Finward Bancorp - Quarter Report: 2020 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

(Mark One)

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2020 or

 

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
	For the transition period from ______ to ______
	Commission File Number: 0-26128

 

NorthWest Indiana Bancorp

(Exact name of registrant as specified in its charter)

 

Indiana	35-1927981
(State or other jurisdiction of incorporation	(I.R.S. Employer Identification Number)
or organization)

 

9204 Columbia Avenue
Munster, Indiana	46321
(Address of principal executive offices)	(ZIP code)

 

                         N/A                              

(Former name, former address and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

                       Yes ☒           No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐

Smaller Reporting Company ☒ Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

There were 3,463,136 shares of the registrant’s Common Stock, without par value, outstanding at May 5, 2020.

 

 

 

NorthWest Indiana Bancorp

 Index

 

	Page  Number
PART I. Financial Information
Item 1. Unaudited Financial Statements and Notes	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures about Market Risk	38
Item 4. Controls and Procedures	38
PART II. Other Information	39
SIGNATURES	40
EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications
101 XBRL Interactive Data File

 

 

 

		March 31,
(Dollars in thousands)		2020				December 31,
		(unaudited)				2019
ASSETS
Cash and non-interest bearing deposits in other financial institutions		$	26,155			$	20,964
Interest bearing deposits in other financial institutions			15,119				10,750
Federal funds sold			872				15,544
Total cash and cash equivalents			42,146				47,258
Certificates of deposit in other financial institutions			1,741				2,170
Securities available-for-sale			293,387				277,219
Loans held-for-sale			5,375				6,091
Loans receivable			918,962				906,869
Less: allowance for loan losses			(9,511	)			(8,999	)
Net loans receivable			909,451				897,870
Federal Home Loan Bank stock			3,912				3,912
Accrued interest receivable			4,114				4,029
Premises and equipment			28,927				29,407
Foreclosed real estate			1,032				1,083
Cash value of bank owned life insurance			30,186				30,017
Goodwill			11,109				11,109
Other assets			18,547				18,557
Total assets		$	1,349,927			$	1,328,722
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing		$	185,219			$	172,094
Interest bearing			976,423				982,276
Total			1,161,642				1,154,370
Repurchase agreements			12,991				11,499
Borrowed funds			14,000				14,000
Accrued expenses and other liabilities			20,639				14,750
Total liabilities			1,209,272				1,194,619
Stockholders' Equity:
Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding			-				-
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: March 31, 2020 - 3,463,136 December 31, 2019 - 3,451,797			-
Additional paid-in capital			29,666				29,657
Accumulated other comprehensive income/(loss)			8,686				4,261
Retained earnings			102,303				100,185
Total stockholders' equity			140,655				134,103
Total liabilities and stockholders' equity		$	1,349,927			$	1,328,722

 

		Three Months Ended
(Dollars in thousands)		March 31,
		2020				2019
Interest income:
Loans receivable
Real estate loans		$	9,357			$	8,748
Commercial loans			1,485				1,684
Consumer loans			187				111
Total loan interest			11,029				10,543
Securities			1,705				1,801
Other interest earning assets			135				143
Total interest income			12,869				12,487
Interest expense:
Deposits			2,064				1,672
Repurchase agreements			40				49
Borrowed funds			94				166
Total interest expense			2,198				1,887
Net interest income			10,671				10,600
Provision for loan losses			514				317
Net interest income after provision for loan losses			10,157				10,283
Noninterest income:
Fees and service charges		$	1,049			$	1,162
Gain on sale of loans held-for-sale, net			635				242
Wealth management operations			554				500
Gain on sale of securities, net			510				352
Increase in cash value of bank owned life insurance			169				163
Gain on sale of foreclosed real estate, net			60				27
Other			569				124
Total noninterest income		$	3,546			$	2,570
Noninterest expense:
Compensation and benefits		$	5,217			$	4,676
Occupancy and equipment			1,409				1,123
Data processing			556				703
Marketing			208				263
Federal deposit insurance premiums			196				91
Other			2,413				3,435
Total noninterest expense		$	9,999			$	10,291
Income before income tax expenses			3,704				2,562
Income tax expenses			512				340
Net income		$	3,192			$	2,222
Earnings per common share:
Basic		$	0.92			$	0.66
Diluted		$	0.92			$	0.66
Dividends declared per common share		$	0.31			$	0.30

 

