Finward Bancorp — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This summary covers the full year, not a standalone fourth quarter. Finward is the holding company for Peoples Bank, a community bank serving Northwest Indiana and the Chicago area.
Financial performance and condition
| Metric | 2023 | 2022 |
|---|---|---|
| Net interest income | $54.6 million | $67.1 million |
| Net interest margin | 2.83% | 3.56% |
| Net income | $8.4 million | $15.1 million |
| Diluted earnings per share | $1.96 | $3.60 |
| Return on average assets | 0.40% | 0.74% |
| Return on average equity | 6.28% | 10.47% |
| Net cash from operating activities | $24.2 million | $17.7 million |
- Balance sheet: Total assets were $2.108 billion, up 1.8% year over year. Total deposits were $1.813 billion, up 2.2%. Loans, net of deferred fees and costs, were $1.513 billion, approximately flat.
- Profitability: Total interest income rose 19.1% to $85.8 million, but interest expense rose sharply to $31.2 million from $4.9 million. The resulting net interest income fell 18.8%. Average cost of interest-bearing liabilities increased to 1.96% from 0.33%.
- Other income and expenses: Noninterest income declined 6.6% to $10.7 million. Noninterest expense declined 11.1% to $55.2 million, partly reflecting lower acquisition-related and conversion expenses than in 2022. The company recorded a $335,000 income tax benefit, versus $1.5 million of tax expense in 2022.
- Liquidity and funding: Cash and cash equivalents were $86.0 million, versus $31.3 million at year-end 2022. Management reported $824.0 million of available liquidity, including borrowing capacity. Year-end borrowings were $80.0 million under the Federal Reserve Bank Term Funding Program (BTFP), plus $38.1 million in repurchase agreements.
- Deposit mix: Certificates of deposit increased 46.5% to $532.1 million, while checking and savings balances declined. Estimated uninsured deposits were $530.2 million, about 29% of deposits; $217.6 million of public funds were covered by Indiana’s Public Deposit Insurance Fund.
- Capital and equity: Bank regulatory capital ratios exceeded minimums for “well capitalized” status: common equity Tier 1 was 10.4%, total capital 11.4%, and Tier 1 leverage 7.8%. Consolidated stockholders’ equity was $147.3 million; book value per share was $34.28.
- Credit quality: Nonperforming loans declined to $11.5 million, or 0.76% of loans, from $18.4 million, or 1.21%. The allowance for credit losses was $18.8 million, 1.24% of loans, versus $12.9 million, or 0.85%, in 2022. Net charge-offs were $2.0 million. Special-mention loans increased to $19.2 million from $11.6 million.
- Securities and interest-rate exposure: Available-for-sale securities totaled $371.4 million. Gross unrealized losses were $68.0 million at year-end, and accumulated other comprehensive loss was $51.6 million. Management attributed unrealized losses mainly to interest rates and said it did not anticipate needing to sell securities at a loss. Two trust preferred securities, with a $2.2 million cost basis, remained in payment-in-kind and non-accrual status.
Material changes versus 2022
- Net income fell 44.4%, primarily due to lower net interest income, a $2.0 million credit-loss provision, and lower noninterest income. Net interest margin contracted by 0.73 percentage points.
- Deposit growth reflected a shift toward higher-yielding certificates of deposit; core deposits declined 9.2% as reported by management. Average total deposit cost rose to 1.43% from 0.20%.
- Credit indicators were mixed: nonperforming loans and substandard loans declined, but special-mention loans rose, and charge-offs increased to $2.6 million from $608,000.
- Unrealized securities losses improved year over year: the portfolio recorded $16.7 million of unrealized gains in 2023, compared with $90.0 million of net unrealized losses in 2022. The resulting improvement in AOCI contributed to higher reported equity.
- Finward adopted CECL on January 1, 2023. Adoption increased the allowance for credit losses and unfunded-commitment liability and reduced retained earnings; the filing describes the total implementation entry inconsistently in different sections.
Outlook, risks, and unusual items
- Regulatory actions: On November 7, 2023, the Bank consented to an FDIC and Indiana Department of Financial Institutions order concerning Bank Secrecy Act compliance and entered an MOU. The Bank must enhance its BSA program, controls, staffing, training, customer due diligence, and transaction review. The MOU also requires prior regulatory approval for cash dividends by the Bank and submission of quarterly progress reports. Management expects additional compliance costs, but did not expect them to materially affect results or financial condition. Noncompliance could lead to further regulatory action.
- Dividends: Finward declared a $0.12-per-share fourth-quarter dividend, paid February 5, 2024. The Bank’s MOU requirement for regulatory approval before paying cash dividends may constrain future dividends to the parent and shareholders.
- Management commentary: Management said net interest margin pressure could continue moderately unless rates decline and funding costs reprice lower. It cited deposit competition, inflation, economic uncertainty, and CRE and other credit concentrations as risks; no numerical earnings or margin guidance is provided.
- Interest-rate and liquidity risks: A significant portion of loans is fixed-rate, while funding costs rose materially. Deposit outflows, uninsured deposit concerns, and the need to sell securities before recovery could pressure liquidity or capital. The $80 million BTFP borrowing was scheduled to mature in March 2024; the Bank filed for an extension, which increased the rate from 4.38% to 5.40%.
- Concentration and credit risks: Commercial real estate was 33.4% of loans. Management identified economic weakness, falling property values, and borrower payment stress as potential sources of higher losses. The filing states that no loan industry concentration exceeded 10% of total loans outside disclosed loan categories.
- Other events: Finward dissolved its captive insurer, NWIN Risk Management, Inc., in August 2023 amid uncertainty around proposed IRS rules; the captive had not been examined by the IRS. In February 2024, the Bank completed a $17.2 million sale-leaseback of five branches, with 15-year initial lease terms; it did not close branches or exit markets.
- Audit and controls: The auditor issued an unqualified opinion on the consolidated financial statements and identified the allowance for credit losses, particularly its qualitative adjustments, as a critical audit matter. Management reported effective financial-reporting controls; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Progress, regulatory feedback, costs, and any consequences associated with the BSA consent order and MOU, particularly restrictions on Bank dividends or business expansion.
- Deposit trends and pricing, including retention of core deposits, certificate maturities, uninsured balances, and reliance on wholesale or program funding.
- Net interest margin sensitivity to rate changes and the pace at which deposit and borrowing costs may reprice.
- CRE and construction credit trends, special-mention exposures, charge-offs, and the adequacy of the CECL allowance and unfunded-commitment reserve.
- Whether securities fair values recover as expected, and whether any liquidity needs require securities sales or additional borrowing.
- The economic and accounting effects of the completed branch sale-leaseback, including lease obligations and use of the proceeds.
- The filing’s inconsistent description of the CECL adoption entry and certain reported share counts; consult the audited financial statements and subsequent filings for clarification.