Finward Bancorp - Quarter Report: 2007 September (Form 10-Q)
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended September 30, 2007, or
o | 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 or organization) |
(I.R.S. Employer Identification Number) |
|
9204 Columbia Avenue | ||
Munster, Indiana | 46321 | |
(Address of principal executive offices) | (ZIP code) |
Registrants telephone number, including area code: (219) 836-4400
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There were 2,808,782 shares of the registrants Common Stock, without par value, outstanding
at October 31, 2007.
NorthWest Indiana Bancorp
Index
Page | ||||||||
Number | ||||||||
PART I. Financial Information |
||||||||
Item 1. Unaudited Financial Statements |
||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5-7 | ||||||||
8-15 | ||||||||
16-17 | ||||||||
18 | ||||||||
19 | ||||||||
20 | ||||||||
21-24 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
Table of Contents
NorthWest Indiana Bancorp
Consolidated Balance Sheets
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
(Dollars in thousands) | (unaudited) | |||||||
ASSETS |
||||||||
Cash and non-interest bearing balances in financial institutions |
$ | 10,056 | $ | 15,764 | ||||
Federal funds sold |
6,140 | | ||||||
Total cash and cash equivalents |
16,196 | 15,764 | ||||||
Securities available-for-sale |
89,311 | 83,765 | ||||||
Securities held-to-maturity; fair value: September 30, 2007 - $16,205
December 31, 2006 - $15,380 |
16,266 | 15,247 | ||||||
Loans held for sale |
190 | | ||||||
Loans receivable |
468,412 | 471,716 | ||||||
Less: allowance for loan losses |
(4,151 | ) | (4,267 | ) | ||||
Net loans receivable |
464,261 | 467,449 | ||||||
Federal Home Loan Bank stock |
3,544 | 3,544 | ||||||
Accrued interest receivable |
2,996 | 3,331 | ||||||
Premises and equipment |
15,061 | 14,603 | ||||||
Foreclosed real estate |
120 | 323 | ||||||
Cash value of bank owned life insurance |
11,124 | 10,822 | ||||||
Other assets |
3,513 | 4,134 | ||||||
Total assets |
$ | 622,582 | $ | 618,982 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Deposits: |
||||||||
Non-interest bearing |
$ | 52,110 | $ | 43,889 | ||||
Interest bearing |
442,969 | 469,042 | ||||||
Total |
495,079 | 512,931 | ||||||
Borrowed funds |
71,633 | 51,501 | ||||||
Accrued expenses and other liabilities |
4,073 | 4,540 | ||||||
Total liabilities |
570,785 | 568,972 | ||||||
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: September 30, 2007 - 2,879,405
December 31, 2006 - 2,870,437 shares outstanding: September 30, 2007 - 2,808,782
December 31, 2006 - 2,799,814 |
360 | 359 | ||||||
Additional paid in capital |
4,833 | 4,610 | ||||||
Accumulated other comprehensive loss |
(146 | ) | (389 | ) | ||||
Retained earnings |
48,272 | 46,952 | ||||||
Treasury stock, common shares at cost: September 30, 2007 - 70,623
December 31, 2006 - 70,623 |
(1,522 | ) | (1,522 | ) | ||||
Total stockholders equity |
51,797 | 50,010 | ||||||
Total liabilities and stockholders equity |
$ | 622,582 | $ | 618,982 | ||||
See accompanying notes to consolidated financial statements.
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Table of Contents
NorthWest Indiana Bancorp
Consolidated Statements of Income
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands, except per share data) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Interest income: |
||||||||||||||||
Loans receivable |
||||||||||||||||
Real estate loans |
$ | 6,688 | $ | 6,617 | $ | 19,986 | $ | 19,149 | ||||||||
Commercial loans |
941 | 1,132 | 2,956 | 3,283 | ||||||||||||
Consumer loans |
49 | 61 | 149 | 193 | ||||||||||||
Total loan interest |
7,678 | 7,810 | 23,091 | 22,625 | ||||||||||||
Securities |
1,274 | 1,020 | 3,516 | 2,969 | ||||||||||||
Other interest earning assets |
21 | 77 | 79 | 241 | ||||||||||||
Total interest income |
8,973 | 8,907 | 26,686 | 25,835 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
3,846 | 3,492 | 11,295 | 9,393 | ||||||||||||
Borrowed funds |
674 | 693 | 2,102 | 1,787 | ||||||||||||
Total interest expense |
4,520 | 4,185 | 13,397 | 11,180 | ||||||||||||
Net interest income |
4,453 | 4,722 | 13,289 | 14,655 | ||||||||||||
Provision for loan losses |
80 | 0 | 85 | 15 | ||||||||||||
Net interest income after provision for loan losses |
4,373 | 4,722 | 13,204 | 14,640 | ||||||||||||
Noninterest income: |
||||||||||||||||
Fees and service charges |
722 | 756 | 2,147 | 2,213 | ||||||||||||
Wealth management operations |
192 | 159 | 530 | 495 | ||||||||||||
Gain on sale of securities, net |
51 | | 99 | | ||||||||||||
Gain on sale of loans, net |
54 | 51 | 172 | 107 | ||||||||||||
Increase in cash value of bank owned life insurance |
107 | 93 | 302 | 266 | ||||||||||||
Gain/(loss) on sale of foreclosed real estate |
12 | (2 | ) | 6 | 40 | |||||||||||
Other |
6 | 5 | 19 | 30 | ||||||||||||
Total noninterest income |
1,144 | 1,062 | 3,275 | 3,151 | ||||||||||||
Noninterest expense: |
||||||||||||||||
Compensation and benefits |
1,895 | 1,859 | 5,551 | 5,585 | ||||||||||||
Occupancy and equipment |
610 | 588 | 1,880 | 1,809 | ||||||||||||
Data processing
|
213 | 204 | 658 | 614 | ||||||||||||
Marketing |
71 | 83 | 190 | 252 | ||||||||||||
Other |
840 | 824 | 2,457 | 2,477 | ||||||||||||
Total noninterest expense |
3,629 | 3,558 | 10,736 | 10,737 | ||||||||||||
Income before income tax expenses |
1,888 | 2,226 | 5,743 | 7,054 | ||||||||||||
Income tax expenses |
444 | 639 | 1,391 | 2,139 | ||||||||||||
Net income |
$ | 1,444 | $ | 1,587 | $ | 4,352 | $ | 4,915 | ||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.51 | $ | 0.57 | $ | 1.55 | $ | 1.76 | ||||||||
Diluted |
$ | 0.51 | $ | 0.57 | $ | 1.54 | $ | 1.75 | ||||||||
Dividends declared per common share |
$ | 0.36 | $ | 0.35 | $ | 1.08 | $ | 1.05 |
See accompanying notes to consolidated financial statements.