		Three Months Ended
(Dollars in thousands)		March 31,
		2020				2019
Net income		$	3,192			$	2,222
Net change in net unrealized gains and losses on securities available-for-sale:
Unrealized gains arising during the period			6,112				4,183
Less: reclassification adjustment for gains included in net income			(510	)			(352	)
Net securities gain/(loss) during the period			5,602				3,831
Tax effect			(1,177	)			(798	)
Net of tax amount			4,425				3,033
Other comprehensive income/(loss), net of tax			4,425				3,033
Comprehensive income/(loss), net of tax		$	7,617			$	5,255

 

										Accumulated
						Additional				Other
		Common				Paid-in				Comprehensive				Retained				Total
(Dollars in thousands, except per share data)		Stock				Capital				(Loss)/Income				Earnings				Equity
Balance at January 1, 2019		$	-			$	11,927			$	(2,796	)		$	92,333			$	101,464
Comprehensive income:
Net income			-				-				-				2,222				2,222
Net unrealized loss on securities available-for- sale, net of reclassification and tax effects			-				-				3,033				-				3,033
Comprehensive income																			5,255
Stock-based compensation expense			-				71				-				-				71
Issuance of 416,478 shares at $42.00 per share, for acquisition of AJS Bancorp, Inc.							17,492												17,492
Cash dividends, $0.30 per share			-				-				-				(1,035	)			(1,035	)
Balance at March 31, 2019		$	-			$	29,490			$	237			$	93,520			$	123,247
Balance at January 1, 2020		$	-			$	29,657			$	4,261			$	100,185			$	134,103
Comprehensive income:
Net income			-				-				-				3,192				3,192
Net unrealized gain on securities available-for- sale, net of reclassification and tax effects			-				-				4,425				-				4,425
Comprehensive income																			7,617
Net surrender value of 1,904 restricted stock awards							(85	)											(85	)
Stock-based compensation expense			-				94				-				-				94
Cash dividends, $0.31 per share			-				-				-				(1,074	)			(1,074	)
Balance at March 31, 2020		$	-			$	29,666			$	8,686			$	102,303			$	140,655

 

		Three Months Ended
(Dollars in thousands)		March 31,
		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,192			$	2,222
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Origination of loans for sale			(24,870	)			(9,760	)
Sale of loans originated for sale			26,197				9,883
Depreciation and amortization, net of accretion			1,039				731
Amortization of mortgage servicing rights			12				17
Stock based compensation expense			94				71
Net surrender value of restricted stock awards			(85	)			-
Gain on sale of securities, net			(510	)			(352	)
Gain on sale of loans held-for-sale, net			(635	)			(242	)
Gain on sale of foreclosed real estate, net			(60	)			(27	)
Provision for loan losses			514				317
Net change in:
Interest receivable			(85	)			(430	)
Other assets			(1,155	)			(50	)
Accrued expenses and other liabilities			5,885				(964	)
Total adjustments			6,341				(806	)
Net cash - operating activities			9,533				1,416
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from maturities and (purchases) of certificates of deposits in other financial institutions..			429				(191	)
Proceeds from maturities and pay downs of securities available-for-sale			16,671				5,704
Proceeds from sales of securities available-for-sale			17,886				13,518
Purchase of securities available-for-sale			(44,972	)			(21,424	)
Net change in loans receivable			(12,118	)			(12,985	)
Purchase of premises and equipment, net			(200	)			(44	)
Proceeds from sale of foreclosed real estate, net			134				439
Cash and cash equivalents from acquisition activity, net			-				52,560
Change in cash value of bank owned life insurance			(169	)			(163	)
Net cash - investing activities			(22,339	)			37,414
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits			7,272				27,641
Proceeds from FHLB advances			-				-
Repayment of FHLB advances			-				(23,000	)
Change in other borrowed funds			1,492				1,063
Dividends paid			(1,070	)			(909	)
Net cash - financing activities			7,694				4,795
Net change in cash and cash equivalents			(5,112	)			43,625
Cash and cash equivalents at beginning of period			47,258				17,139
Cash and cash equivalents at end of period		$	42,146			$	60,764
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	2,283			$	1,907
Income taxes			-				-
Acquisition activity:
Fair value of assets acquired, including cash and cash equivalents		$	-			$	172,925
Value of goodwill and other intangible assets			-				5,491
Fair value of liabilities assumed			-				145,546
Cash paid for acquisition			-				15,378
Issuance of common stock for acquisition			-				17,492
Noncash activities:
Transfers from loans to foreclosed real estate		$	23			$	193

