Business context and reporting period
NorthWest Indiana Bancorp’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019. The company is a bank holding company whose primary business is Peoples Bank SB. The filing reports results in thousands of dollars unless otherwise stated. Results are not directly comparable with 2018 because the company completed the AJSB acquisition in January 2019 and acquired First Personal in July 2018. The filing’s registrant name is NorthWest Indiana Bancorp; the request metadata identifies Finward Bancorp.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $10.8 million | $9.0 million | $32.6 million | $24.7 million |
| Provision for loan losses | $494,000 | $312,000 | $1.322 million | $950,000 |
| Noninterest income | $2.9 million | $2.2 million | $8.1 million | $6.9 million |
| Noninterest expense | $9.3 million | $9.1 million | $28.0 million | $22.9 million |
| Net income | $3.6 million | $1.6 million | $9.8 million | $6.7 million |
| Diluted EPS | $1.04 | $0.54 | $2.88 | $2.29 |
- Q3 net income increased 120.2%; nine-month net income increased 46.7%, with acquisition timing and larger balances materially affecting comparisons.
- Q3 net interest margin was 3.56% (3.63% tax-equivalent), versus 3.72% (3.91% tax-equivalent) a year earlier. Nine-month margin was 3.73% (3.80% tax-equivalent), versus 3.62% (3.81% tax-equivalent). Management attributed quarterly margin pressure to yield-curve compression.
- Efficiency ratio improved to 67.7% for Q3 from 80.59%; nine-month ratio improved to 68.7% from 72.6%.
- At September 30, assets were $1.330 billion, loans receivable $904.3 million, deposits $1.152 billion, and stockholders’ equity $133.0 million (10.00% of assets). Book value per share was $38.53.
- Compared with December 31, 2018, assets rose 21.4%, loans 18.3%, and deposits 23.9%. Borrowed funds declined from $43.0 million to $16.0 million; repurchase agreements were $14.9 million.
- Nine-month operating cash flow was $11.2 million; investing cash flow was negative $8.2 million; financing cash flow was $51.7 million. Cash and cash equivalents rose to $71.9 million from $17.1 million at year-end.
- Regulatory capital ratios remained above applicable minimums: Bancorp CET1 11.7%, total capital 12.7%, and leverage 8.4%; Bank CET1 11.4%, total capital 12.4%, and leverage 8.2%.
Material changes, outlook, risks and unusual items
- The January 2019 AJSB acquisition expanded the bank’s Cook County, Illinois presence and branch network to 22 banking centers. The AJSB purchase-price allocation was preliminary; fair-value estimates could change during the measurement period. The prior-year comparison also includes First Personal only from its July 2018 acquisition.
- Loan quality weakened on several measures: nonperforming loans increased to $9.6 million, or 1.06% of loans, from $6.9 million, or 0.90%, at year-end; substandard loans rose to $10.7 million from $8.2 million. Allowance coverage of nonperforming loans decreased to 95.7% from 115.1%, although the allowance-to-loans ratio was 1.01% versus 1.04%.
- Management said the allowance was adequate and did not expect identified nonperforming or classified loans to materially affect future operations, liquidity, or capital resources. It cited acquisition effects and commercial business loans to several customers among drivers of credit-category increases. The filing reports $8.8 million of nonaccrual loans and $785,000 of loans over 90 days past due that were still accruing.
- Q3 noninterest income included a $205,000 bank-owned life insurance death benefit; this was not reported in Q3 2018. The nine-month results also included $205,000 of such benefit and gains from sales of loans and securities. The effective tax rate was 8.9% for Q3 and 14.0% for the nine-month period.
- Management reported $205.1 million of loan funding commitments, 55.5% variable-rate, and $10.4 million of standby letters of credit; it believed cash flow and borrowing capacity were sufficient to meet them. No earnings or revenue guidance was provided. Management cautioned that forward-looking results are subject to risks, including those described in the 2018 Form 10-K.
- Collateralized debt obligations with a $3.4 million cost basis remained below investment grade; related capital rules generated approximately $15.8 million of risk-weighted assets. Securities with $3.4 million cost basis were in payment-in-kind status and remained on nonaccrual. Management reported no additional impairment at year-end 2018 and planned specialist review at December 2019.
- The company adopted the lease standard in January 2019 without material impact. The expected effective date for the credit-loss standard was extended for the company to fiscal 2023; management was evaluating implementation. Disclosure controls were deemed effective, with no material change in internal control reported. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
- On October 28, 2019, after quarter-end, the board adopted an executive change-in-control severance plan. Eligible participants may receive severance equal to one times salary plus a specified bonus measure, as well as certain health and life-insurance amounts, subject to plan terms.
Important facts for investors to verify
- Separate organic growth and acquisition contributions, and monitor integration costs and the final AJSB purchase-price allocation.
- Track delinquency, nonaccrual, impaired and substandard loans; commercial borrower concentrations; charge-offs; and allowance coverage as the acquired portfolios season.
- Assess whether deposit costs and funding mix continue to pressure net interest margin, particularly after the reported increase in deposit cost.
- Review the sustainability of earnings excluding the bank-owned life insurance death benefit, securities gains, and acquisition-related or purchase-accounting effects.
- Confirm liquidity against commitments and seasonal municipal deposits, and review pledged securities and below-investment-grade collateralized debt obligations.
- Monitor credit-loss standard implementation, capital ratios, and any material updates to acquisition valuations or contingencies.