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NorthWest Indiana Bancorp
Consolidated Statements of Changes in Stockholders Equity
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Balance at beginning of period |
$ | 50,546 | $ | 47,454 | $ | 50,010 | $ | 46,433 | ||||||||
Comprehensive income: |
||||||||||||||||
Net income |
1,444 | 1,587 | 4,352 | 4,915 | ||||||||||||
Net unrealized gain on securities
available-for-sale, net of reclassifications and tax effects |
792 | 861 | 250 | 333 | ||||||||||||
Amortization of unrecognized gain |
(3 | ) | | (8 | ) | | ||||||||||
Comprehensive income |
2,233 | 2,447 | 4,594 | 5,248 | ||||||||||||
Issuance of common stock,
under stockbased compensation plan, including tax effects |
16 | 35 | 172 | 189 | ||||||||||||
Stock based compensation expense |
12 | 10 | 52 | 29 | ||||||||||||
Cash dividends |
(1,010 | ) | (978 | ) | (3,031 | ) | (2,931 | ) | ||||||||
Balance at end of period |
$ | 51,797 | $ | 48,968 | $ | 51,797 | $ | 48,968 | ||||||||
See accompanying notes to consolidated financial statements.
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NorthWest Indiana Bancorp
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
(Dollars in thousands) | 2007 | 2006 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 4,352 | $ | 4,915 | ||||
Adjustments to reconcile net income to
net cash provided by operating activities: |
||||||||
Origination of loans for sale |
(9,964 | ) | (6,584 | ) | ||||
Sale of loans originated for sale |
9,854 | 6,524 | ||||||
Depreciation and amortization, net of accretion |
1,057 | 1,012 | ||||||
Amortization of mortgage servicing rights |
61 | 66 | ||||||
Amortization of investment in real estate limited partnerships |
8 | 24 | ||||||
Equity in (gain)/loss of investment in limited partnership,
net of interest received |
79 | 61 | ||||||
Stock based compensation expense |
52 | 50 | ||||||
Net gains on sale of securities |
(99 | ) | | |||||
Net gains on sale of loans |
(172 | ) | (107 | ) | ||||
Net gain on sale of foreclosed real estate |
(6 | ) | (40 | ) | ||||
Provision for loan losses |
85 | 15 | ||||||
Net change in: |
||||||||
Interest receivable |
335 | (27 | ) | |||||
Cash value of bank owned life insurance |
(302 | ) | (266 | ) | ||||
Other assets |
412 | (159 | ) | |||||
Accrued expenses and other liabilities |
(505 | ) | (385 | ) | ||||
Total adjustments |
895 | 184 | ||||||
Net cash from operating activities |
5,247 | 5,099 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Proceeds from maturities and pay downs of securities available-for-sale |
18,811 | 9,980 | ||||||
Proceeds from sales of securities available-for-sale |
12,853 | | ||||||
Purchase of securities available-for-sale |
(36,711 | ) | (15,758 | ) | ||||
Purchase of securities held-to-maturity |
(1,873 | ) | | |||||
Proceeds from maturities and pay downs of securities held-to-maturity |
814 | 8 | ||||||
Loan participations purchased |
(3,458 | ) | (10,760 | ) | ||||
Net change in loans receivable |
6,325 | 7,280 | ||||||
Purchase of Federal Home Loan Bank Stock |
| (721 | ) | |||||
Purchase of premises and equipment, net |
(1,473 | ) | (631 | ) | ||||
Proceeds from sale of foreclosed real estate |
445 | 197 | ||||||
Purchase of bank owned life insurance |
| (2,000 | ) | |||||
Net cash from investing activities |
(4,267 | ) | (12,405 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Change in deposits |
(17,852 | ) | 1,337 | |||||
Proceeds from FHLB advances |
42,500 | 26,000 | ||||||
Repayment of FHLB advances |
(26,500 | ) | (26,500 | ) | ||||
Change in other borrowed funds |
4,132 | (1 | ) | |||||
Tax effect of nonqualified stock option exercise |
15 | 13 | ||||||
Proceeds from issuance of common stock |
157 | 155 | ||||||
Dividends paid |
(3,000 | ) | (2,872 | ) | ||||
Net cash from financing activities |
(548 | ) | (1,868 | ) | ||||
Net change in cash and cash equivalents |
432 | (9,174 | ) | |||||
Cash and cash equivalents at beginning of period |
15,764 | 39,831 | ||||||
Cash and cash equivalents at end of period |
$ | 16,196 | $ | 30,657 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 13,424 | $ | 11,147 | ||||
Income taxes |
$ | 1,560 | $ | 2,025 | ||||
SUPPLEMENTAL NONCASH INFORMATION: |
||||||||
Transfers from loans to foreclosed real estate |
$ | 236 | $ | |
See accompanying notes to consolidated financial statements.
4
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NorthWest Indiana Bancorp
Notes to Consolidated Financial Statements
Note 1 Basis of Presentation
The consolidated financial statements include the accounts of NorthWest Indiana Bancorp (the
Bancorp), its wholly-owned subsidiary, Peoples Bank SB (the Bank), and the Banks wholly-owned
subsidiaries, Peoples Service Corporation, NWIN, LLC and NWIN Funding, Inc. The Bancorp has no
other business activity other than being a holding company for the Bank. The Bancorps earnings
are 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 financial statements. In the opinion of management, the consolidated financial
statements contain all adjustments (consisting only of normal recurring accruals) necessary to
present fairly the consolidated balance sheets of the Bancorp as of September 30, 2007 and December
31, 2006, and the consolidated statements of income and changes in stockholders equity for the
three and nine months ended September 30, 2007 and 2006, and cash flows for the nine months ended
September 30, 2007 and 2006. The income reported for the nine-month period ended September 30,
2007 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 financial
instruments and status of contingencies are particularly susceptible to material change in the near
term.
