Finward Bancorp annual report, FY2020

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Business context and reporting period

Annual report for the fiscal year ended December 31, 2020, filed March 22, 2021. The filing identifies the registrant as NorthWest Indiana Bancorp, parent of Peoples Bank, operating 22 branches in Northwest Indiana and the Chicago suburbs. The request names Finward Bancorp; verify the issuer identity and any subsequent name change.

Financial results and condition

  • Earnings: Net income was $16.6 million, up 37.3% from $12.1 million; diluted EPS was $4.80 versus $3.53. Return on average assets was 1.16% and return on average equity 11.51%.
  • Income and margins: Interest income was $51.6 million, down 1.2%; interest expense fell 36.9% to $5.7 million, lifting net interest income 6.3% to $45.9 million. Net interest margin narrowed to 3.47% from 3.66%; net interest spread was 3.46% versus 3.63%. Noninterest income increased 70.1% to $18.1 million, including $7.6 million in mortgage-sale gains and $2.3 million in securities-sale gains. Noninterest expense rose 9.2% to $40.8 million.
  • Credit costs and quality: Provision for loan losses increased to $3.7 million from $2.6 million. Loans were $966.6 million; nonperforming loans were $14.4 million, or 1.49% of loans, compared with $7.4 million and 0.81% a year earlier. The allowance was $12.5 million, 1.29% of loans and 86.7% of nonperforming loans. Substandard loans rose to $16.6 million from $8.1 million; special-mention loans increased to $22.7 million from $12.6 million.
  • Balance sheet and liquidity: Total assets were $1.50 billion, up 12.7%; deposits were $1.30 billion, up 12.8%; and stockholders’ equity was $152.9 million. Securities increased 48.1% to $410.7 million. Cash and cash equivalents ended at $19.9 million, down $27.3 million during the year. Management said on-balance-sheet and contingent liquidity were sufficient; available FHLB collateral borrowing capacity was $168.0 million.
  • Debt and capital: Repurchase agreements were $13.7 million and other borrowings $6.1 million, for total borrowings of $19.9 million, down 22.1%. The Bank’s CET1, Tier 1 risk-based, total risk-based, and leverage ratios were 12.7%, 12.7%, 13.9%, and 8.3%; it exceeded well-capitalized thresholds. Book value per share was $44.16.
  • Cash flow and shareholder returns: Operating cash flow was $21.1 million; investing outflow was $186.6 million, largely reflecting securities purchases; financing inflow was $138.1 million, mainly from deposit growth. Cash dividends paid were $4.3 million, or $1.24 per share declared.

Material changes versus 2019

  • Net income rose $4.5 million, supported by lower funding costs and higher noninterest income. Mortgage-sale gains increased from $2.1 million to $7.6 million as fixed-rate mortgage originations for sale rose to $224.9 million from $78.2 million.
  • Asset quality weakened: nonperforming loans nearly doubled, with a $5.3 million hotel-related commercial real estate relationship a key contributor. The allowance increased, but coverage of nonperforming loans declined from 122.1% to 86.7%.
  • Deposits grew $148.0 million, led by checking and savings; certificates of deposit declined $42.9 million. Loans grew 6.6%, while securities rose substantially amid excess liquidity.
  • Net interest margin compressed 19 basis points. The efficiency ratio improved to 63.8% from 69.5%, aided by higher noninterest income and lower interest expense.

Outlook, commentary, risks, and unusual items

  • Management provided no quantified earnings or financial guidance. It anticipated additional COVID-related borrower deferral or modification requests in 2021 and expected most PPP loans originated to qualify for forgiveness. Mortgage demand was expected to normalize as the low-rate environment persisted or rates rose.
  • At year-end, $67.2 million of PPP balances remained outstanding from $91.5 million approved. COVID-related modifications totaling $14.9 million remained in place and were not classified as troubled debt restructurings under elected CARES Act relief. A $5.3 million hotel loan relationship remained in deferral and was classified nonperforming; management allocated a specific reserve.
  • Key exposures include pandemic-related borrower distress, commercial real estate and business credit risk, local economic and property-value weakness, interest-rate and net-interest-margin sensitivity, and reliance on mortgage secondary markets. Fixed-rate loans were 49.1% of total loans. Two trust-preferred securities with a $2.2 million cost basis were in payment-in-kind and non-accrual status.
  • Goodwill was $11.1 million. Interim and annual impairment tests found fair value above carrying value; no impairment was recorded. The independent auditor issued an unqualified opinion on the financial statements and highlighted allowance qualitative factors and goodwill impairment as critical audit matters. Management concluded internal controls were effective; the auditor did not attest to internal control.

Important facts for investors to verify

  • Confirm the registrant’s identity relative to Finward Bancorp and reconcile it with the filing’s NorthWest Indiana Bancorp name.
  • Track subsequent performance, collateral, and reserve adequacy for the hotel relationship and the increases in nonperforming, substandard, and special-mention loans.
  • Monitor PPP forgiveness, recognition of deferred fees, and the performance of COVID-modified loans after relief periods end.
  • Assess whether mortgage-sale gains and securities gains are repeatable, and whether margin pressure persists as asset yields and funding costs change.
  • Review liquidity and securities valuation, particularly the trust-preferred holdings, and note that the common stock traded on the OTC Pink Marketplace and was described as not actively traded.