Business Context and Reporting Period
NorthWest Indiana Bancorp (now associated with Finward Bancorp) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. The company is a bank holding company whose earnings primarily depend on Peoples Bank SB. Unless otherwise noted, amounts below are in millions of dollars.
Results include the January 24, 2019 acquisition of AJS Bancorp (AJSB). The July 2018 First Personal acquisition also affects the comparison with first-quarter 2018. The bank’s retail network expanded to 22 banking centers following AJSB.
Key Financial Results
| Metric | Q1 2019 / March 31, 2019 | Comparable / prior date |
|---|---|---|
| Net interest income | $10.6; up 35.3% | $7.8 in Q1 2018 |
| Net income | $2.2 | $2.6 in Q1 2018; down 13.2% |
| Basic and diluted EPS | $0.66 | $0.89 in Q1 2018 |
| Net interest margin | 3.74%; tax-equivalent 3.81% | 3.58%; tax-equivalent 3.80% in Q1 2018 |
| Return on average assets / equity | 0.72% / 7.59% | 1.10% / 11.20% in Q1 2018 |
| Efficiency ratio | 78.1% | 67.8% in Q1 2018 |
| Total assets | $1,268.4 | $1,096.2 at Dec. 31, 2018 |
| Loans receivable, net | $856.8 | $756.4 at Dec. 31, 2018 |
| Deposits | $1,101.7 | $929.8 at Dec. 31, 2018 |
| Cash and cash equivalents | $60.8 | $17.1 at Dec. 31, 2018 |
| Borrowed funds | $20.0; total borrowings including repurchase agreements $32.7 | $43.0; total including repurchase agreements $54.6 at Dec. 31, 2018 |
Net interest income growth reflected a larger earning-asset base and higher yields, including loan growth and acquisitions. The average yield on interest-earning assets was 4.40% versus 3.99% a year earlier; the cost of funds rose to 0.70% from 0.43%. Noninterest income increased 4.9% to $2.6, while noninterest expense increased 47.7% to $10.3. The expense increase included acquisition-related costs, added operations and AJSB data-conversion costs. Income tax expense was $0.34, with a 13.3% effective tax rate.
Operating cash flow was $1.4, compared with $3.0 in Q1 2018. Investing cash flow was $37.4, including $52.6 of net cash and cash equivalents from acquisition activity; financing cash flow was $4.8. Cash increased $43.6 during the quarter. The company declared a $0.30 per-share dividend, paid April 5, 2019.
Material Changes and Credit Quality
Compared with December 31, 2018, assets increased 15.7%, loans receivable increased $100.6, and deposits increased 18.5%, primarily reflecting AJSB and internally generated growth. Stockholders’ equity increased 21.5% to $123.2, including $17.5 of shares issued for AJSB and $3.0 of after-tax unrealized securities gains.
Nonperforming loans rose to $8.4 from $6.9, or 0.97% of loans from 0.90%. The allowance for loan losses was $8.2, equal to 0.95% of loans and 98.5% of nonperforming loans, compared with 1.04% and 115.1%, respectively, at year-end. Management attributed increases in several criticized and impaired loan categories partly to AJSB-acquired loans. One $47,000 commercial business loan was renewed as a troubled debt restructuring; no subsequent defaults on troubled debt restructurings were reported.
Available-for-sale securities totaled $251.3. Their net unrealized position improved to a $0.24 gain from a $2.80 loss at year-end. Management said unrealized losses were primarily related to interest rates and market volatility and expected values to recover as securities approach maturity. Pooled trust preferred securities had a $3.5 cost basis, were below investment grade, and generated approximately $17.5 of risk-weighted assets; $3.5 of these securities remained in payment-in-kind status.
Outlook, Risks and Other Disclosures
The filing provides no specific earnings or financial guidance. Management said it believed liquidity and borrowing capacity were sufficient to fund $191.4 of loan commitments and $10.1 of standby letters of credit; 54.1% of loan commitments were variable-rate. The Bancorp and Bank exceeded applicable regulatory capital requirements; at March 31, the Bank’s total capital ratio was 12.2% and its Tier 1 leverage ratio was 8.3%.
Key risks include loan-credit and collateral valuation uncertainty, concentration in northwest Indiana and northeast Illinois, interest-rate and securities-market exposure, and integration and purchase-accounting estimates for acquisitions. AJSB and First Personal purchase-price allocations remained preliminary. Management was evaluating the expected-credit-loss standard (ASU 2016-13), effective for the company in 2020, and had not yet determined its financial impact. The company reported effective disclosure controls and no material change in internal control over financial reporting. Management did not expect ordinary-course legal proceedings to have a material adverse effect. The filing states that first-quarter results are not necessarily indicative of full-year results.
Investor Verification Priorities
- Verify the sustainability of earnings and expense levels after acquisition-related costs, including the drivers of the 78.1% efficiency ratio.
- Track asset quality, especially nonperforming loans, criticized loans, acquired credit-impaired loans and allowance coverage.
- Review AJSB purchase-price allocation adjustments, integration progress, and the realization of expected acquisition benefits.
- Assess securities exposure, including unrealized gains and losses and the below-investment-grade pooled trust preferred securities.
- Monitor deposit costs, liquidity needs, variable-rate commitments, and capital and dividend capacity.