Finward Bancorp 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Summary Finward Bancorp is a financial holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank, an Indiana commercial bank, is a wholly-owned subsidiary of the Company. The Company 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, 2026 and December 31, 2025, and the results of operations for the three months ending March 31, 2026 and March 31, 2025. This discussion should be read in conjunction with the condensed consolidated financial statements and other financial data presented elsewhere herein and with the condensed consolidated 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2025. At March 31, 2026, the Company had total assets of $2.0 billion, loans receivable, net of deferred fees and costs, of $1.4 billion and total deposits of $1.7 billion. Stockholders' equity totaled $172.4 million or 8.6% of total assets, with a book value per share of $39.81. Net income for the three months ended March 31, 2026, was $2.2 million, or $0.52 earnings per diluted common share. For the three months ended March 31, 2026, the ROA was 0.44%, while the ROE was 5.00%. On August 9, 2024, the Bank entered into a memorandum of understanding with the FDIC and DFI. The MOU is an informal administrative agreement pursuant to which the Bank has agreed to take various actions and comply with certain requirements to enhance certain areas of the Bank’s operations. The MOU documents an understanding among the Bank, the FDIC, and DFI that, among other things, the Bank will: refrain from paying cash dividends without prior regulatory approval and develop and implement certain plans regarding the Bank’s operations, capital, and strategy. The Bank will submit written quarterly progress reports to the FDIC and DFI detailing compliance with the MOU. The MOU will remain in effect until modified or terminated by the FDIC and DFI. Management does not expect the actions called for by the MOU 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 Bancorp’s or the Bank’s ability or plans to expand and engage in business acquisitions. Financial Condition General During the three months ended March 31, 2026, total assets decreased by $6.0 million (0.30%), with interest-earning assets decreasing by $2.2 million (0.12%). At both March 31, 2026 and December 31, 2025, interest-earning assets totaled $1.9 billion. Earning assets represented 92.9% of total assets at March 31, 2026 and 92.7% December 31, 2025. Loan Portfolio Loans receivable, net of deferred fees and costs totaled $1.46 billion at March 31, 2026 and $1.45 billion at December 31, 2025. The loan portfolio, which is the Company’s largest asset, is the primary source of both interest and fee income. The Company’s lending strategy emphasizes quality loan growth, product diversification, and competitive and profitable pricing. 40 The Company’s end-of-period loan balances were as follows: March 31, 2026 December 31, 2025 (Dollars in thousands) Balance % Loans Balance % Loans Residential real estate $ 445,097 30.6 % $ 442,443 30.5 % Home equity 53,855 3.7 % 53,497 3.7 % Commercial real estate 564,613 38.8 % 555,594 38.3 % Construction and land development 76,582 5.3 % 77,208 5.3 % Multifamily 185,824 12.8 % 183,902 12.7 % Commercial business 94,160 6.5 % 99,304 6.9 % Consumer 310 0.0 % 870 0.1 % Manufactured homes 22,981 1.6 % 23,708 1.6 % Government 9,998 0.7 % 12,298 0.9 % Loans receivable 1,453,420 100.0 % 1,448,824 100.0 % Plus: Net deferred loans origination costs 1,723 1,606 Loan clearing funds (25) (43) Loans receivable, net of deferred fees and costs $ 1,455,118 $ 1,450,387 Adjustable rate loans / loans receivable $ 817,446 56.2 % $ 811,901 56.0 % Our total commercial real estate portfolio (which includes but is not limited to loans secured by office space, medical office space, and mixed-use retail/office space) totaled $564.6 million as of March 31, 2026, compared to $555.6 million as of December 31, 2025. Given prevailing market conditions such as continued elevated interest rate levels, reduced occupancy as a result of the increase in hybrid work arrangements, we are carefully monitoring these loans for signs of deterioration in credit quality. 41 Commercial real estate loans remained our largest loan segment and accounted for 38.8% of the total loan portfolio at March 31, 2026 and 38.3% at December 31, 2025. A further breakdown of the composition of the commercial real estate loan portfolio as of March 31, 2026 and December 31, 2025 is shown in the table below: Commercial Real Estate (CRE) March 31, 2026 December 31, 2025 (Dollars in thousands) # Loans $ Amount % of Total Gross Loans # Loans $ Amount % of Total Gross Loans CRE OO Food services & drinking places 65 $ 35,602 2.4 % 65 $ 35,961 2.5 % Ambulatory health care services 32 32,326 2.2 % 32 31,262 2.2 % Gasoline stations and fuel dealers 32 29,803 2.1 % 31 29,848 2.1 % Repair and maintenance 35 17,957 1.2 % 37 18,333 1.3 % Specialty trade contractors 34 16,051 1.1 % 32 15,571 1.1 % Motor vehicles and parts dealers 19 11,006 0.8 % 17 6,319 0.4 % Merchant wholesalers, durable goods 11 10,719 0.7 % 12 10,888 0.8 % Personal and laundry services 36 12,049 0.8 % 