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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                         

 

Commission file number 001-40999

 

Finward Bancorp

(Exact name of registrant as specified in its charter)

 

Indiana35-1927981
(State or other jurisdiction of(I.R.S. Employer Identification No.)
incorporation or organization) 
  
9204 Columbia Avenue46321
Munster, Indiana(Zip Code)
(Address of principal executive offices) 

                                                                

(219) 836-4400

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, no par value

FNWD

The Nasdaq Stock Market, LLC

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

 

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

 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒        No ☐

 

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

 Large accelerated filer: ☐Accelerated filer: ☐
 Non-Accelerated filer: ☒Smaller reporting company
  Emerging growth company

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

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

Page 1 of 122

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

 

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

 

Based on the average bid and ask prices for the registrant’s Common Stock at June 30, 2023, at that date, the aggregate market value of the registrant’s Common Stock held by nonaffiliates of the registrant (assuming solely for the purposes of this calculation that all directors and executive officers of the registrant are “affiliates”) was $133,611,144.

 

There were 4,299,092 shares of the registrant’s Common Stock, without par value, outstanding at March 28, 2024.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents have been incorporated by reference into this Annual Report on Form 10-K:

1. Definitive Proxy Statement for the 2024 Annual Meeting of Shareholders. (Part III)

 

Page 2 of 122

  

 

 

Finward Bancorp

Index

 

   

Page

Number

PART I.  
  Item 1. Business 4
  Item 1A. Risk Factors 34
  Item 1B. Unresolved Staff Comments 46
  Item 1C. Cybersecurity 47
  Item 2. Properties 48
  Item 3. Legal Proceedings 49
  Item 4. Mine Safety Disclosures 49
  Item 4.5 Information About Our Executive Officers 49
PART II.  
  Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 51
  Item 6. [Reserved] 52
 

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

52
  Item 7A. Quantitative and Qualitative Disclosures about Market Risk 66
  Item 8. Financial Statements 67
  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 115
  Item 9A. Controls and Procedures 115
  Item 9B. Other Information 117
  Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 117
PART III.  
  Item 10. Directors, Executive Officers and Corporate Governance 118
  Item 11. Executive Compensation 118
  Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 118
  Item 13. Certain Relationships and Related Transactions, and Director Independence 118
  Item 14. Principal Accountant Fees and Services 118
PART IV.  
  Item 15. Exhibits and Financial Statement Schedules 119
SIGNATURES 122
EXHIBIT INDEX 119

 

Page 3 of 122

  

 

 

PART I

 

Item 1. Business

 

General

 

Finward Bancorp, an Indiana corporation (the “Bancorp” or “Finward”), was incorporated on January 31, 1994, and is the holding company for Peoples Bank, an Indiana-chartered commercial bank (the “Bank”). The Bank is a wholly owned subsidiary of the Bancorp. The Bancorp has no other business activity other than being a holding company for the Bank and the Bancorp’s earnings are primarily dependent upon the earnings of the Bank.

 

The Bank is primarily engaged in the business of attracting deposits from the general public and the origination of loans, mostly upon the security of single family residences and commercial real estate, as well as, construction loans and various types of consumer loans, commercial business loans and municipal loans, within its primary market areas of Lake and Porter Counties, in Northwest Indiana, and Cook County, Illinois. In addition, the Bancorp's Wealth Management Group currently provides estate and retirement planning, custodial services, guardianships, IRA accounts, investment agency accounts, serves as the personal representative of estates, and acts as corporate trustee for revocable and irrevocable trusts.

 

On January 31, 2022, the Bancorp completed its acquisition of Royal Financial, Inc. (“RYFL”) pursuant to an Agreement and Plan of Merger dated July 28, 2021 (the “Merger Agreement”) between the Bancorp and RYFL. Pursuant to the terms of the Merger Agreement, RYFL merged with and into the Bancorp, with the Bancorp as the surviving corporation (the “RYFL Merger”). Simultaneous with the RYFL Merger, Royal Savings Bank, an Illinois state-chartered savings bank and wholly-owned subsidiary of RYFL, merged with and into the Bank, with the Bank as the surviving institution. Under the terms of the Merger Agreement, RYFL stockholders who owned 101 or more shares of RYFL common stock were permitted to elect to receive either 0.4609 shares of Finward common stock or $20.14 in cash, or a combination of both, for each share of RYFL common stock owned, subject to proration and allocation provisions, such that 65% of the shares of RYFL common stock outstanding immediately prior to the closing of the merger were converted into the right to receive shares of Finward common stock and the remaining 35% of the outstanding RYFL shares were converted into the right to receive cash. Stockholders holding less than 101 shares of RYFL common stock received fixed consideration of $20.14 in cash and no stock consideration for each share of RYFL common stock. As a result of RYFL stockholder stock and cash elections and the related allocation and proration provisions of the Merger Agreement, Finward issued 795,423 shares of its common stock and paid cash consideration of approximately $18.7 million in the RYFL Merger. Based on the closing price of Finward’s common stock on January 28, 2022, the transaction had an implied valuation of approximately $56.7 million. The acquisition further expanded the Bank’s banking center network in Cook County and DuPage County, Illinois, expanding the Bank’s full-service retail banking network.

 

Page 4 of 122

 

NWIN Risk Management, Inc., previously a captive insurance company incorporated in Nevada and a wholly-owned subsidiary of the Bancorp, was dissolved on August 9, 2023. NWIN Risk Management, Inc. was a captive insurance company that insured against certain risks unique to the operations of the Bancorp, the Bank, and their affiliated entities for which insurance may not have been available or economically feasible in the insurance marketplace. The Bancorp decided to dissolve NWIN Risk Management, Inc. In April 2023, the IRS issued proposed regulations which would establish many 831(b) “micro-captives” as listed transactions. Due to the significant complexity and uncertainty created by the organizational structure, the Bancorp decided to move forward and liquidate NWIN Risk Management, Inc., and simplify our organizational structure. The Bancorp has no immediate plans to replace the coverages previously provided by NWIN Risk Management. The captive insurance company structure under which NWIN Risk Management, Inc. operated was not examined by the IRS prior to its dissolution, however the Bancorp’s management believes the captive insurance structure of NWIN Risk Management, Inc. likely would be sustained if examined by the IRS.

