Business context and reporting period
The supplied filing is NorthWest Indiana Bancorp’s Form 10-K for the fiscal year ended December 31, 2018—not a filing under the name Finward Bancorp. It describes a community banking and wealth-management business serving northwest Indiana and the Chicago suburbs. The Bank primarily gathers deposits and makes residential, commercial real estate, commercial business, consumer, and municipal loans.
On July 26, 2018, the Bancorp acquired First Personal Financial Corp., its first expansion into the South Suburban Chicago market. A separate acquisition of AJS Bancorp closed on January 24, 2019, after year-end and is not included in 2018 results.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets, year-end | $1.096 billion | $927.3 million |
| Loans receivable, year-end | $764.4 million | $620.2 million |
| Deposits, year-end | $929.8 million | $793.0 million |
| Net interest income | $34.4 million | $30.8 million |
| Net income | $9.34 million | $8.96 million |
| Diluted earnings per share | $3.17 | $3.13 |
| Stockholders’ equity, year-end | $101.5 million | $92.1 million |
- Total assets grew 18.2%; loans grew approximately 23.3%. The loan portfolio remained concentrated in real estate: commercial real estate represented 33.1% and residential real estate 29.2% of loans at year-end.
- Net interest income rose 11.7%. Net interest margin increased to 3.67% from 3.61%; the average yield on earning assets rose to 4.22% from 3.91%, while the average cost of interest-bearing liabilities rose to 0.57% from 0.32%.
- Noninterest income was $9.10 million, up 17.4%; noninterest expense was $31.38 million, up 23.1%. The efficiency ratio worsened to 72.21% from 66.17%, with management attributing much of the increase to the First Personal acquisition and related expenses.
- Net income increased 4.2%, while return on average assets eased to 0.93% from 0.98% and return on average equity was nearly unchanged at 9.88% versus 9.90%.
- Cash and cash equivalents ended at $17.1 million, up $6.1 million. The audited cash flow statement reports operating cash flow of $10.5 million, investing outflow of $31.2 million, and financing inflow of $26.7 million.
- Year-end funding included $929.8 million of deposits, $11.6 million of repurchase agreements, and $43.0 million of FHLB advances. FHLB collateral-based excess borrowing capacity was $118.6 million. Equity-to-assets was 9.26%.
- The Bank was well-capitalized: its common equity Tier 1 ratio was 11.2%, total capital ratio 12.2%, and Tier 1 leverage ratio 8.4% at year-end.
- Annual dividends declared were $1.19 per share, up from $1.15. The fourth-quarter dividend was $0.30 per share, paid January 8, 2019.
Material changes versus the prior year
- First Personal added assets, loans, deposits, goodwill, and branches, and contributed to reported growth. Management said deposits declined when adjusted to exclude the acquisition.
- Average loan balances increased 13.8%; loan interest income increased 20.6%. Deposit expense rose 84.5% and expense on borrowed funds rose 165.7%, reflecting higher funding rates and balances.
- Credit indicators weakened: nonperforming loans rose to $6.9 million from $5.2 million and to 0.90% of loans from 0.84%. Substandard loans increased to $8.2 million from $5.9 million. Allowance coverage of nonperforming loans declined to 115.1% from 143.3%.
- The allowance for loan losses increased to $8.0 million from $7.5 million; provision expense was $1.31 million versus $1.20 million. Net charge-offs fell to $828,000 from $1.42 million.
- Available-for-sale securities declined to $241.8 million from $244.5 million. Net unrealized securities losses reduced accumulated other comprehensive income by $3.48 million during 2018, versus a $2.08 million gain in 2017.
- The effective tax rate fell to 13.3% from 24.3%, mainly reflecting the lower federal corporate tax rate; 2017 included a $517,000 one-time deferred-tax revaluation expense.
Outlook, risks, contingencies and unusual items
- No quantified earnings or revenue guidance is provided. Management’s commentary emphasizes loan growth, funding costs, margin management, acquisition integration, and maintaining capital and liquidity.
- The AJS Bancorp acquisition closed after year-end. The filing reports an implied value of approximately $34.2 million and says AJSB had $174.9 million of assets, $91.5 million of loans, and $143.8 million of deposits at closing; purchase accounting was still being determined.
- First Personal generated approximately $1.8 million of acquisition costs in 2018; management identified about $609,000 of one-time operating expenses within the year’s expense increase. First Personal also added $5.4 million of goodwill and a $3.0 million core deposit intangible.
- Three trust preferred securities with a $3.5 million cost basis were in payment-in-kind status and on nonaccrual. The securities portfolio had $4.8 million of gross unrealized losses at year-end; management attributed most losses to interest rates and market volatility and reported no additional other-than-temporary impairment in 2018.
- Off-balance-sheet commitments to originate loans totaled $191.7 million, including $106.6 million variable-rate commitments; standby letters of credit totaled $9.7 million. These amounts are exposures, not necessarily funded obligations.
- Management identified interest-rate, credit, local economic, competition, regulatory, cybersecurity, and acquisition risks. CECL adoption was under evaluation; the filing stated the standard would become effective for the Bancorp in fiscal 2020. Management also noted that estimates for loan losses, goodwill, securities values, deferred taxes, and contingencies may change.
- The company reported no material cybersecurity incidents discovered in 2018, no applicable legal proceedings, and an unqualified audit opinion. Management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Confirm the entity and period: the provided document is NorthWest Indiana Bancorp’s 2018 10-K, despite the request metadata naming Finward Bancorp and “2018 Q4.”
- Reconcile the cash-flow figures: the audited statement reports 2018 operating cash flow of $10.5 million and financing cash flow of $26.7 million, while the MD&A narrative cites $6.4 million and $30.9 million, respectively.
- Assess whether loan-quality deterioration, especially residential and commercial exposures, is adequately covered by the allowance and whether acquisition-related credit marks remain appropriate.
- Evaluate the sustainability of funding and margins as deposit costs and borrowing costs rise, including the $29.0 million of FHLB maturities scheduled for 2019 and certificates of deposit maturing in 2019.
- Review integration, purchase accounting, goodwill and expected cost savings for First Personal and the post-year-end AJSB acquisition; confirm subsequent results include AJSB appropriately.
- Examine the trust preferred securities’ payment status and valuation, the effect of securities losses on capital, and the prospective impact of CECL on reserves and regulatory capital.