FINWARD BANCORP Summary
Finward Bancorp (the "Bancorp") is a financial holding company registered with theBoard of Governors of theFederal Reserve System .Peoples Bank (the "Bank"), anIndiana commercial bank, andNWIN Risk Management, Inc. , a captive insurance company, are wholly-owned subsidiaries of the Bancorp. The Bancorp has no other business activity other than being a holding company for the Bank andNWIN Risk Management, Inc. The following management's discussion and analysis presents information concerning our financial condition as ofMarch 31, 2022 , as compared toDecember 31, 2021 , and the results of operations for the three months endingMarch 31, 2022 , andMarch 31, 2021 . This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . AtMarch 31, 2022 , the Bancorp had total assets of$2.1 billion , total loans receivable, net of deferred fees and costs of$1.4 billion and total deposits of$1.9 billion . Stockholders' equity totaled$157.6 million or 7.51% of total assets, with a book value per share of$36.71 . Net income for the three months endedMarch 31, 2022 , was$2.1 million , or$0.53 earnings per common share for both basic and diluted calculations. For the three months endedMarch 31, 2022 , the return on average assets (ROA) was 0.44%, while the return on average stockholders' equity (ROE) was 5.01%. Recent Developments Acquisition ofRoyal Financial, Inc. OnJanuary 31, 2022 , the Bancorp completed its acquisition ofRoyal Financial, Inc. ("RYFL") pursuant to an Agreement and Plan of Merger datedJuly 28, 2021 (the "Merger Agreement") between the Bancorp and RYFL. Pursuant to the terms of the Merger Agreement, RYFL merged with and into the Bancorp, with the Bancorp as the surviving corporation (the "RYFL Merger"). Simultaneous with the RYFL Merger,Royal Savings Bank , anIllinois state-chartered savings bank and wholly-owned subsidiary of RYFL, merged with and into the Bank, with the Bank as the surviving institution. 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 and no stock consideration for each share of RYFL common stock. 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 RYFL Merger. Based on theJanuary 28, 2022 closing price of$47.75 per share of Finward common stock, the transaction had an implied valuation of approximately$56.7 million . The acquisition further expanded the Bank's banking center network inCook County andDuPage County, Illinois , expanding the Bank's full-service retail banking network.
Financial Condition
During the three months endedMarch 31, 2022 , total assets increased by$477.1 million (29.4%), with interest-earning assets increasing by$419.5 million (27.5%). Interest-earning assets totaled$1.9 billion atMarch 31, 2022 , and$1.5 billion atDecember 31, 2021 . Earning assets represented 92.6% of total assets atMarch 31, 2022 , and 94.0% of total assets atDecember 31, 2021 . The increase in total assets and interest earning assets for the three months was primarily the result of the acquisition of Royal. Net loans receivable totaled$1.4 billion atMarch 31, 2022 , compared to$966.7 million atDecember 31, 2021 . The loan portfolio, which is the Bancorp's largest asset, is the primary source of both interest and fee income. The Bancorp's lending strategy emphasizes quality loan growth, product diversification, and competitive and profitable pricing. 28 --------------------------------------------------------------------------------
The Bancorp's end-of-period loan balances were as follows:
(unaudited)
March 31, December 31,
(Dollars in thousands) 2022 2021
Balance % Loans Balance % Loans
Residential real estate $ 444,753 31.0 % 260,134 33.0 %
Home equity 34,284 2.4 % 34,612 5.4 %
Commercial real estate 408,375 28.5 % 317,145 31.2 %
Construction and land development 150,810 10.5 % 123,822 9.7 %
Multifamily 234,267 16.4 % 61,194 5.7 %
Consumer 924 0.1 % 582 0.1 %
Manufactured Homes 38,636 2.7 % 37,887 1.8 %
Commercial business 112,396 7.8 % 115,772 11.4 %
Government 8,176 0.6 % 8,991 1.7 %
Loans receivable 1,432,621 100.0 % 960,139 100.0 %
Plus
Net deferred loans origination
costs 6,700 6,810