 

The Bancorp maintains its corporate office at 9204 Columbia Avenue, Munster, Indiana, from which it oversees the operation of its 26 branch locations. For further information, see “Properties.” The Bancorp’s Internet address is www.ibankpeoples.com.

 

Forward-Looking Statements

 

Certain of the statements made in this report are “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. All statements other than statements of historical fact, including statements regarding our financial position, business strategy, and the plans and objectives of our management for future operations, are forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target,” and other similar words and expressions relating to the future.

 

Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially, and adversely or positively, from the expectations of the Bancorp that are expressed or implied by any forward-looking statement. Risks, uncertainties, and factors that could cause the Bancorp’s actual results to vary materially from those expressed or implied by any forward-looking statement include but are not limited to:

 

 

The Bank’s ability to demonstrate compliance with the terms of the previously disclosed consent order and memorandum of understanding entered into between the Bank and the Federal Deposit Insurance Corporation (“FDIC”) and Indiana Department of Financial Institutions (“DFI”), or to demonstrate compliance to the satisfaction of the FDIC and/or DFI within prescribed time frames;

 

 

The Bank’s agreement under the memorandum of understanding to refrain from paying cash dividends without prior regulatory approval;

 

 

changes in interest rates, market liquidity, and capital markets, as well as the magnitude of such changes, which may reduce net interest margins;

 

 

continuing effects of inflation;

 

 

current financial conditions within the banking industry, liquidity levels, concentrations in certain loan products or categories, net interest margin compression, and responses by the Federal Reserve, Department of the Treasury, and the Federal Deposit Insurance Corporation to address these issues;

 

 

the use of proceeds of future offerings of securities;

 

 

capital management activities, including possible future sales of new securities, or possible repurchases or redemptions by the Bancorp of outstanding debt or equity securities;

 

Page 5 of 122

 

 

changes in asset quality and credit risk;

 

 

our ability to sustain revenue and earnings growth;

 

 

customer acceptance of the Bancorp’s products and services;

 

 

customer borrowing, repayment, investment, and deposit practices;

 

 

customer disintermediation;

 

 

the introduction, withdrawal, success, and timing of asset/liability management strategies or of mergers and acquisitions and other business initiatives and strategies;

 

 

competitive conditions;

 

 

our ability to realize cost savings or revenues or to implement integration plans and other consequences associated with mergers, acquisitions, and divestitures;

 

 

changes in fiscal, monetary, and tax policies;

 

 

factors that may cause the Bancorp to incur impairment charges on its investment securities;

 

 

electronic, cyber, and physical security breaches;

 

 

claims and litigation liabilities, including related costs, expenses, settlements, and judgments, or the outcome of matters before regulatory agencies, whether pending or commencing in the future;

 

 

changes in accounting principles and interpretations;

 

 

economic conditions;

 

 

loss of key personnel;

 

 

the impact, extent, and timing of technological changes, capital management activities, and other actions of the Federal Reserve Board and legislative and regulatory actions and reforms; and

 

 

other factors and risks described under the heading “Risk Factors” in Part I, Item 1A of this Form 10-K, as may be updated from time to time in our other filings with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

In addition to the above factors, we also caution that the actual amounts and timing of any future common stock dividends or share repurchases will be subject to various factors, including our capital position, financial performance, capital impacts of strategic initiatives, market conditions, and regulatory and accounting considerations, as well as any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends.

 

Because such forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. The foregoing list of important factors is not exclusive and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of us. The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K lists some of the factors that could cause the Bancorp’s actual results to vary materially from those expressed in or implied by any forward-looking statements. We direct your attention to this discussion. Other risks and uncertainties that could affect the Bancorp’s future performance are set forth below in Item 1A, “Risk Factors.”

 

Page 6 of 122

 

Lending Activities

 

General. The Bancorp’s product offerings include residential mortgage loans, construction loans, commercial real estate loans, consumer loans, commercial business loans, and loans to municipalities. The Bancorp’s lending strategy stresses quality growth, product diversification, and competitive and profitable pricing. While lending efforts include both fixed and adjustable rate products, the focus has been on products with adjustable rates and/or shorter terms to maturity. It is management’s goal that all programs are marketed effectively to our primary market area.

 

The Bancorp is primarily a portfolio lender. Mortgage banking activities are limited to the sale of fixed rate mortgage loans with contractual maturities generally exceeding fifteen years and greater. These loans are sold, on a case-by-case basis, in the secondary market as part of the Bancorp’s efforts to manage interest rate risk. All loan sales are made to Freddie Mac, US Bank, or to the Federal Home Loan Bank of Indianapolis. All loans held for sale are recorded at the lower of cost or market value.

 

Under Indiana Law, an Indiana bank generally may not make any loan to a borrower or its related entities if the total of all such loans by the bank exceeds 15% of its unimpaired capital and unimpaired surplus (plus up to an additional 10% of unimpaired capital and unimpaired surplus, in the case of loans fully collateralized by readily marketable collateral); provided, however, that certain specified types of loans are exempted from these limitations or subject to different limitations. The maximum amount that the Bank could have loaned to one borrower and the borrower’s related entities at December 31, 2023, under the 15% of capital and surplus limitation, was approximately $27.5 million. At December 31, 2023, the Bank had no loans that exceeded the regulatory limitations.

 

At December 31, 2023, there were no concentrations of loans in any type of industry that exceeded 10% of total loans that were not otherwise disclosed as a loan category.

 

Page 7 of 122

 

Loan Portfolio. The following table sets forth selected data relating to the composition of the Bancorp’s loan portfolio by type of loan at the end of each of the last two years.

 

(Dollars in thousands)

               
   

December 31, 2023

   

December 31, 2022

 

Loans secured by real estate:

               

Residential real estate

  $ 484,948     $ 484,595  

Home equity

    46,599       38,978  

Commercial real estate

    503,202       486,431  

Construction and land development

    115,227       108,926  

Multifamily

    219,917       251,014  

Total loans secured by real estate

    1,369,893       1,369,944  

Commercial business

    97,386       93,278  

Consumer

    610       918  

Manufactured homes

    30,845       34,882  

Government

    10,021       9,549  

Loans receivable

    1,508,755       1,508,571  

Add (less):

               

Net deferred loan origination costs

    3,705       5,083  

Undisbursed loan funds

    135       (23 )

Loans receivable, net of deferred fees and costs..

