Finward Bancorp (filing registrant: NorthWest Indiana Bancorp) — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Financial statements are unaudited; dollar amounts are in thousands unless noted. The filing reports the registrant as NorthWest Indiana Bancorp.
Business context and financial position
The company is a bank holding company whose earnings depend on Peoples Bank SB. On April 1, 2014, the Bank acquired First Federal Savings and Loan Association of Hammond, adding two banking locations. The acquisition materially affects comparisons with prior periods.
| Metric | September 30, 2014 | Comparison |
|---|---|---|
| Total assets | $781.7 million | Up 12.7% from December 31, 2013 |
| Loans receivable, net | $485.4 million | Up from $430.6 million at year-end |
| Deposits | $631.2 million | Up 10.2% from year-end |
| Cash and cash equivalents | $28.0 million | Up from $21.1 million at year-end |
| Stockholders’ equity | $74.1 million | 9.48% of assets; book value per share $26.05 |
| Repurchase agreements and borrowed funds | $64.2 million | Up 42.9% from $44.9 million at year-end |
Earnings, margins, and cash flow
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $6.57 million | $7.10 million | $18.91 million | $18.67 million |
| Net income | $1.91 million | $2.38 million | $5.67 million | $5.75 million |
| Diluted EPS | $0.67 | $0.84 | $1.99 | $2.02 |
| Net interest margin | 3.59% | 4.34% | 3.59% | 3.83% |
| Return on average assets | 0.98% | 1.37% | 1.00% | 1.11% |
| Return on average equity | 10.34% | 13.87% | 10.51% | 10.99% |
| Efficiency ratio | 66.8% | 60.1% | 66.1% | 64.3% |
Q3 net income fell 19.5% year over year, while nine-month net income declined 1.5%. Q3 net interest income decreased 7.4%; the average yield on earning assets fell to 3.85% from 4.60%, while average cost of funds was unchanged at 0.27%. For the nine months, net interest income increased slightly, but margin narrowed. Higher loan and securities balances supported interest income, partly offset by lower loan yields.
Noninterest income increased 14.2% in Q3 and 10.2% year to date, helped by deposit fees, wealth management, and mortgage loan-sale gains. Noninterest expense rose 6.7% in Q3 and 5.8% year to date, including higher compensation and costs associated with First Federal’s two branches. The provision for loan losses was $165,000 in Q3 and $575,000 for the nine months, versus $150,000 and $380,000, respectively, in 2013.
For the nine months, operating activities provided $8.3 million of cash; investing activities used $38.1 million, principally reflecting loan growth and securities purchases; and financing activities provided $36.7 million, including deposit and borrowing inflows. Cash and cash equivalents increased $6.9 million. Dividends paid were $2.0 million.
Material changes, credit, and capital
- The First Federal acquisition added assets with a fair value of $37.9 million and liabilities of $39.6 million; the company recorded $1.6 million of goodwill and a $93,000 core deposit intangible. The acquired loan portfolio includes fair-value discounts that are being accreted into income.
- Nonperforming loans were $6.0 million, or 1.21% of loans, versus $4.0 million and 0.90% at year-end. Management attributed much of the increase to two commercial real estate loans and certain residential loans. Past-due loans totaled $13.9 million; $1.2 million more than 90 days past due remained accruing.
- Watch loans increased to $13.5 million from $7.5 million at year-end. Substandard loans declined to $10.3 million from $12.2 million. The allowance for loan losses was $6.2 million, 1.27% of loans and 104.64% of nonperforming loans, compared with 1.64% and 181.82% at year-end. Management considered the allowance adequate.
- Foreclosed real estate increased to $1.8 million from $1.1 million, with the increase primarily attributed to the acquisition. Management reported no troubled debt restructurings during the first nine months of 2014, but disclosed six TDR loans totaling $6.5 million at quarter-end.
- Regulatory capital ratios remained above then-current “well capitalized” thresholds: total risk-based capital 14.7%, Tier 1 risk-based capital 13.5%, and Tier 1 leverage 9.1%. Ratios were lower than at year-end, which management attributed to acquisition-related and organic asset growth. The filing discusses Basel III requirements and phased implementation beginning in 2015.
Outlook, risks, and unusual items
The filing provides no numerical earnings or revenue guidance. Management cautions that nine-month results are not necessarily indicative of full-year results. It describes ongoing economic and regulatory uncertainty, including Dodd-Frank, CFPB rules, Basel III capital requirements, and Volcker Rule compliance. Management stated it believed the company would meet the new capital rules based on current capital composition and levels, and did not expect material financial implications from the Volcker Rule.
Key exposures include local economic conditions and geographic concentration in northwest Indiana, commercial real estate and other credit risk, interest-rate and securities valuation risk, and funding needs. Four pooled trust preferred securities had a combined fair value of $2.4 million against a $5.2 million cost basis, with $2.8 million of gross unrealized losses; three remained in payment-in-kind status. Management reported no additional other-than-temporary impairment in Q3 and attributed unrealized securities losses primarily to market and interest-rate factors. The company had $86.6 million of loan commitments and $7.5 million of standby letters of credit; management believed available cash flow and borrowing capacity were sufficient to fund them.
The board authorized a new repurchase program for up to 50,000 shares in April 2014. The company repurchased 1,172 shares in Q2 and none in Q3. The declared Q3 dividend was $0.25 per share.
Investor verification priorities
- Assess whether margin pressure and the Q3 decline in earnings persist as loan yields, funding costs, and earning-asset mix change.
- Review acquired-loan performance, nonperforming and watch-loan trends, TDRs, charge-offs, and allowance coverage—especially commercial real estate exposures.
- Separate acquisition-driven growth from organic growth and evaluate the ongoing costs, deposit retention, and expected benefits of First Federal.
- Monitor liquidity and funding mix as deposits, repurchase agreements, and borrowed funds change, and verify the capacity to meet commitments.
- Review the valuation, credit assumptions, payment-in-kind status, and regulatory capital treatment of the pooled trust preferred securities.
- Reconcile the MD&A’s nine-month income-tax discussion: its stated decrease does not match the income-statement amounts shown for 2014 and 2013.