FNWD Finward Bancorp

FOR IMMEDIATE RELEASE

JANUARY 30, 2024

FOR FURTHER INFORMATION

CONTACT SHAREHOLDER SERVICES

(219) 853-7575

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Net interest margin - The net interest margin for the twelve months ended December 31, 2023, was 2.83%, compared to 3.56% for the twelve months ended December 31, 2022. The tax-adjusted net interest margin (a non-GAAP measure) for the twelve months ended December 31, 2023, was 2.98%, compared to 3.74% for the twelve months ended December 31, 2022. The decreased net interest margin is primarily the result of the increase in short-term interest rates relative to long-term interest rates as part of the Federal Reserve’s response to high inflation and other factors. The compression seen in 2023 may continue in moderate fashion into 2024, unless target rates decrease and our interest-bearing liabilities can be repriced at those lower rates. See Table 1 at the end of this press release for a reconciliation of the tax-adjusted net interest margin to the GAAP net interest margin.

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Funding - On December 31, 2023, deposits totaled $1.81 billion, compared to $1.78 billion on December 31, 2022, an increase of $38.4 million or 2.2%. As of December 31, 2023, core deposits totaled $1.3 billion, compared to $1.4 billion on December 31, 2022, a decrease of $131.0 million or 9.2%. Core deposits include checking, savings, and money market accounts and represented 70.7% of the Bancorp’s total deposits at December 31, 2023. During 2023, balances for checking and savings accounts decreased as balances migrated into higher yielding accounts. On December 31, 2023, balances for certificates of deposit totaled $532.1 million, compared to $363.1 million on December 31, 2022, an increase of $169.0 million or 46.5%. The decrease in core deposits and increase in certificate of deposit balances is related to customer preferences for higher yielding deposits. In addition, on December 31, 2023, borrowings and repurchase agreements totaled $118.1 million, compared to $135.5 million at December 31, 2022, a decrease of $17.4 million or 12.8%. The decrease in short-term borrowings was the result of cyclical inflows and outflows of interest-earning assets and interest-bearing liabilities. As of December 31, 2023, 71% of our deposits are fully FDIC insured, and another 11% are further backed by the Indiana Public Deposit Insurance Fund, an overall increase of 1% from the amount as of September 30, 2023, of 73% of deposits being fully FDIC insured, and 8% backed by the Indiana Public Deposit Insurance Fund. The Bancorp’s liquidity position remains strong with solid core deposit customer relationships, excess cash, debt securities, and access to diversified borrowing sources. As of December 31,2023, the Bancorp had available liquidity of $824 million including borrowing capacity from the FHLB and Federal Reserve facilities.

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Unrealized losses on the securities portfolio - Accumulated other comprehensive losses were $51.6 million as of December 31, 2023, compared to $64.3 million on December 31, 2022, a decrease of $12.7 million or 19.7%. The yield on the securities portfolio improved on a year-to-date basis to 2.43% for the twelve months ended December 31, 2023, up from 2.22% for the twelve months ended December 31, 2022. Management continually monitors the securities portfolio for restructuring opportunities but has not yet found economically viable options. Other than potential restructuring, management does not currently anticipate the need to realize losses from sales in the securities portfolio, as losses are currently driven by the interest rate environment and management expects such losses to be fully recoverable. Further, it remains unlikely the Bank will be required to sell the investments in the portfolio before recovery of their amortized cost basis, which may be at maturity.

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Gain on sale of loans - Increases in mortgage rates have slowed the sale of fixed rate mortgage loans into the secondary market. As a result, gains from the sale of loans for the twelve months ended December 31, 2023, totaled $1.1 million, down from $1.4 million for the twelve months ended December 31, 2022. During the twelve months ended December 31, 2023, the Bank originated $37.9 million in new fixed rate mortgage loans for sale, compared to $44.9 million during the twelve months ended December 31, 2022. During the twelve months ended December 31, 2023, the Bank originated $41.6 million in new 1-4 family loans retained in its portfolio, compared to $105.4 million during the twelve months ended December 31, 2022. Total 1-4 family originations for the three-month period ending December 31, 2023, totaled $17.3 million, a decrease of $8.2 million from the amount for the three-month period ending September 30, 2023, totaling $25.5 million. This decrease was driven by seasonal demand for mortgages peaking in the spring and summer months, as well as increasing market interest rates which slowed loan growth. These retained loans are primarily construction loans and adjustable-rate loans with a fixed-rate period of 7 years or less, and the Bank continues to sell longer-duration fixed rate mortgages into the secondary market.

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Commercial lending - The Bank’s aggregate loan portfolio totaled $1.5 billion on December 31, 2023, compared to $1.5 billion on December 31, 2022. During the twelve months ended December 31, 2023, the Bank originated $234.3 million in new commercial loans, compared to $376.0 million during the twelve months ended December 31, 2022. The loan portfolio represents 77.2% of earning assets and is comprised of 61.9% commercial related credits. At December 31, 2023, the Bancorp’s portfolio loan balances in commercial real estate owner occupied properties of $220.2 million or 14.6% of total loan balances and commercial real estate non-owner occupied properties of $283.0 million or 18.7% of total loan balances. Of the $283.0 million in commercial real estate non-owner occupied properties balances, loans collateralized by office buildings represented $41.2 million or 2.7% of total loan balances.

