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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 September 30, 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 | (I.R.S. Employer Identification Number) |
or organization) | |
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:
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 4,297,799 shares of the registrant’s Common Stock, without par value, outstanding at November 14, 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 |
28 |
|
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
43 |
|
|
Item 4. Controls and Procedures |
43 |
|
|
PART II. Other Information |
44 |
|
|
SIGNATURES |
45 |
|
|
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 |
|
Finward Bancorp |
Consolidated Balance Sheet |
(Dollars in thousands) | | September 30, 2022 (unaudited) | | | December 31, 2021 | |
| | | | | | | | |
ASSETS | | | | | | | | |
| | | | | | | | |
Cash and non-interest bearing deposits in other financial institutions | | $ | 26,463 | | | $ | 12,725 | |
Interest bearing deposits in other financial institutions | | | 11,151 | | | | 19,987 | |
Federal funds sold | | | 682 | | | | 464 | |
| | | | | | | | |
Total cash and cash equivalents | | | 38,296 | | | | 33,176 | |
| | | | | | | | |
Certificates of deposit in other financial institutions | | | 2,214 | | | | 1,709 | |
| | | | | | | | |
Securities available-for-sale | | | 359,035 | | | | 526,889 | |
Loans held-for-sale | | | 997 | | | | 4,987 | |
Loans receivable, net of deferred fees and costs | | | 1,502,696 | | | | 966,720 | |
Less: allowance for loan losses | | | (13,398 | ) | | | (13,343 | ) |
Net loans receivable | | | 1,489,298 | | | | 953,377 | |
Federal Home Loan Bank stock | | | 3,038 | | | | 3,247 | |
Accrued interest receivable | | | 6,849 | | | | 5,444 | |
Premises and equipment | | | 43,865 | | | | 31,385 | |
Cash value of bank owned life insurance | | | 31,754 | | | | 31,440 | |
Goodwill | | | 22,615 | | | | 11,109 | |
Other intangible assets | | | 5,188 | | | | 3,126 | |
Other assets | | | 49,837 | | | | 14,854 | |
| | | | | | | | |
Total assets | | $ | 2,052,986 | | | $ | 1,620,743 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | |
Deposits: | | | | | | | | |
Non-interest bearing | | $ | 386,137 | | | $ | 295,294 | |
Interest bearing | | | 1,446,827 | | | | 1,138,907 | |
Total | | | 1,832,964 | | | | 1,434,201 | |
Repurchase agreements | | | 21,966 | | | | 14,581 | |
Borrowed funds | | | 56,174 | | | | - | |
Accrued expenses and other liabilities | | | 23,859 | | | | 15,346 | |
| | | | | | | | |
Total liabilities | | | 1,934,963 | | | | 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: September 30, 2022 - 4,297,900 December 31, 2021 - 3,480,701 | | | - | | | | - | |
Additional paid-in capital | | | 68,826 | | | | 30,430 | |
Accumulated other comprehensive (loss) income | | | (79,839 | ) | | | 4,276 | |
Retained earnings | | | 129,036 | | | | 121,909 | |
| | | | | | | | |
Total stockholders' equity | | | 118,023 | | | | 156,615 | |
| | | | | | | | |
Total liabilities and stockholders' equity | | $ | 2,052,986 | | | $ | 1,620,743 | |
See accompanying notes to consolidated financial statements.