Undisbursed loan funds 407 (229 ) Loans receivable, net of deferred fees and costs$ 1,439,728 $ 966,720 Adjustable rate loans / loans receivable$ 654,902 45.7 %$ 542,975 56.6 % (unaudited) March 31, December 31, 2022 2021 Loans receivable to total assets 68.6 % 59.6 % Loans receivable to earning assets 74.1 % 63.4 % Loans receivable to total deposits 76.0 % 67.4 % The following table sets forth certain information atMarch 31, 2022 , regarding the dollar amount of loans in the Bancorp's portfolio based on their contractual terms to maturity. Demand loans, loans having no schedule of repayment and no stated maturity, and overdrafts are reported as due in one year or less. Contractual principal repayments of loans do not necessarily reflect the actual term of the loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Bancorp the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the property subject to the mortgage. The amounts are stated in thousands (000's). Maturing After one After five within but within but within After one year five years fifteen years fifteen years Total Residential real estate$ 9,363 $ 34,561 $ 107,164 $ 293,665 444,753 Home equity 3,767 21,328 8,826 363 34,284 Commercial real estate 22,631 111,991 270,678 3,075 408,375 Construction and land development 29,207 41,187 63,310 17,106 150,810 Multifamily 16,915 104,713 110,556 2,083 234,267 Farmland - - - - - Consumer 35 861 28 - 924 Manufactured Homes - 59 10,760 27,817 38,636 Commercial business 44,914 51,377 15,585 520 112,396 Government 195 3,211 4,770 - 8,176
Total loans receivable
$ 344,629 $ 1,432,621 The Bancorp is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the three months endedMarch 31, 2022 , the Bancorp originated$15.7 million in new fixed rate mortgage loans for sale, compared to$49.1 million during the three months endedMarch 31, 2021 . Net gains realized from the mortgage loan sales totaled$607 thousand for the three months endedMarch 31, 2022 , compared to$2.0 million for the three months endedMarch 31, 2021 . AtMarch 31, 2022 , the Bancorp had$1.4 million in loans that were classified as held for sale, compared to$5.0 million atDecember 31, 2021 . Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status. AtMarch 31, 2022 , all non-performing loans are also accounted for on a non-accrual basis, except for two commercial business loans totaling$213 thousand , two commercial real estate loans totaling$163 thousand , and two residential real estate loans totaling$117 thousand that remained accruing and more than 90 days past due. The Bancorp at times will continue to classify loans as accruing, despite being over 90 days past due, for short periods of time when management has reason to believe payments are in process of being collected. 29 --------------------------------------------------------------------------------
The Bancorp's nonperforming loans are summarized below:
(Dollars in thousands) (unaudited) Loan Segment March 31, 2022 December 31, 2021 Residential real estate $ 5,827 $ 4,682 Home equity 620 657 Commercial real estate 1,426 1,031 Construction and land development - - Multifamily 447 455 Commercial business 588 436 Consumer - - Manufactured homes - - Government - - Total $ 8,908 $ 7,261 Nonperforming loans to total loans 0.62 % 0.75 % Nonperforming loans to total assets 0.42 % 0.45 %
Substandard loans include non-performing loans and potential problem loans,
where information about possible credit issues or other conditions causes
management to question the ability of such borrowers to comply with loan
covenants or repayment terms. No loans were internally classified as doubtful or
loss at
The Bancorp's substandard loans are summarized below:
(Dollars in thousands) (unaudited) Loan Segment March 31, 2022 December 31, 2021 Residential real estate $ 6,631 $ 3,722 Home equity 635 632 Commercial real estate 6,451 3,562 Construction and land development - - Multifamily 3,030 384 Commercial business 396 387 Consumer - - Manufactured homes - - Government - - Total. $ 17,143 $ 8,687
The increase in substandard loans is the result of loans acquired pursuant to the RYFL acquisition.
In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of special mention loans. Special mention loans represent loans management is closely monitoring due to one or more factors that may cause the loan to become classified as substandard.
The Bancorp's special mention loans are summarized below:
(Dollars in thousands) (unaudited)
Loan Segment March 31, 2022 December 31, 2021
Residential real estate $ 2,308 $ 2,940
Home equity 415 415
Commercial real estate 11,391 12,011
Construction and land development 4,403 3,630
Multifamily 1,532 153
Commercial business 3,395 1,915
Consumer - -
Manufactured homes 59 59
Government - -
Total $ 23,503 $ 21,123
30
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A loan is considered impaired when, based on current information and events, it
is probable that a borrower will be unable to pay all amounts due according to
the contractual terms of the loan agreement. Typically, management does not
individually classify smaller-balance homogeneous loans, such as residential
mortgages or consumer loans, as impaired, unless they are troubled debt
restructurings.
