2 unchanged sentences

Total borrowed funds

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Repurchase agreements increased as part of normal account fluctuations within that product line.

1 unchanged sentence

Liquidity and Capital Resources

For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, and pay dividends and operating expenses.

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.

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Financing activities focus almost entirely on the generation of customer deposits.

In addition, the Bancorp utilizes borrowings (i.e., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds.

During 2023, cash and cash equivalents increased $54.7 million compared to a decrease of $1.9 million for 2022.

The primary sources of cash and cash equivalents were proceeds from the sale of loans originated for sale, proceeds from the sale of securities, proceeds from the maturity and paydown of securities, and proceeds from the Federal Reserve’s BTFP.

The primary uses of cash and cash equivalents were the payment of dividends, change in deposits, and loan originations.

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 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.

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 inflows from financing activities totaled $15.5 million in 2023, compared to net cash outflows of $18.5 million in 2022.

The net cash flows from financing activities were primarily a result of net change in deposits, proceeds from borrowings, the net change in repurchase agreements and dividends paid.

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 $8.4 million and a decrease in net unrealized losses on available for sale securities of $12.7 million, which were partially offset by a decrease from the impact of adoption of ASU No.

2016-13 totaling $6.1 million and dividends of $4.5 million.

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, 2023, the Bank’s capital exceeded all regulatory capital requirements.

The dollar amounts are in millions.

(Dollars in millions)

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.

Bank Level Capital

Minimum Required To Be

(Dollars in thousands)

Minimum Required For

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Tier 1 capital to adjusted average assets

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The Bancorp’s ability to pay dividends to its shareholders is largely dependent upon the Bank’s ability to pay dividends to the Bancorp.

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.

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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.

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 26, 2023, the Board of Directors of the Bancorp declared a fourth quarter dividend of $0.12 per share.

The Bancorp’s fourth quarter dividend was paid to shareholders on February 5, 2024.

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 2023 was $8.4 million, compared to $15.1 million for 2022, a decrease of $6.7 million (44.4%).

The decrease is primarily due to lower net interest income, an increase in the provision for credit losses and a decrease in noninterest income, which were partially offset by a decrease in noninterest expenses and a decrease in income tax expense.

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.

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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 the increase in 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 in 2023 may continue moderately, unless target rates decrease, and our interest-bearing liabilities can be repriced at those lower rates.

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.

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The net interest margin was 2.54% for 2024, compared to 2.83% for 2023.

The Bancorp’s tax equivalent net interest margin for 2023, was 2.98% compared to 3.74% for 2022.

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 increase in interest earning asset income for the year ended December 31, 2023, compared to the year ended December 31, 2022, is primarily related to increased reinvestment rates in 2023 for loans, securities, and excess cash balances, as a result of the Federal Reserve rate increases occurring throughout 2023.

The increase in interest bearing liability expense is primarily the result of the Bancorp 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.

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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.

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

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Wealth management operations

Gain on tax credit investment

Gain on sale of loans held-for-sale, net

Gain (loss) on sale of securities, net

Loss on sale of securities, net

Increase in cash value of bank owned life insurance

Gain on real estate

Gain (Loss) on sale of foreclosed real estate

Total noninterest income

The decrease in fees and service charges is primarily the result of decreased lending fees earned resulting from lower loan volume year over year.

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.

The decrease in gain on sale of loans is the result of a decline in the volume of loans sold due to the increases in interest rates in the economy during 2023 and 2022.

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.

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Data processing

Impairment charge on assets held for sale

Federal deposit insurance premiums

Professional services

Net loss recognized on sale of premises and equipment

Professional and outside services

Total noninterest expense

The decrease in compensation and benefits is primarily the result of nonrecurring expenses related to the acquisition of Royal Financial.

The decrease in data processing expense is primarily the result of the data conversion expenses incurred in 2022 related to the acquisition of Royal Financial.

The decrease in occupancy and equipment expense is primarily due to the elimination of expenses on three branches that were closed in 2022.

The decrease in marketing is a result of nonrecurring expenses related to the Royal Financial acquisition advertising campaign in 2022.

The decrease in impairment charge on assets held for sale is the result of prior year impairment on the carrying value of branches held for sale.

The increase in federal deposit insurance premiums is primarily the result of growth of the Bank’s average assets.

The net loss recognized on sale of premises and equipment in 2022 resulted from the sale of a branch office.

The resulting cost savings were redeployed into building a digital-forward foundation so that the Bancorp can better serve its customers.

The decrease in other operating expenses is primarily the result of one-time expenses incurred in the prior year related to the acquisition of Royal Financial.

Income tax benefit for the year ended December 31, 2023, totaled $335 thousand, compared to income tax expense of $1.4 million for the year ended December 31, 2022, a decrease of $1.8 million (122.7%).

The combined effective federal and state tax rate for the Bancorp was (4.16%) for the year ended December 31, 2023, compared to 8.9% for the year ended December 31, 2022.

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Critical Accounting Estimates

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that management believes are most important to the portrayal of the Bancorp’s financial condition and that require management’s most difficult, subjective or complex judgments.

The Bancorp’s most critical accounting estimates 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 Bancorp’s consolidated financial statements.

Valuation of Investment Securities – The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Different judgments and assumptions used in pricing could result in different estimates of value.

In certain cases where market data is not readily available because of lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy.

At the end of each reporting period securities held in the investment portfolio are evaluated on an individual security level for determination of the need for an allowance for credit losses.

Significant judgments are required in determining whether unrealized losses on securities are due to credit-related causes, as opposed to changes in interest rates in the economy, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates.

We consider the following factors when determining credit-related impairment for a security:

the length of time and the extent to which the market value has been less than amortized cost;

the financial condition and near-term prospects of the issuer;

the underlying fundamentals of the relevant market and the outlook for such market for the near future;

and an assessment of whether the Bancorp has (1) the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before its anticipated market recovery.

If either of these conditions is met, management will recognize credit-related impairment.

If, in management’s judgment, a credit-related impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.

Management will utilize an independent valuation specialist to value securities semi-annually for credit-related impairment.

Allowance for credit losses – The Bancorp maintains an Allowance for credit losses (“ACL”) to absorb probable incurred credit losses that arise from the loan portfolio.

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.

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 credit 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 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.

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Management has allocated general reserves to both performing and non- performing loans based on historical data and current information available.

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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.

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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 Bancorp are monetary in nature.

As a result, interest rates have a more significant impact on the Bancorp’s performance than the effects of general levels of 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.

Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis