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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

 

For the quarterly period ended March 31, 2022 or

 

☐

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

 

For the transition period from ______ to ______

 

Commission File Number: 0-26128

 

Finward Bancorp

(Exact name of registrant as specified in its charter)

 

Indiana35-1927981
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)
  
9204 Columbia Avenue, Munster, Indiana 46321
(Address of principal executive offices)(ZIP code)

 

Registrant's telephone number, including area code: (219) 836‑4400

 

 N/A 
 (Former name, former address and former fiscal year, if changed since last report) 

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, no par value

FNWD

The NASDAQ Stock Market, LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ☒         No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes ☒         No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐Accelerated filer ☐Non-accelerated filer ☒
Smaller Reporting Company ☒Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ☐         No ☒

 

There were 4,294,709 shares of the registrant’s Common Stock, without par value, outstanding at May 16, 2022.

 

 
 
 

 

 

Finward Bancorp

Index

 

 

 

 Page
 

Number

PART I. Financial Information

  
   

Item 1. Unaudited Financial Statements and Notes

1
   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

27
   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

38
   

Item 4. Controls and Procedures

38
   

PART II. Other Information

39
   

SIGNATURES

40
   

EXHIBITS

  

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 

31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

 

32.1 Section 1350 Certifications

 

101 XBRL Interactive Data File

  

 

 
 
 

 

Part I – Financial Information

Item 1. Financial Statements

 

 

 

Finward Bancorp

Consolidated Balance Sheet

 

  

March 31, 2022

  December 31, 

(Dollars in thousands)

 (unaudited)  

2021

 
         

ASSETS

        
         

Cash and non-interest bearing deposits in other financial institutions

 $21,262  $12,725 

Interest bearing deposits in other financial institutions

  31,420   19,987 

Federal funds sold

  1,819   464 
         

Total cash and cash equivalents

  54,501   33,176 
         

Certificates of deposit in other financial institutions

  1,731   1,709 
         

Securities available-for-sale

  464,320   526,889 

Loans held-for-sale

  1,420   4,987 

Loans receivable, net of deferred fees and costs

  1,439,728   966,720 

Less: allowance for loan losses

  (13,387)  (13,343)

Net loans receivable

  1,426,341   953,377 

Federal Home Loan Bank stock

  3,038   3,247 

Accrued interest receivable

  7,427   5,444 

Premises and equipment

  45,773   31,385 

Cash value of bank owned life insurance

  31,378   31,440 

Goodwill

  22,774   11,109 

Other intangible assets

  5,998   3,126 

Other assets

  33,144   14,854 
         

Total assets

 $2,097,845  $1,620,743 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        
         

Deposits:

        

Non-interest bearing

 $380,515  $295,294 

Interest bearing

  1,514,696   1,138,907 

Total

  1,895,211   1,434,201 

Repurchase agreements

  23,239   14,581 

Borrowed funds

  5   - 

Accrued expenses and other liabilities

  21,753   15,346 
         

Total liabilities

  1,940,208   1,464,128 
         

Commitments and contingencies

        
         

Stockholders' Equity:

        

Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding

  -   - 

Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: March 31, 2022 - 4,294,136 December 31, 2021 - 3,480,701

  -   - 

Additional paid-in capital

  68,386   30,430 

Accumulated other comprehensive (loss) income

  (33,462)  4,276 

Retained earnings

  122,713   121,909 
         

Total stockholders' equity

  157,637   156,615 
         

Total liabilities and stockholders' equity

 $2,097,845  $1,620,743 

 

See accompanying notes to consolidated financial statements.