  $ 1,512,595     $ 1,513,631  

 

Page 8 of 122

 

Loan Maturity Schedule. The following table sets forth certain information at December 31, 2023, regarding the dollar amount of loans in the Bancorp’s portfolio based on their contractual terms to maturity. Demand loans, loans having no schedule of repayments 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 Bancorp 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

   

After one

   

After five

                 
   

within

   

but within

   

but within

   

After

         
   

one year

   

five years

   

fifteen years

   

fifteen years

   

Total

 

Residential real estate

  $ 5,280     $ 26,044     $ 97,047     $ 356,577     $ 484,948  

Home equity

    13,905       183       4,364       28,147       46,599  

Commercial real estate

    29,617       117,960       354,964       661       503,202  

Construction and land development

    25,245       39,223       41,250       9,509       115,227  

Multifamily

    16,244       81,744       120,806       1,123       219,917  

Consumer

    167       388       55       -       610  

Manufactured Homes

    -       73       8,034       22,738       30,845  

Commercial business

    32,007       49,425       15,469       485       97,386  

Government

    2,265       3,843       3,913       -       10,021  

Total loans receivable

  $ 124,730     $ 318,883     $ 645,902     $ 419,240     $ 1,508,755  

 

The following table sets forth the dollar amount of all loans due after one year from December 31, 2023, which have predetermined interest rates or have floating or adjustable interest rates. The amounts are stated in thousands (000’s).

 

   

Predetermined

   

Floating or

         
   

rates

   

adjustable rates

   

Total

 

Residential real estate

  $ 375,649     $ 104,019       479,668  

Home equity

    31,259       1,435       32,694  

Commercial real estate

    63,036       410,549       473,585  

Construction and land development

    35,907       54,075       89,982  

Multifamily

    118,841       84,832       203,673  

Farmland

    -       -       -  

Consumer

    443       -       443  

Manufactured Homes

    30,845       -       30,845  

Commercial business

    41,102       24,277       65,379  

Government

    7,756       -       7,756  

Total loans receivable

  $ 704,838     $ 679,187     $ 1,384,025  

 

Lending Area. The primary lending area of the Bancorp encompasses Lake County in northwest Indiana and Cook County in northeast Illinois, where collectively a majority of loan activity is concentrated. The Bancorp is also an active lender in Porter County, and to a lesser extent, LaPorte, Newton, and Jasper counties in Indiana; and DuPage, Lake, and Will counties in Illinois.

 

Loan Origination Fees. All loan origination and commitment fees, as well as incremental direct loan origination costs, are deferred and amortized into income as yield adjustments.

 

Loan Origination Procedure. The primary sources for loan originations are referrals from commercial customers, real estate brokers and builders, solicitations by the Bancorp’s lending and retail staff, and advertising of loan programs and rates. The Bancorp employs no staff appraisers. All appraisals are performed by fee appraisers that have been approved by the Board of Directors and who meet all federal guidelines and state licensing and certification requirements.

 

Page 9 of 122

 

Designated officers have authorities, established by the Board of Directors, to approve loans. Loans up to $4,000,000 are approved by the loan officers’ loan committee. Loans from $4,000,000 to $7,000,000 are approved by the senior officers’ loan committee (SOLC). Loans from $7,000,000 to $15,000,000 are approved the executive officer’s loan committee. All loans in excess of $15,000,000, up to the legal lending limit of the Bank, must be approved by the Bank’s Board of Directors or its Board Risk Management Committee (all members of the Bank’s Board of Directors and Board Risk Management Committee are also members of the Bancorp’s Board of Directors and Board Risk Management Committee, respectively). Certain loan renewals and extensions may not require approval by the Board of Directors or the Board Risk Management Committee as long as there is no material change, credit downgrade, significant change in borrower or guarantor status, material release, or change in collateral value or the eligible loan renewal or extension is not outside the current concentration limits set by the Board of Directors. The maximum in-house legal lending limit as set by the Board of Directors is the lower of 10% of the Bank’s risk-based capital or $15,000,000. Requests that exceed this amount will be considered on a case-by-case basis, after taking into consideration the legal lending limit, by specific Board action. The Bank will not extend credit to any of its executive officers, directors, or principal shareholders or to any related interest of that person, except in compliance with the insider lending restrictions of Regulation O under the Federal Reserve Act and in an amount that, when aggregated with all other extensions of credit to that person, exceeds $1,000,000 unless: (1) the extension of credit has been approved in advance by a majority of the entire Board of Directors of the Bank, and (2) the interested party has abstained from participating directly or indirectly in the voting.

 

All loans secured by personal property must be covered by insurance in an amount sufficient to cover the full amount of the loan. All loans secured by real estate must be covered by insurance in an amount sufficient to cover the full amount of the loan or restore the property to its original state. First mortgage loans must be covered by a lender’s title insurance policy in the amount of the loan.

 

The Current Lending Programs

 

Residential Mortgage Loans. The primary lending activity of the Bancorp has been the granting of conventional mortgage loans to enable borrowers to purchase existing homes, refinance existing homes, or construct new homes. Conventional loans are made up to a maximum of 97% of the purchase price or appraised value, whichever is less. For loans made in excess of 80% of value, private mortgage insurance is generally required in an amount sufficient to reduce the Bancorp’s exposure to 80% or less of the appraised value of the property. Loans insured by private mortgage insurance companies can be made for up to 97% of value. During 2023, 64.4% of mortgage loans closed were conventional loans with borrowers having 20% or more equity in the property. This type of loan does not require private mortgage insurance because of the borrower’s level of equity investment.

 

Fixed rate loans currently originated generally conform to Freddie Mac guidelines for loans purchased under the one‑to‑four family program. Loan interest rates are determined based on secondary market yield requirements and local market conditions. Fixed rate mortgage loans with contractual maturities generally exceeding fifteen years and greater may be sold and/or classified as held for sale to control exposure to interest rate risk.

