Finward Bancorp(FNWD) - 2024 Q1 - Quarterly Report

PART I. Financial Information Unaudited Financial Statements and Notes This section presents the unaudited consolidated financial statements for Finward Bancorp as of March 31, 2024, and for the three months then ended, including the balance sheet, statements of income, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes explaining the basis of presentation and significant accounting policies Consolidated Financial Statements The consolidated financial statements show a decrease in total assets to $2.07 billion from $2.11 billion at year-end 2023, primarily due to a reduction in deposits, while net income for Q1 2024 surged to $9.3 million, largely driven by a significant one-time gain on the sale of real estate Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $2,071,782 | $2,108,279 | | Net Loans Receivable | $1,489,446 | $1,493,827 | | Total Deposits | $1,747,478 | $1,813,421 | | Total Liabilities | $1,920,201 | $1,960,934 | | Total Stockholders' Equity | $151,581 | $147,345 | Consolidated Income Statement Highlights (in thousands, except per share data) | Account | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net Interest Income | $11,780 | $14,668 | | Provision for Credit Losses | $0 | $488 | | Noninterest Income | $13,475 | $2,608 | | Net Income | $9,279 | $2,240 | | Diluted EPS | $2.17 | $0.51 | - A significant driver of the increase in noninterest income and net income in Q1 2024 was an $11.86 million gain on the sale of real estate[9] - Cash flows from investing activities were a net inflow of $39.2 million in Q1 2024, driven by proceeds from the sale of premises and equipment ($17.7 million) and securities ($14.7 million), contrasting with a net outflow of $3.0 million in Q1 2023[15] Notes to Condensed Consolidated Financial Statements The notes detail the composition of the Bancorp's assets and liabilities, including a securities portfolio with significant unrealized losses, a loan portfolio concentrated in commercial and residential real estate, and an allowance for credit losses, along with information on intangibles, deposits, derivatives, borrowings, and a recent sale-leaseback transaction Securities Available-for-Sale (in thousands) | Security Type | Fair Value (Mar 31, 2024) | Gross Unrealized Losses | | :--- | :--- | :--- | | U.S. government sponsored entities | $7,866 | $(1,018) | | CMOs and RMBS | $117,897 | $(27,180) | | Municipal securities | $219,028 | $(45,164) | | Collateralized debt obligations | $1,442 | $(724) | | Total | $346,233 | $(74,086) | Loan Portfolio Composition (in thousands) | Loan Type | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Residential real estate | $480,255 | $484,948 | | Commercial real estate | $518,166 | $503,202 | | Multifamily | $220,789 | $219,917 | | Construction and land development | $102,446 | $115,227 | | Commercial business | $94,521 | $97,386 | | Other | $88,749 | $97,875 | | Total Loans Receivable | $1,504,926 | $1,508,755 | - The allowance for credit losses (ACL) was $18.8 million as of March 31, 2024, a slight increase from $18.77 million at year-end 2023, with no provision for credit losses in Q1 2024 compared to a $488 thousand provision in Q1 2023[9][74] - On February 22, 2024, the Bank completed a sale-leaseback transaction for five branch properties, receiving an aggregate purchase price of $17.2 million and entering into 15-year triple net lease agreements, resulting in a gain of $11.8 million[9][105] - The Bancorp utilized the Federal Reserve's Bank Term Funding Program (BTFP), with $65 million in funding outstanding as of March 31, 2024, before the program ceased new loans on March 11, 2024[104] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Bancorp's financial condition and operating results, highlighting a significant increase in net income in Q1 2024 due to a one-time gain, while addressing challenges such as net interest margin compression and significant regulatory actions related to Bank Secrecy Act compliance Regulatory Developments The Bank entered into a Consent Order with the FDIC and Indiana DFI on November 7, 2023, concerning deficiencies in its Bank Secrecy Act (BSA) compliance program, mandating enhanced oversight, revised BSA programs, and a concurrent Memorandum of Understanding (MOU) requiring prior regulatory approval for cash dividends - On November 7, 2023, the Bank entered into a Consent Order with the FDIC and Indiana DFI related to Bank Secrecy Act (BSA) compliance deficiencies found during a February 2023 examination[110] - Corrective actions required by the order include strengthening board oversight, revising the BSA compliance program, implementing a customer due diligence program, and reviewing past account activity[111] - A concurrent Memorandum of Understanding (MOU) requires the Bank to refrain from paying cash dividends without prior regulatory approval[115] Financial Condition As of March 31, 2024, total assets decreased by 1.7% to $2.1 billion from year-end 2023, with the net loan portfolio remaining stable at $1.5 billion, while non-performing loans slightly increased to 0.78% of total loans, and total deposits declined by 3.6% to $1.7 billion - Total assets decreased by $36.5 million (1.7%) during Q1 2024, while net loans receivable remained stable at approximately $1.5 billion[117][118] Asset Quality Ratios | Metric | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Nonperforming loans to total loans | 0.78% | 0.76% | | ACL-to-total loans | 1.25% | 1.24% | | ACL-to-non-performing loans | 158.7% | 163.9% | - The securities portfolio decreased by $25.1 million (6.8%) to $346.2 million, partly due to a sale of $15.1 million in securities which resulted in a $531 thousand realized loss, and accumulated other comprehensive losses increased to $56.3 million[132] - Total deposits decreased by $65.9 million (3.6%) to $1.7 billion, primarily due to cyclical outflows from municipal depositors and a planned reduction in deposit pricing[138] Liquidity and Capital Resources The Bancorp maintains a strong liquidity position with $516.4 million in total available liquidity as of March 31, 2024, and stockholders' equity increased to $151.6 million in Q1 2024, with capital ratios remaining well above regulatory minimums, though dividend payments are subject to regulatory approval - As of March 31, 2024, the Bancorp had total available liquidity of $516.4 million, including borrowing capacity from the FHLB and Federal Reserve facilities[161][162] Bank Capital Ratios | Ratio | March 31, 2024 | Minimum for Well Capitalized | | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 10.89% | 6.50% | | Tier 1 Capital | 10.89% | 8.00% | | Total Capital | 11.92% | 10.00% | | Tier 1 Leverage | 8.24% | 5.00% | - The Bancorp's ability to pay dividends is dependent on the Bank, which must seek regulatory approval prior to paying cash dividends due to the MOU[170] Results of Operations For Q1 2024, net income was $9.3 million, a 314.2% increase from $2.2 million in Q1 2023, driven by a $10.9 billion increase in noninterest income primarily from an $11.8 million gain on a real estate sale, despite a 19.7% decrease in net interest income due to rising funding costs Key Performance Metrics | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net Income (in millions) | $9.3 | $2.2 | | Return on Average Assets (ROA) | 1.77% | 0.43% | | Return on Average Equity (ROE) | 24.97% | 6.42% | - Net interest income decreased by $2.9 million (19.7%) YoY, as the cost of funds rose to 2.53% from 1.41%, outpacing the increase in asset yields[174] - The tax-adjusted net interest margin compressed to 2.57% in Q1 2024 from 3.23% in Q1 2023, primarily due to the higher interest rate environment increasing funding costs[174][175] - Noninterest income surged by 416.7% to $13.5 million, mainly due to an $11.8 million gain on the sale of real estate from a sale-leaseback transaction[177] - Noninterest expense increased by 5.5% to $15.0 million, driven by higher consulting, legal, and operational enhancement costs[179][180] Quantitative and Qualitative Disclosures about Market Risk This item is marked as not applicable in the report, with detailed disclosures regarding market risk, primarily interest rate risk, provided within Item 2, Management's Discussion and Analysis - The report states this item is not applicable, with market risk disclosures included in the MD&A section[187] Controls and Procedures Management, including the CEO and CFO, concluded that the Bancorp's disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the Bancorp's disclosure controls and procedures were effective as of March 31, 2024[188] - There were no material changes to the internal control over financial reporting during the first quarter of 2024[189] PART II. Other Information Legal Proceedings The Bancorp and its subsidiaries are involved in routine legal proceedings in the ordinary course of business, which management does not expect to have a material adverse effect on the company's financial position - The company is involved in ordinary course legal proceedings which are not expected to have a material adverse effect on its financial condition[191] Unregistered Sales of Equity Securities and Use of Proceeds The Bancorp has a stock repurchase program authorized in 2014 for up to 50,000 shares, with no shares repurchased under this program during Q1 2024, though 2,816 shares were reacquired from employees at an average price of $24.11 per share to satisfy tax withholding obligations - No shares were repurchased under the publicly announced stock repurchase program during Q1 2024, with 48,828 shares remaining for potential repurchase[193][194] - In March 2024, the company reacquired 2,816 shares from employees at an average price of $24.11 to cover tax withholding on vested restricted stock awards[194][197]