Finward Bancorp (NorthWest Indiana Bancorp): Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing registrant is named NorthWest Indiana Bancorp; the supplied company metadata identifies it as Finward Bancorp. Dollar amounts below are in millions unless stated otherwise.
Business and financial performance
The Bancorp is a bank holding company whose earnings primarily depend on Peoples Bank SB. At June 30, 2017, it reported assets of $921.2 million, net loans of $593.9 million, deposits of $787.0 million, and stockholders’ equity of $89.3 million.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $7.66 | $7.36 | $15.17 | $14.90 |
| Provision for loan losses | $0.32 | $0.29 | $0.56 | $0.58 |
| Noninterest income | $1.96 | $1.77 | $3.75 | $3.51 |
| Noninterest expense | $6.03 | $5.94 | $12.33 | $12.05 |
| Net income | $2.53 | $2.24 | $4.83 | $4.49 |
| Diluted earnings per share | $0.89 | $0.78 | $1.69 | $1.57 |
| Net interest margin | 3.60% | 3.58% | 3.59% | 3.64% |
| Efficiency ratio | 62.7% | 65.1% | 65.2% | 65.5% |
Q2 return on average assets and equity were 1.11% and 11.30%; first-half returns were 1.07% and 10.97%. The company declared dividends of $0.29 per share for Q2 and $0.57 per share for the first half.
Financial position, liquidity, and capital
- From December 31, 2016, assets increased $7.6 million (0.8%), loans receivable increased $17.3 million, deposits increased $7.2 million, and stockholders’ equity increased $5.2 million.
- Cash and cash equivalents were $27.8 million, down $17.4 million in the first half. Operating cash flow was $5.0 million; investing cash outflow was $23.4 million; financing cash inflow was $1.0 million.
- Available-for-sale securities totaled $240.7 million. Borrowings were $35.2 million, comprising $15.6 million in repurchase agreements and $19.6 million in borrowed funds.
- Regulatory capital exceeded applicable requirements. Bancorp ratios were 13.0% Common Equity Tier 1, 13.0% Tier 1, 14.1% total capital, and 9.5% Tier 1 leverage. The Bank’s corresponding ratios were 12.8%, 12.8%, 13.8%, and 9.3%.
- Outstanding loan commitments were $141.3 million, about 54.3% variable-rate; standby letters of credit were $8.6 million. Management said available cash flow and borrowing capacity were sufficient to meet these commitments.
Changes, credit quality, and notable items
- Q2 net income rose 12.8% year over year; first-half net income rose 7.6%. Q2 net interest income grew 4.0%, while first-half net interest margin declined to 3.59% from 3.64%.
- Growth in fee and service-charge income and securities-sale gains supported noninterest income. Q2 securities-sale gains were $252,000 versus $165,000; first-half gains were $545,000 versus $418,000. Management cited opportunities to manage securities cash flows while realizing gains.
- Nonperforming loans decreased to $5.6 million from $6.1 million, and the ratio to total loans improved to 0.93% from 1.05%. Management attributed much of the decline to an $829,000 partial charge-off on acquired investor-owned residential loans. First-half net charge-offs were $1.18 million, versus $200,000 a year earlier.
- Watch loans increased 101.2% to $21.3 million, primarily because three related commercial real estate loans totaling $10.4 million were added. The allowance for loan losses was $7.1 million, or 1.18% of loans; management considered it adequate.
- Unrealized losses on available-for-sale securities were $3.15 million at June 30. Management recorded no additional impairment on four pooled trust preferred securities; three, with a combined cost basis of $3.6 million, remained in payment-in-kind status and non-accrual. The filing cites below-investment-grade ratings on three pooled securities and additional regulatory risk-weighted assets associated with these holdings.
- There were no reported legal proceedings, no shares repurchased during the first half, and no material change in internal control over financial reporting. Management reported disclosure controls were effective.
Outlook, risks, and contingencies
No earnings or financial guidance was provided. Management cautioned that forward-looking results may differ because of risks affecting business prospects, interest income and expense, net income, liquidity, and capital needs. The filing also identifies estimates for the loan-loss allowance, foreclosed-property values, securities, and contingencies as particularly susceptible to change. It states that first-half results are not necessarily indicative of full-year results.
Management reported no loans modified as troubled debt restructurings during the first six months. It did not expect identified nonperforming or classified loans to materially affect future operations, liquidity, or capital resources. Future adoption of the credit-loss standard (ASU 2016-13), effective for the Bancorp’s 2020 year, was still under evaluation.
Key facts for investors to verify
- Whether the sharp increase in watch loans, especially the related $10.4 million commercial real estate exposure, leads to downgrades, delinquencies, or additional provisions.
- The sustainability of earnings growth given the first-half margin decline, higher deposit costs, and income from securities-sale gains.
- Trends in charge-offs and the adequacy of the $7.1 million allowance after the significant acquired-loan charge-off.
- Valuation, cash-flow performance, and regulatory-capital effects of the pooled trust preferred securities, including the three payment-in-kind holdings.
- Liquidity after the $17.4 million first-half cash decline and the ability to fund $141.3 million of loan commitments and $8.6 million of letters of credit.
- The realized impact of new accounting standards, particularly the expected-credit-loss standard, and whether the company’s future outlook changes.