 

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of NorthWest Indiana Bancorp (the “Bancorp” or “NWIN”), its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary) and Peoples Bank SB (the “Bank”), and the Bank’s wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC, NWIN Funding, Incorporated, and Columbia Development Company, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are primarily dependent upon the earnings of the Bank. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by U.S. generally accepted accounting principles for complete presentation of consolidated financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of the Bancorp as of March 31, 2020 and December 31, 2019, and the consolidated statements of income, comprehensive income, changes in stockholders’ equity, and consolidated statements of cash flows for the three months ended March 31, 2020 and 2019. The income reported for the three month period ended March 31, 2020 is not necessarily indicative of the results to be expected for the full year.

 

 

Note 2 - Use of Estimates

Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of foreclosed real estate, investment securities, deferred tax assets, goodwill, and the status of contingencies are particularly susceptible to material change in the near term.

 

In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Bancorp’s customers operate and could impair their ability to fulfill their financial obligations to the Bancorp.  The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Bancorp operates.

   

Currently, the Bancorp does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Bancorp does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

    

The Bancorp is working with customers directly affected by COVID-19.  The Bancorp is prepared to offer short-term assistance in accordance with regulator guidelines.  As a result of the current economic environment caused by the COVID-19 virus, the Bancorp is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Bancorp could experience further increases in its required allowance for loan loss and record additional provision for loan loss expense. It is possible that the Bancorp’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

   

In addition, COVID-19 could cause a further and sustained decline in the Bancorp’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill and intangible asset impairment tests and result in an impairment charge being recorded for that period. In the event that the Bancorp concludes that all or a portion of its goodwill or intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

 

 

 

Note 3 - Acquisition Activity

On January 24, 2019, the Bancorp completed its previously announced acquisition of AJS Bancorp, Inc., a Maryland corporation (“AJSB”), pursuant to an Agreement and Plan of Merger dated July 30, 2018 between the Bancorp and AJSB (the “AJSB Merger Agreement”). Pursuant to the terms of the AJSB Merger Agreement, AJSB merged with and into NWIN, with NWIN as the surviving corporation. Simultaneously with the AJSB Merger, A.J. Smith Federal Savings Bank, a federally chartered savings bank and wholly-owned subsidiary of AJSB, merged with and into Peoples Bank SB, with Peoples Bank as the surviving bank.

 

In connection with the AJSB Merger, each AJSB stockholder holding 100 or more shares of AJSB common stock received fixed consideration of (i) 0.2030 shares of NWIN common stock, and (ii) $7.20 per share in cash for each outstanding share of AJSB’s common stock. Stockholders holding less than 100 shares of AJSB common stock received $16.00 in cash and no stock consideration for each outstanding share of AJSB common stock. Any fractional shares of NWIN common stock that an AJSB stockholder would have otherwise received in the AJSB Merger were cashed out in the amount of such fraction multiplied by $43.01.

 

The Bancorp issued 416,478 shares of Bancorp common stock to the former AJSB stockholders, and paid cash consideration of approximately $15.7 million. Based upon the closing price of NWIN’s common stock on January 23, 2019, the transaction had an implied valuation of approximately $33.2 million, which includes unallocated shares held by the AJSB Employee Stock Ownership Plan (“ESOP”), some of which were cancelled in connection with the closing to satisfy the ESOP’s outstanding loan balance. Acquisition costs incurred in 2019 related to the AJSB Merger were approximately $2.1 million. The acquisition further expanded the Bank’s banking center network in Cook County, Illinois, expanding the Bank’s full-service retail banking network to 22 banking centers.

 

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on the valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, the final purchase price for the AJSB acquisition is allocated as follows:

 

 

 

 

Note 4 - Securities

The estimated fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

 

 

 

 

The estimated fair value of available-for-sale debt securities at March 31, 2020, by contractual maturity, were as follows. Securities not due at a single maturity date, primarily collateralized mortgage obligations and residential mortgage-backed securities, are shown separately.

 

 

Sales of available-for-sale securities were as follows for the three months ended:

 

 

Accumulated other comprehensive income/(loss) balances, net of tax, related to available-for-sale securities, were as follows:

 

 

Securities with carrying values of approximately $54.5 million and $65.5 million were pledged as of March 31, 2020, and December 31, 2019, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.