Note 3 Loans Receivable
Non-performing loans at period end were as follows:
(Dollars in thousands) | ||||||||
9/30/2007 | 12/31/2006 | |||||||
Loans past due over 90 days still on accrual |
$ | 1,146 | $ | 182 | ||||
Non-accrual loans |
7,106 | 2,896 |
Impaired loans at period end were as follows:
(Dollars in thousands) | ||||||||
9/30/2007 | 12/31/2006 | |||||||
Period end loans with no allocated
allowance for loan losses |
$ | 5,018 | $ | | ||||
Period end loans with allocated
allowance for loan losses |
848 | 1,887 | ||||||
Total |
$ | 5,866 | $ | 1,887 | ||||
Amount of the allowance for
loan losses allocated |
$ | 263 | $ | 522 | ||||
Average of impaired loans
during the period |
$ | 2,610 | $ | 2,059 | ||||
Interest income recognized
during impairment |
| | ||||||
Cash-basis interest income
recognized |
| |
Note 4 Concentrations of Credit Risk
The primary lending area of the Bancorp encompasses all of Lake County in northwest Indiana,
where a majority of loan activity is concentrated. The Bancorp is also an active lender in Porter
County, and to a lesser extent, LaPorte,
Newton and Jasper counties in Indiana, and Lake, Cook and Will counties in Illinois. Substantially
all loans are secured by specific items of collateral including residences, business assets and
consumer assets.
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Note 5
Earnings Per Share
Earnings per common share is computed by dividing net income by the weighted average number of
common shares outstanding. A reconciliation of the numerators and denominators of the basic and
diluted earnings per common share computation for the three and nine months ended September 30,
2007 and September 30, 2006 is presented below:
(Dollars in thousands, except per share data) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Basic earnings per common share: |
||||||||||||||||
Net income as reported |
$ | 1,444 | $ | 1,587 | $ | 4,352 | $ | 4,915 | ||||||||
Weighted average common shares outstanding: |
2,807,991 | 2,796,611 | 2,805,121 | 2,790,576 | ||||||||||||
Basic earnings per common share: |
$ | 0.51 | $ | 0.57 | $ | 1.55 | $ | 1.76 | ||||||||
Diluted earnings per common share: |
||||||||||||||||
Net income as reported |
$ | 1,444 | $ | 1,587 | $ | 4,352 | $ | 4,915 | ||||||||
Weighted average common shares outstanding: |
2,807,991 | 2,796,611 | 2,805,121 | 2,790,576 | ||||||||||||
Add: Dilutive effect of assumed stock
option exercises: |
23,456 | 22,251 | 25,868 | 21,469 | ||||||||||||
Weighted average common and dilutive
potential common shares outstanding: |
2,831,447 | 2,818,862 | 2,830,989 | 2,812,045 | ||||||||||||
Diluted earnings per common share: |
$ | 0.51 | $ | 0.57 | $ | 1.54 | $ | 1.75 | ||||||||
Note 6
Stock Based Compensation
Financial Accounting Standards No. 123R (FAS 123R), Share-Based Payment, requires companies
to record compensation cost for stock options provided to employees in return for employment
service. The cost is measured at the fair value of the options when granted, and this cost is
expensed over the employment service period, which is normally the vesting period of the options.
Compensation cost will also be recorded for prior option grants that vest after the date of
adoption. For the three months ended September 30, 2007, stock based compensation expense of
$12,000 was recorded, compared to $10,000 for the quarter ended September 30, 2006. For the nine
months ended September 30, 2007, stock based compensation expense of $52,000 was recorded, compared
to $29,000 for the nine months ended September 30, 2006. It is anticipated that current
outstanding vested and unvested options will result in additional compensation expense of
approximately $19,000 in 2007 and $46,000 in 2008.
A summary of option activity under the Bancorps stock option plan for the nine months ended
September 30, 2007 is presented below:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Options | Shares | Price | Term | Value | ||||||||||||
Outstanding at January 1, 2007 |
86,037 | $ | 22.92 | |||||||||||||
Granted |
| $ | | |||||||||||||
Exercised |
(7,568 | ) | $ | 20.57 | ||||||||||||
Forfeited or expired |
(325 | ) | $ | 30.00 | ||||||||||||
Outstanding at September 30, 2007 |
78,144 | $ | 23.15 | 3.9 | 426,556 | |||||||||||
Exercisable at September 30, 2007 |
49,694 | $ | 20.98 | 2.9 | 368,638 | |||||||||||
During the nine months ended September 30, 2007 and 2006, no stock options were granted from
the Bancorps stock option plan. The total intrinsic value of options exercised during the nine
months ended September 30, 2007 and 2006, was $59,233 and $90,621.
Note 7 Adoption of New Accounting Standards
The Bancorp adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN
48), as of January 1, 2007. A tax position is recognized as a benefit only if it is more likely
than not that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. For tax positions not meeting the more
likely than not test, no tax benefit is recorded. The adoption had no affect on the Bancorps
financial statements. The Bancorp and its subsidiaries are subject to U.S. federal income tax as
well as income tax of the state of Indiana, Nevada and Maryland. The Bancorp is no longer subject
to examination by taxing authorities for
6
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years before 2003. The Bancorp does not expect the total
amount of unrecognized tax benefits to significantly increase in the next twelve months. The
Bancorp recognizes interest and/or penalties related to income tax matters in income tax expense.
The Bancorp did not have any amounts accrued for interest and penalties at September 30, 2007.
The Bancorp adopted FASB Statement No. 156, Accounting for Servicing of Financial Assets-an
amendment of FASB Statement No. 140, as of January 1, 2007. This Statement provides the following:
1) revised guidance on when a servicing asset and servicing liability should be recognized; 2)
requires all separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets
and servicing liabilities at fair value each reporting date and report changes in fair value in
earnings in the period in which the changes occur; 4) upon initial adoption, permits a one-time
reclassification of available-for-sale securities to trading securities for securities which are
identified as offsetting the entitys exposure to changes in the fair value of servicing assets or
liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate
presentation of servicing assets and servicing liabilities subsequently measured at fair value in
the statement of financial position and additional footnote disclosures. Currently, the Bancorp
holds servicing assets consisting of mortgage servicing rights and no servicing liabilities. As a
result of the adoption of FASB Statement No. 156, mortgage servicing rights are initially measured
at fair value and subsequent valuations of mortgage servicing rights are measured using the
amortization method, which amortizes the servicing rights in proportion to and over the period of
estimated net servicing income or net servicing loss. Mortgage servicing rights are assessed for
impairment or increased obligation based on fair value at each reporting date. The Bancorp does
not participate in financial hedging activities for its servicing of financial assets.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Summary
NorthWest Indiana Bancorp (the Bancorp) is a bank holding company registered with the Board
of Governors of the Federal Reserve System. Peoples Bank SB, an Indiana savings bank, is a
wholly-owned subsidiary of the Bancorp. The Bancorp has no other business activity other than being
the holding company for the Bank.