 

1
 
 
 

 

Finward Bancorp

Consolidated Statements of Income

(unaudited)

 

(Dollars in thousands)

  

Quarter Ended March 31,

  
   

2022

    

2021

  

Interest income:

                

Loans receivable

   $ 13,286     $ 10,746  

Securities

     2,597       1,961  

Other interest earning assets

     11       20  
                 

Total interest income

     15,894       12,727  
                 

Interest expense:

                

Deposits

     337       651  

Repurchase agreements

     16       10  

Borrowed funds

     6       20  
                 

Total interest expense

     359       681  
                 

Net interest income

     15,535       12,046  

Provision for loan losses

     -       578  
                 

Net interest income after provision for loan losses

     15,535       11,468  
                 

Noninterest income:

                

Fees and service charges

     1,304       1,066  

Gain on sale of loans held-for-sale, net

     607       2,049  

Wealth management operations

     595       607  

Gain on sale of securities, net

     381       417  

Increase in cash value of bank owned life insurance

     252       169  

Gain (loss) on sale of foreclosed real estate

     -       (9 )

Other

     5       14  
                 

Total noninterest income

     3,144       4,313  
                 

Noninterest expense:

                

Compensation and benefits

     7,367       5,685  

Data processing

     3,054       674  

Occupancy and equipment

     1,500       1,372  

Marketing

     651       199  

Federal deposit insurance premiums

     219       180  

Other

     3,478       2,383  
                 

Total noninterest expense

     16,269       10,493  
                 

Income before income tax expenses

     2,410       5,288  

Income tax expenses

     275       745  
                 

Net income

   $ 2,135     $ 4,543  
                 

Earnings per common share:

                

Basic

   $ 0.53     $ 1.31  

Diluted

   $ 0.53     $ 1.31  
                 

Dividends declared per common share

   $ 0.31     $ 0.31  

 

See accompanying notes to consolidated financial statements.

 

2
 
 
 

 

Finward Bancorp

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

(Dollars in thousands)

  

Three Months Ended March 31,

  
   

2022

    

2021

  
                 

Net income

   $ 2,135     $ 4,543  
                 

Net change in net unrealized gains and losses on securities available-for-sale:

                

Unrealized loss arising during the period

     (47,389 )     (7,761 )

Less: reclassification adjustment for gains included in net income

     (381 )     (417 )

Net securities loss during the period

     (47,770 )     (8,178 )

Tax effect

     10,032       1,717  

Other comprehensive loss, net of tax

     (37,738 )     (6,461 )
                 

Comprehensive loss, net of tax

     (35,603 )     (1,918 )
 

 

See accompanying notes to consolidated financial statements.

 

Finward Bancorp

Consolidated Statements of Changes in Stockholder's Equity

(unaudited)

 

          

Accumulated

         
      

Additional

  

Other

         
  

Common

  

Paid-in

  

Comprehensive

  

Retained

  

Total

 

(Dollars in thousands, except per share data)

 

Stock

  

Capital

  

(Loss)/Income

  

Earnings

  

Equity

 
                     
                     

Balance at January 1, 2021

 $-  $29,987  $10,441  $111,261  $151,689 
                     

Net income

  -   -   -   4,543   4,543 

Other comprehensive loss, net of tax

  -   -   (6,461)  -   (6,461)

Net surrender value of 1,711 restricted stock awards

  -   (68)  -   -   (68)

Stock-based compensation expense

  -   146   -   -   146 

Cash dividends, $0.31 per share

  -   -   -   (1,079)  (1,079)
                     

Balance at March 31, 2021

 $-  $30,065  $3,980  $114,725  $148,770 
                     

Balance at January 1, 2022

 $-  $30,430  $4,276  $121,909  $156,615 
                     

Net income

  -   -   -   2,135   2,135 

Other comprehensive loss, net of tax

  -   -   (37,738)  -   (37,738)

Net surrender value of 2,336 restricted stock awards

  -   (115)  -   -   (115)

Stock-based compensation expense

  -   169   -   -   169 

Issuance of 795,423 shares at $47.75 per share, for acquisition of Royal Financial, Inc.

  -   37,902   -   -   37,902 

Cash dividends, $0.31 per share

  -   -   -   (1,331)  (1,331)
                     

Balance at March 31, 2022

 $-  $68,386  $(33,462) $122,713  $157,637 

 

See accompanying notes to consolidated financial statements.