33 10,248 0.7 % Professional, scientific, and technical services 23 9,334 0.6 % 22 8,680 0.6 % Other 178 86,894 6.1 % 191 86,344 5.7 % CRE OO 465 261,741 18.0 % 472 253,454 17.4 % CRE NOO Retail centers - lessors 166 $ 143,339 9.9 % 165 $ 138,425 9.5 % Industrial properties - lessors 68 51,514 3.5 % 65 49,502 3.4 % Office properties - lessors 61 41,575 2.9 % 62 42,139 2.9 % Hotels 16 39,517 2.7 % 16 40,047 2.8 % Special use - lessors 9 10,360 0.7 % 10 10,501 0.7 % Mini Warehouses - lessors 19 8,190 0.6 % 19 8,310 0.6 % Big box retail - lessors 2 7,753 0.5 % 2 7,845 0.5 % Other 5 624 — % 9 5,371 0.4 % Total CRE NOO 346 $ 302,872 20.8 % 348 $ 302,140 20.9 % Total CRE OO & NOO 811 $ 564,613 38.8 % 820 $ 555,594 38.3 % Total Gross Loans $ 1,453,420 $ 1,448,824 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. 42 The following table sets forth certain information at March 31, 2026, regarding the dollar amount of loans in the Company’s portfolio based on their contractual terms to maturity. Demand loans, loans having no schedule of repayment and no stated maturity, and overdrafts are reported as due in one year or less. Contractual principal repayments of loans do not necessarily reflect the actual term of the loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Company the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the property subject to the mortgage. The amounts are stated in thousands (000’s). Maturing within one year After one but within five years After five but within fifteen years After fifteen years Total Residential real estate $ 9,386 $ 20,515 $ 78,180 $ 337,016 $ 445,097 Home equity 2,016 314 9,846 41,679 53,855 Commercial real estate 41,935 149,872 372,277 529 564,613 Construction and land development 28,451 7,574 35,341 5,216 76,582 Multifamily 30,535 50,141 105,148 - 185,824 Commercial business 41,385 36,646 16,106 23 94,160 Consumer 10 300 - - 310 Manufactured homes 1 205 11,624 11,151 22,981 Government 2,422 6,587 989 - 9,998 Total loans receivable $ 156,141 $ 272,154 $ 629,511 $ 395,614 $ 1,453,420 The Company is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Company will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the three months ended March 31, 2026, the Company originated $9.4 million in new fixed rate mortgage loans for sale, compared to $9.6 million during the quarter ended March 31, 2025. Net gains realized from the mortgage loan sales totaled $257 thousand for the three months ended March 31, 2026, compared to $230 thousand for the quarter ended March 31, 2025. At March 31, 2026, the Company had no loans that were classified as held for sale, compared to $1.1 million at December 31, 2025. Asset Quality Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on nonaccrual status. The Company 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. The Company's non-performing loans are summarized below: (Dollars in thousands) Loan Segment March 31, 2026 December 31, 2025 Residential real estate $ 6,797 $ 5,932 Home equity 761 810 Commercial real estate 2,234 1,561 Construction and land development 593 653 Multifamily 597 696 Commercial business 1,299 1,439 Manufactured homes 90 71 Total $ 12,371 $ 11,162 Non-performing loans to total loans 0.85 % 0.77 % Non-performing loans to total assets 0.61 % 0.55 % 43 Substandard loans include potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. No loans were internally classified as doubtful or loss at March 31, 2026 or December 31, 2025. The Company's substandard loans are summarized below: (Dollars in thousands) Loan Segment March 31, 2026 December 31, 2025 Residential real estate $ 6,797 $ 6,016 Home equity 761 813 Commercial real estate 2,234 1,561 Construction and land development 2,166 2,234 Multifamily 597 696 Commercial business 1,299 1,439 Manufactured homes 90 71 Total $ 13,944 $ 12,830 In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of special mention loans. Special mention loans represent loans management is closely monitoring due to one or more factors that may cause the loan to become classified as substandard. The Company's special mention loans are summarized below: (Dollars in thousands) Loan Segment March 31, 2026 December 31, 2025 Residential real estate $ 6,492 $ 4,797 Home equity 301 305 Commercial real estate 14,901 13,200 Construction and land development 486 557 Multifamily 2,694 2,857 Commercial business 3,471 2,768 Manufactured homes - 28 Total $ 28,345 $ 24,512 At March 31, 2026, management is of the opinion that there are no loans where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due or nonaccrual. Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources. The ACL is a valuation allowance for expected losses over the estimated life of loan portfolio, increased by the provision for credit losses, and decreased by charge-offs net of recoveries. A loan is charged off against the allowance by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. 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 and reasonable and supportable forecasts as of the reporting date. The appropriateness of the current period provision and the overall adequacy of the ACL are determined through a disciplined and consistently applied quarterly process that reviews the Company’s current credit risk within the loan portfolio and identifies the required allowance for credit losses given the current risk estimates. 