Finward Bancorp Announces Earnings for The Three and Six Months Ended June 30, 2022

MUNSTER, Ind., July 27, 2022 (GLOBE NEWSWIRE) -- Finward Bancorp (Nasdaq: FNWD) (“Finward” or the “Bancorp”), the holding company for Peoples Bank (the “Bank”), today announced that net income available to common stockholders was $6.6 million, or $1.58 per diluted share, for the six months ended June 30, 2022, as compared to $8.1 million, or $2.33 per share, for the corresponding prior year period. For the three months ended June 30, 2022, the Bancorp’s net income totaled $4.4 million, or $1.03 per diluted share, as compared to $3.6 million, or $1.03 per share, for the three months ending June 30, 2021. Selected performance metrics are as follows for the periods presented:

Core net income for the six months ended June 30, 2022, amounted to $8.0 million, or $1.92 per diluted share, compared to $7.5 million, or $2.15 per diluted share for the six months ended June 30, 2021. Core net income for the three months ended June 30, 2022, amounted to $3.9 million, or $0.91 per diluted share, compared to $3.3 million, or $0.95 per diluted share for the three months ended June 30, 2021. Core net income is a non-GAAP measure. For the periods presented, the core net income measure excludes merger related expenses, net (gain) loss on securities, core deposit accretion, certificate of deposit purchase premium amortization, purchase discount amortization, and related tax benefit/(cost). Selected non-GAAP performance metrics are as follows for the periods presented:

Refer to “Disclosure Regarding Non-GAAP Measures” and the “Reconciliation of the Non-GAAP Performance Ratios” table below for additional information regarding our non-GAAP measures and impact per period by operation.

Highlights of the year-to-date period include:

• Core net income benefiting from acquisition and internal growth: GAAP net income for the six months ended June 30, 2022, decreased $1.5 million compared to the six months ended June 30, 2021. However, core net income for the six months ended June 30, 2022, increased by $533 thousand, as compared to the six months ended June 30, 2021, primarily relating to the increase in interest-earning assets acquired from the acquisition of Royal Financial, Inc. (“Royal”), organic loan growth, and the continued ability to manage the net interest margin.
• Net interest margin improved: The net interest margin for the six months ended June 30, 2022, was 3.50%, compared to 3.31% for the six months ended June 30, 2021. The tax-adjusted net interest margin (a non-GAAP measure) for the six months ended June 30, 2022, was 3.70%, compared to 3.51% for the six months ended June 30, 2021. The increased net interest margin and tax-adjusted margin is primarily related to increased loan balances from acquired and internally generated growth and reducing investment in the securities portfolio to fund increased loan demand. Internally generated loan growth (separate from the acquisition) totaled $57.2 million or 5.9%. Leading the internally generated loan growth was commercial real estate loans of $60.3 million or 12.6%. Additionally, interest expense continued to decrease during the quarter due to the Bancorp’s ability to manage the mix of deposits to fund the balance sheet with additional core deposits, while reducing reliance on certificates of deposits, and tax benefits from the investment in municipal securities. See Table 1 at the end of this press release for a reconciliation of the tax-adjusted net interest margin to the GAAP net interest margin.
• Unrealized losses on the securities portfolio: Accumulated other comprehensive losses increased to $57.8 million during the quarter. However, during the quarter, securities portfolio cashflows from sales and regular amortization of the portfolio of $50 million were used to fund internally generated loan growth. The yield on the securities portfolio improved on a year-to-date basis to 2.12% at June 30, 2022, up from 1.99% at June 30, 2021. The securities portfolio also generated gains of $638 thousand from the sale of securities for the six months ended June 30, 2022. The effective duration of the securities portfolio was 6.8 years on June 30, 2022. Management continues to actively monitor the securities portfolio and does not currently anticipate the need to realize losses from the securities portfolio, and it is unlikely the Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.
• Gain on sale of loans: Increases in mortgage rates have dampened demand and slowed the sale of fixed rate mortgage loans into the secondary market. As a result, gains from the sale of loans for the six-months ended June 30, 2022, totaled $898 thousand, down from $3.2 million for the six-months ended June 30, 2021. During the six months ended June 30, 2022, the Bancorp originated $29.2 million in new fixed rate mortgage loans for sale, compared to $85.9 million during the six months ended June 30, 2021. During the six months ended June 30, 2022, the Bancorp originated $50.0 million in new mortgage loans retained in its portfolio, compared to $33.7 million during the six months ended June 30, 2021.
• Building a digital-forward foundation: Primary focus remains on enhancing the customer experience and managing risk through our digital platforms. The Bank is planning enhancements to customer acquisition, onboarding, and servicing platforms to enhance customer experience and drive efficiency in these areas.
• Optimizing the banking center footprint: Following the previous year’s successful closure of one banking center and the donation and leaseback of another, progress during the quarter continued towards the closure of two additional banking centers which closed on July 1st. The remaining 29 locations are being analyzed for footprint optimization opportunities, with additional locations showing the potential for reducing operating overhead. These efforts are reducing fixed costs, and allowing for redeployment of a portion of occupancy expenses into building a digital-forward foundation to meet customer expectations will continue Finward’s digital-first future.
• Asset Quality: At June 30, 2022, the allowance for loan losses totaled $13.4 million and is considered adequate by management. For the six months ended June 30, 2022, recoveries, net of charge-offs, totaled $63 thousand. On a non-GAAP basis, the allowance for loan losses as a percentage of total loans was 1.45% at June 30, 2022, and the allowance for loan losses as a percentage of non-performing loans, or coverage ratio, was 212.7% at June 30, 2022. See Table 1 at the end of this press release for a reconciliation of the adjusted allowance for loan losses to total loans and coverage ratio to the related GAAP ratios.
• Capital Adequacy: As of June 30, 2022, the Bancorp’s tier 1 leverage capital to adjusted average assets ratio totaled 7.8%, and under all regulatory capital requirements, continues to be considered well capitalized. Tangible book value per share decreased to $25.24 at June 30, 2022, from $30.01 as of March 31, 2022 (a non-GAAP measure). The decrease is due to continued accumulated other comprehensive losses on the security portfolio as noted above. Excluding accumulated other comprehensive losses, tangible book value per share increased to $38.69 as of June 30, 2022, from $37.80 as of March 31, 2022 (a non-GAAP measure). Tangible capital represented 5.2% of tangible assets at June 30, 2022 (a non-GAAP measure). Tangible capital, excluding accumulated other comprehensive losses, was 8.0% at June 30, 2022 (a non-GAAP measure). See Table 1 at the end of this press release for a reconciliation of the tangible book value per share, tangible book value per share adjusted for accumulated other losses, tangible capital as a percentage of tangible assets, and tangible capital as a percentage of tangible assets adjusted for accumulated other comprehensive losses to the related GAAP ratios.

