Finward Bancorp — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2022. Finward is a bank holding company whose earnings primarily depend on Peoples Bank. On January 31, 2022, Finward completed its acquisition of Royal Financial, Inc. (RYFL), expanding its banking network in Cook and DuPage counties, Illinois. The acquisition materially affects year-over-year comparisons.
Financial results and position
- Third quarter: Net interest income was $17.5 million, up 43.5% from $12.2 million; net income was $4.6 million, up 28.8% from $3.5 million. Diluted EPS was $1.07 versus $1.02. Return on average assets was 0.88% and return on average equity was 13.65%.
- Nine months: Net interest income was $50.3 million, up 39.4%; net income was $11.1 million, down 4.5% from $11.7 million. Diluted EPS was $2.67 versus $3.35. Return on average assets was 0.73% versus 0.98%; return on average equity was 9.98% versus 9.96%.
- Interest and margins: Q3 net interest margin was 3.67% (3.84% tax-adjusted, a non-GAAP measure), compared with 3.24% reported and 3.46% tax-adjusted a year earlier. For the nine months, reported margin was 3.56% and tax-adjusted margin 3.75%, versus 3.29% and 3.49%, respectively. Management attributed improvement mainly to acquired earning assets, shifting securities cash flows into loans, and low funding costs.
- Revenue mix and expenses: Q3 noninterest income declined 36.6% to $2.6 million, largely reflecting lower mortgage-sale and securities-sale gains. Noninterest expense rose 21.0% to $15.0 million. For the nine months, noninterest income fell 28.6% to $8.7 million and noninterest expense rose 37.0% to $46.5 million. The company recorded $2.9 million of one-time merger expenses for the nine months.
- Balance sheet at September 30: Total assets were $2.053 billion, up 26.7% from year-end 2021; net loans were $1.489 billion, up from $953.4 million; and deposits were $1.833 billion, up 27.8%. Management attributed much of the growth to the RYFL acquisition. Stockholders’ equity was $118.0 million, or 5.7% of assets, and book value was $27.46 per share.
- Cash flow and liquidity: For the nine months, operating cash flow was $11.6 million, investing cash flow was $10.1 million, and financing cash flow was negative $16.6 million. Cash and cash equivalents ended at $38.3 million. Loan commitments were $279.7 million and standby letters of credit were $13.6 million; management said cash flow and borrowing capacity were sufficient to fund them. Estimated uninsured deposits were $570 million.
- Funding and capital: Borrowed funds were $56.2 million, comprising $37.0 million of FHLB advances and $19.2 million drawn on an FHLB line of credit; there were no borrowed funds at year-end 2021. The Bank’s September 30 capital ratios were 11.8% common equity Tier 1, 11.8% Tier 1 risk-based, 12.8% total risk-based, and 8.1% Tier 1 leverage; the filing reports these exceeded applicable requirements.
Material changes, risks and outlook
- Available-for-sale securities fell to $359.0 million from $526.9 million at year-end. Their net unrealized loss in accumulated other comprehensive income reached $79.8 million, versus a $4.3 million gain at year-end; the nine-month after-tax other comprehensive loss was $84.1 million. Management attributed the decline primarily to rising interest rates and said it did not anticipate needing to sell securities before recovery of amortized cost.
- Loan credit indicators changed: nonperforming loans rose to $10.9 million from $7.3 million, while the allowance-to-loans ratio fell to 0.89% from 1.38%. Substandard loans increased to $17.9 million from $8.7 million; management attributed the increase to acquired RYFL loans. The filing reports no loans classified as doubtful or loss and no defaults among 2022 modified troubled debt restructurings.
- Management noted higher rates have reduced demand for fixed-rate mortgage originations and sales. Nine-month gains on loans held for sale fell to $1.2 million from $4.4 million. It also cited acquisition integration costs, wage inflation, technology spending, and broader inflationary pressures as expense drivers.
- No quantified earnings or revenue guidance is provided. The filing cautions that forward-looking results are subject to risks, including interest-rate changes, credit conditions, liquidity and capital needs, and merger-related factors. Management was evaluating the January 1, 2023 adoption of CECL and said the impact was not yet determined.
- Management reported effective disclosure controls as of September 30, 2022, and no material change in internal control over financial reporting. It stated ordinary-course legal proceedings were not expected to have a material adverse effect; the filing identifies no separate risk factors as reportable for this quarter.
Key facts for investors to verify
- How much of loan, deposit, and earnings growth reflects RYFL versus organic growth, and how integration synergies and merger costs develop.
- Whether the large securities unrealized losses remain unrealized and how rising rates affect securities values, funding costs, and net interest margin.
- Credit performance of acquired and commercial real estate loans, including nonperforming and substandard balances, and the adequacy of reserves as CECL takes effect.
- Deposit stability and concentration, including the estimated $570 million of uninsured deposits, and the use and cost of FHLB borrowings.
- Whether weaker mortgage-sale income, higher operating expenses, and acquisition-related costs affect future profitability; no specific company guidance is provided.