Finward Bancorp(FNWD) - 2023 Q4 - Annual Report

PART I Business Finward Bancorp, holding company for Peoples Bank, offers banking and wealth management services in Indiana and Illinois, recently expanding and addressing regulatory compliance - Finward Bancorp is the holding company for Peoples Bank, an Indiana-chartered commercial bank, primarily attracting public deposits and originating loans for single-family residences and commercial real estate in Northwest Indiana and Cook County, Illinois[13][14] - On January 31, 2022, the Bancorp acquired Royal Financial, Inc. for an implied valuation of approximately $56.7 million, expanding its banking network in Cook and DuPage Counties, Illinois[15] - The Bancorp's Wealth Management Group provides a range of services including estate and retirement planning, custodial services, and trust management[14] - On August 9, 2023, the Bancorp dissolved its captive insurance subsidiary, NWIN Risk Management, Inc., to simplify its organizational structure in response to proposed IRS regulations regarding "micro-captives"[17] Lending Activities The Bancorp maintains a diversified loan portfolio of approximately $1.51 billion, primarily in real estate, focusing on adjustable-rate and shorter-term loans to manage interest rate risk Loan Portfolio Composition (2022-2023) | Loan Type | Dec 31, 2023 ($ thousands) | Dec 31, 2022 ($ thousands) | | :--- | :--- | :--- | | Residential real estate | $484,948 | $484,595 | | Home equity | $46,599 | $38,978 | | Commercial real estate | $503,202 | $486,431 | | Construction and land development | $115,227 | $108,926 | | Multifamily | $219,917 | $251,014 | | Commercial business | $97,386 | $93,278 | | Consumer & Other | $41,476 | $45,349 | | Total Loans Receivable | $1,508,755 | $1,508,571 | - The Bancorp's lending strategy stresses quality growth, product diversification, and competitive pricing, with a focus on adjustable-rate and shorter-term loans to manage interest rate risk[25] - The maximum loan amount to a single borrower was approximately $27.5 million as of December 31, 2023, based on regulatory limits, with no loans exceeding this limit[27] Non-Performing Assets, Asset Classification and Provision for Credit Losses Non-performing loans significantly decreased to $11.5 million in 2023, while the Allowance for Credit Losses increased to $18.8 million due to CECL adoption and higher net charge-offs Non-Performing Assets Summary (2022-2023) | Metric | 2023 ($ thousands) | 2022 ($ thousands) | | :--- | :--- | :--- | | Non-accrual loans | $9,608 | $18,128 | | Accruing loans past due 90+ days | $1,843 | $248 | | Total Non-performing loans | $11,451 | $18,376 | | Ratio of non-performing loans to total loans | 0.76% | 1.21% | Allowance for Credit Losses (ACL) Activity - 2023 | Metric | Amount ($ thousands) | | :--- | :--- | | Balance at beginning of year | $12,897 | | Adoption of ASC 326 (CECL) | $5,158 | | PCD Gross-up | $1,029 | | Net charge-offs | ($2,008) | | Provision for credit losses | $1,692 | | Balance at end of year | $18,768 | - On January 1, 2023, the Bancorp adopted ASU No. 2016-13 (CECL), resulting in an $8.3 million implementation entry that increased the ACL by $5.2 million and the unfunded commitment liability by $3.1 million[77] - Substandard loans decreased from $23.0 million in 2022 to $12.3 million in 2023, while special mention loans increased from $11.6 million to $19.2 million over the same period[61][62] Investment Activities The Bancorp's $371.4 million investment portfolio, primarily in AFS municipal and mortgage-backed securities, provides liquidity and stable earnings, with unrealized losses attributed to interest rate changes Investment Portfolio Composition (Carrying Value) | Security Type | 2023 ($ thousands) | 2022 ($ thousands) | | :--- | :--- | :--- | | U.S. government sponsored agencies | $7,883 | $7,625 | | Collateralized Mortgage Obligations & MBS | $123,464 | $134,116 | | Municipal Securities | $238,670 | $227,718 | | Collateralized Debt Securities | $1,357 | $1,048 | | U.S. treasury securities | $0 | $389 | | Total | $371,374 | $370,896 | - Two trust preferred securities with a cost basis of $2.2 million were on non-accrual status as of December 31, 2023, due to a temporary delay in interest payments[85] Sources of Funds Deposits are the primary funding source, supplemented by FHLB and BTFP borrowings, contributing to $824.0 million in total available liquidity Average Deposits and Rates Paid | Deposit Type | 2023 Avg. Amount ($ thousands) | 2023 Avg. Rate | 2022 Avg. Amount ($ thousands) | 2022 Avg. Rate | | :--- | :--- | :--- | :--- | :--- | | Noninterest bearing demand | $323,694 | - | $377,408 | - | | Interest bearing demand | $344,449 | 0.96% | $374,815 | 0.36% | | MMDA accounts | $284,910 | 2.73% | $286,155 | 0.37% | | Savings accounts | $343,008 | 0.05% | $416,898 | 0.05% | | Certificates of deposit | $488,025 | 2.91% | $368,322 | 0.26% | | Total deposits | $1,784,086 | 1.43% | $1,823,598 | 0.20% | - The Bancorp participated in the Federal Reserve's Bank Term Funding Program (BTFP), accessing $100 million in 2023, with an outstanding balance of $80 million at year-end[94] - As of December 31, 2023, the Bancorp had available liquidity of $824.0 million, including borrowing capacity from the FHLB and