Finward Bancorp: Form 10-Q for the period ended Jun 30, 2026

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 June 30, 2026 and December 31, 2025, and the results of operations for the three and six months ending June 30, 2026 and June 30, 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 June 30, 2026, the Company had total assets of $2.0 billion, loans receivable, net of deferred fees and costs, of $1.5 billion and total deposits of $1.7 billion. Stockholders' equity totaled $178.3 million or 8.7% of total assets, with a book value per share of $41.15. Net income for the three months ended June 30, 2026, was $2.1 million, or $0.48 earnings per diluted common share. For the three months ended June 30, 2026, the ROA was 0.42%, while the ROE was 4.74%. Net income for the six months ended June 30, 2026, was $4.3 million, or $1.00 earnings per diluted common share. For the six months ended June 30, 2026, the ROA was 0.43%, while the ROE was 4.87%.

As previously disclosed, on August 9, 2024, the Bank entered into an informal administrative agreement known as a memorandum of understanding with the FDIC and DFI. By letter dated June 24, 2026, the FDIC and DFI notified the Bank that the FDIC and DFI terminated the MOU effective immediately.

On July 21, 2026, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with First Financial Bancorp, an Ohio corporation (“First Financial”). Pursuant to the Merger Agreement, the Company will merge with and into First Financial (the “Merger”), with First Financial continuing as the surviving corporation in the Merger. Following the Merger, the Bank will merge with and into First Financial Bank, the wholly-owned Ohio state-chartered banking subsidiary of First Financial (“First Financial Bank”), with First Financial Bank continuing as the surviving bank.

Subject to the terms and conditions of the Merger Agreement, upon the completion of the Merger, each share of common stock, no par value, of the Company issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive 1.35 shares of common stock, no par value, of First Financial. The Merger remains subject to regulatory approvals, Company shareholder approval, and other customary closing conditions. Based on First Financial’s July 20, 2026 closing price of $35.48 per share as reported on the Nasdaq Global Select Market, the transaction is valued at approximately $208 million. See Note 15 to the consolidated financial statements of the Company set forth in this Quarterly Report on Form 10-Q.

Financial Condition

General

During the six months ended June 30, 2026, total assets increased by $19.5 million (0.97%), with interest-earning assets increasing by $23.3 million (1.24%). At June 30, 2026 and December 31, 2025, interest-earning assets totaled $1.90 billion and $1.87 billion. Earning assets represented 93.0% of total assets at June 30, 2026 and 92.7% December 31, 2025.

Loan Portfolio

Loans receivable, net of deferred fees and costs totaled $1.50 billion at June 30, 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.

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

(Dollars in thousands)

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 $597.4 million as of June 30, 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.

Commercial real estate loans remained our largest loan segment and accounted for 39.7% of the total loan portfolio at June 30, 2026 and 38.3% at December 31, 2025. A further breakdown of the composition of the commercial real estate loan portfolio as of June 30, 2026 and December 31, 2025 is shown in the table below:

(Dollars in thousands)

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

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

The following table sets forth certain information at June 30, 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).

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 six months ended June 30, 2026, the Company originated $15.2 million in new fixed rate mortgage loans for sale, compared to $18.1 million during the six months ended June 30, 2025. Net gains realized from the mortgage loan sales totaled $228 thousand for the three months ended June 30, 2026, compared to $378 thousand for the quarter ended June 30, 2025. Net gains realized from the mortgage loan sales totaled $485 thousand for the six months ended June 30, 2026, compared to $608 thousand for the six months ended June 30, 2025. The Company had loans of $1.1 million loans that were classified as held for sale at both June 30, 2026 and 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 non-performing balance increases are driven by a variety of credits and not due to concentrations or an indication of overall economic stress within our customer base or footprint.

The Company's non-performing loans are summarized below:

(Dollars in thousands)

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 June 30, 2026 or December 31, 2025.

The Company's substandard loans are summarized below:

(Dollars in thousands)

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)

At June 30, 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.