“Despite the rapidly changing economic environment, we improved our core net income and net interest margin during the second quarter and made significant progress in rebalancing our earning assets. Changes in consumer demands for fixed rate mortgages has slowed our ability to generate gains from the sales of loans; however, we continue to grow our residential real estate loan portfolio. Cashflows from our securities portfolio, along with securities sales in a volatile market and growth in core deposits, have supported strong commercial loan growth with commercial real estate loans increasing by 12.6% year-to-date. We are actively managing our expense base to achieve greater economies of scale, and continue to perform at levels that generate capital and allow for the ongoing investments in the digital transformation process for Peoples Bank and Finward Bancorp,” said Benjamin Bochnowski, president and chief executive officer.

Net Interest Income

Net interest income was $32.8 million for the six months ended June 30, 2022, an increase of $8.9 million (37.3%), compared to $23.9 million for the six months ended June 30, 2021. The Bancorp’s net interest margin on a tax-adjusted basis was 3.70% for the six months ended June 30, 2022, compared to 3.51% for the six months ended June 30, 2021.

Net interest income was $17.3 million for the quarter ended June 30, 2022, an increase of $5.4 million (45.7%), compared to $11.9 million for the quarter ended June 30, 2021. The Bancorp’s net interest margin was 3.59% for the quarter ended June 30, 2022, compared to 3.22% for the quarter ended June 30, 2021. The Bancorp’s net interest margin on a tax-adjusted basis was 3.78% for the quarter ended June 30, 2022, compared to 3.42% for the quarter ended June 30, 2021. The increased net interest income and net interest margin for the three and the six months was primarily the result of the increased earnings assets acquired through the Royal acquisition, the ability to reallocate securities cashflows into organic loan growth, and maintaining lower interest expense.

Noninterest Income

The decrease in gain on sale of loans is the result of significant refinance activity which started in 2020 and continued into 2021 due to the economic and low-rate environment, which resulted in more loans originated and sold. We expect demand for fixed rate mortgage loans held-for-sale in the secondary market to be lower as borrowing rates on loans increase. The increase in fees and service charges is primarily the result of the acquisition of Royal and the resultant increase in our customer base.

Noninterest Expense

The increase in compensation and benefits is primarily the result of the Royal acquisition, management’s continued focus on talent management, and wage inflation. The increase in occupancy and equipment expense is primarily related to the Royal acquisition and higher operating costs. Marketing expenses have increased to enhance brand recognition in new markets and gain more wallet share. The increase in federal deposit insurance premiums is primarily the result of growth of the bank’s average assets. The increase in data processing expense for the six-month period ending June 30, 2022 is primarily the result of data conversion expenses related to the acquisition of Royal, increased system utilization due to growth of the Bank, and continued investment in technological advancements such as Salesforce and nCino. The increase in other operating expenses is primarily the result of one-time expenses related to the acquisition of Royal, continued investments in strategic initiatives focusing on growth of the organization, and inflationary pressures.

Income Tax Expense
The provision for income taxes was $862 thousand for the six months ended June 30, 2022, as compared to $1.1 million for the six months ended June 30, 2021. The effective tax rate was 11.6% for the six months ended June 30, 2022, as compared to 12.3% for the quarter ended June 30, 2021. The Bancorp’s lower current period effective tax rate is a result of a greater increase in tax preferred income relative to earnings. The provision for income taxes was $587 thousand for the three months ended June 30, 2022, as compared to $395 thousand for the three months ended June 30, 2021. The effective tax rate was 11.7% for the three months ended June 30, 2022, as compared to 10.0% for the three months ended June 30, 2021. The Bancorp’s higher current quarter effective tax rate is a result of higher earnings relative to tax preferred income.

Lending
The Bancorp’s loan portfolio totaled $1.5 billion on June 30, 2022, compared to $966.7 million on December 31, 2021, an increase of $507.7 million or 52.5%. The increase is primarily the result of the Royal acquisition, as well as organic loan portfolio growth. During the first six months of 2022 the Bancorp originated $196.9 million in new commercial loans, compared to $178.1 million during the six months ended June 30, 2021. During the six months ended June 30, 2022, the Bancorp originated $29.2 million in new fixed rate mortgage loans for sale, compared to $85.9 million during the six months ended June 30, 2021. During the six months ended June 30, 2022, the Bancorp originated $50.0 million in new mortgage loans retained in its portfolio, compared to $33.7 million during the six months ended June 30, 2021. The loan portfolio represents 76.0% of earning assets and is comprised of 63.1% commercial related credits.

Asset Quality
At June 30, 2022, non-performing loans totaled $10.0 million, compared to $7.3 million at December 31, 2021, an increase of $2.8 million or 38.0%. The Bancorp’s ratio of non-performing loans to total loans was 0.68% at June 30, 2022, compared to 0.76% at December 31, 2021. The Bancorp’s ratio of non-performing assets to total assets was 0.53% at June 30, 2022, compared to 0.51% at December 31, 2021.

For the six months ended June 30, 2022, no provisions to the ALL were required, compared to $1.2 million for the six months ended June 30, 2021, a decrease of $1.2 million. For the three months ended June 30, 2022, no provisions to the ALL were required, compared to $576 thousand for the three months ended June 30, 2021, a decrease of $576 thousand. For the six months ended June 30, 2022, recoveries, net of charge-offs, totaled $63 thousand. For the three months ended June 30, 2022, recoveries, net of charge-offs, totaled $19 thousand. At June 30, 2022, the allowance for loan losses totaled $13.4 million and is considered adequate by management. The allowance for loan losses as a percentage of total loans was 0.91% at June 30, 2022, compared to 1.38% at December 31, 2021. The allowance for loan losses as a percentage of non-performing loans, or coverage ratio, was 133.8% at June 30, 2022, compared to 183.8% at December 31, 2021.

Management also considers reserves that are not part of the ALL that have been established from acquisition activity. 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. Additionally, the Bancorp has acquired loans where there was no evidence of credit quality deterioration since origination and has marked these loans to their fair values. When these additional reserves are included on a non-GAAP basis, the allowance for loan losses as a percentage of total loans was 1.45% at June 30, 2022, and the allowance for loan losses as a percentage of non-performing loans, or coverage ratio, was 212.7% at June 30, 2022. See Table 1 below for a reconciliation of these non-GAAP figures to the Bancorp’s GAAP figures.

Investing
The Bancorp’s securities portfolio totaled $400.5 million at June 30, 2022, compared to $526.9 million at December 31, 2021, a decrease of $126.4 million or 24.0%. The decrease is attributable to increased unrealized losses within the portfolio and the use of cashflows from the securities portfolio to fund loan growth. The securities portfolio represents 20.6% of earning assets and provides a consistent source of liquidity and earnings to the Bancorp. Cash and cash equivalents totaled $79.3 million on June 30, 2022, compared to $33.2 million on December 31, 2021, an increase of $46.1 million or 139.0%. The increase in cash and cash equivalents is primarily the result of the timing of investments in interest earnings assets relative to the inflow and outflow of deposits and repurchase agreements.

Funding
On June 30, 2022, core deposits totaled $1.5 billion, compared to $1.2 billion on December 31, 2021, an increase of $323.8 million or 27.1%. The increase is the result of the Royal acquisition, as well as the Bancorp’s efforts to maintain and grow core deposits. Core deposits include checking, savings, and money market accounts and represented 79.2% of the Bancorp’s total deposits at June 30, 2022. During the first six months of 2022, balances for checking, savings, and money market accounts increased. The increase in these core deposits is a result of the Royal acquisition, as well as management’s sales efforts along with customer preferences for competitively priced short-term liquid investments. On June 30, 2022, balances for certificates of deposit totaled $398.4 million, compared to $239.2 million on December 31, 2021, an increase of $159.2 million or 66.5%. The increase related to certificate of deposits is related to the Royal acquisition, which added $195.2 million of certificates at the time of acquisition. In addition, on June 30, 2022, borrowings and repurchase agreements totaled $24.5 million, compared to $14.6 million at December 31, 2021, an increase of $10.0 million or 68.3%. The increase in short-term borrowings was the result of cyclical inflows and outflows of interest-earning assets and interest-bearing liabilities.

Capital Adequacy
At June 30, 2022, shareholders’ equity stood at $136.7 million, a decrease of $20.0 million, or 12.7% from December 31, 2021. This decrease is the result of net unrealized losses in the securities portfolio which resulted in an accumulated comprehensive loss of $57.8 million at June 30, 2022. The Bank’s regulatory capital ratios at June 30, 2022, were 11.4% for total capital to risk-weighted assets, 10.5% for both common equity tier 1 capital to risk-weighted assets and tier 1 capital to risk-weighted assets, and 7.8% for tier 1 leverage capital to adjusted average assets. Under all regulatory capital requirements, the Bank is considered well capitalized. Tangible capital represented 5.2% of tangible assets at June 30, 2022.The tangible book value of the Bancorp’s stock stood at $25.24 per share at June 30, 2022, compared to $40.91 at December 31, 2021, a decrease of $15.67 or 38.3%. This is primarily the result of increased net unrealized loss on securities available-for-sale, net of reclassification and tax effects. Management continues to actively monitor the securities portfolio and does not currently anticipate the need to realize losses from the securities portfolio that would result in reductions to retained earnings.

Disclosures Regarding Non-GAAP Financial Measures
Reported amounts are presented in accordance with GAAP. In this press release the Bancorp also is providing certain financial measures that are identified as non-GAAP. The Bancorp’s management believes that the non-GAAP information, which consists of core net income, core diluted earnings per share, core return on equity, core return on assets, core pre-provision net revenue, core pre-provision net revenue/average assets, tangible assets (excluding PPP), tangible common equity, tangible common equity/tangible assets (excluding PPP), average tangible common equity, core yield on loans, core noninterest expense, core noninterest expense/average assets, core efficiency ratio, core earnings, adjusted allowance for loan loss to total loans, adjusted allowance for loan loss to nonperforming loans, adjusted allowance for loan loss to total loans (excluding PPP), core revenue, adjusted net interest margin, and reported net income excluding non-core operations, which can vary from period to period, provides a better comparison of period to period operating performance. Additionally, the Bancorp believes this information is utilized by regulators and market analysts to evaluate a company’s financial condition and, therefore, such information is useful to investors. These disclosures should not be viewed as a substitute for financial results in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. Refer to Table 1 – Reconciliation of Non-GAAP Financial Measures at the end of this document for a reconciliation of the non-GAAP measures identified herein and their most comparable GAAP measures.

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 29 locations in Lake and Porter Counties in Northwest Indiana and Chicagoland. Finward Bancorp’s common stock is quoted on the NASDAQ Stock Market, LLC 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: difficulties and delays in integrating Finward’s and Royal’s businesses or fully realizing cost savings and other benefits; business disruption following the merger; any continuing risks and uncertainties for our business, results of operations, and financial condition relating to the COVID-19 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; further deterioration in the market value of securities held in the Bancorp’s investment securities portfolio, whether as a result of macroeconomic factors or otherwise; customer acceptance of the Bancorp’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 matters attributable to Finward or any person acting on its 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.

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