 

The 15 year mortgage loan program has gained wide acceptance in the Bancorp’s primary market area. As a result of the shortened maturity of these loans, this product has been priced below the comparable 20 and 30 year loan offerings. Mortgage applicants for 15 year loans tend to have a larger than normal down payment; this, coupled with the larger principal and interest payment amount, has caused the 15 year mortgage loan portfolio to consist, to a significant extent, of second time home buyers whose underwriting qualifications tend to be above average.

 

The Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice annually or are “Mini-Fixed.” The “Mini‑Fixed” mortgage reprices annually after a one, three, five, seven or ten year period. ARM originations totaled $17.7 million for 2023 and $44.6 million for 2022. During 2023, ARMs represented 28.8% of total mortgage loan originations. The ability of the Bancorp to successfully market ARM’s depends upon loan demand, prevailing interest rates, volatility of interest rates, public acceptance of such loans and terms offered by competitors.

 

Page 10 of 122

 

Construction Loans. Construction loans on residential properties are made primarily to individuals and contractors who are under contract with individual purchasers. These loans are personally guaranteed by the borrower. The maximum loan-to-value ratio is 89% of either the current appraised value or the cost of construction, whichever is less. Residential construction loans are typically made for periods of six months to one year.

 

Loans are also made for the construction of commercial properties. All such loans are made in accordance with well-defined underwriting standards. Generally if the properties are not owner occupied, these types of loans require proof of intent to lease and a confirmed end-loan takeout. In general, loans made do not exceed 80% of the appraised value of the property. Commercial construction loans are typically made for periods not to exceed two years or date of occupancy, whichever is less.

 

Commercial Real Estate and Multifamily Loans. Commercial real estate loans are typically made to a maximum of 80% of the appraised value. Such loans are generally made on an adjustable rate basis. These loans are typically made for terms of 15 to 20 years. Loans with an amortizing term exceeding 15 years normally have a balloon feature calling for a full repayment within seven to ten years from the date of the loan. The balloon feature affords the Bancorp the opportunity to restructure the loan if economic conditions so warrant. Commercial real estate loans include loans secured by commercial rental units, apartments, condominium developments, small shopping centers, owner occupied commercial/industrial properties, hospitality units and other retail and commercial developments.

 

While commercial real estate lending is generally considered to involve a higher degree of risk than single‑family residential lending due to the concentration of principal in a limited number of loans and the effects of general economic conditions on real estate developers and managers, the Bancorp has endeavored to reduce this risk in several ways. In originating commercial real estate loans, the Bancorp considers the feasibility of the project, the financial strength of the borrowers and lessees, the managerial ability of the borrowers, the location of the project and the economic environment. Management evaluates the debt coverage ratio and analyzes the reliability of cash flows, as well as the quality of earnings. All such loans are made in accordance with well-defined underwriting standards and are generally supported by personal guarantees, which represent a secondary source of repayment.

 

Loans for the construction of commercial properties are generally located within an area permitting physical inspection and regular review of business records. Projects financed outside of the Bancorp’s primary lending area generally involve borrowers and guarantors who are or were previous customers of the Bancorp or projects that are underwritten according to the Bank’s underwriting standards.

 

Consumer Loans. The Bancorp offers consumer loans to individuals for personal, household or family purposes. Consumer loans are either secured by adequate collateral, or unsecured. Unsecured loans are based on the strength of the applicant’s financial condition. All borrowers must meet current underwriting standards. The consumer loan program includes both fixed and variable rate products.

 

Home Equity Line of Credit. The Bancorp offers a fixed and variable rate revolving line of credit secured by the equity in the borrower’s home. Both products offer an interest only option where the borrower pays interest only on the outstanding balance each month. Equity lines will typically require a second mortgage appraisal and a second mortgage lender’s title insurance policy. Loans are generally made up to a maximum of 89% of the appraised value of the property less any outstanding liens.

 

Home Improvement Loans and Equity LoansFixed Term. Home improvement and equity loans are made up to a maximum of 85% of the appraised value of the improved property, less any outstanding liens. These loans are offered on both a fixed and variable rate basis with a maximum term of 240 months. All home equity loans are made on a direct basis to borrowers.

 

Page 11 of 122

 

Manufactured Homes. The Bancorp purchases fixed rate closed loans from a third party that are subject to Bancorp’s underwriting requirements and secured by manufactured homes. The maturity date on these loans can range up to 25 years. In addition, these loans have a reserve account held at the Bancorp; further detail regarding this reserve can be found in Note 4 – Loans Receivable.

 

Commercial Business Loans. Although the Bancorp’s priority in extending various types of commercial business loans changes from time to time, the basic considerations in determining the makeup of the commercial business loan portfolio are economic factors, regulatory requirements and money market conditions. The Bancorp seeks commercial loan relationships from the local business community and from its present customers. Conservative lending policies based upon sound credit analysis governs the extension of commercial credit. The following loans, although not inclusive, are considered preferable for the Bancorp’s commercial loan portfolio, loans collateralized by liquid assets; loans secured by general use machinery and equipment; secured short‑term working capital loans to established businesses secured by business assets; short‑term loans with established sources of repayment and secured by sufficient equity and real estate; and unsecured loans to customers whose character and capacity to repay are firmly established.

 

Government Loans. The Bancorp is permitted to purchase non-rated municipal securities, tax anticipation notes, and warrants within the local market area.

 

NonPerforming Assets, Asset Classification and Provision for Credit Losses

 

Loans are reviewed on a regular basis and are generally placed on a non‑accrual status when, in the opinion of management, serious doubt exists as to the collectability of a loan. Loans are generally placed on non‑accrual status when either principal or interest is 90 days or more past due. Consumer non-residential loans are generally charged off when the loan becomes over 120 days delinquent. Interest accrued and unpaid at the time a loan is placed on non‑accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance, tax and insurance reserve or recorded as interest income, depending on the assessment of the ultimate collectability of the loan.

