Finward Bancorp — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2022, with balance-sheet comparisons to December 31, 2021 and earnings comparisons to Q1 2021. Finward is a bank holding company whose principal business is Peoples Bank. On January 31, 2022, Finward acquired Royal Financial, Inc. (RYFL), expanding its banking network in Cook and DuPage Counties, Illinois. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Interest income / interest expense | $15.9 / $0.4 | $12.7 / $0.7 in Q1 2021 |
| Net interest income | $15.5 | Up 29.0% from $12.0 |
| Net interest margin | 3.41%; tax-equivalent 3.63% | 3.40%; tax-equivalent 3.59% in Q1 2021 |
| Noninterest income / expense | $3.1 / $16.3 | $4.3 / $10.5 in Q1 2021 |
| Provision for loan losses | None | $0.6 in Q1 2021 |
| Net income / diluted EPS | $2.1 / $0.53 | $4.5 / $1.31 in Q1 2021; net income declined 53% |
| ROA / ROE | 0.44% / 5.01% | 1.18% / 11.94% in Q1 2021 |
| Total assets | $2,097.8 | Up 29.4% from $1,620.7 at year-end 2021 |
| Net loans / deposits | $1,426.3 / $1,895.2 | $953.4 / $1,434.2 at year-end 2021 |
| Cash and cash equivalents | $54.5 | $33.2 at year-end 2021; $68.0 at March 31, 2021 |
| Stockholders’ equity | $157.6; 7.51% of assets | $156.6 at year-end 2021 |
Net interest income benefited from RYFL and lower funding costs. However, earnings fell as noninterest expense increased 55%, including acquisition-related costs, while mortgage-loan sale gains declined. The reported $2.9 million of pretax merger expenses included $1.9 million in data processing costs; the detailed expense schedule totals $2.852 million.
Cash flow and funding. Operating activities provided $0.7 million, versus $16.4 million in Q1 2021. Investing activities provided $27.2 million, including $33.8 million of net cash from acquisition activity; financing activities used $6.6 million. Deposits were the principal funding source: period-end deposits rose 32.1% from year-end, primarily due to RYFL. Repurchase agreements were $23.2 million and other borrowed funds were negligible at $0.005 million. Management said it had sufficient cash flow and borrowing capacity to fund $241.7 million of loan commitments and $11.5 million of standby letters of credit. Approximately $549.7 million of deposits were estimated to be uninsured.
Credit and capital. The allowance for loan losses was $13.4 million, or 0.93% of loans, compared with 1.38% at year-end; coverage of nonperforming loans was 150.3%, down from 183.8%. Nonperforming loans were $8.9 million (0.62% of loans), versus $7.3 million (0.75%) at year-end. Substandard loans increased to $17.1 million from $8.7 million, which management attributed to RYFL; no loans were classified as doubtful or loss. The Bank remained above “well-capitalized” thresholds: CET1 10.9%, total risk-based capital 11.8%, and Tier 1 leverage 8.2%. These compared with 13.0%, 14.2%, and 8.6%, respectively, at year-end.
Material changes and unusual items
- RYFL’s acquisition was valued at approximately $56.7 million; consideration included 795,423 Finward shares and $18.7 million cash. Preliminary purchase accounting included $11.7 million of goodwill and a $3.2 million core deposit intangible. The fair-value allocation remained subject to change.
- Loan balances increased substantially with the acquisition, including multifamily loans, which rose to $234.3 million from $61.2 million at year-end. Acquired credit-impaired loans and related valuation marks also increased.
- Available-for-sale securities fell to $464.3 million from $526.9 million at year-end. Gross unrealized losses were $44.1 million, compared with $5.5 million, and accumulated other comprehensive loss reached $33.5 million from $4.3 million of accumulated other comprehensive income. The filing attributes the decline principally to interest-rate changes and market volatility, and says management intends and is able to hold affected securities for the foreseeable future.
- The filing revised Q1 2021 comparative results for previously identified immaterial errors involving manufactured-home loan deferred costs. As revised, Q1 2021 net income was $4.543 million and diluted EPS was $1.31.
Outlook, risks, and contingencies
No numerical earnings or revenue guidance was provided. Management expects mortgage-loan demand to revert toward normal levels as borrowing rates rise. It cited acquisition integration expenses, continued strategic and technology investments, and interest-rate changes as relevant factors. The filing identifies credit quality, interest-rate and securities-market movements, acquisition execution, liquidity, and capital needs among forward-looking risks. Management was evaluating the impact of CECL, scheduled to take effect for Finward on January 1, 2023. Management did not expect classified loans to materially affect future operations, liquidity, or capital resources. Ordinary-course legal proceedings were reported; management, after consulting counsel, did not expect resulting liabilities to have a material adverse effect. Disclosure controls were assessed as effective at March 31, 2022.
Important facts for investors to verify
- Final RYFL purchase-price allocation, including acquired-loan fair values, goodwill, and any subsequent adjustments.
- Whether merger and integration costs subside as planned and whether anticipated acquisition synergies materialize.
- Changes in unrealized securities losses and accumulated other comprehensive loss as interest rates and markets evolve.
- Performance and credit quality of acquired loans, particularly the increase in substandard and impaired balances, and adequacy of loan-loss reserves.
- Deposit retention and funding costs, including trends in uninsured deposits, and the effects of CECL adoption in 2023.