Finward Bancorp — Q2 2021 Form 10-Q
Business context and reporting period. Finward Bancorp, a bank holding company whose earnings primarily depend on Peoples Bank, reported unaudited results for the quarter and six months ended June 30, 2021. The company changed its name from NorthWest Indiana Bancorp to Finward Bancorp effective May 24, 2021. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and position
- Q2 earnings: Net income was $3.57 million, or $1.03 per diluted share, down 26.4% from revised Q2 2020 net income of $4.85 million, or $1.40 per share. Return on average assets was 0.90% and return on average equity was 9.17%.
- First-half earnings: Net income was $8.11 million, or $2.33 per diluted share, up 1.9% from revised first-half 2020 net income of $7.96 million, or $2.30 per share. ROA was 1.04% and ROE was 10.54%.
- Net interest income and margins: Q2 net interest income increased 4.0% to $11.87 million; first-half net interest income rose 8.3% to $23.92 million. Net interest margin was 3.22% for Q2 and 3.31% for the first half, versus 3.48% and 3.49%, respectively, a year earlier. Tax-equivalent margins were 3.42% and 3.51%, respectively.
- Other income and expenses: Q2 noninterest income declined 27.1% to $3.68 million, mainly reflecting lower gains on mortgage loan and securities sales. First-half noninterest income fell 7.0% to $7.99 million. Noninterest expense increased 10.0% to $11.01 million in Q2 and 7.0% to $21.50 million for the first half; management cited compensation, retention, and strategic initiatives. The efficiency ratio rose to 70.79% in Q2 and 67.38% for the first half.
- Balance sheet and liquidity: At June 30, total assets were $1.604 billion, up 7.2% from year-end 2020; loans were $969.5 million, up modestly; deposits were $1.395 billion, up 7.1%. Cash and cash equivalents were $68.6 million, compared with $19.9 million at year-end. Available-for-sale securities totaled $473.9 million, up 15.4%.
- Funding and capital: Borrowed funds were zero at quarter-end, compared with $6.1 million at year-end; repurchase agreements were $24.4 million. Stockholders’ equity was $155.6 million, or 9.7% of assets, and book value per share was $44.71. The Bank reported a 12.7% CET1 ratio, 12.7% Tier 1 risk-based ratio, 14.0% total risk-based ratio, and 8.1% Tier 1 leverage ratio, above applicable minimums and “well capitalized” thresholds.
- Cash flow: First-half operating cash flow was $13.5 million, investing cash outflow was $60.0 million, and financing cash inflow was $95.1 million. Cash and cash equivalents increased by $48.7 million. Deposit growth was a principal funding source.
Material changes and credit quality
- Quarterly net income fell despite higher net interest income, as lower noninterest income and increased operating expenses more than offset lower interest expense and income taxes. Q2 weighted-average earning-asset yield declined to 3.38% from 3.93%; funding cost fell to 0.16% from 0.47%.
- Nonperforming loans declined to $12.3 million, or 1.26% of loans, from $14.4 million, or 1.49%, at year-end. The allowance for loan losses was $13.6 million, or 1.41% of loans, compared with $12.5 million, or 1.29%; allowance coverage of nonperforming loans rose to 111.1% from 86.7%.
- Special-mention loans increased to $24.6 million from $22.7 million, while substandard loans declined to $14.3 million from $16.6 million. Management attributed changes in classified loans mainly to movements among commercial real estate relationships.
- First-half loan originations for sale declined to $85.9 million from $114.2 million; net gains on loan sales were $3.2 million versus $3.6 million. The company reported $5.9 million of loans held for sale at June 30.
Outlook, risks, contingencies, and unusual items
- COVID-19: Management said the pandemic’s effects remain uncertain and could affect borrower repayment, collateral values, loan-loss provisions, asset yields, margins, fee income, liquidity, and operations. Management expected borrower deferral and modification requests to continue in 2021 at a reduced pace. At June 30, modified loans still in interest-only, partial-principal, or full-deferral arrangements totaled approximately $5.75 million.
- A $5.0 million hotel commercial real estate relationship was classified as nonperforming after pandemic-related pressure compounded weak operating performance predating the pandemic. A specific allowance was recorded; the borrower had established a payment reserve account and was complying with modified terms at quarter-end.
- The Bank reported $50.3 million of remaining PPP loan balances at June 30. It had approved first- and second-round PPP applications totaling $91.5 million and $37.5 million, respectively.
- Merger announced after quarter-end: On July 28, 2021, Finward agreed to acquire Royal Financial, Inc. for a mix of stock and cash, with an implied value of approximately $52.9 million based on Finward’s July 28 closing price. Closing was anticipated in Q1 2022, subject to shareholder, regulatory, and other customary approvals. Royal reported $533.7 million in assets, $464.2 million in loans, and $466.3 million in deposits at June 30.
- Financial statement revision: The company revised prior-period statements for immaterial errors in deferred costs associated with manufactured-home loans. The corrections reduced reported 2020 Q2 net income by $212,000 and first-half 2020 net income by $291,000; comparative results presented in this filing reflect the revisions.
- Available-for-sale securities had $2.74 million of gross unrealized losses at June 30, including $1.20 million on collateralized debt obligations. Management attributed losses primarily to interest rates and market volatility and said it intended and was able to hold the securities. Certain trust-preferred securities with a $2.2 million cost basis remained in payment-in-kind status.
- Management stated that it considered the loan-loss allowance adequate and believed available cash flow and borrowing capacity were sufficient to meet $219.9 million of loan commitments and $11.2 million of standby letters of credit. The filing provides no earnings guidance; it cautions that first-half results are not necessarily indicative of full-year results.
- Management reported effective disclosure controls at June 30 and no material change in internal control over financial reporting. It said ordinary-course legal proceedings were not expected to have a material adverse effect. Item 1A reported no applicable risk-factor changes.
Most important facts for investors to verify
- Whether net interest margin stabilizes as earning-asset yields and deposit costs adjust, and whether loan and securities growth can sustain net interest income.
- Trends in commercial real estate credit quality, including the hotel relationship, special-mention loans, and pandemic-related modifications.
- Whether the allowance remains adequate as economic conditions and borrower performance evolve.
- Merger approvals, final consideration allocation, closing timing, integration costs, and expected contribution from Royal Financial.
- The effects of the manufactured-home deferred-cost correction and the company’s controls over related accounting.
- Execution of the transition to the expected-credit-loss standard, scheduled to become effective for the company in 2023, and the LIBOR transition plan.