Finward Bancorp quarterly report, Q2 FY2018

Full document

Finward Bancorp (identified in the filing as NorthWest Indiana Bancorp) — Q2 2018 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2018; balance-sheet comparisons are against December 31, 2017. Financial statements are unaudited. The filing was signed July 24, 2018.

Business context and reporting period

The company is a bank holding company whose earnings are primarily dependent on Peoples Bank SB. Its main lending market is northwest Indiana, with additional activity in Illinois. The filing describes an agreement to acquire First Personal Financial Corp. and its bank subsidiary; regulatory approvals had been received, and closing was anticipated on July 26, 2018, subject to customary conditions. First Personal Bank reported $143.2 million in assets, $98.8 million in loans, and $127.5 million in deposits as of June 30. The proposed combination was expected to have approximately $1.1 billion in assets.

Financial results and condition

  • Q2 earnings: Net income was $2.511 million, or $0.88 per basic and diluted share, compared with $2.529 million and $0.89 per share in Q2 2017. ROA was 1.07% and ROE was 11.04%.
  • First-half earnings: Net income was $5.072 million, up 5.1% from $4.827 million; EPS was $1.77 versus $1.69. ROA was 1.08% and ROE 11.12%.
  • Revenue and margins: Q2 net interest income increased 2.8% to $7.876 million; first-half net interest income rose 3.5% to $15.711 million. Q2 net interest margin was 3.56% versus 3.60%; first-half margin was 3.35% versus 3.59%. Tax-equivalent margins were 3.78% for Q2 and 3.79% for the first half. Higher asset yields were partly offset by higher funding costs.
  • Noninterest items and expenses: Q2 noninterest income rose 12.4% to $2.203 million, while expenses increased 14.6% to $6.906 million. First-half noninterest income increased 24.2% to $4.652 million and expenses rose 12.5% to $13.873 million. Data-processing costs increased, in part due to acquisition-related conversion work; compensation and other costs also increased. Efficiency ratio worsened to 68.5% for Q2 and 68.1% for the first half.
  • Taxes and distributions: Effective tax rates declined to 12.7% for Q2 and 13.3% for the first half, primarily reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act. Dividends declared were $0.30 per share for Q2 and $0.59 for the first half.
  • Balance sheet and lending: Total assets were $959.0 million, up 3.4% from year-end; gross loans were $646.3 million, up $26.1 million, and deposits were $806.0 million, up 1.6%. Commercial real estate represented 34.6% of loans, and residential real estate 27.2%. Adjustable-rate loans were 58.8% of loans.
  • Credit quality: Nonperforming loans declined to $4.193 million, or 0.65% of loans, from $5.223 million, or 0.84%. The allowance was $7.448 million, 1.15% of loans, with coverage of nonperforming loans at 177.7%. Special-mention loans were $10.798 million; substandard loans were $5.983 million. First-half provision expense was $638,000 versus $557,000. The company reported $2.058 million in troubled debt restructurings at June 30; a $1.1 million commercial relationship was a principal driver of increased impaired loans.
  • Cash flow and liquidity: First-half operating cash flow was $5.732 million, investing cash outflow was $26.010 million, and financing cash inflow was $29.045 million. Cash and equivalents increased $8.767 million to $19.792 million. Management said available cash and borrowing capacity were sufficient for $151.5 million of loan commitments and $8.7 million of standby letters of credit.
  • Funding and capital: Deposits were $805.977 million. Repurchase agreements and borrowed funds totaled $49.915 million, up 55.1% from year-end; borrowed funds alone rose to $35.679 million. Stockholders’ equity was $90.577 million, or 9.45% of assets. Bank capital ratios exceeded regulatory minimums; the Bank’s CET1 ratio was 12.7% and total capital ratio 13.7%.
  • Securities and comprehensive income: Available-for-sale securities were $238.164 million, down from $244.490 million. First-half unrealized securities losses, net of tax, were $4.921 million; accumulated other comprehensive loss moved to $4.237 million from income of $684,000 at year-end.

Material changes versus comparable periods

  • Q2 net income was nearly flat year over year, as higher net interest and noninterest income were outweighed by higher operating expenses.
  • First-half net income grew 5.1%, supported by higher net interest income and noninterest income, including securities-sale gains; expense growth and lower reported net interest margin partly offset those benefits.
  • Interest expense increased substantially as deposit and borrowing costs rose. First-half weighted-average cost of funds increased to 0.48% from 0.29%.
  • Asset growth was accompanied by increased borrowing and loan funding needs. Loan growth was concentrated in commercial real estate and commercial business lending.
  • Equity declined $1.5 million from year-end, as net income was more than offset by dividends and securities-related accumulated other comprehensive loss.

Outlook, commentary, risks, and unusual items

  • No specific earnings or revenue guidance was provided. Management anticipated the First Personal transaction would close July 26, 2018, subject to customary conditions.
  • Management described the allowance for loan losses as adequate and did not expect identified nonperforming or classified loans to materially affect future operations, liquidity, or capital resources. Actual credit outcomes could differ from estimates.
  • Interest-rate simulation indicated projected 12-month net interest income would be 3.53% below base under an immediate 300-basis-point increase, and 2.68% below base under a 200-basis-point decrease. The filing cautions that simulations are not forecasts of actual results.
  • Three of four pooled trust-preferred securities, with a cost basis of approximately $3.5 million, were in “payment in kind” status and not receiving scheduled quarterly interest. Management kept them on non-accrual, recorded no additional impairment, and changed the specialist review cadence from semiannual to annual, with the next review planned for year-end 2018.
  • The filing identifies interest-rate, credit, liquidity, competition, economic, regulatory, and transaction-execution risks. It reports no material change in previously disclosed risk factors and no material adverse effect expected from ordinary-course legal proceedings.
  • Management stated disclosure controls were effective as of June 30, 2018, and reported no material change in internal control over financial reporting during the first half.

Important facts for investors to verify

  • Confirm the issuer identity: the request metadata names Finward Bancorp, while the filing is headed NorthWest Indiana Bancorp.
  • Verify the First Personal merger’s actual closing, final consideration, integration costs, and post-merger capital, funding, and earnings effects; this filing only gives an expected closing date and estimates.
  • Track deposit pricing, borrowing levels, and net interest margin as rates change; funding costs rose faster than several asset yields.
  • Review credit trends, including the commercial relationship modified as a troubled debt restructuring, substandard and special-mention loans, and allowance adequacy.
  • Monitor the trust-preferred securities in payment-in-kind status and the outcomes of the planned annual impairment review.
  • Reconcile the market-risk disclosure’s scenario table heading, which labels the estimates “March 31, 2018” although the surrounding text describes estimates as of June 30, 2018.