44 The Company's provision for (benefit from) credit losses for the period ended are summarized below: (Dollars in thousands) Three Months Ended March 31, Loan Segment 2026 2025 Residential real estate $ 263 $ (2,055) Home equity (6) (213) Commercial real estate (522) 3,209 Construction and land development 547 (1,007) Multifamily 3 1,225 Commercial business (518) 55 Consumer 12 9 Manufactured homes 9 (123) Government (12) (23) Total $ (224) $ 1,077 The Company's charge-off and recovery information is summarized below: (Dollars in thousands) Three Months Ended March 31, 2026 Loan Segment Charge-offs Recoveries Net (Charge-offs) Recoveries Residential real estate $ (5) $ 21 $ 16 Consumer (14) 1 (13) Total $ (19) $ 22 $ 3 (Dollars in thousands) Three Months Ended March 31, 2025 Loan Segment Charge-offs Recoveries Net (Charge-offs) Recoveries Residential real estate $ - $ 16 $ 16 Commercial real estate - 4 4 Multifamily (46) 10 (36) Commercial business (61) 55 (6) Consumer (12) 1 (11) Total $ (119) $ 86 $ (33) 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. The Company's allowance to total loans and non-performing loans are summarized below: (Dollars in thousands) March 31, 2026 December 31, 2025 Allowance for credit losses $ 17,285 $ 17,506 Total loans $ 1,455,118 $ 1,450,387 Non-performing loans $ 12,371 $ 11,162 ACL-to-total loans 1.19 % 1.21 % ACL-to-non-performing loans (coverage ratio) 139.7 % 156.8 % 45 Investment Portfolio The primary objective of the Company’s investment portfolio is to provide for the liquidity needs of the Company and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest bearing balances in other financial institutions, U.S. government agency securities, U.S. treasury securities, federal agency obligations, obligations of state and local municipalities, mortgage-backed securities, and corporate securities. The securities portfolio, all of which is designated as available-for-sale, totaled $307.7 million at March 31, 2026, compared to $316.2 million at December 31, 2025, a decrease of $8.5 million (2.7%). The decrease in securities available for sale from year end, was primarily due to an increase in the negative fair value adjustment to the portfolio. The yield on the securities portfolio was 2.22% for the three months ended March 31, 2026 and 2.38% for the quarter ended March 31, 2025. Management did not execute any securities sale transactions during the quarter. At March 31, 2026, the securities portfolio represented 16.4% of interest-earning assets and 15.3% of total assets compared to 16.9% of interest-earning assets and 15.6% of total assets at December 31, 2025. The Company’s end-of-period investment portfolio and other short-term investments and stock balances were as follows: March 31, 2026 December 31, 2025 (Dollars in thousands) Balance % Securities Balance % Securities U.S. government agency securities $ 8,483 2.8 % $ 8,466 2.7 % Collateralized mortgage obligations and residential mortgage-backed securities 101,902 33.1 % 104,665 33.1 % Municipal securities 195,410 63.5 % 201,214 63.6 % Collateralized debt obligations 1,891 0.6 % 1,882 0.6 % Total securities available-for-sale $ 307,686 100.0 % $ 316,227 100.0 % (Dollars in thousands) March 31, 2026 December 31, 2025 $ Change % Change Interest bearing deposits in other financial institutions $ 102,997 $ 101,382 $ 1,615 1.6 % Federal Home Loan Bank stock 6,547 6,547 - - The increase in interest bearing deposits in other financial institutions is the result of the timing of loan fundings and payoffs, inflow and outflow of deposits, repurchase agreements and borrowed funds. The contractual maturities and weighted average yields for the U.S. government agency securities, municipal securities, and collateralized debt obligations at March 31, 2026, 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). The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields presented are not on a tax-equivalent basis. Within 1 Year 1 - 5 Years 5 - 10 Years After 10 Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount U.S. government sponsored entities $ - — % $ 8,483 1.00 % $ - — % $ - — % $ 8,483 Collateralized mortgage obligations and residential mortgage-backed securities - — % - — % - — % 101,902 1.54 % 101,902 Municipal securities - — % 3,894 2.45 % 38,631 2.93 % 152,885 2.98 % 195,410 Collateralized debt obligations - — % - — % - — % 1,891 3.31 % 1,891 Totals $ - — % $ 12,377 1.46 % $ 38,631 2.93 % $ 256,678 2.41 % $ 307,686 46 Deposits Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes. The Company offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships. The Company’s end-of-period deposit portfolio balances were as follows: (Dollars in thousands) March 31, 2026 December 31, 2025 $ Change % Change Checking $ 587,575 $ 592,214 $ (4,639) (0.8 %) Savings 253,408 254,055 (647) (0.3 %) Money market 389,274 381,111 8,163 2.1 % Certificates of deposit 488,814 499,591 (10,777) (2.2 %) Total deposits $ 1,719,071 $ 1,726,971 $ (7,900) (0.5 %) As of March 31, 2026, deposits totaled $1.72 billion, a decrease of $7.9 million or 0.5% compared to December 31, 2025. Core deposits totaled $1.2 billion at both March 31, 2026 and December 31, 2025. Core deposits include checking, savings, and money market accounts and represented 71.6% of the Company’s total deposits at March 31, 2026. On March 31, 2026, balances for certificates of deposit totaled $488.8 million, compared to $499.6 million on December 31, 2025, a decrease of $10.8 million or 2.2%. The decrease in deposits is primarily related to cyclical flows and continued planned adjustments to deposit pricing. Checking account balances decreased $4.6 million and interest bearing savings account balances decreased $0.6 million from year end primarily due to decreases in personal statement savings account balances. Money market account balances increased by $8.2 million from year end due to business and retail consumer preferences. Certificates of deposits decreased by $10.8 million primarily reflecting customer prioritization of more liquid deposit products. 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. Non-interest bearing demand accounts comprised 16.2% of total deposits at March 31, 2026 and 15.5% of total deposits at December 31, 2025. Interest bearing demand accounts, including money market and savings accounts, comprised 55.6% of total deposits at both March 31, 2026 and December 31, 2025. Time accounts as a percentage of total deposits were 28.4% at March 31, 2026 and 28.9% at December 31, 2025. The following table presents the average daily amount of deposits and average rates paid on such deposits for the periods indicated. The amounts are stated in thousands (000’s). Three Months Ended March 31, 2026 2025 Amount Rate % Amount Rate % Non-interest bearing demand deposits 270,626 - % $ 279,013 - % Interest bearing demand deposits 318,069 0.62 % 314,545 0.74 % MMDA accounts 383,866 2.75 % 340,740 2.95 % Savings accounts 253,792 0.05 % 274,684 0.05 % Certificates of deposit 492,267 3.09 % 551,408 3.57 % Total deposits $ 1,718,620 1.62 % $ 1,760,390 1.83 % Deposit rates decreased in the three months ended March 31, 2026 compared to same periods in 2025, primarily driven by a decrease in short-term market interest rates. 47 Borrowed Funds 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) March 31, 2026 December 31, 2025 $ Change % Change Federal funds purchased and repurchase agreements $ 40,815 $ 39,703 $ 1,112 2.8 % Borrowed funds 50,000 45,000 5,000 11.1 % Total borrowed funds $ 90,815 $ 84,703 $ 6,112 7.2 % Borrowings, federal funds purchased, and repurchase agreements totaled $90.8 million at March 31, 2026 compared to $84.7 million at December 31, 2025, a decrease of $6.1 million or 7.2%. The increase in borrowings from December 31, 2025, was the result of new FHLB advances and additional repurchase agreement activity. As of March 31, 2026, 72% of our deposits are fully FDIC insured, and another 8% are further backed by the Indiana Public Deposit Insurance Fund. The Company’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, 2026, the Company had available liquidity of $555.0 million including borrowing capacity from the FHLB and Federal Reserve facilities. Other assets totaled $35.1 million at March 31, 2026, compared to $34.9 million at December 31, 2025. The increase in other assets is primarily related an increase in the deferred tax asset. Accrued expenses and other liabilities totaled $32.9 million at March 31, 2026, compared to $34.8 million at December 31, 2025. The decrease in accrued expenses and other liabilities is primarily the result of decreased ACH prefunding balances. Market Risk and Interest Rate Sensitivity General Market risk represents the risk of loss due to changes in market values of assets and liabilities. The Company incurs market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. As of March 31, 2026, the Company has identified interest rate risk as our primary source of market risk. Interest Rate Risk 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). The Company’s Board of Directors establishes broad policy limits with respect to interest rate risk. As part of this policy, ALCO establishes specific operating guidelines within the parameters of the Board of Director’s policies. In general, the ALCO focuses on ensuring a stable and steadily increasing flow of net interest income through managing the size and mix of the balance sheet. The management of interest rate risk is an active process which encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints. An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin. Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk. 48 Evaluation of Interest Rate Risk We use income simulations, an analysis of core funding utilization, and EVE at Risk simulations as our primary tools in measuring and managing interest rate risk. These tools are utilized to quantify the potential earnings impact of changing interest rates over a 12-month simulation horizon (income simulations) as well as identify expected earnings trends given longer term rate cycles (long term simulations, core funding utilizations, and EVE at Risk simulation). A standard gap report and funding matrix will also be utilized to provide supporting detailed information on the expected timing of cashflow and repricing opportunities. There are an infinite number of potential interest rate scenarios, each of which can be accompanied by differing economic, political, and regulatory climates; can generate multiple differing behavior patterns by markets, borrowers, depositors, and other market participants; and can last for varying degrees of time. Therefore, by definition, interest rate risk sensitivity cannot be predicted with certainty. Accordingly, the Company’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between theoretical and practical scenarios; especially given the primary objective of the Company’s overall asset/liability management process is to facilitate meaningful strategy development and implementation. Therefore, we model a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios, the collective impact of which will enable the Company to clearly understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined. We utilize a simulation model as our primary tool to assess the direction and magnitude of variations in net interest income and EVE at Risk resulting from potential changes in market interest rates. Key assumptions in the model, which we believe are reasonable but which may have a significant impact on results, include: (i) the timing of changes in interest rates; (ii) shifts or rotations in the yield curve; (iii) re-pricing characteristics for market-rate-sensitive instruments; (iv) varying loan prepayment speeds for different interest rate scenarios; and (v) the overall growth and mix of assets and liabilities. 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 at Risk, 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. The following table shows the impact of changes in interest rates on net interest income over the next twelve months and EVE at Risk based on our balance sheet as of March 31, 2026 (dollars in millions): Interest Rate Scenario EVE at Risk Percent Change Net interest income Percent Change +400 Bps $ 253 -29.3 % $ 63.7 -0.4 % +300 Bps $ 294 -17.7 % $ 64.6 1.1 % +200 Bps $ 332 -7.4 % $ 65.1 1.7 % +100 Bps $ 352 -1.7 % $ 64.6 1.0 % No change $ 358 0.0 % $ 63.9 0.0 % -100 Bps $ 348 -2.8 % $ 63.6 -0.6 % -200 Bps $ 327 -8.6 % $ 63.9 -0.1 % -300 Bps $ 295 -17.6 % $ 64.3 0.5 % -400 Bps $ 252 -29.5 % $ 64.7 1.2 % If interest rates across the yield curve were to uniformly decrease or increase up to 400 basis points, this analysis suggests the Bank maybe positioned for relatively neutral to modestly negative or positive changes in net interest income over the next twelve months. 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. 49 In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; economic and competitive conditions; potential changes in lending, investing and deposit gathering strategies; and client preferences. Liquidity and Capital Resources For the Company, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, and pay dividends and operating expenses. Because profit and liquidity are often conflicting objectives, management attempts to maximize the Bank’s net interest margin by making adequate, but not excessive, liquidity provisions. Furthermore, we seek to manage funds so that future profits will not be significantly impacted as funding costs increase. We seek to maintain diversified sources of liquidity that may be used during the ordinary course of business as well as on a contingency basis. Our primary sources of liquidity are deposits, principal and interest payments on loans and securities, and proceeds from calls, maturities, and sales of securities, subject to market conditions. While maturities and scheduled amortization of loans and securities are predictable sources of liquidity, deposit flows and loan and securities prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are unencumbered cash and due from banks and unpledged securities classified as available for sale, which could be liquidated, subject to market conditions. In the future, our liquidity position will be affected by the level of customer deposits and payments, as well as acquisitions, dividends, and share repurchases in which we may engage. For the next twelve months, we believe that our existing cash resources will be sufficient to meet the liquidity and capital requirements of our operations. Changes in the liquidity position result from operating, investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. The primary investing activities include loan originations, loan repayments, investments in interest bearing balances in other financial institutions, and the purchase, sale, and maturity of investment securities. Financing activities focus almost entirely on the generation of customer deposits. In addition, the Company utilizes borrowings (i.e., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds. 