Finward Bancorp (filed as NorthWest Indiana Bancorp) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. Unless stated otherwise, dollar amounts below are in millions. The filing identifies the registrant as NorthWest Indiana Bancorp, the holding company for Peoples Bank SB.
Business context and financial position
The Bancorp operates as a community bank holding company focused primarily on lending and deposit-taking in northwest Indiana and nearby Illinois counties. At March 31, 2014, total assets were $723.6 million, up 4.3% from December 31, 2013. Loans, net of allowance, were $445.6 million; deposits were $591.8 million; and stockholders’ equity was $69.8 million, or 9.64% of assets. Book value per share was $24.52.
- Cash and cash equivalents were $30.9 million, compared with $21.1 million at year-end. Available-for-sale securities were $198.2 million.
- Total borrowings, including repurchase agreements, were $54.2 million, up $9.3 million from year-end. The filing attributes increased borrowing to loan and securities growth exceeding deposit funding.
- Deposits increased $18.9 million, or 3.3%, to $591.8 million. Loans grew $15.0 million from year-end; commercial real estate and commercial business loans contributed to growth.
- Regulatory capital ratios remained above the disclosed “well capitalized” thresholds: total risk-based capital 15.2%, Tier 1 risk-based capital 14.0%, and Tier 1 leverage 9.9% at March 31.
Results and comparison with Q1 2013
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net interest income | $5.872 million | $5.801 million | +1.2% |
| Provision for loan losses | $245,000 | $135,000 | +$110,000 |
| Noninterest income | $1.527 million | $1.363 million | +12.0% |
| Noninterest expense | $4.829 million | $4.795 million | +0.7% |
| Income before taxes | $2.325 million | $2.234 million | +4.1% |
| Net income | $1.804 million | $1.670 million | +8.0% |
| Basic and diluted EPS | $0.63 | $0.59 | +$0.04 |
- Net interest margin was 3.54%, down from 3.58%; on a tax-equivalent basis it was 3.79%, versus 3.77%. Interest-rate spread was 3.52%, compared with 3.56%.
- Return on average assets was 1.01% versus 0.97%; return on average equity was 10.11% versus 9.52%. The efficiency ratio improved to 65.3% from 66.9%.
- Loan interest income fell 2.2%, reflecting a lower average loan yield (4.34% versus 4.51%). Lower deposit and borrowing costs helped offset this decline. Securities gains rose to $350,000 from $128,000, supporting noninterest income; loan-sale gains fell to $75,000 from $159,000.
- The effective tax rate declined to 22.4% from 25.3%, which management attributed to higher tax-preferred income. Dividends declared were $0.22 per share, compared with $0.19.
Cash flow, credit quality, and liquidity
Operating activities used $408,000 of cash, versus providing $2.2 million in Q1 2013; management cited increased originations of loans held for sale. Investing activities used $17.4 million, mainly reflecting loan growth and securities purchases. Financing activities provided $27.5 million, including net deposit growth and borrowing inflows. Cash and cash equivalents increased $9.8 million during the quarter. The Bancorp paid $626,000 in dividends.
- Nonperforming loans were approximately $7.0 million, or 1.55% of total loans, compared with $4.0 million and 0.90% at year-end. Management cited one commercial real estate loan and twelve residential real estate loans as primary contributors to the increase. Most nonperforming loans were on nonaccrual; four loans totaling $568,000 were accruing despite being over 90 days past due.
- The allowance for loan losses was $7.443 million, or 1.64% of loans, unchanged as a percentage from year-end. Coverage of nonperforming loans declined to 106.25% from 181.82%. The quarter’s provision was $245,000; net recoveries were $9,000.
- Substandard loans were $12.4 million, watch loans $8.7 million, and impaired loans $9.5 million. Ten existing troubled debt restructurings totaled $9.0 million; the filing reports no loans newly modified as TDRs during Q1 2014.
- Foreclosed real estate was $1.119 million across ten properties. The loan portfolio is concentrated in the Bancorp’s northwest Indiana market, and substantially all loans are collateralized.
- Outstanding loan commitments were $82.9 million, 51.7% variable rate; standby letters of credit were $9.4 million. Management stated that cash flow and borrowing capacity were sufficient to fund these commitments and maintain liquidity.
Outlook, material events, and risks
- The filing provides no specific earnings or financial guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- On April 1, 2014, after quarter-end, Peoples Bank completed its acquisition of First Federal Savings and Loan Association of Hammond. The acquired institution was expected to add approximately $36.4 million of assets based on its December 31, 2013 statements; the Bank was not required to pay consideration or issue shares.
- The Bancorp held four pooled trust preferred securities with a $5.2 million cost basis and $2.430 million fair value. Management recorded no additional other-than-temporary impairment in the quarter, but noted that three securities with a $3.9 million cost basis remained in payment-in-kind status. These securities had substantial unrealized losses and are subject to credit and valuation uncertainty.
- Management cited evolving regulation, compliance costs, interest-rate and market risks, local economic conditions, and credit quality as uncertainties. The Bancorp expected Basel III capital requirements to be phased in beginning in 2015 and stated it believed it would comply based on current capital levels. It reported no impermissible trust-preferred CDO holdings under the Volcker Rule interim exemption and expected no material financial implications.
- Management considered the loan-loss allowance adequate and did not expect the disclosed nonperforming or classified loans to materially affect future operations, liquidity, or capital resources. Estimates for loan losses, collateral values, securities, and contingencies remain subject to change.
- The filing reports no legal proceedings or reportable defaults. Management concluded disclosure controls were effective as of March 31, 2014, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the increase in nonperforming loans, past-due residential balances, and watch loans continues, and how allowance coverage responds.
- The performance, cash flows, valuation assumptions, and potential further impairment of the four pooled trust preferred securities, including those in payment-in-kind status.
- Whether loan growth can be funded sustainably as borrowings rose faster than deposits during the quarter.
- The completed First Federal acquisition’s final assets, integration costs, and subsequent contribution to earnings and credit quality.
- The sensitivity of net interest margin, securities values, and regulatory capital to interest-rate changes and evolving capital rules.