 

The Bancorp’s mortgage loan collection procedures provide that, when a mortgage loan is 15 days or more delinquent, the borrower will be contacted by mail and payment requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower. In certain instances, the Bancorp will recast the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his, her, or its financial affairs. If the loan continues in a delinquent status for 120 days, the Bancorp will generally initiate foreclosure proceedings. Collection procedures for consumer loans provide that when a consumer loan becomes ten days delinquent, the borrower will be contacted by mail and payment requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower. In certain instances, the Bancorp may grant a payment deferral. If a loan continues to be delinquent after 60 days and all collection efforts have been exhausted, the Bancorp will initiate legal proceedings. Collection procedures for commercial business loans provide that when a commercial loan becomes ten days delinquent, the borrower will be contacted by mail and payment requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower pursuant to the commercial loan collection policy. In certain instances, the Bancorp may grant a payment deferral or restructure the loan. Once it has been determined that collection efforts are unsuccessful, the Bancorp will initiate legal proceedings.

 

Any property acquired as the result of foreclosure or by voluntary transfer of property made to avoid foreclosure is classified as foreclosed real estate until such time as it is sold or otherwise disposed of by the Bancorp. Foreclosed real estate is recorded at fair value at the date of foreclosure. At foreclosure, any write-down of the property is charged to the allowance for credit losses. Costs relating to improvement of property are capitalized, whereas holding costs are expensed. Valuations are periodically performed by management, and a valuation allowance is established by a charge to operations if the carrying value of a property exceeds its estimated fair value less selling costs. Subsequent gains or losses on disposition, including expenses incurred in connection with the disposition, are charged to operations.

 

Page 12 of 122

 

The following table sets forth information regarding the Bancorp’s non-performing assets as of December 31, for each period indicated. The amounts are stated in thousands (000’s).

 

Loans that qualify as troubled loan modifications and accruing:

    2023  

Real estate:

 

 

 

Residential

  $ 868  

Total

  $ 868  

 

Loans that qualify as troubled debt restructurings and accruing:

    2022  
Real estate:      

Commercial

  $ 1,984  

Residential

    217  

Home Equity

    76  

Commercial business

    476  

Total

  $ 2,753  

 

   

2023

   

2022

 

Loans accounted for on a non-accrual basis:

         

Real estate:

               

Residential

  $ 1,693     $ 5,347  

Commercial

    833       3,242  

Multifamily

    3,715       7,064  

Home Equity

    468       594  

Commercial business

    2,897       1,881  

Consumer

    2       -  

Total

  $ 9,608     $ 18,128  
                 

Accruing loans which are contractually past due 90 days or more:

 

Real estate:

               

Commercial

  $ 712     $ -  

Residential

    1,131       166  

Manufactured homes

    -       82  

Total

  $ 1,843     $ 248  
                 

Ratio of non-performing loans to total assets

    0.61 %     0.94 %

Ratio of non-performing loans to total loans

    0.76 %     1.21 %

* non-performing loans include non-accrual loans and accruing loans which are contractually past due 90 days or more

 
                 
                 

Trust preferred securities

  $ 1,357     $ 1,048  

Ratio of trust preferred securities to total assets

    0.06 %     0.05 %

 

During 2023, gross interest income of $679 thousand would have been recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the period. Interest on such loans included in income during the period amounted to $109 thousand.

 

Page 13 of 122

 

Federal regulations require banks to classify their own loans and to establish appropriate general and specific allowances, subject to regulatory review. These regulations are designed to encourage management to evaluate loans on a case-by-case basis and to discourage automatic classifications. Loans classified as substandard or doubtful must be evaluated by management to determine loan loss reserves. Loans classified as loss must either be written off or reserved for by a specific allowance. Amounts reported in the allowance for credit losses are included in the calculation of the Bancorp’s total risk-based capital requirement (to the extent that the amount does not exceed 1.25% of total risk-based assets), but are not included in Tier 1 leverage ratio calculations and Tier 1 risk-based capital requirements.

 

Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. No loans were internally classified as doubtful or loss at December 31, 2023 or 2022.

 

 

The Bancorp's substandard loans are summarized below:

         

(Dollars in thousands)

               

Loan Segment

 

December 31, 2023

   

December 31, 2022

 

Residential real estate

  $ 2,098     $ 6,035  

Home equity

    479       612  

Commercial real estate

    2,544       7,421  

Construction and land development

    -       -  

Multifamily

    4,245       7,064  

Commercial business

    2,896       1,881  

Consumer

    2       -  

Manufactured homes

    -       -  

Government

    -       -  

Total

  $ 12,264     $ 23,013  

 

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

 

The Bancorp's special mention loans are summarized below:

         

(Dollars in thousands)

               

Loan Segment

 

December 31, 2023

   

December 31, 2022

 

Residential real estate

  $ 3,084     $ 1,338  

Home equity

    168       385  

Commercial real estate

    7,434       4,955  

Construction and land development

    6,902       2,346  

Multifamily

    -       1,859  

Commercial business

    1,610       703  

Consumer

    -       -  

Manufactured homes

    -       -  

Government

    -       -  

Total

  $ 19,198     $ 11,586  

 

Page 14 of 122

 

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. Purchased credit deteriorated ("PCD") loans have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans held for investment. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through credit loss expense.

 

For acquired non‑credit-deteriorated loans and leases, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loan. While credit discounts are included in the determination of the fair value for non-credit deteriorated loans, since these discounts are expected to be accreted over the life of the loans, they cannot be used to offset the allowance for credit losses that must be recorded at the acquisition date. As a result, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment and is recognized as a provision for credit losses in the consolidated income statements. Any subsequent deterioration (improvement) in credit quality is recognized by recording a provision (recapture) for credit losses.

 

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. Typically, management does not individually classify smaller-balance homogeneous loans, such as residential mortgages or consumer loans, as collateral dependent, unless the loan terms are modified due to the financial difficulty of the borrower.

 

A collateral dependent financial loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with the loan, the Bancorp considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral's value increases and the loan may become collateral dependent.

 

The table below presents the amortized cost basis type of loan collateral and allowance for credit losses (“ACL”) allocated for collateral dependent loans in accordance with ASC 326, which are individually evaluated to determine expected credit losses.