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, 2026, we had five outstanding advances totaling $50 million and the ability to borrow up to $269.5 million from the FHLB. We also have the ability to borrow from the Federal Reserve Bank of Chicago. At March 31, 2026, we had no outstanding balance from the Federal Reserve Bank of Chicago. At March 31, 2026, cash and cash equivalents were $118.8 million and secured borrowing capacity at the Federal Reserve Bank totaled $244.5 million, providing total additional liquidity sources of $555.0 million (excluding brokered deposit capacity). The following table shows the Company’s sources of liquidity as of March 31, 2026 and December 31, 2025: Sources of Liquidity As of March 31, 2026 As of December 31, 2025 Outstanding Additional Capacity Outstanding Additional Capacity FHLB Advances $ 50,000 $ 269,493 $ 45,000 $ 380,737 Fed Discount Window - 244,521 - 252,205 Fed Funds Lines 642 16,000 - 16,000 Other Line of Credit - 25,000 - 25,000 Total $ 50,642 $ 555,014 $ 45,000 $ 673,942 During the three months ended March 31, 2026, cash and cash equivalents decreased by $0.9 million compared to a $1.7 million increase for the quarter ended March 31, 2025. The primary sources of cash and cash equivalents were sales of loans originated for sale and the proceeds from borrowings. The primary uses of cash and cash equivalents were loan originations and the purchase of loans. Cash provided by operating activities totaled $3.6 million for the three months ended March 31, 2026, compared to cash used of $3.8 million for the quarter ended March 31, 2025. Cash used in operating activities was primarily a result of net income and sale of loans originated for sale offset by loans originated for sale. Cash used in investing activities totaled $2.2 million for the current period, compared to cash provided by investing 50 activities of $19.7 million for the quarter ended March 31, 2025. Cash used in investing activities for the current three-month period was primarily related to the purchase of loans. Cash used in financing activities totaled $2.4 million during the current period compared to net cash used in financing activities of $14.1 million for the quarter ended March 31, 2025. The net cash used in financing activities was primarily the result of net change in deposits offset by the proceeds from borrowed funds. On a cash basis, the Company paid dividends on common stock of $520 thousand for the three months ended March 31, 2026, and $518 thousand for the quarter ended March 31, 2025. At March 31, 2026, outstanding commitments to fund loans totaled $267.9 million. Approximately 59.9% of the commitments were at variable rates. Standby letters of credit, which are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party, totaled $15.0 million at March 31, 2026. Management believes that the Company has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity. Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the three months ended March 31, 2026, stockholders' equity decreased by $2.3 million 1.3%. During the three months ended March 31, 2026, stockholders’ equity was primarily decreased by net income of $2.2 million and offset by other comprehensive income as the result of market value changes within the securities portfolio of $4.1 million and dividends declared of $520 thousand. On April 24, 2014, the Company’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Company’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 three months of 2026 or 2025. During 2025, 6,025 restricted stock shares vested under the Incentive Plan outlined in Note 10 of the condensed consolidated financial statements, of which 1,508 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. 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. Pursuant to the above capital regulations, 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%. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions by the institution and certain discretionary bonus payments to management if an institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. On March 19, 2026, the federal banking regulators issued three proposals to modernize the regulatory capital framework for banks of all sizes. The federal banking agencies stated the proposals would streamline capital requirements and better align regulatory capital with risk while maintaining the safety and soundness of the banking system. The proposals are intended to be the final phase of the Basel capital reforms. Comments on the proposals are due by June 18, 2026. The Company's management continues to evaluate the impact of these proposals on the Company, the Bank, and its business, financial condition, and results of operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the FRB to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries. However, under the FRB’s “Small Bank Holding Company” exemption from consolidated bank holding company capital requirements, bank holding companies and savings and loan holding companies with less than $3 billion in consolidated assets, such as the Company, are exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases. 51 During the three months ended March 31, 2026, the Company’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 Company currently holds pooled collateralized debt obligations with a cost basis of $2.1 million. These investments currently have ratings