At September 30, 2007, the Bancorp had total assets of $622.6 million, total loans of $468.4
million and total deposits of $495.1 million. Stockholders equity totaled $51.8 million or 8.3%
of total assets, with book value per share at $18.44. Net income for the quarter ended September
30, 2007, was $1.4 million, or $0.51 earnings per common share for basic and $0.51 for diluted
calculations. The annualized return on average assets (ROA) was 0.94%, while the annualized return
on average stockholders equity (ROE) was 11.12%, for the three months ended September 30, 2007.
Net income for the nine months ended September 30, 2007, was $4.4 million, or $1.55 earnings per
common share for basic and $1.54 for diluted calculations. The annualized return on average assets
(ROA) was 0.95%, while the annualized return on average stockholders equity (ROE) was 11.23%, for
the nine months ended September 30, 2007.
Financial Condition
During the nine months ended September 30, 2007, total assets increased by $3.6 million
(0.6%), with interest-earning assets increasing by $9.6 million (1.7%). At September 30, 2007,
interest-earning assets totaled $583.9 million and represented 93.8% of total assets.
Loans receivable totaled $468.4 million at September 30, 2007, compared to $471.7 million at
December 31, 2006. At September 30, 2007, loans receivable represented 80.2% of interest-earning
assets, 75.2% of total assets and 94.6% of total deposits. The loan portfolio, which is the
Bancorps largest asset, is a significant source of both interest and fee income. The Bancorps
lending strategy stresses quality loan growth, product and geographic diversification, and
competitive and profitable pricing. The loan portfolio includes $47.1 million (10.1%) in
construction and development loans, $233.4 million (49.7%) in residential mortgage loans, $12.9
million (2.8%) in multifamily loans, $0.8 million (0.2%) in a farmland loan, $120.8 million (25.8%)
in commercial real estate loans, $2.6 million (0.6%) in consumer loans, $41.9 million (8.9%) in
commercial business loans and $9.1 million (1.9%) in government and other loans. Adjustable rate
loans comprised 57.3% of total loans at September 30, 2007. During the nine months ended September
30, 2007, loans decreased by $3.3 million (0.7%). During the period, growth occurred in commercial
real estate, while construction and development, multifamily, consumer, commercial business and
government loan balances decreased. During the nine month period, loan balances decreased as a
result of expected construction and development loan, government, and commercial business loan
pay-off activity.
The Bancorp is primarily a portfolio lender. Mortgage banking activities are generally
limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years.
These loans are identified as held for sale when originated and sold, on a case-by-case basis, in
the secondary market as part of the Bancorps efforts to manage interest rate risk. During the
nine months ended September 30, 2007, the Bancorp sold $9.9 million in fixed rate mortgages
originated for sale compared to $6.5 million during the nine months ended September 30, 2006. Net
gains realized from sales for the nine months ended September 30, 2007, totaled $172 thousand
compared to $107 thousand for the nine months ended September 30, 2006. At September 30, 2007, the
Bancorp had $190 thousand in loans that were classified as held for sale.
The primary objective of the Bancorps investment portfolio is to provide for the liquidity
needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable
earnings. Funds are generally invested in federal funds, interest bearing balances in financial
institutions, U.S. government securities, federal agency obligations and obligations of state and
local municipalities. The securities portfolio totaled $105.6 million at September 30, 2007,
compared to $99.0 million at December 31, 2006, an increase of $6.6 million (6.6%). At
September 30, 2007, the securities portfolio represented 18.1% of interest-earning assets and 17.0%
of total assets. The securities portfolio was comprised of 26.0% in U.S. government agency debt
securities, 46.7% in U.S. government agency mortgage-backed securities and collateralized mortgage
obligations, 26.0% in municipal securities, and 1.3% in a trust preferred security. At September
30, 2007, securities available-for-sale (AFS) totaled $89.3 million or 84.6% of total securities.
AFS securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability
management or other reasons. In addition, at September 30, 2007, the Bancorp had $3.5 million in
Federal Home Loan Bank (FHLB) stock. At September 30, 2007, $6.1 million was maintained in
interest bearing balances in financial institutions.
The allowance for loan losses (ALL) is a valuation allowance for probable incurred credit
losses, increased by the provision for loan losses, and decreased by charge-offs less recoveries.
A loan is charged-off against the allowance by management as a loss when deemed uncollectible,
although collection efforts continue and future recoveries may occur.
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The determination of the amounts of the ALL and provisions for loan losses is based on
managements current judgments about the credit quality of the loan portfolio with consideration
given to all known relevant internal and external factors that affect loan collectability as of the
reporting date. The appropriateness of the current year provision and the overall adequacy of the
ALL are determined through a disciplined and consistently applied quarterly process that combines a
review of the current position with a risk assessment worksheet.
The Risk Assessment Worksheet covers the residential, commercial real estate, commercial
business, and consumer loan portfolios. Management uses a risk rating system to assist in
determining the appropriate level for the ALL. Management assigns risk factors to non-performing
loans; loans that management has internally classified as impaired, substandard, doubtful, loss, or
watch; and, performing loans.
Risk factors for non-performing and internally classified loans are based on an analysis of
the estimated collateral liquidation value for individual loans defined as substandard or doubtful.
Estimated collateral liquidation values are based on established loan underwriting standards and
adjusted for current mitigating factors on a loan-by-loan basis. Aggregate substandard loan
collateral deficiencies are determined for residential, commercial real estate, commercial
business, and consumer loan portfolios. These deficiencies are then stated as a percentage of the
total substandard balances to determine the appropriate risk factors.