Federal Reserve facilities[94] Regulation and Supervision Finward Bancorp and Peoples Bank are extensively regulated, meeting capital requirements, but are subject to a recent Consent Order and MOU restricting dividends due to BSA compliance issues - On November 7, 2023, the Bank entered into a Consent Order with the FDIC and Indiana DFI related to Bank Secrecy Act (BSA) compliance, requiring enhancements to its BSA program, internal controls, and staffing[124][209] - Concurrently, the Bank entered into a Memorandum of Understanding (MOU) which requires it to refrain from paying cash dividends without prior regulatory approval and to implement plans regarding operations, capital, and strategy[124][265] Bank Regulatory Capital Ratios (as of Dec 31, 2023) | Capital Ratio | Actual Ratio | Minimum for Adequacy | Minimum to be Well Capitalized | | :--- | :--- | :--- | :--- | | Common equity tier 1 capital | 10.4% | 4.5% | 6.5% | | Tier 1 capital | 10.4% | 6.0% | 8.0% | | Total capital | 11.4% | 8.0% | 10.0% | | Tier 1 leverage | 7.8% | 4.0% | 5.0% | Risk Factors The Bancorp faces credit, market, liquidity, and operational risks, compounded by economic conditions, intense competition, and regulatory actions including a recent Consent Order and MOU - The Bancorp is subject to a Consent Order and MOU with regulators, which is expected to result in additional compliance expenses and may limit or delay the ability to obtain regulatory approval for expansionary activities, with failure to comply potentially leading to further regulatory action[209][210] - A significant portion of the loan portfolio ($681.4 million, or 45.2%) consists of fixed-rate loans, which exposes the bank to interest rate risk, as a prolonged increase in market rates could adversely affect net interest income[182] - The Bancorp faces liquidity risk, which could be impacted by factors such as market downturns, failures of other financial institutions reducing market confidence, or regulatory actions limiting access to funding[179] - Increased unrealized losses in the investment portfolio, driven by rising interest rates, reduce book capital and could affect liquidity if securities must be sold at a loss[180][181] - The business faces strong competition from large regional banks, community banks, and non-bank financial technology ("FinTech") companies, which could impact loan and deposit growth and net interest margins[219][220][222] Unresolved Staff Comments There are no unresolved staff comments to report - Not applicable[235] Cybersecurity The Board's Risk Management Committee oversees cybersecurity risk, with the program based on FFIEC guidance and NIST standards, requiring continuous investment against evolving threats - The Board of Directors has delegated primary oversight of cybersecurity risk to its Risk Management Committee, which receives quarterly reports from the CISO and CRO[236] - The Bancorp's cybersecurity processes are based on the FFIEC guidance and the CRI Profile, which aligns with the NIST Cybersecurity Framework[237] - During 2023, the Bancorp did not discover any material cybersecurity incidents[162] Properties The Bancorp operates 26 banking locations across Indiana and Illinois, owning 21 properties with a net book value of $38.4 million - The Bancorp operates 26 branch locations, with 14 in Northwest Indiana and 12 in Illinois (11 in Cook County, 1 in DuPage County)[240] - The Bank owns 21 of its branch properties and leases 5 under long-term agreements[240] - The net book value of property, premises, and equipment totaled $38.4 million at December 31, 2023[241] Legal Proceedings The Bancorp is involved in ordinary course legal proceedings, with management not anticipating a material adverse effect on its financial position - The company is involved in legal proceedings in the ordinary course of business, but management believes the outcomes will not have a material adverse effect on its financial position[242] Mine Safety Disclosures This item is not applicable to the company - Not applicable[243] Information About Our Executive Officers This section provides background information on the Bancorp's four executive officers, including their roles and ages Executive Officers (as of Dec 31, 2023) | Executive Officer | Age | Position | | :--- | :--- | :--- | | Benjamin J. Bochnowski | 43 | President, CEO of Finward Bancorp, CEO of Peoples Bank | | Robert T. Lowry | 62 | Executive Vice President, Chief Operating Officer | | Todd M. Scheub | 56 | Executive Vice President, Chief Revenue Officer of Finward Bancorp, President of Peoples Bank | | Benjamin L. Schmitt | 43 | Senior Vice President, Chief Financial Officer and Treasurer | PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Finward Bancorp's common stock trades on Nasdaq, with 4.3 million shares outstanding, and the company has an active stock repurchase program - The Bancorp's common stock is listed on the Nasdaq Capital Market under the symbol "FNWD"[248] - A stock repurchase program authorized in 2014 allows for the repurchase of up to 50,000 shares, with 48,828 shares remaining available for repurchase under this program as of December 31, 2023[249][250] - During 2023, no shares were repurchased under the publicly announced program; however, 5,684 shares were reacquired from