that are below investment grade. As a result, approximately $1.9 million of risk-based assets are generated by the collateralized debt obligations in the Company’s and Bank’s total risk based capital calculation. In addition, the following table shows that, at March 31, 2026 and December 31, 2025, the Bank’s capital exceeded all applicable regulatory capital requirements as set forth in 12 C.F.R. § 324. (Dollars in thousands) Actual Minimum Required For Capital Adequacy Purposes Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations March 31, 2026 Amount Ratio Amount Ratio Amount Ratio Common equity tier 1 capital to risk-weighted assets $ 188,162 12.03 % $ 70,362 4.50 % $ 101,634 6.50 % Tier 1 capital to risk-weighted assets $ 188,162 12.03 % $ 93,816 6.00 % $ 125,088 8.00 % Total capital to risk-weighted assets $ 207,478 13.27 % $ 125,088 8.00 % $ 156,360 10.00 % Tier 1 leverage ratio $ 188,162 9.24 % $ 81,448 4.00 % $ 101,810 5.00 % (Dollars in thousands) Actual Minimum Required For Capital Adequacy Purposes Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations December 31, 2025 Amount Ratio Amount Ratio Amount Ratio Common equity tier 1 capital to risk-weighted assets $ 186,214 11.86 % $ 70,626 4.50 % $ 102,016 6.50 % Tier 1 capital to risk-weighted assets $ 186,214 11.86 % $ 94,168 6.00 % $ 125,558 8.00 % Total capital to risk-weighted assets $ 205,472 13.09 % $ 125,558 8.00 % $ 156,947 10.00 % Tier 1 leverage ratio $ 186,214 8.93 % $ 83,379 4.00 % $ 104,223 5.00 % The Company’s ability to pay dividends to its shareholders is largely dependent upon the Bank’s ability to pay dividends to the Company. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the 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 “– Summary” 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 2026, without the need for qualifying for a further exemption or prior DFI approval under the terms of Indiana law described above, is its 2026 net income. On March 2, 2026, the Board of Directors of the Company declared the most recent quarterly dividend of $0.12 per share. The Company’s quarterly dividend was paid to shareholders on March 31, 2026 to shareholders of record on March 16, 2026. 52 Results of Operations - Comparison of the Three Months Ended March 31, 2026 to March 31, 2025 For the three months ended March 31, 2026, the Company reported net income of $2.2 million, an increase of $1.8 million (392.7%) compared to $455 thousand for the quarter ended March 31, 2025. For the three months ended March 31, 2026, the ROA was 0.44%, compared to 0.09% for the quarter ended March 31, 2025. The ROE was 5.00% for the three months ended March 31, 2026, compared to 1.17% for the quarter ended March 31, 2025. Information relating to the average consolidated balance sheet and the yield on average earning assets and cost of average liabilities for the periods indicated are in the following table. Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities derives the disclosed rates. Average balances are derived from daily balances. (Dollars in thousands) Average Balances, Interest, and Rates (unaudited) March 31, 2026 March 31, 2025 Average Balance Interest Rate (%) Average Balance Interest Rate (%) ASSETS ` Interest bearing deposits in other financial institutions $ 96,250 949 3.94 % $ 53,553 $ 541 4.04 % Federal funds sold 1,523 11 2.89 % 1,375 12 3.49 % Securities available-for-sale 318,670 1,771 2.22 % 336,060 1,997 2.38 % Loans receivable 1,445,921 19,871 5.50 % 1,498,312 19,655 5.25 % Federal Home Loan Bank stock 6,547 119 7.27 % 6,547 136 8.31 % Total interest earning assets 1,868,911 22,721 4.86 % 1,895,847 $ 22,341 4.71 % Cash and non-interest bearing deposits in other financial institutions 21,331 27,919 Allowance for credit losses (17,608) (16,946) Other non-interest bearing assets 143,452 153,148 Total assets $ 2,016,086 $ 2,059,968 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits $ 1,447,994 6,959 1.92 % $ 1,481,377 $ 8,045 2.17 % Federal funds purchased and repurchase agreements 38,113 272 2.85 % 41,631 348 3.34 % Borrowed funds 45,334 419 3.70 % 61,613 635 4.12 % Total interest bearing liabilities 1,531,441 7,650 2.00 % 1,584,621 $ 9,028 2.28 % Non-interest bearing deposits 270,626 279,013 Other non-interest bearing liabilities 34,588 40,923 Total liabilities 1,836,655 1,904,557 Total stockholders' equity 179,431 155,411 Total liabilities and stockholders' equity $ 2,016,086 $ 2,059,968 Net interest income 15,071 $ 13,313 Return on average assets 0.44 % 0.09 % Return on average equity 5.00 % 1.17 % Net interest margin (average earning assets) 3.23 % 2.81 % Net interest margin (average earning assets) - tax equivalent 3.35 % 2.95 % Net interest spread 2.86 % 2.43 % Ratio of interest-earning assets to interest-bearing liabilities 1.22x 1.20x Net interest income for the three months ended March 31, 2026, was $15.1 million, an increase of $1.8 million (13.2%), compared to $13.3 million for the quarter ended March 31, 2025. The weighted-average yield on interest-earning assets was 4.86% for the three months ended March 31, 2026 compared to 4.71% for the quarter ended March 31, 2025. The weighted-average cost of interest-bearing