Risk factors for performing and non-classified loans are based on the average net charge-offs
for the most recent five years, which are then stated as a percentage of average loans for the same
period. Historical risk factors are calculated for residential, commercial real estate, commercial
business, and consumer loans. The historical factors are then adjusted for current subjective
risks attributable to: local and national economic factors; loan growth and changes in loan
composition; organizational structure; composition of loan staff; loan concentrations; policy
changes and out of market lending activity.
Non-performing loans include those loans that are 90 days or more past due and those loans
that have been placed on non-accrual status. Non-performing loans totaled $8.3 million at
September 30, 2007, compared to $3.1 million at December 31, 2006, an increase of $5.2 million or
168.1%. The increase in non-performing loans at September 30, 2007, is primarily related to two
past due commercial real estate participation loans totaling $5.0 million, which have also been
classified as substandard and impaired during the current quarter. For both loans, management is
in periodic contact with the lead lenders and continues to gather information regarding steps
required for protection of the banks interest in the collateral. Based on the current information
provided by the lead lenders, management has had to make certain estimates regarding both projects
cash flows, collateral values and strength of personal guarantees. Based upon these estimates,
management believes that there is sufficient collateral and personal guarantees to repay the debt.
To the extent that actual cash flows, collateral values and strength of personal guarantees differ
from current estimates, additional provisions to the allowance for loan losses may be required.
The ratio of non-performing loans to total loans was 1.76% at September 30, 2007, compared to 0.65%
at December 31, 2006. The ratio of non-performing loans to total assets was 1.33% at September 30,
2007, compared to 0.50% at December 31, 2006. The September 30, 2007 non-performing loan balances
include $7.1 million in loans accounted for on a non-accrual basis and $1.2 million in accruing
loans which were contractually past due 90 days or more. Loans, internally classified as
substandard totaled $10.9 million at September 30, 2007, compared to $6.9 million at December 31,
2006. The increase in substandard loans at September 30, 2007, is related to the previously
mentioned commercial real estate participation loans in the amount of $5.0 million. No loans were
classified as doubtful or loss. Substandard loans include non-performing loans and potential
problem loans, where information about possible credit issues or other conditions causes management
to question the ability of such borrowers to comply with loan covenants or repayment terms. In
addition to identifying and monitoring non-performing and other classified loans, management
maintains a list of watch loans. Watch loans represent loans management is closely monitoring due
to one or more factors that may cause the loan to become
classified. Watch loans totaled $9.9 million at September 30, 2007, compared to $7.6 million
at December 31, 2006. The increase in watch loans at September 30, 2007 is related to commercial
business and real estate loans with potential cash flow issues.
A loan is considered impaired when, based on current information and events, it is probable
that a borrower will be unable to collect all amounts due according to the contractual terms of the
loan agreement. At September 30, 2007, impaired loans totaled $5.9 million, compared to $1.9
million at December 31, 2006. The September 30, 2007, impaired loan balances consist of five loans
to four commercial borrowers that are secured by business assets and real estate, and are
personally guaranteed by the owners of the businesses. During the quarter ended September 30,
2007, a previously reported impaired commercial real estate loan totaling $230 thousand was
charged-off, while two commercial real estate participation loans totaling $5.0 million and one
commercial business loan totaling $141 thousand were classified as impaired. The September 30,
2007, impaired loan balances were also included in the
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previously discussed non-performing and
substandard loan balances. There were no other loans considered to be impaired loans as of, or
for the quarter ended, September 30, 2007.
At September 30, 2007, management is of the opinion that there are no loans, except those
discussed above, where known information about possible credit problems of borrowers causes
management to have serious doubts as to the ability of such borrowers to comply with the present
loan repayment terms and which may result in disclosure of such loans as non-accrual, past due or
restructured loans. Also, at September 30, 2007, no other interest bearing assets were required to
be disclosed as non-accrual, past due, restructured or potential problems if such assets were
loans. Management does not presently anticipate that any of the non-performing loans or classified
loans would materially impact future operations, liquidity or capital resources.
The Bancorp is a party to financial instruments in the normal course of business to meet
financing needs of its customers. These financial instruments, which include commitments to make
loans and standby letters of credit, are not reflected in the accompanying consolidated financial
statements. Such financial instruments are recorded when they are funded. The Bancorp has a $1.1
million participation in a $6.4 million letter of credit, which acts as payment support to
bondholders. The Bancorps management currently believes that the principal of the borrower has
the financial capacity to meet future bond repayment obligations. Cash flows from the security
collateralizing the letter of credit have been negatively impacted due to the closing of a major
tenant. The letter of credit is also secured by a cash collateral account in the amount of $1.0
million. Management continues to monitor the letter of credit and bond repayments.
For the nine months ended September 30, 2007, $85 thousand in additions to the ALL account
were required, compared to $15 thousand for the nine months ended September 30, 2006. The
September 30, 2007 ALL contained $263 thousand in specific allowances for the collateral deficiency
associated with two loans totaling $849 thousand, which had been classified as impaired at
September 30, 2007. Charge-offs, net of recoveries, totaled $201 thousand for the current nine
months, compared to charge-offs, net of recoveries of $65 thousand for the nine months ended
September 30, 2006. The ALL provisions take into consideration managements current judgments
about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio
mix and local economic conditions. In determining the provision for loan loss for the current
period, management has given consideration to increased risks associated with in the local economy,
changes in loan balances and mix, and asset quality.
The ALL to total loans was 0.89% at September 30, 2007, compared to 0.90% at December 31,
2006, while the ALL to non-performing loans (coverage ratio) was 50.3% at September 30, 2007,
compared to 138.6% at December 31, 2006. The decrease in the coverage ratio is attributable to the
two commercial real estate participation loans totaling $5.0 million that were placed in nonaccrual
status during the current quarter. The September 30, 2007 balance in the ALL account of $4.2
million is considered adequate by management after evaluation of the loan portfolio, past
experience and current economic and market conditions. While management may periodically allocate
portions of the allowance for specific problem loans, the whole allowance is available for any loan
charge-offs that occur. The allocation of the ALL reflects performance and growth trends within
the various loan categories, as well as consideration of the facts and circumstances that affect
the repayment of individual loans, and loans which have been pooled as of the evaluation date, with
particular attention given to non-performing loans and loans which have been classified as
substandard, doubtful or loss. Management has allocated general reserves to both performing and
non-performing loans based on current information available.