Finward Bancorp |
Consolidated Statements of Income |
(unaudited) |
(Dollars in thousands) |
|
Quarter Ended September 30, |
|
|
Nine Months Ended September 30, |
|
(Unaudited) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
$ |
16,122 |
|
|
$ |
10,270 |
|
|
$ |
44,629 |
|
|
$ |
31,291 |
|
Securities |
|
|
2,292 |
|
|
|
2,378 |
|
|
|
7,358 |
|
|
|
6,483 |
|
Other interest earning assets |
|
|
125 |
|
|
|
18 |
|
|
|
186 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
18,539 |
|
|
|
12,666 |
|
|
|
52,173 |
|
|
|
37,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
871 |
|
|
|
452 |
|
|
|
1,597 |
|
|
|
1,652 |
|
Repurchase agreements |
|
|
51 |
|
|
|
13 |
|
|
|
93 |
|
|
|
35 |
|
Borrowed funds |
|
|
110 |
|
|
|
1 |
|
|
|
143 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
1,032 |
|
|
|
466 |
|
|
|
1,833 |
|
|
|
1,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
17,507 |
|
|
|
12,200 |
|
|
|
50,340 |
|
|
|
36,118 |
|
Provision for loan losses |
|
|
- |
|
|
|
139 |
|
|
|
- |
|
|
|
1,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
17,507 |
|
|
|
12,061 |
|
|
|
50,340 |
|
|
|
34,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and service charges |
|
|
1,570 |
|
|
|
1,473 |
|
|
|
4,434 |
|
|
|
4,010 |
|
Wealth management operations |
|
|
407 |
|
|
|
604 |
|
|
|
1,590 |
|
|
|
1,787 |
|
Gain on sale of loans held-for-sale, net |
|
|
344 |
|
|
|
1,229 |
|
|
|
1,242 |
|
|
|
4,394 |
|
Gain on sale of securities, net |
|
|
23 |
|
|
|
590 |
|
|
|
662 |
|
|
|
1,276 |
|
Increase in cash value of bank owned life insurance |
|
|
183 |
|
|
|
180 |
|
|
|
628 |
|
|
|
537 |
|
Gain on sale of foreclosed real estate |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
27 |
|
Other |
|
|
103 |
|
|
|
70 |
|
|
|
114 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
2,630 |
|
|
|
4,146 |
|
|
|
8,670 |
|
|
|
12,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
7,498 |
|
|
|
6,042 |
|
|
|
22,403 |
|
|
|
17,624 |
|
Data processing |
|
|
1,212 |
|
|
|
872 |
|
|
|
5,512 |
|
|
|
1,997 |
|
Occupancy and equipment |
|
|
1,804 |
|
|
|
1,380 |
|
|
|
5,033 |
|
|
|
4,076 |
|
Marketing |
|
|
587 |
|
|
|
334 |
|
|
|
1,623 |
|
|
|
728 |
|
Federal deposit insurance premiums |
|
|
350 |
|
|
|
236 |
|
|
|
949 |
|
|
|
620 |
|
Net loss recognized on sale of premises and equipment |
|
|
254 |
|
|
|
- |
|
|
|
254 |
|
|
|
- |
|
Other |
|
|
3,305 |
|
|
|
3,537 |
|
|
|
10,681 |
|
|
|
8,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
15,010 |
|
|
|
12,401 |
|
|
|
46,455 |
|
|
|
33,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expenses |
|
|
5,127 |
|
|
|
3,806 |
|
|
|
12,555 |
|
|
|
13,060 |
|
Income tax expenses |
|
|
571 |
|
|
|
268 |
|
|
|
1,433 |
|
|
|
1,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,556 |
|
|
$ |
3,538 |
|
|
$ |
11,122 |
|
|
$ |
11,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.07 |
|
|
$ |
1.02 |
|
|
$ |
2.68 |
|
|
$ |
3.35 |
|
Diluted |
|
$ |
1.07 |
|
|
$ |
1.02 |
|
|
$ |
2.67 |
|
|
$ |
3.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.31 |
|
|
$ |
0.31 |
|
|
$ |
0.93 |
|
|
$ |
0.93 |
|
See accompanying notes to consolidated financial statements.
Finward Bancorp |
Consolidated Statements of Comprehensive (Loss) Income |
(unaudited) |
(Dollars in thousands) |
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,556 |
|
|
$ |
3,538 |
|
|
$ |
11,122 |
|
|
$ |
11,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net unrealized gains and losses on securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain arising during the period |
|
|
(27,900 |
) |
|
|
(6,501 |
) |
|
|
(105,810 |
) |
|
|
(8,638 |
) |
Less: reclassification adjustment for gains included in net income |
|
|
(23 |
) |
|
|
(590 |
) |
|
|
(662 |
) |
|
|
(1,276 |
) |
Net securities (loss) gain during the period |
|
|
(27,923 |
) |
|
|
(7,091 |
) |
|
|
(106,472 |
) |
|
|
(9,914 |
) |
Tax effect |
|
|
5,865 |
|
|
|
1,490 |
|
|
|
22,357 |
|
|
|
2,081 |
|
Other comprehensive (loss) gain, net of tax |
|
|
(22,058 |
) |
|
|
(5,601 |
) |
|
|
(84,115 |
) |
|
|
(7,833 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) gain, net of tax |
|
|
(17,502 |
) |
|
|
(2,063 |
) |
|
|
(72,993 |
) |
|
|
3,819 |
|
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 June 30, 2021 | | $ | - | | | $ | 30,141 | | | $ | 8,209 | | | $ | 117,219 | | | $ | 155,569 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | 3,538 | | | | 3,538 | |
Other comprehensive loss, net of tax | | | - | | | | - | | | | (5,601 | ) | | | - | | | | (5,601 | ) |
Stock-based compensation expense | | | - | | | | 143 | | | | - | | | | - | | | | 143 | |
Cash dividends, $0.31 per share | | | - | | | | - | | | | - | | | | (1,080 | ) | | | (1,080 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2021 | | $ | - | | | $ | 30,284 | | | $ | 2,608 | | | $ | 119,677 | | | $ | 152,569 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2021 | | $ | - | | | $ | 29,987 | | | $ | 10,441 | | | $ | 111,261 | | | $ | 151,689 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | 11,652 | | | | 11,652 | |
Other comprehensive loss, net of tax | | | - | | | | - | | | | (7,833 | ) | | | - | | | | (7,833 | ) |
Net surrender value of 1,904 restricted stock awards | | | - | | | | (131 | ) | | | - | | | | - | | | | (131 | ) |
Stock-based compensation expense | | | - | | | | 428 | | | | - | | | | - | | | | 428 | |
Cash dividends, $0.31 per share | | | - | | | | - | | | | - | | | | (3,236 | ) | | | (3,236 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2021 | | $ | - | | | $ | 30,284 | | | $ | 2,608 | | | $ | 119,677 | | | $ | 152,569 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2022 | | $ | - | | | $ | 68,623 | | | $ | (57,781 | ) | | $ | 125,812 | | | $ | 136,654 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | 4,556 | | | | 4,556 | |
Other comprehensive loss, net of tax | | | - | | | | - | | | | (22,058 | ) | | | - | | | | (22,058 | ) |
Stock-based compensation expense | | | - | | | | 203 | | | | - | | | | - | | | | 203 | |
Cash dividends, $0.31 per share | | | - | | | | - | | | | - | | | | (1,332 | ) | | | (1,332 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2022 | | $ | - | | | $ | 68,826 | | | $ | (79,839 | ) | | $ | 129,036 | | | $ | 118,023 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2022 | | $ | - | | | $ | 30,430 | | | $ | 4,276 | | | $ | 121,909 | | | $ | 156,615 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | 11,122 | | | | 11,122 | |
Other comprehensive loss, net of tax | | | - | | | | - | | | | (84,115 | ) | | | - | | | | (84,115 | ) |
Net surrender value of 2,479 restricted stock awards | | | - | | | | (120 | ) | | | - | | | | - | | | | (120 | ) |
Stock-based compensation expense | | | - | | | | 535 | | | | - | | | | - | | | | 535 | |
Issuance of 795,423 shares at $47.75 per share, for acquisition of Royal Financial, Inc | | | - | | | | 37,981 | | | | - | | | | - | | | | 37,981 | |
Cash dividends, $0.31 per share | | | - | | | | - | | | | - | | | | (3,995 | ) | | | (3,995 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2022 | | $ | - | | | $ | 68,826 | | | $ | (79,839 | ) | | $ | 129,036 | | | $ | 118,023 | |
See accompanying notes to consolidated financial statements.
Finward Bancorp |
Consolidated Statements of Cash Flows |
(unaudited) |
(Dollars in thousands) | | Nine months ended September 30, | |
| | 2022 | | | 2021 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 11,122 | | | $ | 11,652 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Origination of loans for sale | | | (40,775 | ) | | | (120,101 | ) |
Sale of loans originated for sale | | | 45,994 | | | | 131,477 | |
Depreciation and amortization, net of accretion | | | 4,695 | | | | 3,289 | |
Stock based compensation expense | | | 535 | | | | 428 | |
Gain on sale of securities, net | | | (662 | ) | | | (1,276 | ) |
Gain on sale of loans held-for-sale, net | | | (1,352 | ) | | | (4,546 | ) |
Loss on sale of premises and equipment, net | | | 254 | | | | - | |
Gain on sale of foreclosed real estate | | | - | | | | (27 | ) |
Gain on cash value of bank owned life insurance | | | (628 | ) | | | (537 | ) |
Loss on derivatives | | | 110 | | | | 152 | |
Provision for loan losses | | | - | | | | 1,293 | |
Net change in: | | | | | | | | |
Interest receivable | | | 431 | | | | (546 | ) |
Other assets | | | (5,043 | ) | | | 1,591 | |
Accrued expenses and other liabilities | | | (3,045 | ) | | | (6,290 | ) |
Net cash provided by operating activities | | | 11,636 | | | | 16,559 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Proceeds from maturities of certificates of deposit in other financial institutions | | | 474 | | | | 920 | |
Purchase of certificates of deposit in other financial institutions | | | (734 | ) | | | - | |
Proceeds from maturities and pay downs of securities available-for-sale | | | 37,289 | | | | 43,488 | |
