Finward Bancorp annual report, FY2016

Business context and reporting period

This is NorthWest Indiana Bancorp’s Form 10-K for the fiscal year ended December 31, 2016 (filed February 27, 2017). The Bancorp, whose business is conducted primarily through Peoples Bank SB, serves northwest Indiana, operating 16 branches. Its core activities are deposit-taking, residential and commercial real estate lending, commercial and municipal lending, and wealth management. This is an annual filing; it does not provide a standalone 2016 fourth-quarter income statement.

Financial performance and position

At year-end, total assets were $913.6 million, deposits $779.8 million, loans receivable $583.7 million, investment securities $233.6 million, borrowed funds including repurchase agreements $39.8 million, and stockholders’ equity $84.1 million. Book value was $29.41 per share. Return on average assets was 1.03%; return on average equity was 10.65%; and the efficiency ratio was 65.61%.

Audited cash-flow statements report operating cash flow of $10.39 million, investing cash outflow of $20.39 million, financing cash inflow of $43.58 million, and a $33.58 million increase in cash and cash equivalents, to $45.11 million. The Bank reported regulatory capital ratios of 13.1% CET1, 13.1% Tier 1, 14.3% total capital, and 9.2% Tier 1 leverage; the Bancorp and Bank were categorized as well capitalized.

Material changes versus the prior comparable period

• Net income increased 16.4%, supported by higher net interest and noninterest income. Net interest income rose 9.8%; average loans increased 12.4%, with a full-year contribution from the 2015 Liberty Savings acquisition.
• Total assets increased 5.6%, loans 2.1%, and deposits 9.1%. Deposit growth reduced reliance on borrowings, which declined 31.3% to $39.8 million.
• Noninterest income rose 11.1%, including higher gains on loan sales ($1.61 million versus $1.21 million) and securities sales ($0.83 million versus $0.61 million). Noninterest expense increased 4.6%, slower than revenue growth.
• Credit indicators were mixed: nonperforming loans rose to $6.1 million from $5.6 million, while substandard loans fell to $6.1 million from $11.3 million and impaired loans declined to $3.5 million from $7.4 million. Foreclosed real estate increased to $2.7 million from $1.6 million.
• Unrealized securities losses moved accumulated other comprehensive income from a $1.41 million gain in 2015 to a $1.51 million loss in 2016; 2016 other comprehensive loss was $2.91 million.

Outlook, commentary, risks and unusual items

The filing gives no numerical earnings or revenue guidance. Management described improving credit and economic conditions and emphasized quality loan growth, diversification, pricing, and capital strength. Forward-looking statements are subject to risks that could cause actual results to differ, including credit quality, local economic conditions, interest rates, funding costs, liquidity, and capital needs.

• Credit remains concentrated in northwest Indiana and real estate-related lending. Net charge-offs rose to $523,000 from $362,000; the allowance was $7.70 million, or 1.32% of loans, and management considered it adequate.
• One borrower’s 17 investor-owned residential properties were transferred to foreclosed real estate in fourth-quarter 2016; the filing describes the balance as approximately $1.7 million in MD&A and $2.0 million in a credit-quality note. This contributed to the increase in foreclosed property.
• Three of four trust preferred securities were on payment-in-kind status and non-accrual, with reported cost basis around $3.7 million to $3.8 million; management expected payment delays could continue through 2019. The portfolio also had $2.58 million of gross unrealized losses on collateralized debt obligations.
• Interest-rate and securities-market changes affect asset yields, funding costs, and the fair value of available-for-sale securities. The filing identifies no derivatives or hedging activity in 2016.
• Dividends are subject to bank regulatory and retained-income limits. The Bancorp declared $1.11 per share in 2016; the fourth-quarter $0.28 dividend was paid in January 2017.
• Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the financial statements; it did not audit internal control. No legal proceedings were reported.

Most important facts for investors to verify

1. Confirm reported cash-flow figures against the audited statement: MD&A gives operating cash flow as $9.6 million and financing inflows as $44.4 million, while the audited cash-flow statement reports $10.39 million and $43.58 million, respectively.
2. Review the impaired trust preferred securities’ payment status, valuation assumptions, and prospects for resuming cash interest.
3. Track nonperforming loans, the allowance and charge-offs, and the concentration and disposition of foreclosed residential properties.
4. Assess the sustainability of earnings growth, including the contribution from the Liberty acquisition, loan-sale gains, securities-sale gains, and acquisition-related loan discount accretion.
5. Evaluate deposit growth, deposit pricing, borrowing maturities, available FHLB capacity, and the effects of interest-rate changes on margins and securities values.