Finward Bancorp(FNWD) - 2022 Q3 - Quarterly Report

PART I. Financial Information Unaudited Financial Statements and Notes This section presents Finward Bancorp's unaudited consolidated financial statements and notes for the period ended September 30, 2022, detailing the financial position and performance, significantly impacted by the Royal Financial acquisition Consolidated Balance Sheet Total assets increased to $2.05 billion by September 30, 2022, primarily from loan growth funded by deposits, while stockholders' equity decreased due to comprehensive losses Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 (unaudited, in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total cash and cash equivalents | $38,296 | $33,176 | | Securities available-for-sale | $359,035 | $526,889 | | Net loans receivable | $1,489,298 | $953,377 | | Goodwill | $22,615 | $11,109 | | Total assets | $2,052,986 | $1,620,743 | | Total deposits | $1,832,964 | $1,434,201 | | Borrowed funds | $56,174 | $- | | Total liabilities | $1,934,963 | $1,464,128 | | Accumulated other comprehensive (loss) income | $(79,839) | $4,276 | | Total stockholders' equity | $118,023 | $156,615 | | Total liabilities and stockholders' equity | $2,052,986 | $1,620,743 | Consolidated Statements of Income Net income for Q3 2022 increased to $4.6 million due to higher net interest income, while nine-month net income slightly declined to $11.1 million due to noninterest income and expense changes Quarterly and Nine-Month Income Statement Highlights (in thousands, except per share data) | Metric | Q3 2022 (in thousands) | Q3 2021 (in thousands) | Nine Months 2022 (in thousands) | Nine Months 2021 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $17,507 | $12,200 | $50,340 | $36,118 | | Provision for loan losses | $- | $139 | $- | $1,293 | | Total noninterest income | $2,630 | $4,146 | $8,670 | $12,139 | | Total noninterest expense | $15,010 | $12,401 | $46,455 | $33,904 | | Net income | $4,556 | $3,538 | $11,122 | $11,652 | | Diluted EPS | $1.07 | $1.02 | $2.67 | $3.35 | Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, financial components, and the significant Royal Financial, Inc. (RYFL) acquisition, along with upcoming accounting standard changes like CECL - On January 31, 2022, Finward completed its acquisition of Royal Financial, Inc. (RYFL), issuing 795,423 shares of common stock and paying approximately $18.7 million in cash, for an implied transaction value of about $56.7 million[20][22] - The acquisition resulted in the recording of approximately $11.5 million in goodwill and a $3.2 million core deposit intangible[23][25] - The Bancorp will adopt ASU No. 2016-13 (CECL) for measuring credit losses on financial instruments effective January 1, 2023, with management currently evaluating its impact[86] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Bancorp's financial condition and results, emphasizing the Royal Financial acquisition's impact on asset growth, loan portfolio, asset quality, and capital, alongside quarterly and nine-month performance - The acquisition of Royal Financial, Inc. (RYFL) on January 31, 2022, was a key event, expanding the Bank's network in Cook and DuPage counties, Illinois[117] - Total assets increased by $432.2 million (26.7%) during the first nine months of 2022, primarily due to the RYFL acquisition[120] - Stockholders' equity decreased by $38.6 million (24.6%) in the first nine months of 2022, mainly due to an $84.1 million other comprehensive loss from market value changes in the securities portfolio[155] Financial Condition Total assets grew to $2.1 billion by September 30, 2022, driven by the RYFL acquisition and loan growth, while the investment portfolio decreased due to unrealized losses Loan Portfolio Composition (in thousands) | Loan Type | Sept 30, 2022 (in thousands) | % of Total | Dec 31, 2021 (in thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Residential real estate | $471,565 | 31.5% | $260,134 | 33.0% | | Commercial real estate | $452,852 | 30.3% | $317,145 | 31.2% | | Multifamily | $258,377 | 17.3% | $61,194 | 5.7% | | Commercial business | $95,372 | 6.4% | $115,772 | 11.4% | | Other | $218,821 | 14.5% | $143,232 | 18.7% | | Total Loans Receivable | $1,496,387 | 100.0% | $960,139 | 100.0% | - The securities portfolio, all available-for-sale, decreased by $167.9 million (31.9%) to $359.0 million, attributed to increased unrealized losses from rising interest rates and using cash flows to fund loan growth[141] - Total deposits increased by $398.8 million (27.8%) to $1.83 billion, largely due to the RYFL acquisition and efforts to grow core deposits[146][148] Asset