Finward Bancorp — FY 2021 Form 10-K
Business context and reporting period. Finward Bancorp is the holding company for Peoples Bank, a community bank serving northwest Indiana and the Chicago-area suburbs. Its principal activities include deposit-taking and lending, with wealth management services. This filing reports the fiscal year ended December 31, 2021; it is an annual report, not a standalone fourth-quarter report.
On January 31, 2022, after year-end, Finward completed its acquisition of Royal Financial, Inc. for approximately $56.7 million in implied value, issuing 795,423 shares and paying approximately $18.7 million in cash. The transaction expanded the branch network to 30 locations. Royal’s results and assets were not included in Finward’s December 31, 2021 financial statements.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Total assets at year-end | $1.621 billion | $1.496 billion |
| Total deposits at year-end | $1.434 billion | $1.302 billion |
| Net income | $15.0 million | $15.9 million |
| Basic and diluted EPS | $4.30 | $4.60 |
| Net interest income | $48.6 million | $45.9 million |
| Net interest margin | 3.29% | 3.47% |
| Return on average assets / equity | 0.95% / 9.61% | 1.12% / 11.04% |
| Stockholders’ equity at year-end | $156.6 million | $151.7 million |
- Revenue and earnings: Total interest income was $50.7 million, down 1.9%; interest expense fell 63.8% to $2.1 million, lifting net interest income 5.9%. Noninterest income declined 12.1% to $15.9 million, chiefly because mortgage-sale gains fell to $5.3 million from $7.6 million. Noninterest expense increased 12.0% to $46.6 million. Net income consequently declined 6.1%.
- Credit costs and asset quality: Provision for loan losses was $1.5 million, down from $3.7 million. The allowance for loan losses ended at $13.3 million, or 1.38% of loans, versus $12.5 million and 1.29%. Nonperforming loans declined to $7.3 million, or 0.75% of loans, from $14.4 million, or 1.49%. Management attributed much of the improvement to selling a $5.1 million hotel-related commercial real estate loan and resolution or removal of other problem loans.
- Loans and investments: Net loans were $966.7 million, nearly unchanged year over year. Commercial real estate was $317.1 million, or 33.0% of loans; construction and land development grew to $123.8 million from $93.6 million. Available-for-sale securities increased 28.3% to $526.9 million, with municipal securities representing $332.1 million.
- Cash flow and liquidity: Cash and cash equivalents ended at $33.2 million, up $13.3 million. Operating cash flow was $17.0 million; investing activities used $125.9 million and financing activities provided $122.1 million, primarily reflecting deposit growth. Deposits rose 10.1%; certificates of deposit fell 16.0%. Finward had $14.6 million in repurchase agreements and no other borrowed funds at year-end. It reported $192.8 million of excess FHLB borrowing capacity based on collateral.
- Capital and shareholder returns: The Bank was well capitalized; its year-end CET1 and total risk-based capital ratios were 12.6% and 13.9%, respectively. Stockholders’ equity was 9.66% of total assets. The company declared $1.24 per share in dividends for 2021, unchanged from 2020; cash dividends paid were $4.3 million.
Material changes and notable items
- Despite higher net interest income and a lower loan-loss provision, net income fell as expenses rose and noninterest income declined. Lower asset yields were partly offset by lower deposit and borrowing costs; the net interest margin narrowed from 3.47% to 3.29%.
- Unrealized securities gains declined: accumulated other comprehensive income related to securities was $4.3 million at year-end, versus $10.4 million a year earlier. The filing attributes unrealized losses primarily to interest-rate and market movements and says management did not consider them other-than-temporary.
- Two pooled trust preferred securities, with a $2.2 million cost basis, were in payment-in-kind status and on nonaccrual. Their reported carrying value was $992,000; management reported no additional other-than-temporary impairment in 2021.
- The company revised previously issued 2020 statements for immaterial errors related to deferred costs on manufactured-home loans. The revision reduced 2020 net income by $672,000 and year-end assets and equity by $1.2 million; management determined the errors were not material to the previously issued statements.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion and identified the allowance for loan losses as a critical audit matter. The auditor did not attest to internal control effectiveness.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management’s commentary emphasizes that future results depend on net interest margins, asset quality, deposit behavior, economic conditions, and execution of strategic initiatives, including the Royal acquisition. Finward said it was evaluating the expected impact of CECL, scheduled to become effective for the company on January 1, 2023.
- Key risks include interest-rate exposure: $417.1 million, or 43.4% of loans, had fixed rates at year-end, while rising deposit costs or borrower stress could pressure margins and credit quality.
- Commercial real estate represented 33.0% of loans, and commercial business lending represented 12.1%; losses could rise if local economic or property conditions weaken.
- Approximately $452.0 million of deposits were estimated uninsured. Deposit outflows, competition, or funding-cost increases could affect liquidity and earnings.
- Other disclosed risks include COVID-19 uncertainty, inflation, securities valuation and municipal-credit risk, cybersecurity and third-party system dependence, regulatory changes, and acquisition integration or dilution. No material cybersecurity incident was reported during 2021; management stated it knew of no legal matters expected to materially affect the financial statements.
- Off-balance-sheet commitments included $234.4 million to originate loans and $12.3 million in standby letters of credit. These amounts are contractual exposures, not necessarily expected cash outflows.
Most important facts for investors to verify
- How the Royal Financial acquisition affects pro forma earnings, credit quality, capital, integration costs, and deposit retention.
- Whether net interest margin stabilizes as rates and funding costs change, given the fixed-rate loan exposure and large securities portfolio.
- Whether asset-quality improvement persists, particularly in commercial real estate and construction lending, and whether the $13.3 million allowance remains adequate.
- The composition and stability of uninsured deposits, available liquidity, and reliance on collateralized or other funding if deposits leave.
- The effect of the securities portfolio’s unrealized losses and the nonaccrual trust preferred securities on earnings, capital, and liquidity; also review the 2020 financial-statement revision and the forthcoming CECL transition.