 

(Dollars in thousands)

 

December 31, 2023

         
   

Real Estate

   

Equipment/Inventory

   

Accounts Receivable

   

Other

   

Total

   

ACL Allocation

 

Residential real estate

  $ 32     $ -     $ -     $ -     $ 32     $ 30  

Commercial real estate

    230       -       -       -       230       53  

Multifamily

    1,378       -       -       -       1,378       85  

Commercial business

    -       1,010       494       162       1,666       738  
    $ 1,640     $ 1,010     $ 494     $ 162     $ 3,306     $ 906  

 

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 financial difficulty modification. The valuation basis for the Bancorp’s troubled loan modification is based on the present value of expected future cash flows; unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

 

Page 15 of 122

 

Loan Modification Disclosures Pursuant to ASU 2022-02

The following table shows the amortized cost of loans at December 31, 2023, that were both experiencing financial difficulty and modified during the year ended December 31, 2023, segregated by portfolio segment and type of modification. The percentage of the amortized cost of loans that were modified to borrowers in financial distress as compared to the amortized cost of each segment of financial receivable is also presented below.

 

   

For the year ended December 31, 2023

 

(Dollars in thousands)

 

Payment

Delay

   

Term

Extension

   

Interest

Rate

Reduction

   

Combination Term

Extension and

Interest Rate

Reduction

   

% of Total

Segment

Financing

Receivables

 

Residential Real Estate

  $ -     $ 868     $ -     $ -       0.18 %

Total

  $ -     $ 868     $ -     $ -       0.06 %

 

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

 

The Bancorp closely monitors the performance of loans and leases that have been modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of such loans and leases that have been modified during the year ended December 31, 2023.

 

(Dollars in thousands)

 

Current

   

30-59 Days

Past Due

   

60-89

Days Past

Due

   

Greater Than 90

Days Past Due

 

Residential Real Estate

  $ 868     $ -     $ -     $ -  

Total

  $ 868     $ -     $ -     $ -  

 

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. 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.

 

Troubled Debt Restructuring (TDR) Disclosures Prior to the Adoption of ASU 2022-02

 

During the year ending December 31, 2022, nine residential real estate loans to nine customers totaling $743 thousand were modified to include deferral of principal or interest resulting in troubled debt restructuring classification. Two home equity loans to two customers totaling $189 thousand were modified to include deferral of principal or interest resulting in troubled debt restructuring classification. One commercial real estate loan totaling $1.4 million was provided a short-term renewal resulting in troubled debt restructuring classification. No troubled debt restructuring loans had subsequently defaulted during the year ending December 31, 2022.

 

As of December 31, 2023, the Bancorp had one residential real estate loan in the process of foreclosure totaling $32 thousand. The Bancorp was not in the process of foreclosing on any residential real estate loan as of December 31, 2022.

 

All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

 

On January 1, 2023, the Bancorp adopted ASU No. 2016-13 resulting in an implementation entry of $8.3 million, increasing the ACL by $5.2 million and unfunded commitment liability of $3.1 million, retained earnings decreased $6.1 million and a deferred tax asset of $2.2 million was generated. The majority of the implementation entry is related to including acquired loan portfolios in the model and the addition of using economic forecasts in estimating future losses. In addition, $1.0 million of non-acceptable credit loan discounts on purchase credit impaired loans now classified as purchase credit deteriorated were reallocated to the ACL.

 

Page 16 of 122

 

The table that follows sets forth the Allowance for credit losses and related ratios for the years ended December 31, 2023 and 2022. The amounts are stated in thousands (000’s).

 

   

2023

   

2022

 

Balance at beginning of year

  $ 12,897     $ 13,343  

Loans charged-off:

               

Real estate residential

    (998 )     (29 )

Home Equity

    (43 )     -  

Commercial real estate

    (372 )     (431 )

Commercial business

    (1,065 )     (57 )

Consumer

    (93 )     (91 )

Total charge-offs

    (2,571 )     (608 )

Recoveries:

               

Residential real estate

    149       53  

Commercial real estate

    3       -  

Multifamily

    131          

Commercial business

    264       89  

Consumer

    16       20  

Total recoveries

    563       162  

Net charge-offs

    (2,008 )     (446 )

Adoption of ASC 326

    5,158       -  

PCD Gross-up

    1,029       -  

Provision for credit losses

    1,692       -  

Balance at end of year

  $ 18,768     $ 12,897  
                 

ACL to loans outstanding

    1.24 %     0.85 %

ACL to nonperforming loans

    163.90 %     70.18 %

Net charge-offs to average loans outstanding during the year

    -0.13 %     -0.03 %

Nonaccruing loans to total loans

    0.64 %     1.20 %

 

The following table shows the allocation of the allowance for credit losses at December 31, for the dates indicated. The dollar amounts are stated in thousands (000’s). The percent columns represent the percentage of loans in each category to total loans.

 

   

2023

   

2022

 
   

$

   

%

   

$

   

%

 

Real estate loans:

                               

Residential

    4,682       35.2       3,431       34.7  

Commercial and other dwelling

    12,249       55.6       8,044       56.1  

Consumer loans

    7       2.1       57       2.4  

Commercial business and other

    1,830       7.1       1,365       6.8  

Total

    18,768       100.0       12,897       100.0  

 

Page 17 of 122

 

Investment Activities

 

The primary objective of the 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. Securities can be classified as trading, held-to-maturity (HTM), or available-for-sale (AFS) at the time of purchase. No securities are classified as trading or as HTM. AFS securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. It has been the policy of the Bancorp to invest its excess cash in U.S. government agency securities, mortgage-backed securities, collateralized mortgage obligations, municipal securities, and treasury securities. In addition, short-term funds are generally invested as interest bearing balances in financial institutions and federal funds. At December 31, 2023, the Bancorp’s investment portfolio totaled $371.4 million. In addition, the Bancorp had $6.5 million in FHLB stock.

 

The table below shows the carrying values of the available for sale securities portfolio at December 31, 2023 and 2022. The amounts are stated in thousands (000’s).

