Finward Bancorp — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Finward is a bank holding company whose results primarily reflect Peoples Bank. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2023 / Sep. 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $21.8 | $18.5 in Q3 2022 |
| Net interest income | $13.1 | $17.5 in Q3 2022 |
| Net interest margin | 2.72% GAAP; 2.87% tax-adjusted | 3.67% GAAP; 3.84% tax-adjusted in Q3 2022 |
| Net income / diluted EPS | $2.2 / $0.51 | $4.6 / $1.07 in Q3 2022 |
| Total assets | $2,087.5 | $2,070.3 at Dec. 31, 2022 |
| Net loans | $1,506.2 | $1,500.7 at Dec. 31, 2022 |
| Deposits | $1,784.0 | $1,775.0 at Dec. 31, 2022 |
| Cash and cash equivalents | $71.6 | $31.3 at Dec. 31, 2022 |
| Stockholders’ equity | $119.0; 5.7% of assets | $136.4 at Dec. 31, 2022 |
For the first nine months, interest income was $63.5 million, net interest income $41.8 million, and net income $6.9 million ($1.60 diluted EPS), versus $52.2 million, $50.3 million, and $11.1 million ($2.67 diluted EPS), respectively, in 2022. Nine-month net interest margin was 2.89% GAAP (3.04% tax-adjusted), compared with 3.56% (3.75% tax-adjusted).
- Profitability and costs: Q3 net income declined 51.9% year over year; nine-month net income declined 38.2%. Higher funding costs more than offset improved asset yields. Q3 average yield on earning assets rose to 4.51% from 3.88%, while average cost of interest-bearing liabilities increased to 2.16% from 0.27%. Q3 ROA was 0.42% and ROE 6.55%.
- Cash flow: Nine-month operating cash flow was $22.4 million, investing cash flow $0.4 million, and financing cash flow $17.6 million. Cash and cash equivalents increased $40.4 million. Dividends paid were $4.0 million.
- Funding and debt: Deposits grew 0.5% from year-end, but core deposits fell 12.1% as customers shifted toward higher-yielding certificates of deposit. CDs increased 49.5% to $543.0 million. Uninsured deposits were estimated at $480.7 million, or 27.0% of deposits. Borrowings were $100.0 million under the Bank Term Funding Program (BTFP), plus $48.3 million in repurchase agreements.
- Liquidity and capital: Management reported $757.9 million of available liquidity, including borrowing capacity, and liquidity sources plus cash equal to 170.6% of uninsured deposits. Bank capital ratios included 10.2% CET1, 11.2% total capital, and 7.8% Tier 1 leverage; the filing says the Bank exceeded applicable “well-capitalized” thresholds.
- Securities and equity: Available-for-sale securities had a fair value of $339.3 million, down from $370.9 million at year-end. Gross unrealized losses were $103.7 million; accumulated other comprehensive loss was $78.8 million after tax. Management attributed the losses primarily to interest rates and said it did not expect to need to sell securities before recovery or maturity.
- Credit: The loan allowance was $19.4 million, or 1.27% of loans; nonperforming loans were $10.1 million, down from $18.4 million at year-end, with allowance coverage of 192.9%. The nine-month provision for credit losses was $1.2 million. Adoption of CECL on January 1, 2023 reduced retained earnings by $6.1 million and increased the loan allowance and unfunded-commitment liability.
Material changes versus prior periods
- Q3 net interest income fell 25.0% year over year, and nine-month net interest income fell 16.9%, despite higher earning-asset yields. Management attributed the decline chiefly to rising funding costs and said margin compression could continue unless rates decline and liabilities reprice lower.
- Noninterest expense declined 10.1% in Q3 and 10.2% for the nine-month period. Management cited lower staffing, data-processing and acquisition-related costs; FDIC insurance premiums increased.
- Nine-month noninterest income fell 7.6%, including lower mortgage-sale gains and securities-sale results, partly offset by higher wealth-management income and other income from building sales.
- Equity declined $17.4 million from year-end, primarily due to after-tax securities losses, the CECL adoption adjustment, and dividends, partly offset by net income.
Outlook, risks and unusual items
- Regulatory actions after quarter-end: On November 7, 2023, the Bank consented to an FDIC and Indiana DFI order concerning Bank Secrecy Act compliance, without admitting or denying the findings. Required actions include strengthening oversight, controls, staffing, training, customer due diligence, suspicious-activity reporting, and reviewing past account and transaction activity. The Bank also entered an MOU requiring operational, capital and strategic plans, quarterly progress reports, and no cash dividends without prior regulatory approval. Management expects additional compliance expense but said it is not expected to materially affect results or financial condition; the actions may constrain expansion or business combinations.
- Interest-rate and liquidity risks: Management identifies interest-rate risk as its primary market risk. Its model estimates a 0.2% increase in next-12-month net interest income under a +200-basis-point shock, while economic value of equity falls 12.7%. Outcomes depend on rates, deposit behavior, asset growth and other assumptions. The $100 million BTFP advance matures in 2024; the program expires March 11, 2024.
- Credit and concentration risks: Commercial real estate exposure was $498.5 million. Management said it is monitoring these loans amid higher rates, hybrid-work-related occupancy changes and lower property valuations. The loan portfolio is concentrated primarily in northwest Indiana and northeast Illinois.
- Other items: CECL adoption was a significant accounting change. The filing identifies no material legal proceedings and reports disclosure controls were effective as of September 30, 2023. No formal earnings guidance is provided.
Important facts for investors to verify
- Implementation milestones, costs and regulatory status of the BSA consent order and MOU, including the practical effect of the dividend-approval restriction.
- Deposit mix, deposit pricing and uninsured-deposit trends, as well as the Bank’s liquidity capacity and funding plan around BTFP maturity.
- Whether funding costs stabilize and net interest margin performs in line with management’s expectation that compression may continue.
- Commercial real estate credit quality, criticized and nonperforming loan trends, charge-offs, and the assumptions supporting the CECL allowance.
- Potential consequences of the securities portfolio’s unrealized losses for capital, liquidity and the ability to hold securities until recovery or maturity.