Purchased loans acquired in a business combination are recorded at estimated
fair value on their purchase date. Purchased loans with evidence of credit
quality deterioration since origination are considered purchased credit impaired
loans. Expected future cash flows at the purchase date in excess of the fair
value of loans are recorded as interest income over the life of the loans if the
timing and amount of the future cash flows is reasonably estimable ("accretable
yield"). The difference between contractually required payments and the cash
flows expected to be collected at acquisition is referred to as the
non-accretable difference and represents probable losses in the portfolio. In
determining the acquisition date fair value of purchased credit impaired loans,
and in subsequent accounting, the Bancorp aggregates these purchased loans into
pools of loans by common risk characteristics, such as credit risk rating and
loan type. Subsequent to the purchase date, increases in cash flows over those
expected at the purchase date are recognized as interest income prospectively.
Subsequent decreases to the expected cash flows will generally result in a
provision for loan losses.
The Bancorp's impaired loans, including purchased credit impaired loans, are summarized below:
(Dollars in thousands) (unaudited)
Loan Segment March 31, 2022 December 31, 2021
Residential real estate $ 3,661 $ 1,771
Home equity 269 284
Commercial real estate 4,461 1,600
Construction and land development 804 -
Multifamily 3,302 556
Commercial business 1,562 1,597
Consumer 21 -
Manufactured homes - -
Government - -
Total $ 14,080 $ 5,808
The increase in impaired loans is the result of purchase credit impaired loans acquired pursuant to the RYFL acquisition.
At times, the Bancorp will modify the terms of a loan to forego a portion of interest or principal or reduce the interest rate on the loan to a rate materially less than market rates, or materially extend the maturity date of a loan as part of a troubled debt restructuring. The valuation basis for the Bancorp's troubled debt restructurings is based on the present value of expected future cash flows; unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation. The Bancorp's troubled debt restructured loans are summarized below: (Dollars in thousands) (unaudited) Loan Segment March 31, 2022 December 31, 2021 Residential real estate $ 532 $ 342 Home equity 88 83 Commercial real estate 645 747 Construction and land development - - Multifamily - - Commercial business 681 694 Consumer - - Manufactured homes - - Government - - Total $ 1,946 $ 1,866 AtMarch 31, 2022 , management is of the opinion that there are no loans, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure. Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources. 31
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The allowance for loan losses (ALL) is a valuation allowance for probable
incurred credit losses, increased by the provision for loan losses, and
decreased by charge-offs net of recoveries. A loan is chargedoff against the
allowance by management as a loss when deemed uncollectible, although collection
efforts continue and future recoveries may occur. The determination of the
amounts of the ALL and provisions for loan losses is based on management's
current judgments about the credit quality of the loan portfolio with
consideration given to all known relevant internal and external factors that
affect loan collectability as of the reporting date. The appropriateness of the
current period provision and the overall adequacy of the ALL are determined
through a disciplined and consistently applied quarterly process that reviews
the Bancorp's current credit risk within the loan portfolio and identifies the
required allowance for loan losses given the current risk estimates.
The Bancorp's provision for loan losses for the three months ended are
summarized below:
(Dollars in thousands)
(unaudited)
Loan Segment March 31, 2022 March 31, 2021
Residential real estate $ (8 ) $ (41 )
Home equity (3 ) 34
Commercial real estate 15 320
Construction and land development 16 182
Multifamily 41 54
Commercial business (99 ) 36
Consumer 38 (7 )
Manufactured homes - -
Government - -
Total $ - $ 578
The Bancorp's charge-off and recovery information is summarized below:
(Dollars in thousands) (unaudited)
As of March 31, 2022
Loan Segment Charge-off Recoveries Net Charge-offs
Residential real estate $ - $ 21 $ 21
Home equity - - -
Commercial real estate - - -
Construction and land development - - -
Multifamily - - -
Commercial business - 31 31
Consumer (10 ) 2 (8 )
Manufactured homes - -
Government - - -
Total $ (10 ) $ 54 $ 44
The Bancorp's charge-off and recovery information is summarized below:
(Dollars in thousands) (unaudited)
As of March 31, 2021
Loan Segment Charge-off Recoveries Net Charge-offs
Residential real estate $ (4 ) $ 10 $ 6
Home equity (1 ) - (1 )
Commercial real estate - - -
Construction and land development - - -
Multifamily - - -
Farmland - - -
Commercial business - 8 8
Consumer (6 ) 4 (2 )
Manufactured homes - -
Government - - -
Total $ (11 ) $ 22 $ 11
32
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The Bancorp's allowance to total loans and non-performing loans are
summarized below:
(Dollars in thousands) (unaudited)
March 31, 2022 December 31, 2021
Allowance for loan losses $ 13,387 $ 13,343
Total loans $ 1,439,728 $ 966,720
Non-performing loans $ 8,908 $ 7,261
ALL-to-total loans 0.93 % 1.38 %
ALL-to-non-performing loans (coverage ratio) 150.3 % 183.8 %
The ALL provisions take into consideration management's current judgments about
the credit quality of the loan portfolio, loan portfolio balances, changes in
the portfolio mix and local economic conditions. In determining the provision
for loan losses for the current period, management has considered risks
associated with the local economy, changes in loan balances and mix, and asset
quality.