 

3
 
 
 

 

Finward Bancorp

Consolidated Statements of Cash Flows

(unaudited)

 

(Dollars in thousands)

  

Three months ended March 31,

  
   

2022

    

2021

  

CASH FLOWS FROM OPERATING ACTIVITIES:

                

Net income

   $ 2,135     $ 4,543  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Origination of loans for sale

     (15,664 )     (49,083 )

Sale of loans originated for sale

     19,760       57,876  

Depreciation and amortization, net of accretion

     1,191       1,043  

Stock based compensation expense

     169       146  

Gain on sale of securities, net

     (381 )     (417 )

Gain on sale of loans held-for-sale, net

     (582 )     (2,026 )

Loss on sale of foreclosed real estate

     -       9  

Gain on cash value of bank owned life insurance

     (252 )     (169 )

Gain on derivatives

     (25 )     (23 )

Provision for loan losses

     -       578  

Net change in:

                

Interest receivable

     (1,983 )     (284 )

Other assets

     1,504       2,643  

Accrued expenses and other liabilities

     (5,150 )     1,558  

Net cash provided by operating activities

     722       16,394  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

                

Proceeds from maturities of certificates of deposit in other financial institutions

     223       423  

Proceeds from maturities and pay downs of securities available-for-sale

     9,225       27,287  

Proceeds from sales of securities available-for-sale

     16,236       6,904  

Purchase of securities available-for-sale

     (10,724 )     (54,540 )

Proceeds from bank owned life insurance

     314       -  

Net change in loans receivable

     (20,094 )     (4,331 )

Proceeds of Federal Home Loan Bank Stock

     1,512       -  

Purchase of loans receivable

     (2,113 )     (2,989 )

Purchase of premises and equipment, net

     (1,219 )     (379 )

Proceeds from sale of foreclosed real estate

     -       48  

Cash and cash equivalents from acquisition activity, net

     33,799       -  

Net cash provided by (used in) investing activities

     27,159       (27,577 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

                

Change in deposits

     (14,025 )     64,355  

Repayment of FHLB advances

     -       (6,000 )

Net surrender value of restricted stock awards

     (115 )     (68 )

Change in repurchase agreements and other borrowed funds

     8,663       2,057  

Dividends paid

     (1,079 )     (1,074 )

Net cash (used in) provided by financing activities

     (6,556 )     59,270  

Net change in cash and cash equivalents

     21,325       48,087  

Cash and cash equivalents at beginning of period

     33,176       19,922  

Cash and cash equivalents at end of period

   $ 54,501     $ 68,009  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

                

Cash paid during the period for:

                

Interest

   $ 339     $ 690  

Acquisition activity:

                

Fair value of assets acquired, including cash and cash equivalents

   $ 528,083     $ -  

Value of goodwill and other intangible assets

     14,884       -  

Fair value of liabilities assumed

     486,340       -  

Cash paid for acquisition

     18,725       -  

Issuance of common stock for acquisition

     37,902       -  

Noncash activities:

                

Dividends declared not paid

     1,331       1,079  

Securities purchased not settled

     -       1,765  

 

See accompanying notes to consolidated financial statements.

 

4
 

 

Finward Bancorp

Notes to Consolidated Financial Statements

(unaudited)

 

 

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of Finward Bancorp (the “Bancorp” or “FNWD”), its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary) and Peoples Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC, NWIN Funding, Incorporated, 1683 Real Estate LLC, and Columbia Development Company, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are primarily dependent upon the earnings of the Bank. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by U.S. generally accepted accounting principles for complete presentation of consolidated financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of the Bancorp as of March 31, 2022, and December 31, 2021, and the consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and consolidated statements of cash flows for the three months ended March 31, 2022, and 2021. The income reported for the three month period ended March 31, 2022, is not necessarily indicative of the results to be expected for the full year.

 

The Notes to the Consolidated Financial Statements appearing in Finward Bancorp’s Annual Report on Form 10-K (2021 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. The Consolidated Balance Sheet at December 31, 2021 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on net income.

 

Revision of Previously Issued Financial Statements

 

We have revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form 10-Q related to immaterial errors discovered during the second quarter of 2021. The errors relate to certain deferred costs booked related to our manufactured home loan product, which resulted in increased assets and understatements of expense in prior periods.

 

We evaluated the aggregate effects of the errors to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, determined that the errors were not material to the previously issued financial statements and disclosures included in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021.

 

5
 
 

The following tables present the revisions to the line items of our previously issued financial statements to reflect the correction of the errors:

 

Consolidated Statement of Income

 

For the three months ending March 31, 2021

 

As Reported

  

Adjustment

  

As Revised

 

Compensation and benefits

 $5,530  $155  $5,685 

Total noninterest expense

  10,338   155   10,493 

Income before income tax expense

  5,443   (155)  5,288 

Income tax expenses

  764   (19)  745 

Net income

  4,679   (136)  4,543 

Earnings per common share:

            

Basic

  1.35   (0.04)  1.31 

Diluted

  1.35   (0.04)  1.31 

 

Consolidated Statements of Comprehensive Income (Loss)

 

For the three months ending March 31, 2021

 

As Reported

  

Adjustment

  

As Revised

 

Net income

 $4,679  $(136) $4,543 

Comprehensive income, net of tax

  (1,782)  (136)  (1,918)

 

Consolidated Statements of Changes in Stockholders' Equity

 

Balance at January 1, 2021

 

As Reported

  

Adjustment

  

As Revised

 

Retained earnings

 $112,494  $(1,233) $111,261 

Total equity

  152,922   (1,233)  151,689 
             

For the three months ending March 31, 2021

            

Net income

  4,679   (136)  4,543 

Retained earnings

  116,094   (1,369)  114,725 

Total equity

  150,139   (1,369)  148,770 

 

Consolidated Statements of Cash Flows

 

For the three months ending March 31, 2021

 

As Reported

  

Adjustment

  

As Revised

 

Net income

 $4,679  $(136) $4,543 

Net change in other assets

  2,662   (19)  2,643 

Net cash - operating activities

  16,549   (155)  16,394 

Net change in loan

  (4,486)  155   (4,331)

Net cash - investing activities

  (27,732)  155   (27,577)

 

 

Note 2 - Use of Estimates

Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of foreclosed real estate, loan servicing rights, investment securities, deferred tax assets, goodwill, and the status of contingencies are particularly susceptible to material change in the near term.

 

 

Note 3 - Acquisition Activity

On January 31, 2022, Finward Bancorp (“Finward”) completed its previously announced acquisition of Royal Financial, Inc., a Delaware corporation (“RYFL”), pursuant to an Agreement and Plan of Merger dated July 28, 2021 (the “Merger Agreement”) between Finward and RYFL. The stockholders of both Finward and RYFL approved the Merger Agreement at the respective stockholder meetings of the companies held on December 13, 2021. Pursuant to the Merger Agreement, RYFL merged with and into Finward, with Finward as the surviving corporation (the “Merger”), and Royal Savings Bank, an Illinois state-chartered savings bank and wholly-owned subsidiary of RYFL, merged with and into Peoples Bank, the wholly-owned Indiana state-chartered commercial bank subsidiary of Finward, with Peoples Bank as the surviving bank.

 

Under the terms of the merger agreement, RYFL stockholders who owned 101 or more shares of RYFL common stock were permitted to elect to receive either 0.4609 shares of Finward common stock or $20.14 in cash, or a combination of both, for each share of RYFL common stock owned, subject to proration and allocation provisions such that 65% of the shares of RYFL common stock outstanding immediately prior to the closing of the merger were converted into the right to receive shares of Finward common stock and the remaining 35% of the outstanding RYFL shares were converted into the right to receive cash. Stockholders holding less than 101 shares of RYFL common stock received fixed consideration of $20.14 in cash per share and no stock consideration.

 

6
 
 

As a result of RYFL stockholder stock and cash elections and the related allocation and proration provisions of the merger agreement, Finward issued 795,423 shares of its common stock and paid cash consideration of approximately $18.7 million in the Merger. Based on the January 28, 2022, closing price of $47.75 per share of Finward common stock, the transaction had an implied valuation of approximately $56.7 million. In connection with the acquisition, Robert W. Youman, was appointed to the boards of directors of Finward and Peoples Bank effective as of the closing of the Merger. RYFL had a home office and eight branch offices in Cook County and DuPage County, Illinois. The acquisition has further expanded the Bank’s banking center network in Cook County and DuPage County, Illinois.

 

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on the valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the Royal acquisition is allocated as follows:

 

ASSETS

    

LIABILITIES

    

Cash and due from banks

 $52,524 

Deposits

    

Investment securities, available for sale

  - 

Non-interest bearing

 $32,095 

Certificate of deposit in other financial institutions

  245 

NOW accounts

  63,639 
     

Savings and money market

  184,149 

Total Loans

  450,757 

Certificates of deposits

  195,153 
     

Total Deposits

  475,036 

Premises and equipment, net

  13,848      

FHLB stock

  1,303 

Interest payable

  75 

Goodwill

  11,664 

Other liabilities

  11,228 

Core deposit intangible

  3,220      

Interest receivable

  1,836      

Other assets

  7,569      

Total assets purchased

 $542,966      

Common shares issued

  37,902      

Cash paid

  18,725      

Total purchase price

 $56,627 

Total liabilities assumed

 $486,339 

 

Final estimates of fair value on the date of acquisition have not been finalized yet. Prior to the end of the one-year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods as if the adjustments to the provisional amounts had been recognized as of the acquisition date.

 

Goodwill of approximately $11.7 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, is expected to be recorded in the RYFL acquisition and is the result of expected operational synergies and other factors. This goodwill is not expected to be deductible for tax purposes. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the RYFL acquisition will change.

 

Gross loans acquired during the RYFL transaction totaled $456.7 million. As of the three months ended March 31, 2022, the remaining outstanding principal of loans directly related to the RYFL acquisition total $443.8 million, of which $6.1 million are expected to be uncollectable.

 

Revenue, excluding all purchase accounting adjustments, attributed to RYFL totaled $3.2 million for the three months ended March 31, 2022.

 

7
 
 

The following pro-forma and earnings (unaudited) of the combined company are presented as if the RYFL merger had occurred on January 1, 2022 and January 1, 2021:

 

  

For the three months ended

  

For the three months ended

 

(in thousands)

 

March 31, 2022

  

March 31, 2021

 

Selected Financial Data

        

Interest income

 $17,589  $17,391 

Interest expense

  (460)  (1,191)

Recovery of (provision for) loan losses

  -   (278)

Non-interest income

  3,283   4,516 

Non-interest expense (1)

  (14,397)  (12,945)

Income before provision for income taxes

  6,015   7,493 

Income tax expense

  (1,032)  (1,173)

Net income

 $4,983  $6,320 
         

Earnings per common share:

        

Basic

 $1.24  $1.82 

Diluted

 $1.24  $1.82 

 

(1)

Excludes $2.9 million in pre-tax merger expenses for the three months ended March 31, 2022.

 

As of the three months ended March 31, 2022, the Bancorp has recorded $2.9 million in pretax one-time merger expenses related to the RYFL acquisition, these expenses have been allocated to the following non-interest expense line items within the income statement:

 

  

Three months ended

 

Noninterest expense:

 

March 31, 2022

 

Compensation and benefits

 $132 

Data processing

  1,929 

Marketing

  135 

Other

  656 
     

Period merger expense

 $2,852 

 

8
 
 

 

 

Note 4 - Securities

The estimated fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

 

  

(Dollars in thousands)

 
      

Gross

  

Gross

  

Estimated

 
  

Cost

  

Unrealized

  

Unrealized

  

Fair

 
  

Basis

  

Gains

  

Losses

  

Value

 

March 31, 2022

                

U.S. government sponsored entities

 $8,883  $-  $(681) $8,202 

U.S. treasury securities

  199   -   -   199 

Collateralized mortgage obligations and residential mortgage-backed securities

  178,431   45   (14,353)  164,123 

Municipal securities

  317,000   1,727   (27,903)  290,824 

Collateralized debt obligations

  2,173   -   (1,201)  972 

Total securities available-for-sale

 $506,686  $1,772  $(44,138) $464,320 

 

  

(Dollars in thousands)

 
      

Gross

  

Gross

  

Estimated

 
  

Cost

  

Unrealized

  

Unrealized

  

Fair

 
  

Basis

  

Gains

  

Losses

  

Value

 

December 31, 2021

                

U.S. government sponsored entities

 $8,883  $-  $(214) $8,669 

U.S. treasury securities

  400   -   -   400 

Collateralized mortgage obligations and residential mortgage-backed securities

  187,279   961   (3,539)  184,701 

Municipal securities

  322,750   9,904   (527)  332,127 

Collateralized debt obligations

  2,173   -   (1,181)  992 

Total securities available-for-sale

 $521,485  $10,865  $(5,461) $526,889 

 

The estimated fair value of available-for-sale debt securities at March 31, 2022, by contractual maturity, were as follows. Securities not due at a single maturity date, primarily collateralized mortgage obligations and residential mortgage-backed securities, are shown separately.

 

  

(Dollars in thousands)

 
  

Available-for-sale

 
      

Estimated

 
  

Cost

  

Fair

 

March 31, 2022

 

Basis

  

Value

 

Due in one year or less

 $389  $390 

Due from one to five years

  1,759   1,763 

Due from five to ten years

  30,204   29,468 

Due over ten years

  295,903   268,576 

Collateralized mortgage obligations and residential mortgage-backed securities

  178,431   164,123 

Total

 $506,686  $464,320 

 

9
 
 

The contractual maturities and weighted average yields for the U.S. government securities, agency securities, municipal securities, and trust preferred securities at March 31, 2022, are summarized in the table below. Securities not due at a single maturity date, such as mortgage-backed securities and collateralized mortgage obligations are not included in the following table. The carrying values are stated in thousands (000’s).

 

The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields presented are not on a tax-equivalent basis.

 

  

Within 1 Year

  

1 - 5 Years

  

5 - 10 Years

  

After 10 Years

  

Total

 
  

Amount

  

Yield

  

Amount

  

Yield

  

Amount

  

Yield

  

Amount

  

Yield

  

Amount

 

U.S. government sponsored entities:

 $-   0.00% $-   0.00% $8,202   1.00% $-   0.00% $8,202 

AFS

                                    

U.S. treasury securities:

                                    

AFS

  199   0.13%  -   0.00%  -   0.00%  -   0.00%  199 

Municipal Securities:

                                    

AFS

  191   4.84%  1,763   4.13%  21,266   3.56%  267,604   2.87%  290,824 

Trust Preferred Securities:

                                    

AFS

  -   0.00%  -   0.00%  -   0.00%  972   1.57%  972 

Totals

 $390   2.43% $1,763   4.13% $29,468   2.85% $268,576   2.87% $300,197 

 

Sales of available-for-sale securities were as follows for the three months ended:

 

  

(Dollars in thousands)

 
  

March 31,

  

March 31,

 
  

2022

  

2021

 
         

Proceeds

 $16,236  $6,904 

Gross gains

  397   417 

Gross losses

  (16)  - 

 

Accumulated other comprehensive income/(loss) balances, net of tax, related to available-for-sale securities, were as follows:

 

  (Dollars in thousands) 
  

Unrealized
gain/(loss)

 

Ending balance, December 31, 2021

 $4,276 

Current period change

  (37,738)

Ending balance, March 31, 2022

 $(33,462)

 

Securities with market values of approximately $34.8 million and $39.5 million were pledged as of March 31, 2022, and December 31, 2021, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.

 

10
 
 

Securities with gross unrealized losses at March 31, 2022, and December 31, 2021, not recognized in income are as follows:

 

  

(Dollars in thousands)

     
  

Less than 12 months

  

12 months or longer

  

Total

  Percentage of 
  

Estimated

      

Estimated

      

Estimated

      

Total Portfolio

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

in Loss

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

  

Position

 

March 31, 2022

                            

U.S. government sponsored entities

 $-  $-  $8,202  $(681) $8,202  $(681)  100.0%

Collateralized mortgage obligations and residential mortgage-backed securities

  99,994   (7,368)  60,792   (6,985)  160,786   (14,353)  98.0%

Municipal securities

  232,220   (27,678)  2,594   (225)  234,814   (27,903)  80.7%

Collateralized debt obligations

  -   -   972   (1,201)  972   (1,201)  100.0%

Total temporarily impaired

 $332,214  $(35,046) $72,560  $(9,092) $404,774  $(44,138)  87.2%

Number of securities

      384       33       417     

 