Proceeds from sales of securities available-for-sale | | | 53,953 | | | | 28,565 | |
Purchase of securities available-for-sale | | | (30,421 | ) | | | (191,130 | ) |
Proceeds from bank owned life insurance | | | 314 | | | | - | |
Net change in loans receivable | | | (82,501 | ) | | | 20,148 | |
Proceeds of Federal Home Loan Bank Stock | | | 1,512 | | | | 671 | |
Purchase of loans receivable | | | (2,663 | ) | | | (11,331 | ) |
Purchase of premises and equipment, net | | | (2,656 | ) | | | (1,019 | ) |
Proceeds from sale of premises and equipment | | | 1,694 | | | | - | |
Proceeds from sale of foreclosed real estate | | | - | | | | 484 | |
Cash and cash equivalents from acquisition activity, net | | | 33,799 | | | | - | |
Net cash provided by (used in) investing activities | | | 10,060 | | | | (109,204 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Change in deposits | | | (76,273 | ) | | | 103,861 | |
Proceeds from FHLB advances | | | 37,000 | | | | - | |
Repayment of FHLB advances | | | - | | | | (6,000 | ) |
Net surrender value of restricted stock awards | | | (120 | ) | | | (131 | ) |
Change in repurchase agreements | | | 7,385 | | | | 10,133 | |
Change in other borrowed funds | | | 19,174 | | | | (149 | ) |
Dividends paid | | | (3,742 | ) | | | (3,226 | ) |
Net cash (used in) provided by financing activities | | | (16,576 | ) | | | 104,488 | |
Net change in cash and cash equivalents | | | 5,120 | | | | 11,843 | |
Cash and cash equivalents at beginning of period | | | 33,176 | | | | 19,922 | |
Cash and cash equivalents at end of period | | $ | 38,296 | | | $ | 31,765 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | $ | 1,749 | | | $ | 1,744 | |
Income taxes | | | 1,157 | | | | 2,185 | |
Acquisition activity: | | | | | | | | |
Fair value of assets acquired, including cash and cash equivalents | | $ | 528,321 | | | $ | - | |
Value of goodwill and other intangible assets | | | 14,726 | | | | - | |
Fair value of liabilities assumed | | | 486,341 | | | | - | |
Cash paid for acquisition | | | 18,725 | | | | - | |
Issuance of common stock for acquisition | | | 37,981 | | | | - | |
Noncash activities: | | | | | | | | |
Dividends declared not paid | | | 1,332 | | | | 1,080 | |
Securities purchased not settled | | | - | | | | 11,187 | |
See accompanying notes to consolidated financial statements.
Finward Bancorp
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1 - Basis of Presentation
Organization and Description of Business
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 September 30, 2022, and December 31, 2021, and the consolidated statements of income, comprehensive income (loss), and changes in stockholders’ equity for the quarter and nine months ended September 30, 2022, and 2021, and consolidated statements of cash flows for the nine months ended September 30, 2022, and 2021. The income reported for the nine month period ended September 30, 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.
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 RYFL 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 | | | 13,896 | | | | | | |
FHLB stock | | | 1,303 | | Interest payable | | | 75 | |
Goodwill | | | 11,506 | | Other liabilities | | | 11,228 | |
Core deposit intangible | | | 3,220 | | | | | | |
Interest receivable | | | 1,836 | | | | | | |
Other assets | | | 7,758 | | | | | | |
Total assets purchased | | $ | 543,045 | | | | | | |
Common shares issued | | | 37,981 | | | | | | |
Cash paid | | | 18,725 | | | | | | |
Total purchase price | | $ | 56,706 | | Total liabilities assumed | | $ | 486,339 | |
During the second quarter of 2022, an adjustment was made to the carrying value of other assets of $189 thousand, due to the valuation of prepaids brought over in the acquisition, and premises and equipment, net, of $48 thousand, due to a correction in the valuation of buildings, in addition, a correction was made to the valuation of shares issued increasing the value by $79 thousand. The resulting impact of these changes was a decrease to the goodwill balance related to the RYFL acquisition of $158 thousand.
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 $11.5 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 nine months ended September 30, 2022, the remaining outstanding principal of loans directly related to the RYFL acquisition total $389.5 million, of which $5.6 million are expected to be uncollectable.