At September 30, 2007, the Bancorp had two properties in foreclosed real estate totaling $120
thousand, compared to four properties totaling $323 thousand at December 31, 2006.
Deposits are a fundamental and cost-effective source of funds for lending and other investment
purposes. The Bancorp offers a variety of products designed to attract and retain customers, with
the primary focus on building and expanding relationships. At September 30, 2007, deposits totaled
$495.1 million. During the nine months ended
September 30, 2007, deposits decreased by $17.9 million (3.5%). Checking account balances
increased by $3.6 million (3.3%). Savings account balances decreased by $355 thousand (0.7%)
during the current period. Money market deposit accounts (MMDAs) decreased by $25.0 million
(18.2%), as a result of planned withdrawals by local governmental units. Certificates of deposit
increased by $3.8 million (1.8%), as additional certificates of deposit balances were acquired to
replace MMDAs withdrawals. At September 30, 2007, the deposit base was comprised of 22.5%
checking accounts, 22.7% MMDAs, 10.9% savings accounts and 43.9% certificates of deposit.
Borrowings are primarily used to fund asset growth not supported by deposit generation. At
September 30, 2007, borrowed funds totaled $71.6 million compared to $51.5 million at December 31,
2006, an increase of $20.1 million (39.1%). During the current period, short-term variable
borrowings were utilized for funding requirements, instead of higher rate term deposits, in
anticipation of a decrease in the Fed funds rate by the Federal Reserve. Retail repurchase
agreements totaled $13.9 million at September 30, 2007, compared to $14.7 million at December 31,
2006, a decrease
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of $773 thousand (5.2%). Federal Home Loan Bank (FHLB) fixed, variable and line
of credit advances totaled $55.3 million at September 30, 2007, compared to $35.1 million at
December 31, 2006, an increase of $20.2 million (57.5%). During the three months ended September
30, 2007, advance balances increased by $19.4 million as a result of decreases in deposit balances.
In addition, other short-term borrowings totaled $2.4 million at September 30, 2007, compared to
$1.7 million at December 31, 2006, a decrease of $717 thousand (42.2%).
Liquidity and Capital Resources
For the Bancorp, liquidity management refers to the ability to generate sufficient cash
to fund current loan demand, meet deposit withdrawals, and pay dividends and operating
expenses. Because profitability and liquidity are often conflicting objectives, management
attempts to maximize the Bancorps net interest margin by making adequate, but not excessive,
liquidity provisions.
Changes in the liquidity position result from operating, investing and financing
activities. Cash flows from operating activities are generally the cash effects of
transactions and other events that enter into the determination of net income. The primary
investing activities include loan originations, loan repayments, investments in interest
bearing balances in financial institutions, and the purchase, sale, and maturity of
investment securities. Financing activities focus almost entirely on the generation of
customer deposits. In addition, the Bancorp utilizes borrowings (i.e., retail repurchase
agreements and advances from the FHLB) as a source of funds.
During the nine months ended September 30, 2007, cash and cash equivalents increased by $432
thousand compared to a $9.2 million decrease for the nine months ended September 30, 2006. The
primary sources of cash were proceeds from pay downs of securities, loan sales, loan repayments and
proceeds from FHLB advances and other borrowed funds. The primary uses of cash were the purchase
of securities, funding of withdrawals for short-term local government funds, repayment of FHLB
advances, purchase of loan participations and the payment of common stock dividends. Cash provided
for operating activities totaled $5.2 million for the nine months ended September 30, 2007,
compared to $5.1 million for the period ended September 30, 2006. Cash outflows from investing
activities totaled $4.3 million for the current period, compared to cash outflows of $12.4 million
for the nine months ended September 30, 2006. The change for the current period was primarily due
the maturities and sales of available-for-sale securities. Net cash outflows from financing
activities totaled $548 thousand during the current period compared to net cash outflows of $1.9
million for the nine months ended September 30, 2006. The change in net cash outflows from
financing activities was primarily due to an increase in net proceeds from FHLB advance balances
during the nine months ended September 30, 2007. The Bancorp paid dividends on common stock of
$3.0 million during the current nine month period compared to $2.9 million for the nine months
ended September 30, 2006.
At September 30, 2007, outstanding commitments to fund loans totaled $123.0 million.
Approximately 48% of the commitments were at variable rates. Management believes that the
Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments
and to maintain proper levels of liquidity.
During the fourth quarter of 2007, the Bancorp will complete the construction of a
state-of-the-art banking center in Crown Point, Indiana. The cost of the new facility is
expected to be approximately $1.2 million. During the current nine months, construction
disbursements totaled $636 thousand. Approximately $564 thousand in additional construction
disbursements will occur in 2007. The funding for these disbursements will be acquired from
current period cash inflows. For the nine months ended September 30, 2007, capitalized interest
totaled $2 thousand. The facility will not have a material impact on noninterest expense during
2007. The new facility will provide opportunities to expand market share for the Bancorps
products and services in Crown Point and the surrounding areas.
Management strongly believes that maintaining a high level of capital enhances safety and
soundness. During the nine months ended September 30, 2007, stockholders equity increased by $1.8
million (3.6%). The increase was primarily a result of the Bancorps $4.4 million in net income
for the current nine month period. The Bancorp declared $3.0 million in cash dividends for the
nine month period ended September 30, 2007. The net unrealized loss on available-for-sale
securities, net of tax was $252 thousand for the current nine months. During the current nine
month period, the Bancorp received $171 thousand from the issuance of Bancorp common stock from
stock-based compensation plans.
The Bancorp is subject to risk-based capital guidelines adopted by the Board of
Governors of the Federal Reserve System (the FRB), and the Bank is subject to risk-based
capital guidelines adopted by the FDIC. As applied to the Bancorp and the Bank, the FRB and
FDIC capital requirements are substantially identical. The Bancorp and the Bank are required
to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. In
addition, the FRB and FDIC regulations provide for a minimum Tier 1 leverage ratio (Tier 1
capital
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to adjusted average assets) of 3% for financial institutions that meet certain
specified criteria, including that they have the highest regulatory rating and are not
experiencing or anticipating significant growth. All other financial institutions are
required to maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at least one
to two percent.