 

   

2023

   

2022

 
                 

U.S. government sponsored agencies

  $ 7,883     $ 7,625  

U.S. treasury securities

    -       389  

Collateralized Mortgage Obligations and Mortgage-backed securities

    123,464       134,116  

Municipal Securities

    238,670       227,718  

Collateralized Debt Securities

    1,357       1,048  

Total

  $ 371,374     $ 370,896  

 

The contractual maturities and weighted average yields for the U.S. government agency securities, municipal securities, and trust preferred securities at December 31, 2023, 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

   

Variable Maturities

   

Total

 
   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

 

U.S. government sponsored entities:

  $ -       0.00 %   $ 7,883       1.00 %   $ -       0.00 %   $ -       0.00 %   $ -       0.00 %   $ 7,883  

Municipal Securities:

    249       3.78 %     1,442       2.83 %     20,486       3.35 %     216,494       2.71 %     -       0.00 %     238,671  

Trust Preferred Securities:

    -       0.00 %     -       0.00 %     -       0.00 %     1,357       8.18 %     -       0.00 %     1,357  

Collateralized mortgage obligations and residential mortgage- backed securities:

    -       0.00 %     -       0.00 %     -       0.00 %     -       0.00 %     123,465       1.92 %     123,465  
                                                                                         

Totals

  $ 249       3.78 %   $ 9,325       1.29 %   $ 20,486       3.35 %   $ 217,850       2.74 %   $ 123,465       1.92 %   $ 371,375  

 

The Bancorp currently holds two trust preferred securities and the securities’ quarterly interest payments have been placed 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 in non-accrual status. At December 31, 2023, the cost basis of the two trust preferred securities on non-accrual status totaled $2.2 million.

 

Unrealized losses on securities have not been recognized into income because the securities are of high credit quality, have undisrupted cash flows, or have been independently evaluated. Management has the intent and ability to hold the securities for the foreseeable future, and the decline in fair value is largely due to changes in interest rates and volatility in the securities markets. The fair values are expected to recover as the securities approach maturity.

 

Page 18 of 122

 

Sources of Funds

 

General. Deposits are the major source of the Bancorp’s funds for lending and other investment purposes. In addition to deposits, the Bancorp derives funds from maturing investment securities and certificates of deposit, dividend receipts from the investment portfolio, loan principal repayments, repurchase agreements, advances from the Federal Home Loan Bank of Indianapolis (FHLB) and other borrowings. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of other sources of funds. They may also be used on a longer-term basis for general business purposes. The Bancorp uses repurchase agreements, as well as a line-of-credit and advances from the FHLB for borrowings. At December 31, 2023, the Bancorp had $80.0 million from the Bank Term Funding Program (described below) and $38.1 million in repurchase agreements. The Bancorp had no other borrowed funds as of December 31, 2023.

 

Deposits. Retail and commercial deposits are attracted principally from within the Bancorp’s primary market area. The Bancorp offers a broad selection of deposit instruments including non-interest bearing demand accounts, interest bearing demand accounts, savings accounts, money market deposit accounts, certificate accounts and retirement savings plans. Deposit accounts vary as to terms, with the principal differences being the minimum balance required, the time period the funds must remain on deposit and the interest rate. Certificate account offerings typically range in maturity from ten days to 42 months. The deregulation of federal controls on insured deposits has allowed the Bancorp to be more competitive in obtaining funds and to be flexible in meeting the threat of net deposit outflows. The Bancorp does not obtain funds through brokers, however, the Bancorp did acquire brokered deposits through the acquisition of Royal Financial, which it still maintains.

 

The following table presents the average daily amount of deposits and average rates paid on such deposits for the years indicated. The amounts are stated in thousands (000’s).

 

   

December 31, 2023

   

December 31, 2022

 
   

Amount

   

Rate %

   

Amount

   

Rate %

 

Noninterest bearing demand deposits

  $ 323,694       -     $ 377,408       -  

Interest bearing demand deposits

    344,449       0.96       374,815       0.36  

MMDA accounts

    284,910       2.73       286,155       0.37  

Savings accounts

    343,008       0.05       416,898       0.05  

Certificates of deposit

    488,025       2.91       368,322       0.26  

Total deposits

  $ 1,784,086       1.43     $ 1,823,598       0.20  

 

As of December 31, 2023, and 2022, approximately $530.2 million and $516.1 million, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.

 

The following table sets forth the portion of the Bank's time deposits, by account, that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31, 2023 (dollars in thousands).

 

3 months or less

 

$

15,248  

Over 3 months through 6 months

    10,469  

Over 6 months through 12 months

    21,301  

Over 12 months

    20,355  

Total

  $ 67,373  

 

Page 19 of 122

 

Borrowings. Borrowed money is used on a short-term basis to compensate for reductions in the availability of other sources of funds and is generally accomplished through repurchase agreements, as well as, through a line of credit and advances from the FHLB. Repurchase agreements generally mature within one year and are generally secured by U.S. government securities or U.S. agency securities, under the Bancorp’s control. FHLB advances with maturities ranging from one year to five years are used to fund securities and loans of comparable duration, as well as to reduce the impact that movements in short-term interest rates have on the Bancorp’s overall cost of funds. Fixed rate advances are payable at maturity, with a prepayment penalty for advances paid prior to maturity.

 

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. During the first quarter of 2023, the Bancorp participated in the BTFP by accessing $100 million of low-cost capital under the program and had $80 million outstanding as of December 31, 2023. As of December 31, 2023, the Bancorp had pledged securities as collateral for the program with a par value of $105.3 million. The Bancorp’s liquidity position remains strong with solid core deposit customer relationships, excess cash, debt securities, and access to diversified borrowing sources. The Bancorp has available liquidity of $824.0 million including borrowing capacity from the FHLB and Federal Reserve facilities. In addition to the BTFP, the Bancorp maintains a $25.0 million line of credit with the Federal Home Loan Bank of Indianapolis. The Bancorp did not have a balance on the line of credit at December 31, 2023 or 2022.

 

At December 31, 2023, the borrowing from the BTFP was scheduled to mature in March 2024, but the Bank filed an extension per program guidelines, which resulted in the rate increasing from 4.38% to 5.40% at that time.

 

Page 20 of 122

 

The following tables set forth certain information regarding borrowing and repurchase agreements by the Bancorp at the end of and during the periods indicated. The amounts are stated in thousands (000’s).