 

  

(Dollars in thousands)

     
  

Less than 12 months

  

12 months or longer

  

Total

  Percentage of 
  

Estimated

      

Estimated

      

Estimated

      Total Portfolio 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

in Loss

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

  

Position

 

December 31, 2021

                            

U.S. government sponsored entities

 $8,669  $(214) $-  $-  $8,669  $(214)  100.0%

Collateralized mortgage obligations and residential mortgage-backed securities

  126,373   (3,175)  8,109   (364)  134,482   (3,539)  72.8%

Municipal securities

  70,309   (527)  -   -   70,309   (527)  21.2%

Collateralized debt obligations

  -   -   992   (1,181)  992   (1,181)  100.0%

Total temporarily impaired

 $205,351  $(3,916) $9,101  $(1,545) $214,452  $(5,461)  40.7%

Number of securities

      133       5       138     

 

Unrealized losses on securities have not been recognized into income because the securities are of high credit quality or have undisrupted cash flows. Management has the intent and ability to hold those securities for the foreseeable future, and the decline in fair value is largely due to changes in interest rates and volatility in securities markets. The fair values are expected to recover as the securities approach maturity.

 

 

Note 5 - Loans Receivable

 

The Bancorp’s current lending programs are described below:

 

Residential Real Estate. The primary lending activity of the Bancorp has been the granting of conventional mortgage loans to enable borrowers to purchase existing homes, refinance existing homes, or construct new homes. Conventional loans are made up to a maximum of 97% of the purchase price or appraised value, whichever is less. For loans made in excess of 80% of value, private mortgage insurance is generally required in an amount sufficient to reduce the Bancorp’s exposure to 80% or less of the appraised value of the property. Loans insured by private mortgage insurance companies can be made for up to 97% of value. Loans closed with over 20% of equity do not require private mortgage insurance because of the borrower’s level of equity investment.

 

Fixed rate loans currently originated generally conform to Freddie Mac guidelines for loans purchased under the one‑to‑four family program. Loan interest rates are determined based on secondary market yield requirements and local market conditions. Fixed rate mortgage loans with contractual maturities generally exceeding fifteen years and greater may be sold and/or classified as held for sale to control exposure to interest rate risk.

 

The Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice annually or are “Mini-Fixed.” The “Mini‑Fixed” mortgage reprices annually after a one, three, five, seven or ten year period. The ability of the Bancorp to successfully market ARM’s depends upon loan demand, prevailing interest rates, volatility of interest rates, public acceptance of such loans and terms offered by competitors.

 

Home Equity Line of Credit. The Bancorp offers a fixed and variable rate revolving line of credit secured by the equity in the borrower’s home. Both products offer an interest only option where the borrower pays interest only on the outstanding balance each month. Equity lines will typically require a second mortgage appraisal and a second mortgage lender’s title insurance policy. Loans are generally made up to a maximum of 89% of the appraised value of the property less any outstanding liens.

 

Fixed term home improvement and equity loans are made up to a maximum of 85% of the appraised value of the improved property, less any outstanding liens. These loans are offered on both a fixed and variable rate basis with a maximum term of 240 months. All home equity loans are made on a direct basis to borrowers.

 

11
 
 

Commercial Real Estate and Multifamily Loans. Commercial real estate loans are typically made to a maximum of 80% of the appraised value. Such loans are generally made on an adjustable rate basis. These loans are typically made for terms of 15 to 20 years. Loans with an amortizing term exceeding 15 years normally have a balloon feature calling for a full repayment within seven to ten years from the date of the loan. The balloon feature affords the Bancorp the opportunity to restructure the loan if economic conditions so warrant. Commercial real estate loans include loans secured by commercial rental units, apartments, condominium developments, small shopping centers, owner occupied commercial/industrial properties, hospitality units and other retail and commercial developments.

 

In originating commercial real estate loans, the Bancorp considers the feasibility of the project, the financial strength of the borrowers and lessees, the managerial ability of the borrowers, the location of the project and the economic environment. Management evaluates the debt coverage ratio and analyzes the reliability of cash flows, as well as the quality of earnings. All such loans are made in accordance with well-defined underwriting standards and are generally supported by personal guarantees, which represent a secondary source of repayment.