The table on the following page shows that, at September 30, 2007, and December 31,
2006, the Bancorps capital exceeded all regulatory capital requirements. The Bancorps and
the Banks regulatory capital ratios were substantially the same at both dates. The dollar
amounts are in millions.
Required for | To be well | |||||||||||||||||||||||
Actual | adequate capital | capitalized | ||||||||||||||||||||||
At September 30, 2007 | Amount Ratio | Amount Ratio | Amount Ratio | |||||||||||||||||||||
Total capital to risk-weighted assets |
$ | 56.1 | 12.3 | % | $ | 36.6 | 8.0 | % | $ | 45.7 | 10.0 | % | ||||||||||||
Tier 1 capital to risk-weighted assets |
$ | 51.9 | 11.4 | % | $ | 18.3 | 4.0 | % | $ | 27.4 | 6.0 | % | ||||||||||||
Tier 1 capital to adjusted average
assets |
$ | 51.9 | 8.4 | % | $ | 18.5 | 3.0 | % | $ | 30.8 | 5.0 | % |
Required for | To be well | |||||||||||||||||||||||
Actual | adequate capital | capitalized | ||||||||||||||||||||||
At December 31, 2006 | Amount Ratio | Amount Ratio | Amount Ratio | |||||||||||||||||||||
Total capital to risk-weighted assets |
$ | 54.7 | 12.0 | % | $ | 36.4 | 8.0 | % | $ | 45.5 | 10.0 | % | ||||||||||||
Tier 1 capital to risk-weighted assets |
$ | 50.4 | 11.1 | % | $ | 18.2 | 4.0 | % | $ | 27.3 | 6.0 | % | ||||||||||||
Tier 1 capital to adjusted average
assets |
$ | 50.4 | 8.0 | % | $ | 19.0 | 3.0 | % | $ | 31.7 | 5.0 | % |
The Bancorps ability to pay dividends to its shareholders is entirely dependent upon
the Banks ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay
dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and
other operating expenses) as is considered expedient by the Banks Board of Directors.
However, the Bank must obtain the approval of the Indiana Department of Financial
Institutions for the payment of a dividend if the total of all dividends declared by the
Bank during the current year, including the proposed dividend, would exceed the sum of
retained net income for the year to date plus its retained net income for the previous two
years. For this purpose, retained net income, means net income as calculated for call
report purposes, less all dividends declared for the applicable period. Moreover, the FDIC
and the Federal Reserve Board may prohibit the payment of dividends if it determines that
the payment of dividends would constitute an unsafe or unsound practice in light of the
financial condition of the Bank. The aggregate amount of dividends, which may be declared
by the Bank in 2007, without prior regulatory approval, approximates $4,907,000 plus current
2007 net profits.
Results of Operations Comparison of the Quarter Ended September 30, 2007 to the Quarter
Ended September 30, 2006
Net income for the quarter ended September 30, 2007 was $1.4 million, compared to $1.6
million for the quarter ended September 30, 2006, a decrease of $143 thousand (9.0%). The
earnings represent a ROA of 0.94% for the quarter ended September 30, 2007, compared to
1.02% for the quarter ended September 30, 2006.
The ROE was 11.12% for the quarter ended September 30, 2007, compared to 13.11% for the
quarter ended September 30, 2006.
Net interest income for the three months ended September 30, 2007 was $4.5 million, a
decrease of $269 thousand (5.7%), compared to $4.7 million for the quarter ended September
30, 2006. The decrease in net interest income has been negatively impacted by short-term
interest rates and slow loan and checking account growth. The weighted-average yield on
interest-earning assets was 6.24% for the three months ended September 30, 2007, compared to
6.15% for the three months ended September 30, 2006. The weighted-average cost of funds for
the quarter ended September 30, 2007, was 3.23% compared to 2.94% for the quarter ended
September 30, 2006. The impact of the 6.24% return on interest earning assets and the 3.23%
cost of funds resulted in an interest rate spread of 3.01% for the current quarter compared
to 3.21% for the quarter ended September 30, 2006. During the current quarter, total
interest income increased by $66 thousand (0.7%) while total interest expense increased by
$335 thousand (8.0%). The net interest margin was 3.10% for the three months ended September
30, 2007, compared to 3.26% for the quarter ended September 30, 2006. On a tax equivalent
basis, the Bancorps net interest margin was 3.19% for the three months ended September 30,
2007, compared to
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3.36% for the quarter ended September 30, 2006. Comparing the net
interest margin on a tax equivalent basis more accurately compares the returns on tax-exempt
loans and securities to those on taxable interest-earning assets.
During the three months ended September 30, 2007, interest income from loans decreased
by $132 thousand (1.7%), compared to the three months ended September 30, 2006. The decrease
was primarily due to a decrease in average daily loan balances. The weighted-average yield
on loans outstanding was 6.64% for the current quarter, compared to 6.57% for the three
months ended September 30, 2006. Loan balances averaged $462.7 million for the current
quarter, a decrease of $12.7 million (2.7%) from $475.4 million for the three months ended
September 30, 2006. The decrease in average daily loan balances was affected by several
large commercial real estate and commercial business loan pay-offs. During the three months
ended September 30, 2007, interest income on securities and other interest bearing balances
increased by $198 thousand (18.1%), compared to the quarter ended September 30, 2006. The
increase was due to higher securities balances and an increase in the weighted-average
portfolio yield. The weighted-average yield on securities and other interest bearing
balances was 4.60%, for the current quarter, compared to 4.22% for the three months ended
September 30, 2006. Securities balances averaged $110.7 million for the current quarter, up
$12.4 million (12.6%) from $98.3 million for the three months ended September 30, 2006.
Other interest bearing balances averaged $1.8 million for the current quarter, down $3.9
million (68.4%) from $5.7 million for the three months ended September 30, 2006.
Interest expense on deposits increased by $354 thousand (10.1%) during the current
quarter compared to the three months ended September 30, 2006. The change was primarily due
to an increase in the weighted-average rate paid on deposits. The weighted-average rate paid
on deposits for the three months ended September 30, 2007 was 3.08%, compared to 2.80% for
the quarter ended September 30, 2006. Total deposit balances averaged $498.8 million for the
current quarter, up $11.5 thousand (0.0%) from $498.7 million for the quarter ended September
30, 2006. Interest expense on borrowed funds decreased by $19 thousand (2.8%) during the
current quarter due to a decrease in average daily balances for borrowed funds. The
weighted-average cost of borrowed funds was 4.38% for the current quarter compared to 3.94%
for the three months ended September 30, 2006. Borrowed funds averaged $61.5 million during
the quarter ended September 30, 2007, a decrease of $8.8 million (12.5%) from $70.3 million
for the quarter ended September 30, 2006.