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 | | | For the nine months ended | | | For the nine months ended | |
(in thousands) | | September 30, 2022 | | | September 30, 2021 | | | September 30, 2022 | | | September 30, 2021 | |
Selected Financial Data | | | | | | | | | | | | | | | | |
Interest income | | $ | 18,539 | | | $ | 17,939 | | | $ | 53,868 | | | $ | 52,593 | |
Interest expense | | | (1,032 | ) | | | (838 | ) | | | (1,934 | ) | | | (3,027 | ) |
Recovery of (provision for) loan losses | | | - | | | | (14 | ) | | | - | | | | (1,108 | ) |
Non-interest income | | | 2,630 | | | | 4,376 | | | | 8,809 | | | | 12,794 | |
Non-interest expense (1) | | | (15,010 | ) | | | (15,559 | ) | | | (44,583 | ) | | | (42,335 | ) |
Income before provision for income taxes | | | 5,127 | | | | 5,904 | | | | 16,160 | | | | 18,917 | |
Income tax expense | | | (571 | ) | | | (866 | ) | | | (2,190 | ) | | | (2,678 | ) |
Net income | | $ | 4,556 | | | $ | 5,038 | | | $ | 13,970 | | | $ | 16,239 | |
| | | | | | | | | | | | | | | | |
Earnings per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 1.07 | | | $ | 1.45 | | | $ | 3.36 | | | $ | 4.67 | |
Diluted | | $ | 1.07 | | | $ | 1.45 | | | $ | 3.35 | | | $ | 4.67 | |
(1) Excludes $2.9 million in pre-tax merger expenses for the nine months ended September 30, 2022. |
For the nine months ended September 30, 2022, the Bancorp has recorded $2.9 million in pre-tax one-time merger expenses related to the RYFL acquisition, and these expenses have been allocated to the following non-interest expense line items within the income statement:
(in thousands) | | Nine months ended | |
Noninterest expense: | | September 30, 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 | |
September 30, 2022 | | | | | | | | | | | | | | | | |
U.S. government sponsored entities | | $ | 8,883 | | | $ | - | | | $ | (1,338 | ) | | $ | 7,545 | |
U.S. treasury securities | | | 394 | | | | - | | | | - | | | | 394 | |
Collateralized mortgage obligations and residential mortgage-backed securities | | | 166,651 | | | | - | | | | (29,370 | ) | | | 137,281 | |
Municipal securities | | | 282,002 | | | | - | | | | (69,214 | ) | | | 212,788 | |
Collateralized debt obligations | | | 2,173 | | | | - | | | | (1,146 | ) | | | 1,027 | |
Total securities available-for-sale | | $ | 460,103 | | | $ | - | | | $ | (101,068 | ) | | $ | 359,035 | |
| | (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 cost basis and estimated fair value of available-for-sale debt securities at September 30, 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 | |
September 30, 2022 | | Basis | | | Value | |
Due in one year or less | | $ | 190 | | | $ | 190 | |
Due from one to five years | | | 1,978 | | | | 1,972 | |
Due from five to ten years | | | 21,124 | | | | 18,207 | |
Due over ten years | | | 270,160 | | | | 201,385 | |
| | | | | | | | |
Collateralized mortgage obligations and residential mortgage-backed securities | | | 166,651 | | | | 137,281 | |
Total | | $ | 460,103 | | | $ | 359,035 | |
Sales of available-for-sale securities were as follows for the quarter ended:
| | (Dollars in thousands) | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Proceeds | | $ | 10,178 | | | $ | 9,275 | |
Gross gains | | | 41 | | | | 591 | |
Gross losses | | | (18 | ) | | | (1 | ) |
Sales of available-for-sale securities were as follows for the nine months ended:
| | (Dollars in thousands) | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Proceeds | | $ | 53,953 | | | $ | 28,565 | |
Gross gains | | | 733 | | | | 1,297 | |
Gross losses | | | (71 | ) | | | (21 | ) |
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, June 30, 2022 | | $ | (57,781 | ) |
Current period change | | | (22,058 | ) |
Ending balance, September 30, 2022 | | $ | (79,839 | ) |
| | (Dollars in thousands) | |
| | Unrealized gain/(loss) | |
Ending balance, June 30, 2021 | | $ | 8,209 | |
Current period change | | | (5,601 | ) |
Ending balance, September 30, 2021 | | $ | 2,608 | |
| | (Dollars in thousands) | |
| | Unrealized gain/(loss) | |
Ending balance, December 31, 2021 | | $ | 4,276 | |
Current period change | | | (84,115 | ) |
Ending balance, September 30, 2022 | | $ | (79,839 | ) |
| | (Dollars in thousands) | |
| | Unrealized gain/(loss) |