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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)
Indiana | 35-1927981 |
(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.
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.
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.
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.
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.
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.
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.
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 | |
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 | |
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.
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.
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.
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 | | | - | | | | - | | | | - | | | | - | | | | |