Finward Bancorp quarterly report, Q2 FY2019

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Finward Bancorp (NorthWest Indiana Bancorp) — Q2 2019 Form 10-Q

Filing identity: The supplied filing is for NorthWest Indiana Bancorp, not under the name Finward Bancorp. It covers the quarter and six months ended June 30, 2019; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.

Business context and reporting period

The Bancorp is a bank holding company whose earnings are primarily generated by Peoples Bank SB. Its banking footprint expanded to 22 banking centers following the January 24, 2019 acquisition of AJS Bancorp (AJSB), adding locations in Cook County, Illinois. The 2018 acquisition of First Personal also contributed to year-over-year comparisons.

Financial performance and condition

  • Q2 earnings: Net income was $4.02 million, up 60.2% from $2.51 million in Q2 2018. Basic and diluted EPS were $1.17, versus $0.88. Return on average assets was 1.27% and return on average equity was 12.77%.
  • First-half earnings: Net income was $6.25 million, up 23.1% from $5.07 million; EPS was $1.84 versus $1.77. ROA was 1.00% versus 1.08%, and ROE was 10.25% versus 11.12%.
  • Interest income and margins: Q2 net interest income rose 42.2% to $11.20 million; first-half net interest income rose 38.7% to $21.80 million. Net interest margin was 3.89% for Q2 and 3.81% for the first half, compared with 3.56% for both prior-year periods. First-half net interest margin on a tax-equivalent basis was 3.88% versus 3.75%.
  • Other income and expenses: Q2 noninterest income increased 21.2% to $2.67 million, while noninterest expense increased 22.0% to $8.42 million. First-half noninterest income increased 12.6% to $5.24 million and expense increased 34.9% to $18.71 million. The efficiency ratio was 60.7% for Q2 versus 68.5%; for the first half it was 69.2% versus 68.1%.
  • Balance sheet at June 30: Assets were $1.309 billion, up 19.4% from December 31, 2018; loans receivable were $894.3 million and deposits were $1.127 billion. Cash and cash equivalents were $61.2 million, versus $17.1 million at year-end. Stockholders’ equity was $128.8 million, or 9.84% of assets; book value per share was $42.52.
  • Debt and funding: Repurchase agreements were $20.6 million and borrowed funds were $18.0 million, versus $11.6 million and $43.0 million, respectively, at year-end. Deposits increased $197.3 million, primarily reflecting AJSB and organic growth.
  • Cash flow, first half: Net cash provided by operating activities was $6.0 million; investing activities provided $2.9 million and financing activities provided $35.2 million. Cash and cash equivalents increased $44.0 million. The cash flow statement reports these amounts; portions of the MD&A cash-flow narrative differ slightly.
  • Capital: At June 30, Bancorp CET1 and Tier 1 risk-based capital ratios were 11.5%, total capital was 12.5%, and Tier 1 leverage was 8.5%. The Bank’s corresponding ratios were 11.2%, 12.2%, and 8.3%; it exceeded the stated well-capitalized thresholds.

Material changes versus comparable periods

  • Growth in assets, loans, deposits, interest income, and net interest income reflects the AJSB acquisition and internally generated growth; the First Personal acquisition also affects year-over-year results.
  • Q2 interest-earning asset yield increased to 4.65% from 4.05%, while cost of funds rose to 0.78% from 0.53%. The first-half figures were 4.53% versus 4.02% and 0.74% versus 0.48%, respectively.
  • First-half noninterest expense growth outpaced noninterest income growth, including higher compensation, occupancy, data processing, marketing, and other costs related in part to acquisitions and integration.
  • Nonperforming loans rose to $9.9 million from $6.9 million at year-end, or 1.11% of loans versus 0.90%. The allowance for loan losses was $8.7 million; allowance-to-nonperforming-loan coverage declined to 88.3% from 115.1%.
  • Equity increased partly through $17.5 million of shares issued for AJSB and a $5.6 million after-tax increase in unrealized securities gains. Accumulated other comprehensive income moved from a $2.8 million loss at year-end to $2.8 million income.

Outlook, risks, contingencies, and unusual items

  • Guidance: The filing provides no specific earnings or financial guidance. Management cautions that first-half results are not necessarily indicative of full-year results.
  • Credit and concentration risks: Lending is concentrated primarily in Lake County, Indiana, and Cook County, Illinois. Management attributed increases in nonperforming, substandard, and impaired loans partly to AJSB-acquired loans and two commercial business loans to one customer. Management said it did not expect these loans to materially affect future operations, liquidity, or capital resources.
  • Acquisition accounting: AJSB purchase-price allocations remained preliminary. A $365,000 payment to former AJSB option holders was identified in Q2 and added to acquisition consideration and goodwill. AJSB-related costs through June 30 were approximately $2.1 million.
  • Securities: Available-for-sale securities totaled $258.7 million. Unrealized losses of $1.7 million were not recognized in earnings; management attributed them primarily to interest-rate and market changes and stated it intended and was able to hold the securities. Pooled trust preferred securities with a $3.5 million cost basis were below investment grade and in payment-in-kind status; management kept them on nonaccrual until scheduled interest payments resume consistently.
  • Liquidity commitments: Loan commitments were $199.0 million, approximately 54.5% variable-rate, and standby letters of credit totaled $10.9 million. Management believed cash flow and borrowing capacity were sufficient to meet them.
  • Accounting and contingencies: The Bancorp was evaluating the expected-credit-loss standard, then scheduled to take effect in 2020; a proposed delay for smaller reporting companies could apply if approved. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were reported effective, with no material change in internal control identified.

Most important facts for investors to verify

  • Confirm the registrant’s identity and corporate-name relationship: this filing names NorthWest Indiana Bancorp, while the request identifies Finward Bancorp.
  • Assess how much earnings growth reflects acquisitions, purchase-accounting accretion, and one-time gains versus recurring organic performance.
  • Review credit trends, particularly the increase in nonperforming loans, lower allowance coverage, and the commercial borrower exposures identified by management.
  • Track AJSB integration costs, final purchase-price allocations, goodwill, and any further acquisition-related adjustments.
  • Monitor deposit pricing and funding costs, liquidity commitments, and the valuation and payment status of the trust preferred securities.
  • Reconcile the MD&A cash-flow narrative with the consolidated cash flow statement, which reports operating, investing, and financing cash flows of $6.0 million, $2.9 million, and $35.2 million, respectively.