In addition, management considers additional reserves 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. At March 31, 2022 , total
purchased credit impaired loan reserves totaled $2.0 million compared to $1.4
million at December 31, 2021 . 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. As part of the fair value of loans
receivable, a net fair value discount was established for loans acquired and
totaled $6.4 million at March 31, 2022 , compared to $1.1 million at December 31,
2021 . Details on these fair value marks and the additional reserves created can
be found in Note 5, Loans Receivable.
The primary objective of the Bancorp's investment portfolio is to provide for
the liquidity needs of the Bancorp and to contribute to profitability by
providing a stable flow of dependable earnings. Funds are generally invested in
federal funds, interest bearing balances in other financial institutions, U.S.
government securities, federal agency obligations, obligations of state and
local municipalities and corporate securities. The securities portfolio, all of
which is designated as available-for-sale, totaled $464.3 million at March 31,
2022 , compared to $526.9 million at December 31, 2021 , an increase of $62.6
million (11.9%). The decrease is attributable to increased unrealized losses
within the portfolio and a return of liquidity from the securities portfolio. At
March 31, 2022 , the securities portfolio represented 23.9% of interest-earning
assets and 22.1% of total assets compared to 34.6% of interest-earning assets
and 32.5% of total assets at December 31, 2021 .
The Bancorp's end-of-period investment portfolio and other short-term investments and stock balances were as follows:
(unaudited)
March 31, December 31,
(Dollars in thousands) 2022 2021
Balance % Securities Balance % Securities
U.S. government sponsored entities$ 8,202 1.8 %$ 8,669 1.6 % U.S. treasury securities 199 0.1 % 400 0.1 % Collateralized mortgage obligations and residential mortgage-backed securities 164,123 35.3 % 184,701 35.1 % Municipal securities 290,824 62.6 % 332,127 63.0 % Collateralized debt obligations 972 0.2 % 992 0.2 % Total securities available-for-sale$ 464,320 100.0 %$ 526,889 100.0 % (unaudited) March 31, December 31, YTD (Dollars in thousands) 2022 2021 Change Balance Balance $ % Interest bearing deposits in other financial institutions$ 31,420 $ 19,987 $ 11,433 57.2 % Fed funds sold 1,819 464 1,355 292.0 % Certificates of deposit in other financial institutions 1,731 1,709 22 1.3 % Federal Home Loan Bank stock 3,038 3,247 (209 ) -6.4 %
The net increase in interest bearing deposits in other financial institutions and fed funds sold is primarily the result of the RYFL acquisition.
33
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Deposits are a fundamental and cost-effective source of funds for lending and
other investment purposes. The Bancorp offers a variety of products designed to
attract and retain customers, with the primary focus on building and expanding
relationships.
The Bancorp's end-of-period deposit portfolio balances were as follows:
(unaudited)
March 31, December 31, YTD
(Dollars in thousands) 2022 2021 Change
Balance Balance $ %
Checking $ 731,340 $ 629,038 $ 102,302 16.3 %
Savings 425,634 293,976 131,658 44.8 %
Money market 307,850 271,970 35,880 13.2 %
Certificates of deposit 430,387 239,217 191,170 79.9 %
Total deposits $ 1,895,211 $ 1,434,201 $ 461,010 32.1 %
The following table presents the average daily amount of deposits and average
rates paid on such deposits for the periods indicated. The amounts are stated
inthousands (000's).
March 31, 2022
(unaudited) December 31, 2021
Amount Rate % Amount Rate %
Noninterest bearing demand deposits $ 343,176 - $ 280,900 -
Interest bearing demand deposits 336,441 0.06 297,012 0.08
MMDA accounts 308,377 0.11 253,468 0.13
Savings accounts 388,087 0.05 277,839 0.06
Certificates of deposit 361,539 0.16 271,882 0.46
Total deposits $ 1,737,620 0.08 $ 1,381,101 0.18
As of March 31, 2022 , and December 31, 2021 , approximately $549.7 million and
$452.0 million , respectively, of our deposit portfolio was uninsured. The
uninsured amounts are estimates based on the methodologies and assumptions used
for the Bank's regulatory reporting requirements.
The overall increase in total deposits is a result of the RYFL acquisition, as well as management's sales efforts along with customer preferences for competitively priced short-term liquid investments.
The Bancorp's borrowed funds are primarily used to fund asset growth not
supported by deposit generation. The Bancorp's end-of-period borrowing balances
were as follows:
(unaudited)
March 31, December 31, YTD
(Dollars in thousands) 2022 2021 Change
Balance Balance $ %
Repurchase agreements $ 23,239 $ 14,581 $ 8,658 59.4 %
Borrowed funds 5 - 5 100.0 %
Total borrowed funds $ 23,244 $ 14,581 $ 8,663 59.4 %
Repurchase agreements increased as part of normal account fluctuations within that product line.
Liquidity and Capital Resources
For the Bancorp, liquidity management refers to the ability to generate
sufficient cash to fund current loan demand, meet deposit withdrawals, and pay
dividends and operating expenses. Because profit and liquidity are often
conflicting objectives, management attempts to maximize the Bank's net interest
margin by making adequate, but not excessive, liquidity provisions. Furthermore,
funds are managed so that future profits will not be significantly impacted as
funding costs increase.
Changes in the liquidity position result from operating, investing and financing
activities. Cash flows from operating activities are generally the cash effects
of transactions and other events that enter into the determination of net
income. The primary investing activities include loan originations, loan
repayments, investments in interest bearing balances in other financial
institutions, and the purchase, sale, and maturity of investment securities.
Financing activities focus almost entirely on the generation of customer
deposits. In addition, the Bancorp utilizes borrowings (i.e., repurchase
agreements, FHLB advances and federal funds purchased) as a source of funds.
34-------------------------------------------------------------------------------- During the three months endedMarch 31, 2022 , cash and cash equivalents increased by$21.3 million compared to a$48.1 million increase for the three months endedMarch 31, 2021 . The primary sources of cash and cash equivalents were cash and cash equivalents from acquisition activity, the sale of loans originated for sale, proceeds from the sale of securities, and proceeds from the maturity and paydown of securities. The primary uses of cash and cash equivalents were the purchase of securities, loan originations, and change in deposits. Cash provided by operating activities totaled$722 thousand for the three months endedMarch 31, 2022 , compared to cash provided of$16.4 million for the three months endedMarch 31, 2021 . Cash provided from operating activities was primarily a result of net income and sale of loans originated for sale, offset by loans originated for sale and net change in accrued expenses and other liabilites. Cash inflows from investing activities totaled$27.2 million for the current period, compared to cash outflows of$27.6 million for the three months endedMarch 31, 2021 . Cash inflows from investing activities for the current three months were primarily related to the cash and cash equivalents from acquisition activity, net, and proceeds from the sales and maturities of securities, offset against the net change in loans receivable and purchase of securiites. Net cash outflows from financing activities totaled$6.6 million during the current period compared to net cash provided of$59.3 million for the three months endedMarch 31, 2021 . The net cash outflows from financing activities were primarily a result of net change in deposits, offset against the change in other borrowed funds. On a cash basis, the Bancorp paid dividends on common stock of$1.1 million for the three months endedMarch 31, 2022 andMarch 31, 2021 . AtMarch 31, 2022 , outstanding commitments to fund loans totaled$241.7 million . Approximately 53.0% of the commitments were at variable rates. Standby letters of credit, which are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party, totaled$11.5 million atMarch 31, 2022 . Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity. Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the three months endedMarch 31, 2022 , stockholders' equity increased by$1.0 million (0.7%). During the three months endedMarch 31, 2022 , stockholders' equity was primarily increased by additional paid in capital related to the RYFL acquisition, offset against increased unrealized losses on available for sale securities. Increasing stockholders' equity was net income of$2.1 million . OnApril 24, 2014 the Bancorp's Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp's outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased under the program during the first three months of 2022 or 2021. During 2022, 10,863 restricted stock shares vested under the Bancorp's 2015 Stock Option and Incentive Plan outlined in Note 9 of the financial statements, of which 2,336 of these shares were withheld in the form of a net surrender to cover the withholding tax obligations of the vesting employees. The repurchase of these surrendered shares is considered outside of the scope of the formal stock repurchase program. The Bank is subject to risk-based capital guidelines adopted by theFDIC . The regulations divide capital into multiple tiers. The first tier (Common Equity Tier 1 Capital) includes common shareholders' equity, after deductions for various items including goodwill and certain other intangible assets, and after certain other adjustments. Common Equity Tier 1 Capital also includes accumulated other comprehensive income (for organizations that do not make opt-out elections). The next tier (Tier 1 Capital) is comprised of Common Equity Tier 1 Capital plus other qualifying capital instruments such as perpetual noncumulative preferred stock and junior subordinated debt issued to trusts, and other adjustments. The third tier (Tier 2 Capital) includes instruments such as subordinated debt that have a minimum original maturity of at least five years and are subordinated to the claims of depositors and general creditors, total capital minority interest not included in Tier 1 Capital, and limited amounts of the allowance for loan losses, less applicable regulatory adjustments and deductions. The Bank are required to maintain a Common Equity Tier 1 Capital ratio of 4.5%, a Tier 1 Capital ratio of 6%, and a Total Capital ratio (comprised of Tier 1 Capital plus Tier 2 Capital) of 8%. In addition, the capital regulations provide for a minimum leverage ratio (Tier 1 capital to adjusted average assets) of 4%. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions by the institution and certain discretionary bonus payments to management if an institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. 35 -------------------------------------------------------------------------------- The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the FRB to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries. However, under the FRB's "Small Bank Holding Company " exemption from consolidated bank holding company capital requirements, bank holding companies and savings and loan holding companies with less than$3 billion in consolidated assets, such as the Bancorp, are exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases.
During the three months ended
In addition, the following table shows that, at
(Dollars in millions) Minimum Required To Be
Minimum Required For Well Capitalized Under Prompt
Actual Capital Adequacy Purposes Corrective Action Regulations
At March 31, 2022 Amount Ratio Amount Ratio Amount Ratio
Common equity tier 1
capital to
risk-weighted assets $ 156.8 10.9 % $ 65.0 4.5 % $ 93.9 6.5 %
Tier 1 capital to
risk-weighted assets $ 156.8 10.9 % $ 86.7 6.0 % $ 115.6 8.0 %
Total capital to
risk-weighted assets $ 170.2 11.8 % $ 115.6 8.0 % $ 144.5 10.0 %
Tier 1 capital to
adjusted average
assets $ 156.8 8.2 % $ 77.7 4.0 % $ 97.2 5.0 %
(Dollars in millions)
Minimum Required To Be
Minimum Required For Well Capitalized Under Prompt
Actual Capital Adequacy Purposes Corrective Action Regulations
At December 31, 2021 Amount Ratio Amount Ratio Amount Ratio
Common equity tier 1
capital to
risk-weighted assets $ 136.6 13.0 % $ 47.4 4.5 % N/A N/A
Tier 1 capital to
risk-weighted assets $ 136.6 13.0 % $ 63.3 6.0 % N/A N/A
Total capital to
risk-weighted assets $ 149.8 14.2 % $ 84.3 8.0 % N/A N/A
Tier 1 capital to
adjusted average
assets $ 136.6 8.6 % $ 64.2 4.0 % N/A N/A
The Bancorp's ability to pay dividends to its shareholders is entirely dependent
upon the Bank's ability to pay dividends to the Bancorp. Under Indiana law, the
Bank may pay dividends from its undivided profits (generally, earnings less
losses, bad debts, taxes and other operating expenses) as is considered
expedient by the Bank's Board of Directors. However, the Bank must obtain the
approval of the Indiana Department of Financial Institutions (DFI) if the total
of all dividends declared by the Bank during the current year, including the
proposed dividend, would exceed the sum of retained net income for the year to
date plus its retained net income for the previous two years. For this purpose,
"retained net income," means net income as calculated for call report purposes,
less all dividends declared for the applicable period. An exemption from DFI
approval would require that the Bank have been assigned a composite uniform
financial institutions rating of 1 or 2 as a result of the most recent federal
or state examination; the proposed dividend would not result in a Tier 1
leverage ratio below 7.5%; and that the Bank not be subject to any corrective
action, supervisory order, supervisory agreement, or board approved operating
agreement. The aggregate amount of dividends that may be declared by the Bank in
2022, without the need for qualifying for an exemption or prior DFI approval, is
its 2022 net profits plus $21.4 million . Moreover, the FDIC and the Federal
Reserve Board may prohibit the payment of dividends if it determines that the
payment of dividends would constitute an unsafe or unsound practice in light of
the financial condition of the Bank. On February 25, 2022 , the Board of
Directors of the Bancorp declared a first quarter dividend of $0.31 per share.
