Finward Bancorp — Q1 2023 Form 10-Q
Business context and reporting period. Finward Bancorp is a bank holding company whose primary earnings depend on Peoples Bank. This unaudited filing covers the three months ended March 31, 2023, with comparisons to Q1 2022 for income and cash flows and to December 31, 2022 for balance-sheet measures. Unless stated otherwise, amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Total assets | $2.10 billion | Up 1.4% from December 31, 2022 |
| Total loans, before allowance | $1.52 billion | Up modestly from year-end |
| Total deposits | $1.81 billion | Up 1.8% from year-end |
| Net income | $2.24 million | Up 4.9% from $2.14 million in Q1 2022 |
| Diluted EPS | $0.51 | Down from $0.53 |
| Net interest income | $14.67 million | Down 5.6% from $15.54 million |
| Net interest margin | 3.07%; 3.23% tax-equivalent | Down from 3.41%; 3.63% tax-equivalent |
| Cash from operating activities | $3.95 million | Compared with $0.72 million in Q1 2022 |
| Cash and cash equivalents | $54.8 million | Up from $31.3 million at year-end |
| Stockholders’ equity | $139.7 million | Up from $136.4 million at year-end; 6.7% of assets per MD&A |
| Borrowed funds | $100 million | Down from $120 million at year-end; new BTFP borrowing matures in 2024 |
Interest income increased to $20.14 million from $15.89 million, but interest expense rose sharply to $5.47 million from $0.36 million as funding costs repriced. Average cost of interest-bearing liabilities was 1.15%, versus 0.08% a year earlier. Return on average assets was 0.43% and return on average equity was 6.42%. The declared dividend was $0.31 per share, unchanged year over year.
Q1 2023 cash flows included $3.95 million from operations, $2.98 million used in investing, and $22.52 million from financing. Financing cash flow benefited from deposit growth and repurchase agreements, partly offset by repayment of $120 million in FHLB advances.
Material changes versus comparable periods
- Net income increased modestly, but diluted EPS declined as the weighted-average share count increased.
- Margin pressure reflected the faster rise in deposit and borrowing costs than in asset yields. Management said it expects compression to continue unless target rates decline and interest-bearing liabilities can be repriced lower.
- Noninterest income fell 17.0% to $2.61 million, mainly due to lower mortgage-sale gains and no securities-sale gain, compared with $381,000 of securities gains in Q1 2022. The filing attributes $241,000 of “other” income primarily to a branch sale.
- Noninterest expense declined 12.6% to $14.23 million, largely because Q1 2022 included acquisition-related data-conversion and other merger expenses. Compensation, occupancy, and FDIC premiums increased.
- Deposits rose overall, but checking and savings balances declined while certificates of deposit increased $108.3 million and money-market deposits increased $22.1 million. Core deposits, defined as checking, savings, and money-market accounts, were reported down 5.5% from year-end.
- Uninsured deposits were estimated at $339.5 million, or 18.8% of deposits, compared with $516.1 million, or 29.1%, at year-end.
- Available-for-sale securities’ fair value increased to $377.9 million from $370.9 million. Gross unrealized losses decreased to $73.6 million from $84.6 million; accumulated other comprehensive loss improved to $55.9 million from $64.3 million.
Outlook, commentary, risks and unusual items
- Liquidity and funding: The company reported minimal deposit outflow amid 2023 banking-sector turmoil and said liquidity remained strong. It accessed $100 million through the Federal Reserve’s Bank Term Funding Program, pledging securities with $177.7 million market value and $224.0 million par value. The filing describes available liquidity as $918 million in one passage, while another gives $701.6 million of borrowing capacity and separately reports $54.8 million cash; the measures are not clearly reconciled in the filing text.
- Capital: Peoples Bank reported common equity Tier 1 and total capital ratios of 10.0% and 11.0%, respectively, above regulatory “well capitalized” thresholds. The filing notes that below-investment-grade collateralized debt obligations increase risk-weighted assets.
- Credit and CECL: Finward adopted CECL on January 1, 2023. Adoption increased the loan allowance by $5.2 million and established a $3.1 million liability for unfunded commitments, reducing retained earnings by $6.1 million after tax. The loan allowance was $19.6 million at March 31; nonperforming loans were $20.0 million, or 1.32% of loans, versus $18.4 million, or 1.21%, at year-end. Management highlighted judgment and forecast uncertainty in estimating expected credit losses.
- Loan and securities risks: Commercial real estate loans totaled $484.6 million. Management said it is monitoring this portfolio for effects of higher rates, reduced occupancy associated with hybrid work, and lower property valuations. Management stated it did not anticipate needing to sell securities to realize losses and believed it could hold them until recovery or maturity; securities’ unrealized losses are largely attributed to market-rate changes.
- Interest-rate sensitivity: The company’s model estimates a 6.6% increase in next-12-month net interest income under an immediate +200-basis-point scenario and a 10.7% decrease under a -200-basis-point scenario. The modeled economic value of equity declines 12.5% in the +200-basis-point scenario. Results depend on assumptions and are not forecasts.
- Commitments and contingencies: Loan-funding commitments were $269.3 million, 53.7% variable rate; standby letters of credit were $14.0 million. Management said it believed liquidity and borrowing capacity were sufficient to fund them. Management expected ordinary-course legal matters, if any, not to have a material adverse effect.
- No formal earnings guidance: The filing does not provide a numerical earnings or revenue outlook. Management said Q1 income is not necessarily indicative of full-year results and cautioned that actual credit losses and results may differ from estimates.
Most important facts for investors to verify
- Reconcile the reported $918 million available-liquidity figure with the $701.6 million borrowing-capacity figure and the separately reported cash balance; confirm what each measure includes.
- Track deposit mix, funding costs, and uninsured deposits, particularly the shift from noninterest-bearing and savings balances into higher-cost certificates of deposit and money-market accounts.
- Assess whether ongoing net interest margin compression and the modeled sensitivity to rate changes align with subsequent results.
- Review CECL assumptions, allowance coverage, delinquency and nonaccrual trends, and exposure to commercial real estate and multifamily loans.
- Monitor the market value and unrealized losses in the securities portfolio, collateral pledged for funding, and whether liquidity needs could require securities sales.
- Confirm that capital ratios remain above regulatory thresholds and that the $100 million BTFP advance is repaid or refinanced by its 2024 maturity.