Finward Bancorp — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; balance-sheet comparisons are to December 31, 2021. Dollar amounts are in millions unless stated otherwise. Finward is a bank holding company whose earnings primarily depend on Peoples Bank.
Business context and reporting period
Finward completed its acquisition of Royal Financial, Inc. (RYFL) on January 31, 2022. The approximately $56.7 million transaction included $18.7 million cash and 795,423 Finward shares, and expanded the bank’s branch network in Cook and DuPage counties, Illinois. The acquisition materially affects year-over-year comparisons and drove much of the increase in assets, loans, and deposits.
Financial performance and condition
- Q2 earnings: Net income was $4.4 million, up 24.1% from $3.6 million; diluted EPS was $1.04 versus $1.03. Return on average assets was 0.85% and return on average equity was 12.45%.
- First-half earnings: Net income was $6.6 million, down 19.1% from $8.1 million; diluted EPS was $1.59 versus $2.33. ROA was 0.65% and ROE was 8.40%.
- Net interest: Q2 net interest income rose 45.7% to $17.3 million; reported net interest margin was 3.59% versus 3.22% a year earlier, and tax-adjusted margin was 3.78% versus 3.42%. First-half net interest income increased 37.3% to $32.8 million; tax-adjusted margin was 3.70% versus 3.51%.
- Other income and expenses: Q2 noninterest income declined 21.3% to $2.9 million, principally because gain on mortgage loan sales fell to $0.3 million from $1.1 million. Q2 noninterest expense rose 37.8% to $15.2 million. For the first half, noninterest income fell 24.4% to $6.0 million and noninterest expense increased 46.2% to $31.4 million.
- Assets and funding at June 30: Total assets were $2.10 billion, net loans $1.46 billion, deposits $1.92 billion, and cash and cash equivalents $79.3 million. Compared with year-end, assets grew 29.7%, net loans grew to $1.46 billion from $953.4 million, and deposits increased 33.7% to $1.92 billion; acquisition activity was the primary driver.
- Liquidity and cash flow: First-half operating cash flow was $5.9 million, investing cash flow was $24.8 million, and financing cash flow was $15.4 million; cash and cash equivalents increased $46.1 million. Loan funding commitments were $276.1 million, 54.1% variable-rate, and standby letters of credit were $13.6 million. Management stated it believed available cash flow and borrowing capacity were sufficient to meet these commitments.
- Debt and capital: Repurchase agreements were $24.5 million, up from $14.6 million at year-end; the filing reports no FHLB advances outstanding in the balance-sheet comparison. Stockholders’ equity was $136.7 million, or 6.5% of assets, and book value was $31.80 per share. The Bank’s June 30 regulatory ratios were 10.5% CET1, 10.5% Tier 1, 11.4% total capital, and 7.8% leverage; it exceeded applicable requirements.
- Credit quality: Nonperforming loans were $10.0 million, or 0.68% of loans, versus $7.3 million and 0.75% at year-end. The allowance was $13.4 million, 0.91% of loans and 133.8% of nonperforming loans. Substandard loans increased to $16.7 million, primarily due to RYFL-acquired loans.
Material changes versus prior periods
- Q2 net interest income and earnings increased, supported by RYFL-acquired earning assets, loan growth, and lower funding costs. For the first half, however, earnings declined as higher operating expenses and lower mortgage-sale gains outweighed higher net interest income.
- First-half mortgage loan sale gains fell 71.6% to $0.9 million. Management attributed the decline to reduced refinancing and mortgage demand as rates rose.
- Finward recorded $2.852 million of pretax one-time merger expenses in the first half, including $1.929 million of data-processing costs. Q2 data-processing expense was lower than Q1, following substantial RYFL conversion costs in Q1.
- Available-for-sale securities declined to $400.5 million from $526.9 million. Their $73.2 million gross unrealized loss at June 30 contributed to a $62.1 million after-tax first-half other comprehensive loss and reduced stockholders’ equity. Management attributed the decline in value primarily to rising interest rates and stated it did not anticipate needing to sell securities before recovery.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or other formal financial guidance. Management expected lower demand for fixed-rate mortgage loans sold into the secondary market as borrowing rates increased.
- Management identified merger integration and expenses, wage and other inflation, technology investment, and growth-related costs as factors affecting expenses. It also noted that actual results may differ from forward-looking statements.
- Credit risks include commercial real estate and other loan exposures, acquired credit-impaired loans, and economic conditions in the bank’s concentrated Indiana and Illinois markets. Acquired loans included $425.8 million of remaining principal at June 30, of which $8.1 million was expected to be uncollectable; purchase accounting and related credit reserves also affect reported loan values.
- Finward reported $631.5 million of estimated uninsured deposits. The bank also held $2.2 million cost basis of below-investment-grade pooled collateralized debt obligations; $2.2 million remained in payment-in-kind status and was kept on nonaccrual.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the first half. Legal proceedings arise in the ordinary course; management did not expect them to have a material adverse effect. The filing marked risk factors “Not Applicable.”
- CECL credit-loss guidance was scheduled to take effect for Finward on January 1, 2023; management was evaluating implementation and expected to run parallel calculations. The filing states first-half results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether RYFL integration delivers anticipated operating benefits and whether merger-related, technology, and ongoing costs moderate.
- Loan performance and reserve adequacy, especially acquired loans, the increase in substandard and nonperforming loans, and exposure to commercial real estate.
- Deposit retention and funding costs, including the level and trend of uninsured deposits as rates change.
- How securities portfolio values and accumulated other comprehensive losses respond to interest rates, and whether any securities sales become necessary.
- CECL adoption assumptions and resulting effect on the allowance, earnings, and regulatory capital; also monitor capital ratios and liquidity against commitments.