The Company's provision for (benefit from) credit losses for the period ended are summarized below:

(Dollars in thousands)

The Company's charge-off and recovery information is summarized below:

(Dollars in thousands)

(Dollars in thousands)

48

(Dollars in thousands)

(Dollars in thousands)

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)

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 $310.2 million at June 30, 2026, compared to $316.2 million at December 31, 2025, a decrease of $6.0 million (1.9%). The decrease in securities available for sale from year end, was primarily due to continued payoffs and lack of new purchases within the portfolio. The yield on the securities portfolio was 2.25% for the six months ended June 30, 2026 and 2.40% for the six months ended June 30, 2025. Management did not execute any securities sale transactions during the quarter. At June 30, 2026, the securities portfolio represented 16.3% of interest-earning assets and 15.2% 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:

(Dollars in thousands)

(Dollars in thousands)

The decrease 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 June 30, 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.

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)

50

As of June 30, 2026, deposits totaled $1.73 billion, an increase of $5.6 million or 0.3% compared to December 31, 2025. Core deposits totaled $1.2 billion at both June 30, 2026 and December 31, 2025. Core deposits include checking, savings, and money market accounts and represented 71.3% of the Company’s total deposits at June 30, 2026. On June 30, 2026, balances for certificates of deposit totaled $497.4 million, compared to $499.6 million on December 31, 2025, a decrease of $2.1 million or 0.4%. The increase in deposits is primarily related to cyclical flows and continued planned adjustments to deposit pricing. The Company has experienced a high rate of deposit retention after the closure of two of its bank branches during the quarter.

Checking account balances decreased $7.3 million and interest bearing savings account balances decreased $7.0 million from year end primarily due to decreases in personal statement savings account balances. Money market account balances increased by $22.0 million from year end due to business and retail consumer preferences. Certificates of deposits decreased by $2.1 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 15.6% of total deposits at June 30, 2026 and 15.5% of total deposits at December 31, 2025. Interest bearing demand accounts, including money market and savings accounts, comprised 55.7% of total deposits at June 30, 2026 compared to 52.8% at December 31, 2025. Time accounts as a percentage of total deposits were 28.7% at June 30, 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).

Deposit rates decreased in the six months ended June 30, 2026 compared to same periods in 2025, primarily driven by a decrease in short-term market interest rates.

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)

Borrowings, federal funds purchased, and repurchase agreements totaled $95.3 million at June 30, 2026 compared to $84.7 million at December 31, 2025, an increase of $10.6 million or 12.5%. The increase in borrowings from December 31, 2025, was the result of new FHLB advances. As of June 30, 2026, 73% 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 June 30, 2026, the Company had available liquidity of $604.3 million including borrowing capacity from the FHLB and Federal Reserve facilities.

Other assets totaled $33.1 million at June 30, 2026, compared to $34.9 million at December 31, 2025. The decrease in other assets is primarily related to decreased fair value of the Company's interest rate swap derivative asset as well as reductions in prepaid assets and deferred tax assets. Accrued expenses and other liabilities totaled $34.6 million at June 30, 2026, compared to $34.8 million at December 31, 2025. The decrease in accrued expenses and other liabilities is primarily the result of reduction of accrued interest on deposits, various accrued expenses, and the long-term operating liability related to leased properties.

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 June 30, 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.

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 June 30, 2026 (dollars in millions):

If interest rates across the yield curve were to uniformly decrease or increase up to 200 basis points, this analysis suggests the Bank may be positioned for relatively neutral changes in net interest income over the next twelve months. If interest rates across the yield curve were to uniformly increase or decrease by 300 to 400 basis points, this analysis suggests a more pronounced impact to net interest income.

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.

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 June 30, 2026, we had five outstanding advances totaling $65 million and the ability to borrow up to $314.7 million from the FHLB. We also have the ability to borrow from the Federal Reserve Bank of Chicago. At June 30, 2026, we had no outstanding balance from the Federal Reserve Bank of Chicago. At June 30, 2026, cash and cash equivalents were $94.6 million and secured borrowing capacity at the Federal Reserve Bank totaled $248.5 million, providing total additional liquidity sources of $604.3 million (excluding brokered deposit capacity).