 

 

Securities with gross unrealized losses at March 31, 2020, and December 31, 2019, not recognized in income are as follows:

 

 

 

 

Unrealized losses on securities have not been recognized into income because the securities are of high credit quality or have undisrupted cash flows. Management has the intent and ability to hold those securities for the foreseeable future, and the decline in fair value is largely due to changes in interest rates and volatility in securities markets. The fair values are expected to recover as the securities approach maturity.

 

 

Note 5 - Loans Receivable

 

Loans receivable are summarized below:

 

 

 

 

A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased. This reserve is available for use for manufactured home loan nonperformance and costs associated with nonperformance. If the segment performs in line with expectation, the deferred cost reserve is paid as an origination cost to the third party originator of the loan. The unamortized balance of the deferred cost reserve totaled $2.1 million and $1.9 million as of March 31, 2020 and December 31, 2019, respectively, and is included in net deferred loan origination costs.

 

 

 

The Bancorp's credit quality indicators are summarized below at March 31, 2020 and December 31, 2019:

 

 

 

 

The Bancorp has established a standard loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio. The use and application of these grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system is as follows:

 

1 – Minimal Risk

Borrower demonstrates exceptional credit fundamentals, including stable and predictable profit margins, strong liquidity and a conservative balance sheet with superior asset quality. Excellent cash flow coverage of existing and projected debt service. Historic and projected performance indicates borrower is able to meet obligations under almost any economic circumstances.

 

2 – Moderate risk

Borrower consistently internally generates sufficient cash flow to fund debt service, working assets, and some capital expenditures. Risk of default considered low.

 

3 – Above average acceptable risk

Borrower generates sufficient cash flow to fund debt service and some working assets and/or capital expansion needs. Profitability and key balance sheet ratios are at or slightly above peers. Current trends are positive or stable. Earnings may be level or trending down slightly or be erratic; however, positive strengths are offsetting. Risk of default is reasonable but may warrant collateral protection.

 

4 – Acceptable risk

Borrower generates sufficient cash flow to fund debt service, but most working asset and all capital expansion needs are provided from external sources. Profitability ratios and key balance sheet ratios are usually close to peers but one or more ratios (e.g. leverage) may be higher than peer. Earnings may be trending down over the last three years. Borrower may be able to obtain similar financing from other banks with comparable or less favorable terms. Risk of default is acceptable but requires collateral protection.

 

5 – Marginally acceptable risk

Borrower may exhibit excessive growth, declining earnings, strained cash flow, increasing leverage and/or weakening market position that indicate above average risk. Limited additional debt capacity, modest coverage, and average or below average asset quality, margins and market share. Interim losses and/or adverse trends may occur, but not to the level that would affect the Bank’s position. The potential for default is higher than normal but considered marginally acceptable based on prospects for improving financial performance and the strength of the collateral.

 

6 – Pass/monitor

The borrower has significant weaknesses resulting from performance trends or management concerns. The financial condition of the company has taken a negative turn and may be temporarily strained. Cash flow may be weak but cash reserves remain adequate to meet debt service. Management weaknesses are evident. Borrowers in this category will warrant more than the normal level of supervision and more frequent reporting.

 

7 – Special mention (watch)

Special mention credits are considered bankable assets with no apparent loss of principal or interest envisioned but requiring a high level of management attention. Assets in this category are currently protected but are potentially weak. These borrowers are subject to economic, industry, or management factors having an adverse impact upon their prospects for orderly service of debt. The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted. These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of Substandard.

 

8 – Substandard

This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit, some loss could be incurred in collection if the deficiencies are not corrected.

 

Performing loans are loans that are paying as agreed and are approximately less than ninety days past due on payments of interest and principal.

 

 

During the first three months of 2020, one commercial real estate loan totaling $149 thousand and one residential loan totaling $53 thousand was renewed as a troubled debt restructuring. One commercial business trouble debt restructuring loan totaling $312 thousand has subsequently defaulted during the periods presented. All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

 

 

 

 

 

 

 

As a result of acquisition activity, the Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At March 31, 2020, total purchased credit impaired loans with unpaid principal balances totaled $6.1 million with a recorded investment of $3.9 million. At December 31, 2019, purchased credit impaired loans with unpaid principal balances totaled $6.3 million with a recorded investment of $4.1 million.

 

 

 

 

For the acquisitions of First Federal Savings & Loan (“First Federal”), Liberty Savings Bank (“Liberty Savings”), First Personal Bank (“First Personal”), and A.J. Smith Federal Savings Bank, as part of the fair value of loans receivable, a net fair value discount was established for loans as summarized below: