Finward Bancorp (filing registrant: NorthWest Indiana Bancorp) — Q2 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2015. NorthWest Indiana Bancorp is a bank holding company whose principal business is Peoples Bank SB. Financial amounts below are in millions of dollars unless stated otherwise. The statements are unaudited. The filing notes that first-half results are not necessarily indicative of full-year results.
Financial performance and condition
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $6.610 | $6.462 | $13.007 | $12.334 |
| Provision for loan losses | $0.198 | $0.165 | $0.485 | $0.410 |
| Noninterest income | $1.732 | $1.560 | $3.682 | $3.087 |
| Noninterest expense | $5.670 | $5.305 | $11.302 | $10.134 |
| Net income | $1.976 | $1.949 | $3.903 | $3.753 |
| Diluted earnings per share | $0.69 | $0.69 | $1.37 | $1.32 |
- Net income increased 1.4% year over year in Q2 and 4.0% for the first half. Q2 basic and diluted EPS were both $0.69; first-half basic and diluted EPS were both $1.37.
- Net interest margin was 3.55% in Q2 and 3.53% for the first half, down from 3.62% and 3.58%, respectively, in 2014. Tax-equivalent margins were 3.80% and 3.78%, versus 3.89% and 3.85%.
- Return on average assets and equity were 1.00% and 10.03% in Q2, compared with 1.02% and 10.77%. For the first half, ROA was 0.99% and ROE 9.95%, versus 1.02% and 10.59%.
- The efficiency ratio rose to 68.0% in Q2 and 67.7% for the first half, from 66.1% and 65.7% in the comparable periods.
- At June 30, total assets were $813.3 million, up 4.9% from year-end 2014; net loans were $500.3 million and deposits were $668.1 million. Stockholders’ equity was $77.0 million, or 9.47% of assets; book value per share was $27.02.
- Cash and cash equivalents were $35.1 million, versus $22.0 million at December 31, 2014. First-half operating cash flow was $8.6 million, investing cash flow was negative $27.8 million, financing cash flow was $32.4 million, and cash increased $13.2 million.
- Deposits grew $34.2 million (5.4%) from year-end. Repurchase agreements were $19.3 million and borrowed funds $34.2 million, for total borrowings of $53.5 million, down $0.4 million from year-end.
- Regulatory capital ratios were above stated minimums: common equity Tier 1 and Tier 1 capital ratios were each 13.4%, total capital was 14.6%, and Tier 1 leverage was 9.4%. The filing states the Bancorp and Bank exceeded applicable capital requirements.
Material changes versus comparable periods
- First-half net interest income rose 5.5%, while net interest margin declined. Loan interest income grew with higher average loan balances and yield; interest expense on deposits increased 16.7% as balances and rates rose.
- First-half noninterest income increased 19.3%, chiefly from mortgage loan sale gains of $0.734 million versus $0.216 million a year earlier. The Bancorp sold $28.1 million of newly originated fixed-rate mortgages, compared with $11.6 million.
- First-half noninterest expense increased 11.5%, including compensation and benefits growth of 17.1%. Management attributed increases to salary adjustments, additional sales staff, higher system use and the prior-year acquisition.
- Available-for-sale securities increased to $227.4 million from $220.1 million at year-end. First-half other comprehensive income was negative $1.583 million, largely reflecting the decline in unrealized securities values; accumulated other comprehensive income was $5 thousand at June 30.
- Nonperforming loans fell to $3.3 million, or 0.66% of loans, from $5.5 million, or 1.10%, at year-end. Management attributed the improvement principally to a commercial real estate short sale/payoff and improved residential real estate conditions. Net charge-offs were $0.147 million for the first half, versus $1.4 million in 2014.
Outlook, risks, contingencies and unusual items
- Acquisition: The Bank completed its acquisition of Liberty Savings Bank on July 1, 2015, after quarter-end, with no shares, cash or other consideration paid. Liberty reported June 30 assets of $58.5 million, loans of $29.6 million and deposits of $55.6 million. The combined bank was reported at approximately $870.7 million of assets, $534.9 million of loans and $724.3 million of deposits. The transaction expands the branch network into Whiting and Winfield, Indiana.
- Credit risk: The allowance for loan losses was $6.7 million, or 1.32% of loans, compared with 1.30% at year-end; coverage of nonperforming loans was 200.73%. Watch loans were $14.8 million, up 1.6% from year-end. One accruing commercial real estate hotel loan of $4.5 million was the largest concentration among substandard loans. Management considered the allowance adequate and did not expect classified or nonperforming loans to materially affect future operations, liquidity or capital.
- Outstanding loan commitments were $106.6 million, approximately 50.7% variable-rate, and standby letters of credit were $8.6 million. Management stated it believed available cash flow and borrowing capacity were sufficient to meet these commitments and maintain liquidity.
- Investment exposure: Four pooled trust-preferred CDO securities had a $5.1 million cost basis and $2.6 million fair value, including $2.474 million of gross unrealized losses. Three securities, with a $3.8 million cost basis, remained in payment-in-kind status. Management recorded no additional other-than-temporary impairment for the period and said it expected recovery based on its cash-flow analysis; these securities remain a material valuation and credit risk.
- Management cited regulatory uncertainty and compliance costs, including Dodd-Frank, Basel III capital rules and the Volcker Rule. It reported compliance with capital rules and no expected material financial implications from Volcker Rule requirements. The filing gives no specific earnings or margin guidance.
- The filing identifies estimates for loan-loss allowances, foreclosed real estate, servicing rights, securities, deferred tax assets, goodwill and contingencies as particularly sensitive to change. It also cautions that forward-looking statements are subject to risks that could cause actual results to differ.
- Management reported disclosure controls were effective as of June 30, 2015, with no material change in internal control over financial reporting during the six months. No reportable legal proceedings were disclosed.
Important facts for investors to verify
- Post-quarter Liberty acquisition integration, realized costs or benefits, and the final combined balance-sheet and credit profile.
- Trends in net interest margin, deposit pricing, loan growth and mortgage-sale income, including how much noninterest income depends on securities and loan-sale gains.
- Performance of the $4.5 million hotel loan, watch and substandard credits, troubled debt restructurings, and adequacy of the loan-loss allowance.
- Valuation, cash flows and impairment sensitivity of the pooled trust-preferred securities, especially those in payment-in-kind status.
- Capacity to fund $106.6 million of loan commitments while maintaining liquidity, and the effect of regulatory requirements on capital, dividends and operating costs.