 

   

At December 31,

 

Repurchase agreements:

 

2023

   

2022

 

Balance

  $ 38,124     $ 15,503  

Securities underlying the agreements:

               

Ending carrying amount

    54,458       32,660  

Ending fair value

    54,458       32,660  

Weighted average rate (1)

    4.00 %     0.94 %

 

   

For year ended December 31,

 
   

2023

   

2022

 

Highest month-end balance

  $ 48,947     $ 28,328  

Average outstanding balance

    35,543       20,649  

Weighted average rate on securities sold under agreements to repurchase (2)

    5.14 %     2.43 %

 

   

At December 31,

 
   

2023

   

2022

 

Fixed rate short-term advances from the FHLB

  $ -     $ 120,000  

Fixed rate advances from the Federal Reserve with outstanding rates of 4.38% as of December 31, 2023

    80,000       -  

Total borrowings

  $ 80,000     $ 120,000  

 


(1) The weighted average rate for each period is calculated by weighting the principal balances outstanding for the various interest rates.

 

(2) The weighted average rate is calculated by dividing the interest expense for the period by the average daily balances of securities sold under agreements to repurchase for the period.

 

Wealth Management Group

 

In addition, the Bancorp's Wealth Management Group currently provides estate and retirement planning, custodial services, guardianships, IRA accounts, investment agency accounts, serves as the personal representative of estates, and acts as corporate trustee for revocable and irrevocable trusts. At December 31, 2023, the market value of the Wealth Management Group’s assets under management totaled $387.1 million, an increase of $25.7 million, compared to December 31, 2022. Property, other than cash deposits, held in a fiduciary or agency capacity is not included in the consolidated balance sheets since such property is not owned by the Bancorp.

 

Analysis of Profitability and Key Operating Ratios

 

Financial Ratios and the Analysis of Changes in Net Interest Income.

 

The tables below set forth certain financial ratios of the Bancorp for the periods indicated:

 

   

Year ended December 31,

 
   

2023

   

2022

 

Return on average assets

    0.40 %     0.74 %

Return on average equity

    6.28 %     10.47 %

Average equity-to-average assets ratio

    6.41 %     7.07 %

Dividend payout ratio

    53.55 %     34.34 %

 

   

At December 31,

 
   

2023

   

2022

 

Total stockholders’ equity to total assets

    6.99 %     6.59 %

 

Page 21 of 122

 

 The average balance sheet amounts, the related interest income or expense, and average rates earned or paid are presented in the following table.

 The amounts are stated in thousands (000's).

 

   

Year ended December 31, 2023

   

Year ended December 31, 2022

 
           

Interest

                   

Interest

         
   

Average

   

Income/

   

Average

   

Average

   

Income/

   

Average

 
   

Balance

   

Expense

   

Rate

   

Balance

   

Expense

   

Rate

 

Assets:

                                               
                                                 

Interest bearing balances in financial institutions

  $ 37,615     $ 1,846       4.91 %   $ 23,553     $ 315       1.34 %

Federal funds sold

    1,341       58       4.33       3,025       11       0.36  

Nontaxable Securities

    226,896       6,117       2.70       260,485       6,677       2.56  

Taxable Securities

    142,594       3,000       2.10       170,481       2,899       1.70  

Total investments

    408,446       11,021       2.70       457,544       9,902       2.16  

Loans:*

                                               

Real estate mortgage loans

    1,389,048       66,870       4.81       1,273,453       54,522       4.28  

Commercial business loans

    96,302       6,419       6.67       118,595       5,862       4.94  

Consumer loans

    33,660       1,473       4.38       38,969       1,749       4.49  

Total loans

    1,519,010       74,762       4.92       1,431,017       62,133       4.34  

Total interest-earning assets

    1,927,456       85,783       4.45       1,888,561       72,035       3.81  

Allowance for credit losses

    (18,106 )                     (13,385 )                

Other assets

    174,011                       163,079                  

Total assets

  $ 2,083,361                     $ 2,038,255                  
                                                 

Liabilities:

                                               
                                                 

NOW accounts

  $ 344,449     $ 3,294       0.96 %   $ 374,815     $ 1,363       0.36 %

Money market demand accounts

    284,910       7,777       2.73       286,155       1,052       0.37  

Savings accounts

    343,008       175       0.05       416,898       216       0.05  

Certificates of deposit

    488,025       14,192       2.91       368,322       973       0.26  

Total interest-bearing deposits

    1,460,392       25,438       1.74       1,446,190       3,604       0.25  

Repurchase Agreements

    35,543       1,294       3.64       20,649       195       0.94  

Borrowed funds

    98,848       4,496       4.55       26,806       1,087       4.06  

Total interest-bearing liabilities

    1,594,783       31,228       1.96       1,493,645       4,886       0.33  
                                                 

Demand deposit accounts

    323,694                       377,408                  

Other liabilities

    31,347                       23,132                  

Total liabilities

    1,949,824                       1,894,185                  
                                                 

Stockholders' equity

    133,537                       144,070                  

Total liabilities and stockholders' equity

  $ 2,083,361                     $ 2,038,255                  

Net interest income

          $ 54,555                     $ 67,149          

Net interest spread

                    2.49 %                     3.49 %

Net interest margin**

                    2.83 %                     3.56 %

Ratio of interest-earning assets to interest-bearing liabilities

                    1.21                     1.26

 

*  Non-accruing loans have been included in the average balances.

** Net interest income divided by average interest-earning assets.

 

Page 22 of 122

 

The table below sets forth certain information regarding changes in interest income and interest expense of the Bancorp for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (1) changes in volume (change in volume multiplied by old rate) and (2) changes in rate (change in rate multiplied by old volume). Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate. The amounts are stated in thousands (000's).

 

   

Year Ended December 31,

 
   

2023

   

vs.

   

2022

 
   

Increase / (Decrease)

 
    Due To  
   

Volume

   

Rate

   

Total

 
                         

Interest income:

                       

Loans receivable

  $ 3,981     $ 8,648     $ 12,629  

Nontaxable securities

    (893 )     333       (560 )

Taxable securities