The Bancorp's first quarter dividend was paid to shareholders on April 4, 2022 .
Results of Operations - Comparison of the Three Months Ended
For the three months endedMarch 31, 2022 , the Bancorp reported net income of$2.1 million , compared to net income of$4.5 million for the three months endedMarch 31, 2021 , a decrease of$2.4 million (53.0%). For the three months endedMarch 31, 2022 , the ROA was 0.44%, compared to 1.18% for the three months endedMarch 31, 2021 . The ROE was 5.01% for the three months endedMarch 31, 2022 , compared to 11.94% for the three months endedMarch 31, 2021 . 36 -------------------------------------------------------------------------------- Net interest income for the three months endedMarch 31, 2022 , was$15.5 million , an increase of$3.5 million (29.0%), compared to$12.0 million for the three months endedMarch 31, 2021 . The weighted-average yield on interest-earning assets was 3.49% for the three months endedMarch 31, 2022 , compared to 3.59% for the three months endedMarch 31, 2021 . The weighted-average cost of funds for the three months endedMarch 31, 2022 was 0.08% compared to 0.20% for the three months endedMarch 31, 2021 . The impact of the 3.49% return on interest earning assets and the 0.08% cost of funds resulted in an interest rate spread of 3.41% for the current three months, an increase from the 3.39% spread for the three months endedMarch 31, 2021 . The net interest margin on earning assets was 3.41% for the three months endedMarch 31, 2022 , and 3.40% for the three months endedMarch 31, 2021 . On a tax equivalent basis, the Bancorp's net interest margin was 3.63% for the three months endedMarch 31, 2022 , compared to 3.59% for the three months endedMarch 31, 2021 . The Bancorp believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Tax adjusted net interest margin represents a non-GAAP financial measure. See the non-GAAP reconciliation table immediately below and the section captioned "Non-GAAP Financial Measures" for further disclosure regarding non-GAAP financial measures. (Dollars in thousands) Three Months Ended (unaudited) March 31, 2022 March 31, 2021 Calculation of tax adjusted net interest margin Net interest income $ 15,535 $
12,046
Tax adjusted interest on securities and loans 966 677
Adjusted net interest income 16,501 12,723
Total average earning assets 1,820,588 1,417,462
Tax adjusted net interest margin 3.63 % 3.59 %
Information relating to the average consolidated balance sheet and the yield on
average earning assets and cost of average liabilities for the periods indicated
are in the following table. Dividing the related interest, on an annualized
basis, by the average balance of assets or liabilities drives the disclosed
rates. Average balances are derived from daily balances.
Quarter-to-Date
(Dollars in
thousands) Average Balances, Interest, and Rates
(unaudited) March 31, 2022 March 31, 2021
Average Average
Balance Interest Rate (%) Balance Interest Rate (%) ASSETS ` Interest bearing deposits in other financial institutions$ 22,295 $ 8 0.14$ 51,688 $ 12 0.09 Federal funds sold 8,015 - - 788 - - Certificates of deposit in other financial institutions 1,725 3 0.70 1,598 8 2.00 Securities available-for-sale 510,119 2,575 2.02 383,877 1,941 2.02 Loans receivable* 1,274,407 13,286 4.17 975,593 10,746 4.41 Federal Home Loan Bank stock 4,027 22 2.19 3,918 20 2.04 Total interest earning assets 1,820,588$ 15,894 3.49 1,417,462$ 12,727 3.59 Cash and non-interest bearing deposits in other financial institutions 20,183 33,719 Allowance for loan losses (13,367 ) (12,662 ) Other noninterest bearing assets 127,943 98,316 Total assets$ 1,955,347 $ 1,536,835 LIABILITIES AND STOCKHOLDERS' EQUITY Total deposits$ 1,737,620 $ 337 0.08$ 1,348,160 $ 651 0.19 Repurchase agreements 19,390 16 0.33 14,479 10 0.28 Borrowed funds 6,091 6 0.39 2,967 20 2.70 Total interest bearing liabilities 1,763,101$ 359 0.08 1,365,606$ 681 0.20 Other noninterest bearing liabilities 21,872 19,049 Total liabilities 1,784,973 1,384,655 Total stockholders' equity 170,374 152,180 Total liabilities and stockholders' equity$ 1,955,347 $ 1,536,835 Net intrest spread 3.41 % 3.39 % Net interest margin** 3.41 % 3.40 % Ratio of interest-earning assets to interest-bearing liabilities 1.03 x 1.04 x
* Non-accruing loans have been included in the average balances. ** Net interest income divided by average interest-earning assets.