Quality Asset quality metrics, including nonperforming and substandard loans, increased due to the RYFL acquisition, while the allowance for loan losses remained stable with no new provision Asset Quality Summary (in thousands) | Metric | Sept 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Nonperforming loans | $10,925 | $7,261 | | Substandard loans | $17,922 | $8,687 | | Special mention loans | $21,153 | $21,123 | | Impaired loans | $13,006 | $5,808 | | Allowance for loan losses (ALL) | $13,398 | $13,343 | | ALL to Total Loans | 0.90% | 1.38% | - The increase in substandard and impaired loans is primarily the result of loans acquired through the RYFL acquisition[127][132] - No provision for loan losses was recorded for the nine months ended September 30, 2022, compared to a provision of $1.3 million for the same period in 2021[137] Liquidity and Capital Resources Liquidity improved with increased cash, but stockholders' equity decreased due to unrealized securities losses, though capital ratios remain well above regulatory minimums Bank Capital Ratios | Ratio | Sept 30, 2022 | Minimum for Capital Adequacy | | :--- | :--- | :--- | | Common equity tier 1 capital to risk weighted assets | 11.8% | 4.5% | | Tier 1 capital to risk-weighted assets | 11.8% | 6.0% | | Total capital to risk-weighted assets | 12.8% | 8.0% | | Tier 1 capital to adjusted average assets | 8.1% | 4.0% | - The Bancorp's ability to pay dividends depends on the Bank's ability to pay dividends to the Bancorp, which is subject to regulatory limits by the DFI and FDIC[162] - No shares were repurchased under the stock repurchase program during the first nine months of 2022[155] Results of Operations For Q3 2022, net income rose to $4.6 million driven by net interest income, while nine-month net income fell to $11.1 million due to a $3.5 million drop in noninterest income and a $12.6 million rise in noninterest expense Quarterly Results of Operations (in thousands) | Metric | Q3 2022 (in thousands) | Q3 2021 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $17,507 | $12,200 | 43.5% | | Noninterest Income | $2,630 | $4,146 | -36.6% | | Noninterest Expense | $15,010 | $12,401 | 21.0% | | Net Income | $4,556 | $3,538 | 28.8% | Nine-Month Results of Operations (in thousands) | Metric | Nine Months 2022 (in thousands) | Nine Months 2021 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $50,340 | $36,118 | 39.4% | | Noninterest Income | $8,670 | $12,139 | -28.6% | | Noninterest Expense | $46,455 | $33,904 | 37.0% | | Net Income | $11,122 | $11,652 | -4.5% | - The increase in noninterest expense for the nine-month period was driven by the Royal acquisition, talent management, wage inflation, and investments in technology like Salesforce and nCino[186] Quantitative and Qualitative Disclosures about Market Risk This item is marked as 'Not applicable', indicating no new or materially changed quantitative and qualitative disclosures about market risk for this period - The report states this item is not applicable for this filing[193] Controls and Procedures Management concluded that the Bancorp's disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal controls identified - The Chief Executive Officer and Chief Financial Officer concluded that the Bancorp's disclosure controls and procedures were effective as of September 30, 2022[194] - There were no changes in internal control over financial reporting during the nine months ended September 30, 2022, that materially affected or are likely to materially affect the controls[195] PART II. Other Information Legal Proceedings The Bancorp is involved in routine legal proceedings, with management expecting no material adverse financial impact from ultimate liabilities - The company is involved in routine legal proceedings, but management does not expect any material adverse financial impact[198] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased under the Bancorp's existing stock repurchase program during the nine months ended September 30, 2022 - No shares were repurchased under the existing stock repurchase program during the nine months ended September 30, 2022[200] Share Repurchase Activity (Jan - Sep 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Number of Shares That May Yet Be Purchased | | :--- | :--- | :--- | :--- | | Jan - Sep 2022 | - | N/A | 48,828 | Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and the Inline XBRL Interactive Data File - Filed exhibits include CEO and CFO certifications as required by Sarbanes-Oxley Act rules[202][203] - The filing includes an Inline XBRL Interactive Data File containing tagged financial statements and notes[203][204]