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Asset quality - At December 31, 2023, non-performing loans totaled $11.5 million, compared to $18.4 million at December 31, 2022, a decrease of $6.9 million or 37.7%. The Bank’s ratio of non-performing loans to total loans was 0.76% at December 31, 2023, compared to 1.21% at December 31, 2022. The Bank’s ratio of non-performing assets to total assets was 0.61% at December 31, 2023, compared to 0.94% at December 31, 2022. The decrease in non-performing loans is primarily the result of management’s strategic non-performing asset management which includes proactive relationship management and note sales. In December 2023, the Bank completed a $5.4 million substandard loan sale to further reduce our outstanding nonperforming loans and increase our liquidity. At December 31, 2023, the allowance for credit losses (ACL) totaled $18.8 million and is considered adequate by management. For the year ended December 31, 2023, charge-offs, net of recoveries, totaled $2.0 million. The allowance for credit losses as a percentage of total loans was 1.24% at December 31, 2023, and the allowance for credit losses as a percentage of non-performing loans, or coverage ratio, was 163.9% at December 31, 2023. On January 1, 2023, the Bancorp adopted ASU No. 2016-13 resulting in an implementation entry of $8.3 million, increasing the ACL by $5.2 million and unfunded commitment liability by $3.1 million, and also resulting in retained earnings decreasing $6.1 million and generating a deferred tax asset of $2.2 million. The majority of the implementation entry is related to including acquired loan portfolios in the model and the addition of using economic forecasts in estimating future losses. In addition, $1.0 million of non-accretable credit loan discounts on purchase credit impaired loans now classified as purchase credit deteriorated were reallocated to the ACL.

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Operating Expenses: Non-interest expense as a percent of average assets was 2.65% for the twelve months ended December 31, 2023, as compared to 3.05% for 2022. Recent branch closures have had a positive impact on this ratio. Management also continues to improve efficiency in personnel and has netted a reduction of 14 full time equivalents, or 4%, through the twelve months ended December 31, 2023. Compensation and benefits expense is down 4.6% for the twelve months ended December 31, 2023, compared to 2022.

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Capital Adequacy - As of December 31, 2023, the Bank’s tier 1 capital to adjusted average assets ratio totaled 7.8%, on par with the ratio as of September 30, 2023, of 7.8%, and is within all regulatory capital requirements, and continues to be considered well capitalized. The Bancorp’s tangible book value per share was $28.31 at December 31, 2023, up from $25.41 as of December 31, 2022 (a non-GAAP measure). The increase in tangible book value per share is primarily a result of an improvement in our accumulated other comprehensive losses attributable to net unrealized gains on securities available for sale of approximately $13 million for the year ended December 31, 2023. Tangible common equity to total assets was 5.77% at December 31, 2023, up from 5.27% as of December 31, 2022 (a non-GAAP measure). The increase is due to decreased accumulated other comprehensive losses compared to the year-ended December 31, 2022. Excluding accumulated other comprehensive losses, tangible book value per share decreased to $40.31 as of December 31, 2023, from $40.36 as of December 31, 2022 (a non-GAAP measure). The decrease is related to a reduction of retained earnings of $6.1 million due to the impact of the adoption of ASU No. 2016-13 and the payment of dividends of $4.5 million. See Table 1 at the end of this press release for a reconciliation of the tangible book value per share, tangible book value per share adjusted for accumulated other losses, tangible common equity as a percentage of total assets, and tangible common equity as a percentage of total assets adjusted for accumulated other comprehensive losses to the related GAAP ratios.

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Sale-Leaseback Transaction - On January 29, 2024, the Bank entered into an agreement for the purchase and sale of property (the “Sale Agreement”), with MountainSeed Real Estate Services, LLC (the “Buyer”), a Georgia limited liability company, which provides for the sale to the Buyer of 5 properties owned and operated as branch locations by the Bank (the “Properties”) for an aggregate purchase price of $17.2 million, subject to customary adjustments at closing. Four of the Properties are located in Lake County, Indiana and one Property is located in Cook County, Illinois.  Under the Sale Agreement, the Bank has agreed, concurrently with the closing of the sale of the Properties, to enter into lease agreements (the “Lease Agreements”) with the Buyer under which the Bank will lease each of the Properties. Each of the Lease Agreements will have an initial term of 15 years.  The Bank’s obligations under the Lease Agreements will be guaranteed by the Bancorp pursuant to a form of guaranty to be entered into at the closing of the sale-leaseback transaction.  The Bancorp expects that the sale-leaseback transaction will close by the third week of February 2024, subject to the satisfaction of customary closing conditions.  We will not close any branches or exit any markets as part of the sale-leaseback transaction. We expect the sale-leaseback transaction will result in proceeds in excess of book value of the Properties of approximately $11.7 million. The aggregate first full year of rent expense under the Lease Agreements will be approximately $1.5 million pre-tax, and will be partially offset by the elimination of the annual pre-tax depreciation expenses on the buildings of approximately $265 thousand. The Lease Agreements also include an annual rent adjustment of 2.0%. The Bank anticipates using the net proceeds generated from the sale-leaseback transaction for general corporate purposes, including a potential reduction in borrowed funds and associated interest expense costs.