The increase in interest earning asset income for the three months ended
37
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The following table shows the change in noninterest income for the three months
ending
(Dollars in thousands) Quarter Ended March 31, 3/31/2022 vs. 3/31/2021
2022 2021 $ Change % Change
Noninterest income:
Fees and service charges 1,304 1,066 238 22.3 %
Gain on sale of loans
held-for-sale, net 607 2,049 (1,442 ) -70.4 %
Wealth management operations 595 607 (12 ) -2.0 %
Gain on sale of securities, net 381 417 (36 ) -8.6 %
Increase in cash value of bank
owned life insurance 252 169 83 49.1 %
Gain (loss) on sale of foreclosed
real estate - (9 ) 9 -100.0 %
Other 5 14 (9 ) -64.3 %
Total noninterest income 3,144 4,313 (1,169 ) -27.1 %
The decrease in gain on sale of loans is the result of significant refinance
activity which started in 2020 and continued into the following year due to the
economic and low rate environment, which resulted in more loans originated and
sold. We anticipate the demand for mortgage loans will continue to revert to
normal levels as borrowing rates on loans increase. The increase in fees and
service charges for the three-month period ended March 31, 2022 compared to the
three-month period ended March 31, 2021 is primarily the result of changes in
customer usage of bank services.
The following table shows the change in noninterest expense for the three months
ending
(Dollars in thousands) Quarter Ended March 31, 3/31/2022 vs. 3/31/2021
2022 2021 $ Change % Change
Noninterest expense:
Compensation and benefits 7,367 5,685 1,682 29.6 %
Data processing 3,054 674 2,380 353.1 %
Occupancy and equipment 1,500 1,372 128 9.3 %
Marketing 651 199 452 227.1 %
Federal deposit insurance premiums 219 180 39 21.7 %
Other 3,478 2,383 1,095 46.0 %
Total noninterest expense 16,269 10,493 5,776 55.0 %
For the three months ended March 31, 2022 , the increase in compensation and
benefits is primarily the result of the RYFL acquisition and management's
continued focus on talent management and retention. The increase in data
processing expense in primarily the result of data conversion expenses related
to the acquisition of RYFL, increased system utilization due to growth of the
Bank, and continued investment in technological advancements such as Salesforce
and nCino. The increase in occupancy and equipment expense is primarily related
to the RYFL acquisition and related assets acquired in the transaction. The
increase in marketing expense is primarily the result of the RYFL acquisition.
The increase in other operating expenses is primarily the result of one-time
expenses related to the acquisition of RYFL and continued investments in
strategic initiatives focusing on growth of the organization.
Income tax expenses for the three months ended March 31, 2022 , totaled $275
thousand , compared to income tax expense of $745 thousand for the three months
ended March 31, 2021 , a decrease of $470 thousand (63.1%). The combined
effective federal and state tax rates for the Bancorp was 11.4% for the three
months ended March 31, 2022 , compared to 14.1% for the three months ended March
31, 2021 . The Bancorp's lower current period effective tax rate is a result of a
greater increase to tax preferred income relative to earnings.
Critical Accounting Policies
Critical accounting policies are those accounting policies that management believes are most important to the portrayal of the Bancorp's financial condition and that require management's most difficult, subjective or complex judgments. The Bancorp's critical accounting policies fromDecember 31, 2021 remain unchanged. Forward-Looking Statements Statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are also intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. The Bancorp cautions readers that forward-looking statements, including without limitation those relating to the Bancorp's future business prospects, merger and acquisition activities, interest income and expense, net income, liquidity, and capital needs are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this report, including those identified in the Bancorp's 2021 Form 10-K. 38
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Non-GAAP Financial Measures This filing includes certain financial measures that are identified as non-GAAP, including adjusted net interest income and tax adjusted net interest margin. The Bancorp provides these non-GAAP performance measures because they are used by management to evaluate and measure the Bancorp's performance, which the Bancorp believes also is useful to assist investors in assessing the Bancorp's operating performance. Where non-GAAP financial measures are used in this report, the most comparable GAAP measure, as well as the reconciliation to the most comparable GAAP measure, can be found in the tables referenced herein. The adjusted net interest income and tax-adjusted net interest margin measures recognize the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans are presented using the current federal income tax rate of 21%. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes. Although these non-GAAP financial measures are frequently used by investors to evaluate a financial institution's business and performance, 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. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business operations and performance.
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