employees to satisfy tax withholding obligations on vested restricted stock awards[249][251] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased to $8.4 million in 2023 due to lower net interest income and margin compression, while total assets grew slightly and asset quality improved amidst CECL adoption and regulatory actions Key Financial Metrics (2023 vs 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $8.4 million | $15.1 million | | Diluted EPS | $1.96 | $3.60 | | Return on Average Assets | 0.40% | 0.74% | | Return on Average Equity | 6.28% | 10.47% | | Net Interest Margin | 2.83% | 3.56% | - The decrease in net income was primarily driven by a $12.6 million (18.8%) decrease in net interest income, as the cost of funds rose significantly from 0.33% in 2022 to 1.96% in 2023[299] - The company adopted the CECL accounting standard on January 1, 2023, which required a significant adjustment to the allowance for credit losses[258] - The company is addressing regulatory actions, including a Consent Order on BSA compliance and an MOU that restricts dividend payments without prior regulatory approval[259][265] Quantitative and Qualitative Disclosures about Market Risk This item is not applicable to the company - Not applicable[316] Financial Statements This section presents the consolidated financial statements for 2023 and 2022, including the auditor's report, balance sheets, income statements, and detailed notes Consolidated Financial Statements The consolidated financial statements show total assets of $2.11 billion and net income of $8.4 million in 2023, with an increase in stockholders' equity Consolidated Balance Sheet Highlights | Account | Dec 31, 2023 ($ thousands) | Dec 31, 2022 ($ thousands) | | :--- | :--- | :--- | | Total Assets | $2,108,279 | $2,070,339 | | Net Loans Receivable | $1,493,827 | $1,500,734 | | Total Deposits | $1,813,421 | $1,775,017 | | Total Liabilities | $1,960,934 | $1,933,946 | | Total Stockholders' Equity | $147,345 | $136,393 | Consolidated Income Statement Highlights | Account | 2023 ($ thousands) | 2022 ($ thousands) | | :--- | :--- | :--- | | Net Interest Income | $54,555 | $67,149 | | Provision for Credit Losses | $2,025 | $0 | | Noninterest Income | $10,746 | $11,509 | | Noninterest Expense | $55,231 | $62,100 | | Net Income | $8,380 | $15,080 | Notes to Consolidated Financial Statements The notes detail accounting policies, CECL adoption, portfolio composition, goodwill, regulatory capital, and a significant subsequent sale-leaseback transaction - The Bancorp adopted ASU 2016-13 (CECL) on January 1, 2023, resulting in a day-one after-tax decrease to retained earnings of $6.1 million and an increase to the allowance for credit losses on loans of $6.2 million[384][386] - On January 29, 2024, the Bank entered into a sale-leaseback agreement for 5 branch properties for an aggregate purchase price of $17.2 million, with the transaction closing on February 22, 2024[507][508] - Goodwill from past acquisitions totaled $22.4 million as of December 31, 2023, and no impairment was recorded[448] - As of December 31, 2023, the Bancorp had outstanding loan origination commitments of $244.1 million and standby letters of credit totaling $18.3 million[481] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure to report - There are no items reportable under this item[510] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes during the year - The CEO and CFO concluded that the Bancorp's disclosure controls and procedures were effective as of December 31, 2023[510] - Management's assessment, based on the COSO framework, determined that the Bancorp's internal control over financial reporting was effective as of December 31, 2023[513] Other Information There were no items to report under this section - There are no items reportable under this item[515] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[516] PART III Directors, Executive Officers and Corporate Governance Information on directors, corporate governance, and executive officers is incorporated by reference from the 2024 Proxy Statement - The required information for this item is incorporated by reference from the company's 2024 Definitive Proxy Statement[518] Executive Compensation Information on executive compensation is incorporated by reference from the 2024 Proxy Statement - The required information for this item is incorporated by reference from the company's 2024 Definitive Proxy Statement[519] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2024 Proxy Statement Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 0 | $0.00 | 224,845 | | Total | 0 | $0.00 | 224,845 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2024 Proxy Statement - The required information for this item is incorporated by reference from the company's 2024 Definitive Proxy Statement[524] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2024 Proxy Statement - The required information for this item is incorporated by reference from the company's 2024 Definitive Proxy Statement[525] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report - This item lists all financial statements and exhibits filed with the Form 10-K, including the auditor's report, consolidated financial statements, and various corporate and compensatory agreements[527][529]