Finward Bancorp quarterly report, Q3 FY2021

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Finward Bancorp — Form 10-Q summary

Reporting period: Quarter and nine months ended September 30, 2021; filed November 9, 2021. Unaudited. Finward is a bank holding company whose earnings primarily depend on Peoples Bank. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.

Financial performance and position

  • Third-quarter results: Net income was $3.54 million, down 24.5% from $4.69 million in third-quarter 2020. Diluted EPS was $1.02 versus $1.35. Net interest income rose 4.4% to $12.20 million, while total noninterest income fell 14.6% to $4.15 million and noninterest expense rose 23.6% to $12.40 million. The provision for loan losses was $0.14 million, versus $0.85 million.
  • Nine-month results: Net income was $11.65 million, down 7.9% from $12.65 million; diluted EPS was $3.35 versus $3.65. Net interest income increased 6.9% to $36.12 million. Noninterest income decreased 9.7% to $12.14 million, and noninterest expense increased 12.5% to $33.90 million. Provision for loan losses was $1.29 million, compared with $1.87 million.
  • Margins and returns: Net interest margin was 3.24% for Q3 (3.41% in 2020) and 3.29% for the nine months (3.46% in 2020); tax-equivalent margins were 3.46% and 3.49%, respectively. Q3 ROA and ROE were 0.87% and 8.90%. The filing gives conflicting nine-month ROA figures—0.89% in the summary and 0.98% in MD&A—while nine-month ROE is 9.96%.
  • Balance sheet at September 30: Total assets were $1.610 billion, up 7.6% from December 31, 2020. Deposits were $1.406 billion, up 8.0%; loans receivable were $956.4 million, down from $965.1 million. Available-for-sale securities increased to $531.0 million from $410.7 million. Stockholders’ equity was $152.6 million, or 9.5% of assets; book value per share was $43.85.
  • Funding and liquidity: Cash and cash equivalents were $31.8 million, up $11.8 million from year-end. Nine-month operating cash flow was $16.6 million; investing activities used $109.2 million and financing activities provided $104.5 million. Deposits were the primary financing source. Borrowed funds were zero at quarter-end, compared with $6.1 million at year-end; repurchase agreements were $23.8 million. Management said available cash flow and borrowing capacity were sufficient for commitments and letters of credit.
  • Credit and capital: The allowance for loan losses was $13.8 million, or 1.44% of loans, versus 1.30% at year-end; coverage of nonperforming loans was 101.7%, versus 86.7%. Nonperforming loans were $13.5 million (1.42% of loans), down from $14.4 million. The Bank’s reported capital ratios exceeded regulatory minimums. The capital-ratio tables, however, label the 2021 figures “At June 30, 2021,” so they do not clearly establish quarter-end ratios.

Material changes versus comparable periods

  • Lower funding costs partly offset declining yields: Q3 yield on interest-earning assets fell to 3.36% from 3.75%, while cost of funds declined to 0.13% from 0.35%. Nine-month figures were 3.44% versus 3.96% and 0.16% versus 0.52%.
  • Lower mortgage refinance activity reduced nine-month originations of loans held for sale to $120.1 million from $171.2 million, and related net gains to $4.4 million from $6.0 million.
  • The efficiency ratio worsened to 75.87% for Q3 from 60.66%, and to 70.26% for the nine months from 63.83%, reflecting higher expenses and lower noninterest income. Management cited talent retention, technology and facilities investment, increased system utilization, and marketing/rebranding costs.
  • Unrealized securities losses reduced accumulated other comprehensive income by $7.8 million during the nine months, from $10.4 million to $2.6 million. Management attributed the market-value declines primarily to interest rates and market volatility and said it intended and was able to hold the securities.
  • Deposits grew, particularly checking and savings, while certificates of deposit declined. The loan mix shifted toward commercial real estate, construction and land development, multifamily, and manufactured-home loans; commercial business loans decreased.

Outlook, risks, contingencies, and unusual items

  • Outlook: The filing provides no quantified earnings or financial guidance. Management said COVID-19-related customer distress was expected to continue, at a lesser degree, through year-end 2021 and early 2022. It cited uncertainty around government aid, business recovery, the Delta variant, inflation, supply shortages, interest rates, and customer demand.
  • COVID-19 exposure: As of September 30, 2021, 11 mortgage loans totaling $1.49 million remained on interest-only terms under pandemic-related modifications; no commercial loans were then reported in modification status. A $5.0 million hotel commercial-real-estate relationship remained nonperforming and had a specific reserve. Management continued monitoring hospitality, restaurant, retail, and commercial real-estate borrowers.
  • Merger: Finward agreed to acquire Royal Financial, Inc. The parties anticipated closing in Q1 2022, subject to shareholder and regulatory approvals and other conditions. Consideration is structured, in aggregate, as 65% Finward stock and 35% cash; the stated election is 0.4609 Finward shares or $20.14 cash per Royal share, subject to allocation and adjustment provisions. Royal reported $533.7 million of assets at June 30, 2021; the combined bank was expected to have about $2.1 billion in assets.
  • Prior-period revision: Finward corrected immaterial errors involving deferred costs for manufactured-home loans. Revised figures reduced 2020 net income by $0.216 million for Q3 and $0.507 million for the first nine months; the filing says the errors were not material to previously issued statements. The company also disclosed a $5.0 million unamortized manufactured-home deferred-cost reserve.
  • Other risks and contingencies: The loan portfolio is concentrated principally in northwest Indiana and northeast Illinois. Two residential loans and one commercial-real-estate loan were modified as troubled debt restructurings; a further commercial-business loan received a short-term renewal pending restructuring. The filing reports $219.9 million of loan commitments and $11.2 million of standby letters of credit. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. The company identified no material control changes and concluded disclosure controls were effective.

Most important facts for investors to verify

  1. Resolve the inconsistent nine-month ROA disclosure (0.89% versus 0.98%) and confirm the date and applicability of the reported capital ratios.
  2. Track the Royal Financial merger’s approvals, closing conditions, final stock/cash allocation, and integration costs.
  3. Assess the $5.0 million hotel relationship and broader commercial-real-estate credit exposure, including how nonperforming loans and reserves evolve.
  4. Monitor securities valuation and accumulated other comprehensive income sensitivity to interest rates, including the $2.2 million cost basis of below-investment-grade pooled trust preferred securities.
  5. Evaluate whether expense growth, lower mortgage-sale gains, and margin pressure persist, and review the impact of the disclosed manufactured-home loan accounting correction.