The following table shows the Company’s sources of liquidity as of June 30, 2026 and December 31, 2025:

During the six months ended June 30, 2026, cash and cash equivalents decreased by $25.0 million compared to a $2.0 million increase for the six months ended June 30, 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 $8.4 million for the six months ended June 30, 2026, compared to cash provided of $1.0 million for the six months ended June 30, 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 $48.4 million for the current period, compared to cash provided by investing activities of $29.9 million for the six months ended June 30, 2025. Cash used in investing activities for the current six-month period was primarily related to the purchase of loans and net change in loans. Cash provided by financing activities totaled $15.1 million during the current period compared to net cash provided by financing activities of $2.0 million for the six months ended June 30, 2025. The net cash provided by financing activities was primarily the result of proceeds from borrowed funds partially offset by the repayment of borrowed funds. On a cash basis, the Company paid dividends on common stock of $1.0 million for the six months ended June 30, 2026, and $520 thousand for the six months ended June 30, 2025.

At June 30, 2026, outstanding commitments to fund loans totaled $268.4 million. Approximately 60.1% 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 $14.1 million at June 30, 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 six months ended June 30, 2026, stockholders' equity increased by $3.6 million 2.1%. During the six months ended June 30, 2026, stockholders’ equity was primarily increased by net income of $4.3 million and offset by dividends declared of $1,040 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 six months of 2026 or 2025. During 2026, 11,541 restricted stock shares vested under the Incentive Plan outlined in Note 10 of the condensed consolidated financial statements, of which 1,972 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 were 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.

During the six months ended June 30, 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 June 30, 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)

(Dollars in thousands)

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. 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.

Results of Operations - Comparison of the Three Months Ended June 30, 2026 and June 30, 2025

For the quarter ended June 30, 2026, the Company reported net income of $2.1 million, compared to net income of $2.2 million for the quarter ended June 30, 2025, a decrease of $58 thousand. For the quarter ended June 30, 2026, the ROA was 0.42%, compared to 0.42 % for the quarter ended June 30, 2025. The ROE was 4.74% for the quarter ended June 30, 2026, compared to 5.66% for the quarter ended June 30, 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 drives the disclosed rates. Average balances are derived from daily balances.

(Dollars in thousands)

(unaudited)

Net interest income for the quarter ended June 30, 2026, was $15.2 million, an increase of $1.2 million (8.9%), compared to $13.9 million for the quarter ended June 30, 2025. The weighted-average yield on interest-earning assets was 4.93% for the quarter June 30, 2026, compared to 4.82% for the quarter ended June 30, 2025. The weighted-average cost of interest-bearing liabilities for the quarter ended June 30, 2026, was 2.06% compared to 2.22% for the quarter ended June 30, 2025. The impact of the 4.93% return on interest-earning assets and the 2.06% cost of interest-bearing liabilities resulted in an interest rate spread of 2.87% for the current quarter, an increase from the 2.60% spread for the quarter ended June 30, 2025. On a tax adjusted basis, the Company’s net interest margin was 3.37% for the quarter ended June 30, 2026, compared to 3.11% for the quarter ended June 30, 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. Net interest margin on a tax-equivalent basis 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.

(Dollars in thousands)

(unaudited)

The increased net interest income and net interest margin for the quarter ended June 30, 2026, was primarily due to continued repricing and maturity of the existing loan portfolio, as well as strength in new loan originations.

The following table shows the change in non-interest income for the quarter ending June 30, 2026, and June 30, 2025.

(Dollars in thousands)

The decrease in non-interest income during the quarter ended June 30, 2026 compared to the same period in 2025 was primarily due to a $180 thousand dollar loss associated with the closure of one of the Company's leased branch locations.