 

Loans for the construction of commercial properties are generally located within an area permitting physical inspection and regular review of business records. Projects financed outside of the Bancorp’s primary lending area generally involve borrowers and guarantors who are or were previous customers of the Bancorp or projects that are underwritten according to the Bank’s underwriting standards.

 

Construction and Land Development. Construction loans on residential properties are made primarily to individuals and contractors who are under contract with individual purchasers. These loans are personally guaranteed by the borrower. The maximum loan-to-value ratio is 89% of either the current appraised value or the cost of construction, whichever is less. Residential construction loans are typically made for periods of six months to one year.

 

Loans are also made for the construction of commercial properties. All such loans are made in accordance with well-defined underwriting standards. Generally if the loans are not owner occupied, these types of loans require proof of intent to lease and a confirmed end-loan takeout. In general, loans made do not exceed 80% of the appraised value of the property. Commercial construction loans are typically made for periods not to exceed two years or date of occupancy, whichever is less.

 

Commercial Business. Although the Bancorp’s priority in extending various types of commercial business loans changes from time to time, the basic considerations in determining the makeup of the commercial business loan portfolio are economic factors, regulatory requirements and money market conditions. The Bancorp seeks commercial loan relationships from the local business community and from its present customers. Conservative lending policies based upon sound credit analysis governs the extension of commercial credit. The following loans, although not inclusive, are considered preferable for the Bancorp’s commercial loan portfolio: loans collateralized by liquid assets; loans secured by general use machinery and equipment; secured short‑term working capital loans to established businesses secured by business assets; short‑term loans with established sources of repayment and secured by sufficient equity and real estate; and unsecured loans to customers whose character and capacity to repay are firmly established.

 

Consumer Loans. The Bancorp offers consumer loans to individuals for personal, household or family purposes. Consumer loans are either secured by adequate collateral, or unsecured. Unsecured loans are based on the strength of the applicant’s financial condition. All borrowers must meet current underwriting standards. The consumer loan program includes both fixed and variable rate products.

 

Manufactured Homes. The Bancorp purchases fixed rate closed loans from a third party that are subject to Bancorp’s underwriting requirements and secured by manufactured homes. The maturity date on these loans can range up to 25 years. In addition, these loans have a reserve account held at the Bancorp.

 

Government Loans. The Bancorp is permitted to purchase non-rated municipal securities, tax anticipation notes and warrants within the local market area.

 

12
 
 

Loans receivable are summarized below:

 

(Dollars in thousands)

        
  

March 31, 2022

  

December 31, 2021

 

Loans secured by real estate:

        

Residential real estate

 $444,753  $260,134 

Home equity

  34,284   34,612 

Commercial real estate

  408,375   317,145 

Construction and land development

  150,810   123,822 

Multifamily

  234,267   61,194 

Total loans secured by real estate

  1,272,489   796,907 

Commercial business

  112,396   115,772 

Consumer

  924   582 

Manufactured homes

  38,636   37,887 

Government

  8,176   8,991 

Loans receivable

  1,432,621   960,139 

Add (less):

        

Net deferred loan origination costs

  6,700   6,810 

Undisbursed loan funds

  407   (229)

Loans receivable, net of deferred fees and costs

 $1,439,728  $966,720 

 

(Dollars in thousands)

 

Beginning Balance

  

Charge-offs

  

Recoveries

  

Provisions

  

Ending Balance

 
                     

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended March 31, 2022:

 
                     

Allowance for loan losses:

                    

Residential real estate

 $2,480  $-  $21  $(8) $2,493 

Home equity

  357   -   -   (3)  354 

Commercial real estate

  5,515   -   -   15   5,530 

Construction and land development

  2,119   -   -   16   2,135 

Multifamily

  848   -   -   41   889 

Commercial business

  2,009   -   31   (99)  1,941 

Consumer

  15   (10)  2   38   45 

Manufactured homes

  -   -   -   -   - 

Government

  -   -   -   -