Business context and reporting period
The filing is a Form 10-Q for NorthWest Indiana Bancorp for the quarter ended September 30, 2018, with comparisons to the third quarter and first nine months of 2017. The request identifies Finward Bancorp, but the filing names NorthWest Indiana Bancorp; verify the entity and any subsequent name change before attributing these results.
The Bancorp is a bank holding company whose earnings primarily depend on Peoples Bank SB. It completed the acquisition of First Personal Financial Corp. on July 26, 2018, expanding into Cook County, Illinois. Accordingly, 2018 results include First Personal only from the acquisition date and are not fully comparable with 2017.
Financial performance and position
- Third-quarter results: Net income was $1.625 million, down 27.7% from $2.248 million; diluted EPS was $0.54 versus $0.78. Net interest income rose 16.0% to $9.016 million, while provision for loan losses increased to $312,000 from $165,000.
- Nine-month results: Net income was $6.697 million, down 5.3% from $7.075 million; diluted EPS was $2.29 versus $2.47. Net interest income increased 7.8% to $24.727 million; provision was $950,000 versus $722,000.
- Revenue and expenses: Noninterest income rose 7.1% to $2.223 million in the quarter and 18.1% to $6.875 million year to date. Noninterest expense increased 30.8% to $9.057 million and 19.1% to $22.930 million, respectively. The efficiency ratio worsened to 80.6% from 70.3% for the quarter and to 72.6% from 66.9% year to date.
- Margins and returns: Quarterly net interest margin was 3.72% versus 3.63%; year-to-date NIM was 3.62% versus 3.60%. Quarterly ROA and ROE were 0.62% and 6.70%, compared with 0.98% and 9.82%. Nine-month ROA and ROE were 0.92% and 9.56%, versus 1.04% and 10.54%.
- Balance sheet at September 30: Assets were $1.073 billion, up 15.7% from year-end 2017; loans were $742.2 million, up from $620.2 million; deposits were $902.8 million, up from $793.0 million. Stockholders’ equity was $96.5 million, or 8.99% of assets, and book value per share was $31.85.
- Funding and liquidity: Cash and cash equivalents were $14.0 million. Repurchase agreements and borrowed funds totaled $60.9 million, versus $32.2 million at year-end. Nine-month operating cash flow was $2.3 million, investing cash outflow $10.4 million, and financing cash inflow $11.0 million. Management said available cash flow and borrowing capacity were sufficient for $185.3 million of loan commitments and $10.2 million of standby letters of credit.
- Capital: The Bank’s September 30 capital ratios included 10.9% Common Equity Tier 1, 10.9% Tier 1 risk-based capital, 11.9% total risk-based capital and 8.4% Tier 1 leverage; each exceeded applicable requirements. The Bancorp also reported capital above applicable requirements.
Material changes versus prior periods
- First Personal contributed scale and new Illinois branches; the Bancorp issued 161,875 shares and paid approximately $8.7 million cash for an implied transaction value of about $15.6 million. Purchase accounting remained preliminary; recorded goodwill from this acquisition was $5.4 million.
- Quarterly net interest income benefited from higher average earning assets and yields, but funding costs rose: the average cost of funds increased to 0.56% from 0.32%. Acquisition-related costs and other expense growth more than offset revenue gains, contributing to lower net income.
- Available-for-sale securities declined to $238.1 million from $244.5 million. Net-of-tax accumulated unrealized losses worsened by $6.676 million to a $5.992 million loss, weighing on comprehensive income and equity. Management attributed unrealized losses primarily to interest rates and market volatility, and said it intended and was able to hold affected securities.
- Asset quality measures increased: nonperforming loans were $6.406 million, or 0.86% of loans, versus $5.223 million, or 0.84%, at year-end. Substandard loans rose to $7.433 million from $5.902 million; special-mention loans rose to $14.519 million from $11.683 million. Management attributed increases to the acquisition and certain commercial relationships. Allowance coverage of nonperforming loans was 121.0%, down from 143.3%.
- Deposits increased overall with the acquisition, but management said deposits excluding First Personal decreased, reflecting the timing of municipal money-market deposits. Borrowed funds increased 131.4% from year-end, primarily because of FHLB advances.
Outlook, commentary, risks and unusual items
- The Bancorp had agreed to acquire AJS Bancorp, Inc.; closing was anticipated early in the first quarter of 2019, subject to AJSB shareholder and regulatory approvals and customary conditions. The filing estimated a combined institution of approximately $1.3 billion in assets, $839.0 million in loans and $1.1 billion in deposits.
- No earnings guidance was provided. Management cautioned that nine-month results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainties.
- Quarterly data-conversion costs related to First Personal were approximately $600,000; year-to-date conversion expenses accounted for approximately $960,000 of the increase in data-processing expense. The lower effective tax rate—13.1% for the quarter and 13.3% year to date—was attributed primarily to the Tax Cuts and Jobs Act.
- The Bank reported $3.5 million cost basis in below-investment-grade pooled trust preferred securities, generating approximately $18.9 million of risk-weighted assets for capital calculations. Some securities were in payment-in-kind status; management said it would keep them on nonaccrual until interest payments resumed consistently. No additional impairment was recorded in the period; a specialist review was planned for year-end.
- Legal proceedings were described as ordinary-course matters; management did not expect resulting liabilities to materially adversely affect financial position. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm that this NorthWest Indiana Bancorp filing is the intended issuer for the Finward Bancorp request.
- Track integration costs, realized cost savings and the final purchase-price allocation for First Personal, including acquired-loan performance and goodwill or intangible adjustments.
- Monitor completion, approvals, consideration and integration risks for the proposed AJSB merger.
- Assess whether elevated operating expenses and the 80.6% quarterly efficiency ratio improve after acquisition-related conversion costs, and whether deposit funding stabilizes as borrowing costs rise.
- Review subsequent delinquency, nonperforming and classified-loan trends, reserve adequacy, and credit performance of acquired and commercial relationship exposures.
- Track securities valuation and accumulated unrealized losses, the trust preferred portfolio’s payment status and impairment assessment, and the effects on capital and earnings.
- Confirm liquidity and capital remain adequate after growth, dividends, commitments and planned merger activity.