Finward Bancorp (FNWD) — Q1 2024 Form 10-Q
Reporting period: Quarter ended March 31, 2024. Finward Bancorp is a bank holding company whose principal subsidiary is Peoples Bank. Financial amounts below are in U.S. dollars; “million” is used for readability.
Financial performance
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Net interest income | $11.8 million | $14.7 million; down 19.7% |
| Net interest margin | 2.42% GAAP; 2.57% tax-equivalent | 3.07% GAAP; 3.23% tax-equivalent |
| Provision for credit losses | $42,000 | $488,000 |
| Noninterest income | $13.5 million | $2.6 million |
| Noninterest expense | $15.0 million | $14.2 million |
| Net income | $9.3 million | $2.2 million |
| Diluted EPS | $2.17 | $0.51 |
| Return on average assets / equity | 1.77% / 24.97% | 0.43% / 6.42% |
Net income benefited substantially from an approximately $11.8 million gain on the sale-leaseback of five branch properties. The quarter also included a $531,000 realized loss on securities sales. The reported profit increase therefore was not driven by stronger core net interest income.
Interest income rose to $22.0 million from $20.1 million, but interest expense increased to $10.2 million from $5.5 million. Average earning-asset yield improved to 4.52% from 4.22%, while the cost of interest-bearing liabilities rose to 2.53% from 1.41%. Management attributed lower net interest income and margin primarily to higher funding costs.
Financial position, cash flow and credit
- Total assets were $2.072 billion at March 31, down 1.7% from year-end. Net loans were $1.489 billion, roughly unchanged; total deposits were $1.747 billion, down $65.9 million, or 3.6%.
- Cash and cash equivalents were $71.8 million, down $14.2 million during the quarter. Operating cash flow was negative $25,000; investing activities provided $39.2 million, including sale-leaseback proceeds; financing activities used $53.4 million, mainly reflecting deposit outflows and borrowing activity.
- Borrowings were $90.0 million, including $65.0 million outstanding under the Federal Reserve Bank Term Funding Program (BTFP), and repurchase agreements were $41.1 million. Management reported $516.4 million of available liquidity, including borrowing capacity.
- Stockholders’ equity was $151.6 million, or 7.3% of assets. Accumulated other comprehensive loss widened to $56.3 million from $51.6 million, principally reflecting securities valuation changes. Bank regulatory capital ratios exceeded well-capitalized thresholds: CET1 10.89%, Tier 1 10.89%, total capital 11.92%, and leverage 8.24%.
- Nonperforming loans were $11.8 million, or 0.78% of loans, versus $11.5 million, or 0.76%, at year-end. The allowance was $18.8 million, 1.25% of loans and 158.7% of nonperforming loans. Net charge-offs were minimal. Commercial real estate was the largest loan segment at $518.2 million, or 34.4% of loans.
Material changes and unusual items
- The February 22 sale-leaseback covered five branch properties for approximately $17.2 million. The Bank entered into triple-net leases with initial 15-year terms; the filing reports $15.3 million of lease liabilities and $16.1 million of right-of-use assets. The transaction produced a roughly $11.8 million gain included in Q1 noninterest income.
- The Bancorp sold $14.7 million of available-for-sale securities and recorded a $531,000 loss. Management said the sale was intended to improve future profitability, reduce borrowings and benefit regulatory capital in subsequent periods. The portfolio’s gross unrealized losses were $74.1 million at quarter-end; management attributed them primarily to interest rates and market volatility and said it intends and is able to hold the securities for the foreseeable future.
- Deposits declined mainly because municipal and business customers used excess cash and money-market balances fell; management also cited planned reductions in deposit pricing. Core deposits were 69.6% of total deposits.
- Noninterest expense rose 5.5%, with management citing CECL model review and enhancement costs, sale-leaseback-related consulting and legal costs, and other operational enhancement expenses. Management said it remained focused on expense reductions.
Outlook, risks and contingencies
- No numeric earnings or full-year guidance was provided. Management expects first-quarter net interest margin compression to continue unless target interest rates decline and interest-bearing liabilities can reprice lower. Its rate-sensitivity analysis projected a 6.0% increase in next-12-month net interest income under a +300 basis-point shock and a 9.3% decrease under a -300 basis-point shock; modeled results are sensitive to assumptions.
- The Bank is subject to a November 2023 FDIC and Indiana DFI consent order concerning Bank Secrecy Act compliance. Required actions include enhancing oversight, controls, staffing, training, customer due diligence and suspicious-activity reporting, as well as reviewing past account activity. Management described corrective work underway and expects related expenses not to have a material financial impact.
- A related memorandum of understanding requires regulatory approval before the Bank pays cash dividends and calls for plans and quarterly progress reports concerning operations, capital and strategy. Regulators’ actions may limit or delay expansion and business combinations. The Bancorp declared a $0.12-per-share dividend; it was paid May 6, 2024. The filing also states that the Bank paid no cash dividend without prior regulatory approval under the MOU.
- Interest-rate, deposit-flow, commercial real estate valuation and borrower-performance risks remain important. Management is monitoring commercial real estate exposures amid higher rates, hybrid-work-related occupancy changes and lower valuations. Outstanding loan commitments were $262.5 million, with 55% at variable rates; standby letters of credit totaled $16.4 million.
- Management concluded disclosure controls were effective as of March 31, 2024, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of Q1 earnings came from the one-time sale-leaseback gain, and what recurring earnings look like without it.
- Deposit retention, funding costs, net interest margin trends and liquidity availability—particularly following the end of new BTFP lending on March 11, 2024.
- Progress and costs in meeting the BSA consent order and MOU requirements, including the effect of dividend restrictions on capital distributions.
- Commercial real estate credit performance, nonperforming and criticized loan trends, allowance adequacy, and the valuation and duration risks in the securities portfolio.
- The sale-leaseback’s ongoing rent and operating costs, and whether management’s stated future profitability and capital benefits from securities restructuring materialize.