Finward Bancorp Announces Earnings for the Quarter and Twelve Months Ended December 31, 2021

MUNSTER, Ind., Jan. 26, 2022 (GLOBE NEWSWIRE) -- Finward Bancorp (Nasdaq: FNWD) (the “Bancorp”), the holding company for Peoples Bank (the “Bank”), reported net income of $15.0 million, or $4.30 per share, for the twelve months ended December 31, 2021. Net income for the twelve months ended December 31, 2021, decreased by $969 thousand (6.1%), from the twelve months ended December 31, 2020, primarily due to higher noninterest expense and lower noninterest income. For the twelve months ended December 31, 2021, the return on average assets (ROA) was 0.95% and the return on average equity (ROE) was 9.61%. In connection with the acquisition of Royal Financial, Inc. (OTCQX: RYFL) (“Royal”), which will close in the first quarter of 2022, the Bancorp incurred one-time expenses of approximately $838 thousand in the year ending 2021.

Excluding the one-time Royal acquisition costs, the Bancorp’s net income, as adjusted, was $15.7 million, or $4.52 per share, for the twelve months ended December 31, 2021. Excluding these same one-time Royal acquisition costs, the Bancorp’s ROA, as adjusted, was 1.00% and its ROE, as adjusted, was 10.11% for 2021. See Table 1 below for a reconciliation of these non-GAAP figures to the Bancorp’s GAAP figures.

For the quarter ended December 31, 2021, the Bancorp’s net income totaled $3.3 million, or $0.95 per share. Net income for the quarter ended December 31, 2021, increased by $550 thousand (19.9%), from the quarter ended December 31, 2020, primarily due to higher net interest income and lower income tax expense. For the fourth quarter of 2021, the ROA was 0.83% and the ROE was 8.56%.

During the twelve months ended December 31, 2021, total assets increased by $124.5 million (8.3%), with interest-earning assets increasing by $125.1 million (8.9%). On December 31, 2021, interest-earning assets totaled $1.5 billion compared to $1.4 billion at December 31, 2020. Earning assets represented 94.0% of total assets at December 31, 2021, and 93.5% of total assets at December 31, 2020. The increase in total assets and interest earning assets for the twelve months was primarily the result of increased securities and interest-bearing cash balances related to strong core deposit growth.

“2021 was a strong year coming off the record earnings we saw in 2020. We made significant investments in the future of the business in 2021, including a rebranding of Peoples Bank and investments in implementing Salesforce and nCino. Fourth quarter earnings were also impacted by roughly $838 thousand in one-time expenses related to the closing and integration of our pending Royal Financial acquisition. The merger is on track to close by the end of January, and we anticipate the significant portion of the remaining one-time expenses to be recognized in the first quarter. We will also benefit from initiatives related to our branch network and look to expand on our pilot branch closure in 2022,” said Benjamin Bochnowski, CEO.

“Asset quality was significantly improved as we were able to resolve a long-standing problem loan. We had an excellent opportunity to improve asset quality and have positioned the Bank for stability in the credit portfolio heading into 2022, with a strong allowance that we believe keeps us well reserved against any unexpected problems related to larger macroeconomic forces. Wage inflation, interest rates, and COVID all are headwinds for 2022, but we are actively managing the balance sheet and we continue to actively manage expenses to thrive in this uncertain environment,” he continued. “I remain extremely proud of our team and our dedication to our mission and our future as we navigate the next phase of the pandemic together.”

Net Interest Income
Net interest income was $48.6 million for the twelve months ended December 31, 2021, an increase of $2.7 million (5.9%), compared to $45.9 million for the twelve months ended December 31, 2020. The Bancorp’s net interest margin on a tax-adjusted basis was 3.51% for the twelve months ended December 31, 2021, compared to 3.63% for the twelve months ended December 31, 2020. Net interest income was $12.5 million for the quarter ended December 31, 2021, an increase of $350 thousand (2.9%), compared to $12.1 million for the quarter ended December 31, 2020. The Bancorp’s net interest margin on a tax-adjusted basis was 3.58% for the quarter ended December 31, 2021, compared to 3.68% for the quarter ended December 31, 2020. The increased net interest income for the quarter and the twelve months was primarily the result of lower interest expense attributable to the Bancorp’s ability to manage through the current historically low interest rate cycle and higher securities income from additional investments in the securities portfolio. The decrease in the net interest margin is a result of lower reinvestment rates on the Bancorp’s loan and securities portfolios. Management has adjusted deposit pricing to align with the current interest rate cycle and remains prepared to adjust rates paid on interest bearing deposits as the rate cycle shifts.

Noninterest Income
Noninterest income from banking activities totaled $15.9 million for the twelve months ended December 31, 2021, compared to $18.1 million for the twelve months ended December 31, 2020, a decrease of $2.2 million or 12.1%. Noninterest income from banking activities totaled $3.8 million for the quarter ended December 31, 2021, compared to $4.7 million for the quarter ended December 31, 2020, a decrease of $893 thousand or 19.0%. The decrease in gain on sale of loans for the current quarter and twelve-month period is the result of significant refinance activity in the prior year due to the economic and rate environment, which resulted in more loans originated and sold. The increase in fees and service charges for the twelve-month period is primarily the result of the Bancorp’s efforts to provide products and services to help customers be more successful, including debit card and ATM services. The increase in wealth management income for the current quarter and twelve-month period is the result of the Bancorp’s continued focus on expanding its wealth management line of business. The decrease in gains on the sale of securities for the current quarter and twelve-month period is a result of current market conditions and actively managing the portfolio.

Noninterest Expense
Noninterest expense totaled $46.6 million for the twelve months ended December 31, 2021, compared to $41.6 million for the twelve months ended December 31, 2020, an increase of $5.0 million or 12.0%. Noninterest expense totaled $12.7 million for the quarter ended December 31, 2021, compared to $11.5 million for the quarter ended December 31, 2020, an increase of $1.2 million or 10.8%. The increase in compensation and benefits for the current quarter and twelve-month period is primarily the result of management’s continued focus on talent management and retention. The increase in occupancy and equipment for the current quarter and twelve-month period is primarily related to facilities improvement efforts aimed at enhancing technology and efficiency. The increase in data processing expense for the current quarter and twelve-month period is primarily the result of increased system utilization and investment in technological advancements such as Salesforce and nCino. The increase in marketing expense for the current quarter and twelve-month period is the result of increased marketing and rebranding initiatives. The increase in other operating expenses for the current quarter and twelve-month period is primarily the result of investments in strategic initiatives focusing on growth of the organization, such as the planned acquisition of Royal Financial.

The Bancorp’s efficiency ratio was 78.28% for the quarter ended December 31, 2021, compared to 68.40% for the quarter ended December 31, 2020. The Bancorp’s efficiency ratio was 72.28% for the twelve months ended December 31, 2021, compared to 65.03% for the twelve months ended December 31, 2020. The increase in the efficiency ratio is the result of lower noninterest income and higher noninterest expense. Excluding the one-time acquisition expenses associated with the Royal transaction, the efficiency ratio would have decreased to 70.98% for the twelve months ended December 31, 2021. See Table 1 below for a reconciliation of the non-GAAP figure to the Bancorp’s GAAP efficiency ratio. The efficiency ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period.

Lending
The Bancorp’s loan portfolio totaled $966.7 million at December 31, 2021, compared to $965.1 million at December 31, 2020, an increase of $1.6 million or 0.2%. The increase in loan balances is primarily the result of organic loan growth offset against loan paydowns and forgiveness within the PPP portfolio. During the twelve months ended December 31, 2021, the Bancorp originated $339.9 million in new commercial loans, compared to $333.3 million during the twelve months ended December 31, 2020. During the twelve months ended December 31, 2021, the Bancorp originated $153.1 million in new fixed rate mortgage loans for sale, compared to $224.9 million during the twelve months ended December 31, 2020. The loan portfolio is 63.4% of earning assets and is comprised of 64.4% commercial related credits.

In addition, the Bancorp participates in the U.S. Small Business Administration’s Paycheck Protection Program (“PPP”), a program initiated to help small businesses maintain their workforces during the pandemic. As of December 31, 2021, the Bancorp approved 782 applications totaling $91.5 million for the first round, with an average loan size of approximately $117 thousand. These loans helped local business owners retain 10,758 employees based on the borrowers’ applications. The Bancorp’s SBA lender fee is averaging approximately 3.80% for the first round of the program, and fees will be earned over the life of the associated loans. The first round of PPP closed in August of 2020. On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, which included provisions for a second round of PPP funding in 2021. As of December 31, 2021, the Bancorp approved 420 applications totaling $37.5 million for the second round, with an average loan size of approximately $89 thousand. These loans will help local business owners retain 4,410 employees based on the borrowers’ applications. The Bancorp’s SBA lender fee is averaging approximately 5.32% for this program, and fees will be earned over the life of the associated loans. As of December 31, 2021, the Bancorp had remaining loan balances under the Paycheck Protection Program totaling $22.1 million.

Investing
The Bancorp’s securities portfolio totaled $526.9 million at December 31, 2021, compared to $410.7 million at December 31, 2020, an increase of $116.2 million or 28.3%. The increase is attributable to the investment of additional liquidity from the growth in core deposits. The securities portfolio represents 34.6% of earning assets and provides a consistent source of liquidity and earnings to the Bancorp. Cash and cash equivalents totaled $33.2 million at December 31, 2021, compared to $19.9 million at December 31, 2020, an increase of $13.3 million or 66.5%. The increase in cash and cash equivalents is primarily the result of the timing of investments in interest earnings assets relative to the inflow of deposits and repurchase agreements.

Funding
At December 31, 2021, core deposits totaled $1.2 billion, compared to $1.0 billion at December 31, 2020, an increase of $177.5 million or 17.4%. The increase is the result of the Bancorp’s efforts to maintain and grow core deposits. Core deposits include checking, savings, and money market accounts and represented 83.3% of the Bancorp’s total deposits at December 31, 2021. During the twelve months ended December 31, 2021, balances for noninterest bearing checking, interest bearing checking, savings, and money market accounts increased. The increase in these core deposits is a result of management’s sales efforts along with customer preferences for competitively priced short-term liquid investments. At December 31, 2021, balances for certificates of deposit totaled $239.2 million, compared to $284.8 million at December 31, 2020, a decrease of $45.6 million or 16.0%. The decrease in certificate of deposits was the result of product pricing strategies to lower excess liquidity on the balance sheet. In addition, at December 31, 2021, borrowings and repurchase agreements totaled $14.6 million, compared to $19.9 million at December 31, 2020, a decrease of $5.3 million or 26.6%. The decrease in borrowings was a result of the availability of deposits to fund growth in the Bancorp’s asset base.

Asset Quality
At December 31, 2021, non-performing loans totaled $7.3 million, compared to $14.4 million at December 31, 2020, a decrease of $7.1 million or 49.5%. The Bancorp’s ratio of non-performing loans to total loans was 0.75% at December 31, 2021, compared to 1.49% at December 31, 2020. The Bancorp’s ratio of non-performing assets to total assets was 0.51% at December 31, 2021, compared to 1.06% at December 31, 2020. The improvement in both ratios is the result of the strategic sale of one large impaired commercial hotel loan that had a carrying balance of $5.1 million at the time of the sale.

For the twelve months ended December 31, 2021, $1.5 million in provisions to the allowance for loan losses were required, compared to $3.7 million for the twelve months ended December 31, 2020, a decrease of $2.2 million or 59.1%. For the twelve months ended December 31, 2021, charge-offs, net of recoveries, totaled $624 thousand. At December 31, 2021, the allowance for loan losses is considered adequate by management and totaled $13.3 million. The allowance for loan losses as a percentage of total loans was 1.38% at December 31, 2021, compared to 1.29% at December 31, 2020. The allowance for loan losses as a percentage of non-performing loans, or coverage ratio, was 183.76% at December 31, 2021, compared to 86.72% at December 31, 2020. The improvement in the coverage ratio as of December 31, 2021 is the result of the strategic sale of one large impaired commercial hotel loan that had a carrying balance of $5.1 million at the time of the sale.

Management also considers reserves on loans from acquisition activity that are not part of the allowance for loan losses. The Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At December 31, 2021, total purchased credit impaired loan reserves totaled $1.4 million compared to $2.1 million at December 31, 2020. Additionally, the Bancorp has acquired loans without evidence of credit quality deterioration since origination and has marked these loans to their fair values. As part of the fair value of loans receivable, there was a net fair value discount for loans acquired of $1.1 million at December 31, 2021, compared to $2.0 million at December 31, 2020. When these additional reserves are included on a pro forma basis, the allowance for loan losses as a percentage of total loans was 1.63% at December 31, 2021, and the allowance for loan losses as a percentage of non-performing loans, or coverage ratio, was 217.20% at December 31, 2021. See Table 1 below for a reconciliation of these non-GAAP figures to the Bancorp’s GAAP figures.

The Bancorp continues to prudently help borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. Consistent with regulatory guidance, the Bancorp will consider deferring or modifying a loan customer’s repayment obligation if the customer’s cash flow has been negatively impacted by the pandemic. Outstanding borrower deferrals and modifications continue to decline. Loans modified to interest only payment or full payment deferral as part of the effects of COVID-19 as of December 31, 2021 and September 30, 2021, are as follows:

As the Bancorp continues to monitor the borrowers that are in and outside of deferral status, some loan relationships may be deemed non-performing. As of December 31, 2021, a total of 242 loans have come out of COVID-19 related deferral status with carrying balances of $86.6 million. All of these loans continue to be performing, except two commercial real estate loans with total carrying balances of $1.8 million and several residential real estate loans with total carrying balances of $1.1 million. 

Capital Adequacy
At December 31, 2021, shareholders’ equity stood at $156.6 million, and tangible capital represented 8.8% of total assets. The Bancorp’s regulatory capital ratios at December 31, 2021, were 14.2% for total capital to risk-weighted assets, 13.0% for both common equity tier 1 capital to risk-weighted assets and tier 1 capital to risk-weighted assets, and 8.6% for tier 1 leverage capital to adjusted average assets. Under all regulatory capital requirements, the Bancorp is considered well capitalized. The tangible book value of the Bancorp’s stock stood at $40.91 per share at December 31, 2021.

About Finward Bancorp
Finward Bancorp is a locally managed and independent financial holding company headquartered in Munster, Indiana, whose activities are primarily limited to holding the stock of Peoples Bank. Peoples Bank provides a wide range of personal, business, electronic and wealth management financial services from its 21 locations in Lake and Porter Counties in Northwest Indiana and South Chicagoland. Finward Bancorp’s common stock is listed on the Nasdaq Capital Market under the symbol FNWD. The website ibankpeoples.com provides information on Peoples Bank’s products and services, and Finward Bancorp’s investor relations.

Forward Looking Statements
This press release may contain forward-looking statements regarding the financial performance, business prospects, growth and operating strategies of the Bancorp. For these statements, the Bancorp claims the protections of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements in this communication should be considered in conjunction with the other information available about the Bancorp, including the information in the filings the Bancorp makes with the SEC. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Forward-looking statements are typically identified by using words such as “anticipate,” “estimate,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance.

Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include: the ability to meet the closing conditions to the merger; delay in closing the merger; difficulties and delays in integrating Finward’s and Royal’s businesses or fully realizing cost savings and other benefits; business disruption following the merger; the significant risks and uncertainties for our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios and other regulatory requirements caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its influence on financial markets, the effectiveness of our remote work arrangements and staffing levels in branches and other operational facilities, and actions taken by governmental authorities and other third parties in response to the pandemic; changes in asset quality and credit risk; the inability to sustain revenue and earnings growth; changes in interest rates, market liquidity, and capital markets, as well as the magnitude of such changes, which may reduce net interest margins; inflation; customer acceptance of the Finward’s and Royal’s products and services; customer borrowing, repayment, investment, and deposit practices; customer disintermediation; the introduction, withdrawal, success, and timing of business initiatives; competitive conditions; the inability to realize cost savings or revenues or to implement integration plans and other consequences associated with mergers, acquisitions, and divestitures; economic conditions; and the impact, extent, and timing of technological changes, capital management activities, and other actions of the Federal Reserve Board and legislative and regulatory actions and reforms. Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in Finward’s reports (such as the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K) filed with the SEC and available at the SEC’s Internet website (www.sec.gov). All subsequent written and oral forward-looking statements concerning the proposed transaction or other matters attributable to Finward or Royal Financial or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements above. Except as required by law, Finward does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statement is made.

In addition to the above factors, we also caution that the actual amounts and timing of any future common stock dividends or share repurchases will be subject to various factors, including our capital position, financial performance, capital impacts of strategic initiatives, market conditions, and regulatory and accounting considerations, as well as any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends. Further, statements about the effects of the COVID-19 pandemic on our business, operations, financial performance, and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable, and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties, and us.

Disclosure Regarding Non-GAAP Measures

This press release includes certain financial measures that are identified as non-GAAP. However, certain non-GAAP performance measures are used by management to evaluate and measure the Bancorp’s performance. Although these non-GAAP financial measures are frequently used by investors to evaluate a financial institution, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. This supplemental information should not be considered in isolation or as a substitute for the related GAAP measures. See the attached Table 1 at the end of this press release for a reconciliation of the non-GAAP earnings measures identified herein and their most comparable GAAP measures.

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