The following table shows the change in non-interest expense for the three months ending June 30, 2026 and June 30, 2025.

(Dollars in thousands)

Increases in non-interest expenses during the quarter ended June 30, 2026 were primarily attributable to higher compensation and benefits and the seasonality of certain professional and outside services expenses.

The expense for income taxes was $364 thousand for the quarter ended June 30, 2026, as compared to the benefit of $35 thousand for the quarter ended June 30, 2025. The effective tax rate was 14.8% for the quarter ended June 30, 2026 as compared to negative 1.7% for the quarter ended June 30, 2025. The Company’s higher current effective tax rate for the quarter ended June 30, 2026, is primarily a result of updated projected earnings levels used in estimating full year 2026 tax accrual as well as the expiration of tax credits which no longer reduced tax expense in 2026.

Results of Operations - Comparison of the Six Months Ended June 30, 2026 to June 30, 2025

For the six months ended June 30, 2026, the Company reported net income of $4.3 million, an increase of $1.7 million (66.3%) compared to $2,606 thousand for the six months ended June 30, 2025. For the six months ended June 30, 2026, the ROA was 0.43%, compared to 0.25% for the six months ended June 30, 2025. The ROE was 4.87% for the six months ended June 30, 2026, compared to 3.39% for the six months ended June 30, 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)

(unaudited)

Net interest income for the six months ended June 30, 2026, was $30.3 million, an increase of $3.0 million (11.0%), compared to $27.3 million for the six months ended June 30, 2025. The weighted-average yield on interest-earning assets was 4.90% for the six months ended June 30, 2026 compared to 4.77% for the six months ended June 30, 2025. The weighted-average cost of interest-bearing liabilities for the six months ended June 30, 2026, was 2.03% compared to 2.25% for the six months ended June 30, 2025. The impact of the 4.90% return on interest-earning assets and the 2.03% cost of interest-bearing liabilities resulted in an interest rate spread of 2.87% for the six months ended June 30, 2026, an increase from the 2.52% spread for the six months ended June 30, 2025. The Company’s net interest margin on a tax-equivalent basis was 3.36% for the six months ended June 30, 2026, compared to 3.03% for the six months ended June 30, 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.

(Dollars in thousands)

The increased net interest income and net interest margin for the six months ended June 30, 2026, was primarily the result of reduced deposit and borrowing costs as well as strength in new loan originations.

The following table shows the change in non-interest income for the six months ended June 30, 2026, and June 30, 2025.

(Dollars in thousands)

The decrease in non-interest income was primarily due to a $180 thousand dollar loss associated with the closure of one of the Company's leased branch locations and reduced gains on the sale of loans held-for-sale partially offset by an increase in fees and service charges.

The following table shows the change in non-interest expense for the six months ended June 30, 2026, and June 30, 2025.

(Dollars in thousands)

Increases in non-interest expenses during the six months ended June 30, 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.

The provision for income taxes was $787 thousand for the six months ended June 30, 2026 as compared to the provision of $126 thousand for the six months ended June 30, 2025. The effective tax rate was 15.4% for the six months ended June 30, 2026, as compared to 4.6% for the six months ended June 30, 2025. The Company’s year-to-date effective tax rate for the six months ended June 30, 2026, is primarily a result of updated projected earnings levels used in estimating full year 2026 tax accrual as well as expiration of tax credits which no longer reduced tax expense in 2026.

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 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 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.

(a) Evaluation of Disclosure Controls and Procedures.

The Company maintains disclosure controls and procedures (as defined in Sections 13a – 15(e) and 15d – 15(e)) of regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The Company's Chief Executive Officer and Chief Financial Officer evaluate the effectiveness of the Company's disclosure controls and procedures as of the end of each quarter. Based on that evaluation as of June 30, 2026, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective as of that date in ensuring that information required to be disclosed by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control Over Financial Reporting.

There was no change in the Company's internal control over financial reporting identified in connection with the Company’s evaluation of controls that occurred during the quarter ended June 30, 2026, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.