Finward Bancorp(US:FNWD)2023-03-29 16:00PART I Business Overview Finward Bancorp, holding company for Peoples Bank, focuses on diversified lending and deposit-taking, expanding through the 2022 Royal Financial acquisition - Finward Bancorp is the holding company for Peoples Bank, an Indiana-chartered commercial bank, and NWIN Risk Management, Inc13 - The Bancorp completed the acquisition of Royal Financial, Inc. on January 31, 2022, expanding its network in Illinois16 RYFL Merger Consideration | Metric | Value | | :--- | :--- | | Implied Valuation | ~$56.7 million | | Finward Common Stock Issued | 795,423 shares | | Cash Consideration Paid | ~$18.7 million | Lending Activities Lending activities focus on diversified growth, with total loans reaching $1.51 billion in 2022, primarily in real estate Loan Portfolio Composition (in thousands) | Loan Type | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Residential real estate | $484,595 | $260,134 | | Commercial real estate | $486,431 | $317,145 | | Multifamily | $251,014 | $61,194 | | Construction and land development | $108,926 | $123,822 | | Commercial business | $93,278 | $115,772 | | Other | $84,327 | $82,072 | | Total Loans Receivable | $1,508,571 | $960,139 | - The Bancorp primarily operates as a portfolio lender, selling longer-term fixed-rate loans to manage interest rate risk27 - The maximum loan to a single borrower was approximately $26.1 million as of December 31, 2022, within regulatory limits28 Non‑Performing Assets, Asset Classification and Provision for Loan Losses Non-performing assets significantly increased in 2022, with non-accrual loans reaching $18.1 million, and a zero provision for loan losses Non-Performing Assets (in thousands) | Category | 2022 | 2021 | | :--- | :--- | :--- | | Non-accrual loans | $18,128 | $7,056 | | Accruing loans 90+ days past due | $248 | $205 | | Troubled debt restructurings (accruing) | $2,753 | $1,422 | | Total Non-performing Loans* | $18,376 | $7,261 | | Ratio of non-performing loans to total loans | 1.21% | 0.76% | | Ratio of non-performing loans to total assets | 0.94% | 0.51% | Allowance for Loan Losses (ALL) Activity (in thousands) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Balance at beginning of period | $13,343 | $12,458 | | Net charge-offs | ($446) | ($624) | | Provision for loan losses | $0 | $1,509 | | Balance at end of period | $12,897 | $13,343 | | ALL to loans outstanding | 0.85% | 1.38% | | ALL to nonperforming loans | 70.18% | 183.76% | Investment Activities The investment portfolio decreased to $370.9 million in 2022, primarily due to rising interest rates affecting fair value Investment Portfolio Composition (Carrying Value, in thousands) | Security Type | 2022 | 2021 | | :--- | :--- | :--- | | Municipal Securities | $227,718 | $332,127 | | CMOs and Mortgage-backed securities | $134,116 | $184,701 | | U.S. government sponsored agencies | $7,625 | $8,669 | | Other | $1,437 | $1,392 | | Total | $370,896 | $518,220 | - Two trust preferred securities with a cost basis of $2.2 million were on non-accrual status due to delayed interest payments73 - Management expects the fair value of securities to recover as they approach maturity, despite current declines from interest rate changes74 Sources of Funds Deposits remain the primary funding source, with average total deposits growing to $1.82 billion in 2022 Average Deposits and Rates Paid (in thousands) | Category | 2022 Average Balance | 2022 Average Rate | 2021 Average Balance | 2021 Average Rate | | :--- | :--- | :--- | :--- | :--- | | Noninterest bearing demand | $377,408 | - | $280,900 | - | | Interest bearing demand | $374,815 | 0.36% | $297,012 | 0.08% | | MMDA accounts | $286,155 | 0.37% | $253,468 | 0.13% | | Savings accounts | $416,898 | 0.05% | $277,839 | 0.06% | | Certificates of deposit | $368,322 | 0.26% | $271,882 | 0.46% | | Total Deposits | $1,823,598 | 0.20% | $1,381,101 | 0.18% | - As of December 31, 2022, the Bancorp had $120.0 million in FHLB advances and $15.5 million in repurchase agreements7583 Regulation and Supervision The Bancorp and Peoples Bank are extensively regulated, exceeding all 'well capitalized' requirements, and preparing for CECL adoption Bank Regulatory Capital Ratios (December 31, 2022) | Ratio | Actual | Minimum for Capital Adequacy | Minimum to be Well Capitalized | | :--- | :--- | :--- | :--- | | Common equity tier 1 capital | 10.1% | 4.5% | 6.5% | | Tier 1 capital | 10.1% | 6.0% | 8.0% | | Total capital | 10.9% | 8.0% | 10.0% | | Tier 1 leverage | 7.7% | 4.0% | 5.0% | - The new CECL accounting standard, effective January 1, 2023, is expected to result in a $3.8 million to $6.8 million adjustment to the allowance for credit losses125342 - The Bancorp is a financial holding company regulated by the FRB, while Peoples Bank is regulated by the FDIC and Indiana DFI102106 Risk Factors The Bancorp faces significant business, market, liquidity, and industry risks, including interest rate sensitivity and increased competition - Key business risks include credit, market, and liquidity, with $809.7 million (53.7%) of the loan portfolio in fixed-rate loans posing interest rate risk160164 - Rising interest rates in 2022 led to approximately $90.0 million in unrealized losses in the investment portfolio, impacting book capital162163 - Industry risks include intense competition, economic conditions in key markets, and increased customer concerns over deposit insurance following recent bank failures192196199 Properties The Bancorp owns its corporate office and all 26 branch locations, with a net book value of $40.2 million for property and equipment - The Bancorp owns its corporate office and all 26 branch locations, with 14 in Northwest Indiana and 12 in Cook County, Illinois217218 - The net book value of property, premises, and equipment was $40.2 million as of December 31, 2022219 Legal Proceedings The Bancorp is involved in routine legal proceedings, with no expected material adverse effect on its financial position - The company is involved in ordinary course legal proceedings, not expected to materially affect its financial position220 Information About Our Executive Officers This section provides biographical information for the Bancorp's six executive officers, including their roles and experience - The report lists six executive officers, detailing their positions and professional backgrounds221 - Executive Chairman David A. Bochnowski announced his retirement effective June 30, 2023221 PART II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Bancorp's common stock trades on Nasdaq, with a repurchase program having 48,828 shares remaining available - The Bancorp's common stock trades on the Nasdaq Capital Market under the symbol "FNWD"227 - A stock repurchase program authorized in 2014 has 48,828 shares remaining available for repurchase as of year-end 2022228229 Management's Discussion and Analysis of Financial Condition and Results of Operations Total assets grew to $2.1 billion in 2022, driven by acquisition and loan growth, with stable net income despite increased expenses Financial Condition Total assets grew to $2.1 billion in 2022, driven by loan portfolio expansion to $1.5 billion and increased deposits Key Balance Sheet Metrics (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $2,070,339 | $1,620,743 | | Net Loans Receivable | $1,500,734 | $953,377 | | Total Deposits | $1,775,017 | $1,434,201 | | Total Borrowed Funds | $135,503 | $14,581 | - Nonperforming loans as a percentage of total loans increased to 1.21% in 2022 from 0.75% in 2021240 - The ALL to total loans ratio decreased to 0.85% in 2022 from 1.38% in 2021, with ALL coverage for non-performing loans dropping to 70.2%250 Liquidity and Capital Resources Stockholders' equity decreased to $136.4 million due to unrealized losses on securities, yet the Bank remained well-capitalized - Stockholders' equity decreased by $20.2 million to $136.4 million, primarily due to $68.6 million in unrealized losses on securities261 - Book value per share decreased to $31.73 at December 31, 2022, from $45.00 at year-end 2021261 - The Bank's capital levels exceeded all regulatory requirements, maintaining a "well capitalized" status as of December 31, 2022262263 Results of Operations – Comparison of 2022 to 2021 Net income remained stable at $15.1 million in 2022, driven by increased net interest income offset by higher noninterest expenses Key Performance Metrics | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Income | $15.1 million | $15.0 million | | Return on Average Assets | 0.74% | 0.95% | | Return on Average Equity | 10.47% | 9.61% | | Net Interest Income | $67.1 million | $48.6 million | | Net Interest Margin | 3.56% | 3.29% | - Noninterest income decreased by $4.4 million (-27.8%), mainly due to lower gains on loan and securities sales268 - Noninterest expense increased by $15.5 million (33.2%), driven by higher compensation, data processing, and other operating costs related to the Royal acquisition270271 Financial Statements This section presents the audited consolidated financial statements for 2022 and 2021, including key audit matters like ALLL valuation and acquisition accounting - The independent auditor's report from FORVIS, LLP provides an unqualified opinion on the fair presentation of financial statements285 - Critical audit matters include the valuation of the Allowance for Loan Losses (ALLL) and the accounting for the Royal Financial, Inc. acquisition291293 Consolidated Financial Statements Consolidated financial statements show total assets grew to $2.07 billion, net loans to $1.50 billion, and deposits to $1.78 billion Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $2,070,339 | $1,620,743 | | Net Loans Receivable | $1,500,734 | $953,377 | | Goodwill | $22,395 | $11,109 | | Total Deposits | $1,775,017 | $1,434,201 | | Total Liabilities | $1,933,946 | $1,464,128 | | Total Stockholders' Equity | $136,393 | $156,615 | Consolidated Income Statement Highlights (in thousands) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Net Interest Income | $67,149 | $48,575 | | Provision for Loan Losses | $0 | $1,509 | | Noninterest Income | $11,509 | $15,947 | | Noninterest Expense | $62,100 | $46,636 | | Net Income | $15,080 | $14,963 | | Diluted EPS | $3.60 | $4.30 | Notes to Consolidated Financial Statements Notes provide detailed accounting policies, Royal Financial acquisition details, loan portfolio breakdown, and investment securities with $84.6 million in unrealized losses - The Royal Financial, Inc. acquisition on January 31, 2022, for approximately $56.7 million, resulted in $11.3 million goodwill and $3.2 million core deposit intangibles350353 - The available-for-sale investment securities portfolio had $84.6 million in gross unrealized losses as of December 31, 2022358 - The allowance for loan losses decreased to $12.9 million at year-end 2022, with no provision recorded during the year363 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - The CEO and CFO concluded that the Bancorp's disclosure controls and procedures were effective as of December 31, 2022448 - Management determined the Bancorp's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework451 PART III Items 10-14 This section incorporates information from the 2023 Proxy Statement, covering directors, executive compensation, security ownership, and related party transactions - Information on directors, executive officers, corporate governance, executive compensation, security ownership, related party transactions, and accountant fees is incorporated by reference from the 2023 Proxy Statement456457458462463 Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 0 | $0 | 224,845 | PART IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Form 10-K, including the Royal Financial merger agreement and corporate documents - This section lists all financial statements and exhibits filed with the Form 10-K, including the merger agreement and corporate governance documents465470