Finward Bancorp (filing registrant: NorthWest Indiana Bancorp) — Q1 2015 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited. Unless stated otherwise, dollar amounts below are in U.S. dollars. The filing cautions that quarterly results are not necessarily indicative of full-year results.
Business context and financial position
The Bancorp is a bank holding company whose principal operating subsidiary is Peoples Bank SB, serving northwest Indiana. At March 31, 2015, total assets were $793.9 million, loans receivable were $490.5 million, deposits were $649.4 million, and stockholders’ equity was $77.9 million, or 9.81% of assets. Book value per share was $27.32.
Results and key financial metrics
- Profit: Net income was $1.927 million, up 6.8% from $1.804 million in Q1 2014. Basic and diluted EPS were $0.68, versus $0.63. ROA was 0.99% (1.01% prior year) and ROE was 9.88% (10.11%).
- Revenue and margins: Net interest income rose 8.9% to $6.397 million; total interest income was $6.862 million and interest expense was $465,000. Net interest margin was 3.50%, down from 3.54%; tax-equivalent NIM was 3.75%, versus 3.79%. Noninterest income increased 27.7% to $1.950 million, including $380,000 in gains on loan sales and $393,000 in securities gains.
- Expenses: Noninterest expense grew 16.6% to $5.632 million, led by compensation and benefits, up 19.9% to $3.173 million. The efficiency ratio increased to 67.5% from 65.3%. The effective tax rate declined to 20.6% from 22.4%.
- Credit: The provision for loan losses was $287,000, versus $245,000. The allowance was $6.586 million, or 1.34% of loans; management considered it adequate. Management reported nonperforming loans of $4.1 million, down 25.5% from year-end, and a nonperforming-loan ratio of 0.85%, versus 1.10%. Net charge-offs were $62,000. Foreclosed real estate totaled $1.821 million.
- Cash flow and liquidity: Cash and cash equivalents were $26.427 million, up $4.464 million from year-end. Operating cash flow was $6.992 million, investing cash outflow was $12.471 million, and financing cash inflow was $9.943 million. Outstanding loan commitments were $99.3 million, 51.9% variable-rate, and standby letters of credit were $8.7 million; management stated it believed available cash flow and borrowing capacity were sufficient to meet them.
- Funding and debt: Deposits increased 2.4% from December 31, 2014, to $649.370 million. Repurchase agreements and borrowed funds totaled $49.138 million, down $4.768 million. Total liabilities were $715.946 million.
- Capital: Actual Q1 capital ratios were 13.6% common equity Tier 1, 13.6% Tier 1 risk-based, 14.9% total risk-based, and 9.4% Tier 1 leverage. The filing states the Bancorp and Bank exceeded applicable requirements and were well capitalized.
Material changes and notable items
- Compared with Q1 2014, net income, net interest income, and noninterest income increased, but noninterest expense grew faster than net interest income and the efficiency ratio worsened. Mortgage loan sales rose to $15.450 million from $3.522 million; related gains rose to $380,000 from $75,000.
- On March 20, 2015, the Bank agreed to acquire Liberty Savings Bank FSB without issuing shares or paying cash consideration. Liberty reported year-end 2014 assets of $58.9 million, loans of $30.8 million, and deposits of $55.1 million. Subject to regulatory approvals and customary conditions, the transaction was expected to close in Q3 2015; the filing gives no assurance of closing.
- Q1 acquisition-accounting adjustments for a First Federal loan pool increased goodwill by $377,000 and purchased credit-impaired loan balances by $423,000. Goodwill was $1.988 million at quarter-end.
- The available-for-sale securities portfolio was $230.842 million. It included collateralized debt obligations with $2.477 million of gross unrealized losses; three pooled trust preferred securities with a $3.9 million cost basis remained in payment-in-kind status. Management recorded no additional impairment in Q1 and expected specialist review in June 2015.
- The quarterly dividend declared was $0.25 per share, up from $0.22 a year earlier. Cash dividends paid were $713,000. No shares were repurchased in the quarter.
Outlook, risks, and controls
The filing provides no earnings or revenue guidance. Management’s forward-looking statements are subject to risks that could cause actual results to differ, including credit quality and local economic conditions, interest-rate and securities-market changes, funding and liquidity needs, and regulatory requirements. Management discussed Basel III capital rules and ongoing compliance costs; it stated that the Bancorp believed it was in compliance with the applicable capital rules. The Liberty transaction remained subject to regulatory approvals. Management said it did not expect a material financial impact from the Volcker Rule. Disclosure controls were judged effective as of March 31, 2015, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Confirm Liberty acquisition approvals, closing timing, integration plans, and eventual acquired asset and liability values.
- Review trends in nonperforming, past-due, impaired, and restructured loans, including the filing’s differing loan-quality presentations and the large accruing hotel loan classified as substandard and troubled debt restructured.
- Assess the valuation, cash-flow assumptions, payment-in-kind status, and impairment exposure of the pooled trust preferred securities and other securities with unrealized losses.
- Track whether deposit growth, loan growth, and mortgage-sale gains are sustainable, and whether expense growth and the efficiency ratio improve.
- Monitor capital and liquidity against regulatory changes and the $99.3 million of loan commitments; verify the effect of dividends and any future share repurchases.