liabilities for the three months ended March 31, 2026, was 2.00% compared to 2.28% for the quarter ended March 31, 2025. The impact of the 4.86% return on interest-earning assets and the 2.00% cost of interest-bearing liabilities resulted in an interest rate spread of 2.86% for the three months ended March 31, 2026, 53 an increase from the 2.43% spread for the quarter ended March 31, 2025. The Company’s net interest margin on a tax-equivalent basis was 3.35% for the three months ended March 31, 2026, compared to 2.95% for the quarter ended March 31, 2025. The Company 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. Three Months Ended March 31, (Dollars in thousands) 2026 2025 Calculation of net interest margin, tax-equivalent basis Net interest income $ 15,071 $ 13,313 Tax-equivalent adjustment on securities and loans 582 670 Net interest income (tax-equivalent basis) $ 15,653 $ 13,983 Total average earning assets $ 1,868,911 $ 1,895,847 Net interest margin (tax-equivalent basis) 3.35 % 2.95 % The increased net interest income and net interest margin for the three months ended March 31, 2026, was primarily the result of reduced deposit and borrowing costs. The following table shows the change in non-interest income for the three months ended March 31, 2026, and March 31, 2025. (Dollars in thousands) Three Months Ended March 31, 3/31/2026 vs. 3/31/2025 2026 2025 $ Change % Change Non-interest income: Fees and service charges $ 1,295 $ 1,109 $ 186 16.8 % Wealth management operations 661 619 42 6.8 % Gain (loss) on tax credit investment - 67 (67) (100.0) % Gain (loss) on sale of loans held-for-sale, net 257 230 27 11.7 % Bank owned life insurance 201 198 3 1.5 % Other 3 6 (3) (50.0) % Total non-interest income $ 2,417 $ 2,229 $ 188 8.4 % The increase in non-interest income was primarily due to an increase in fees and service charges. 54 The following table shows the change in non-interest expense for the three months ended March 31, 2026, and March 31, 2025. (Dollars in thousands) Three Months Ended March 31, 3/31/2026 vs. 3/31/2025 2026 2025 $ Change % Change Non-interest expense: Compensation and benefits $ 7,591 $ 7,372 $ 219 3.0 % Occupancy and equipment 1,991 2,111 (120) (5.7) % Data processing 1,105 1,039 66 6.4 % Marketing 587 86 501 582.6 % Federal deposit insurance premiums 381 433 (52) (12.0) % Professional and outside services 1,169 1,260 (91) (7.2) % Technology 508 454 54 11.9 % Other 1,436 1,717 (281) (16.4) % Total non-interest expense $ 14,768 $ 14,472 $ 296 2.0 % Increases in non-interest expenses during the three months ended March 31, 2026, were primarily attributable to planned increases in marketing expenses, due to seasonal promotion and planned business generation purposes, as well as compensation and benefit expense driven by annual merit-based increases. The provision for income taxes was $423 thousand for the three months ended March 31, 2026 as compared to the provision of $161 thousand for the quarter ended March 31, 2025. The effective tax rate was 15.9% for the three months ended March 31, 2026, as compared to 26.1% for the quarter ended March 31, 2025. The Company’s year-to-date effective tax rate for the three months ended March 31, 2026, decreased primarily due to lower levels of core income experienced during the three months ended March 31, 2025. Critical Accounting Policies The notes to the condensed consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10–K for 2025 contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Forward-Looking Statements Statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are also intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. The Company cautions readers that forward-looking statements, including without limitation those relating to the Company’s future business prospects, merger and acquisition activities, interest income and expense, net income, liquidity, and capital needs are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this report, including those identified in the Company’s 2025 Form 10-K. Non-GAAP Financial Measures This filing includes certain financial measures that are identified as non-GAAP, including adjusted net interest income and tax adjusted net interest margin. The Company's provides these non-GAAP performance measures because they are used by management to evaluate and measure the Company’s performance, which the Company believes also is useful to assist investors in assessing the Company’s operating performance. Where non-GAAP financial measures are used in this report, the most comparable GAAP measure, as well as the reconciliation to the most comparable GAAP measure, can be found in the tables referenced herein. 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%. Management believes that it is standard practice in the banking industry to 55 present net interest income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes. Although these non-GAAP financial measures are frequently used by investors to evaluate a financial institution’s business and performance, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business operations and performance. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.