Noninterest income for the quarter ended September 30, 2007 was $1.14 million, an
increase of $82 thousand (7.7%) from $1.06 million for the quarter ended September 30, 2006.
During the current quarter, fees and service charges totaled $722 thousand, a decrease of $34
thousand (4.5%) from $756 thousand for the quarter ended September 30, 2006. Fees from
Wealth Management operations totaled $192 thousand for the quarter ended September 30, 2007,
an increase of $33 thousand (20.8%) from $159 thousand for the quarter ended September 30,
2006. Gains from the sale of securities totaled $51 thousand for the current quarter. No
security gains were realized during the quarter ended September 30, 2006. Gains from loan
sales totaled $54 thousand for the current quarter, an increase of $3 thousand (5.9%),
compared to $51 thousand for the quarter ended September 30, 2006. Income from an increase
in the cash value of bank owned life insurance totaled $107 thousand for the quarter ended
September 30, 2007, an increase of $14 thousand (15.1%), compared to $93 thousand for the
quarter ended September 30, 2006. For the quarter ended September 30, 2007, a $12 thousand
gain from the sale of foreclosed real estate was realized, compared to a loss of $2 thousand
for the quarter ended September 30, 2006.
Noninterest expense for the quarter ended September 30, 2007 was $3.63 million, an increase of
$71 thousand (2.0%) from $3.56 million for the three months ended September 30, 2006. During the
current quarter, compensation
and benefits totaled $1.90 million, an increase of $36 thousand (1.9%) from $1.86 million for
the quarter ended September 30, 2006. The increase was primarily due to the addition of more
employees. Occupancy and equipment totaled $610 thousand for the current quarter, an increase of
$22 thousand (3.8%) compared to $588 thousand for the quarter ended September 30, 2006. The
increase was a result of additional depreciation expense for capital expenditures. Data processing
expense totaled $213 thousand for the three months ended September 30, 2007, an increase of $9
thousand (4.4%) from $204 thousand for the three months ended September 30, 2006. The change was a
result of increased utilization of the Bancorps core data processing system. Marketing expense
related to banking products totaled $71 thousand for the current quarter, a decrease of $12
thousand (14.5%) from $83 thousand for the three months ended September 30, 2006. Marketing
expenses for the current quarter were down, as the Bank continues to focus on reengineering its
marketing function. Other expenses related to banking operations totaled $840 thousand for the
quarter ended September 30, 2007, an increase of $16 thousand (2.0%) from $824 thousand for the
quarter ended September 30, 2006. The change is a result of an increase in standard operating
expenses. The Bancorps efficiency ratio was 64.8% for the quarter ended September 30, 2007,
compared to 61.5% for the three months ended September 30, 2006. The ratio is determined by
dividing total noninterest expense by the sum of net interest income and total noninterest income
for the period.
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Income tax expenses for the three months ended September 30, 2007 totaled $444 thousand,
compared to $639 thousand for the three months ended September 30, 2006, a decrease of $195
thousand (30.5%). The combined effective federal and state tax rates for the Bancorp was 23.5% for
the three months ended September 30, 2007, compared to 28.7% for the three months ended September
30, 2006. The decrease was attributable to an increased investment in municipal securities and the
Banks Real Estate Investment Trust.
Results of Operations Comparison of the Nine Months Ended September 30, 2007 to the Nine
Months Ended September 30, 2006
Net income for the nine months ended September 30, 2007 was $4.4 million, compared to
$4.9 million for the nine months ended September 30, 2006, a decrease of $563 thousand
(11.4%). The earnings represent a ROA of 0.95% for the nine months ended September 30,
2007, compared to 1.06% for the nine months ended September 30, 2006. The ROE was 11.23%
for the nine months ended September 30, 2007, compared to 13.71% for the nine months ended
September 30, 2006.
Net interest income for the nine months ended September 30, 2007 was $13.3 million, a
decrease of $1.4 million (9.3%), compared to $14.7 million for the nine months ended
September 30, 2006. The decrease in net interest income has been negatively impacted by
short-term interest rates and slow loan and checking account growth. The weighted-average
yield on interest-earning assets was 6.22% for the nine months ended September 30, 2007,
compared to 5.98% for the nine months ended September 30, 2006. The weighted-average cost of
funds for the nine months ended September 30, 2007, was 3.19% compared to 2.64% for the nine
months ended September 30, 2006. The impact of the 6.22% return on interest-earning assets
and the 3.19% cost of funds resulted in an interest rate spread of 3.03% for the current nine
months compared to 3.34% for the nine months ended September 30, 2006. During the current
nine months, total interest income increased by $851 thousand (3.3%) while total interest
expense increased by $2.2 million (19.8%). The net interest margin was 3.10% for the nine
months ended September 30, 2007, compared to 3.39% for the nine months ended September 30,
2006. On a tax equivalent basis, the Bancorps net interest margin was 3.19% for the nine
months ended September 30, 2007, compared to 3.49% for the nine months ended September 30,
2006.
During the nine months ended September 30, 2007, interest income from loans increased by
$466 thousand (2.1%), compared to the nine months ended September 30, 2006. The increase was
primarily due to an increase in the weighted-average loan yield. The weighted-average yield
on loans outstanding was 6.63% for the current nine months, compared to 6.38% for the nine
months ended September 30, 2006. Loan balances averaged $464.6 million for the current nine
months, a decrease of $7.5 million (1.6%) from $472.1 million for the nine months ended
September 30, 2006. The decrease in average daily loan balances was affected by several
large commercial real estate and commercial business loan pay-offs. During the nine months
ended September 30, 2007, interest income on securities and other interest bearing balances
increased by $385 thousand (12.0%), compared to the nine months ended September 30, 2006.
The increase was due to higher securities balances and an increase in the weighted-average
portfolio yield. The weighted-average yield on securities and other interest bearing
balances was 4.46%, for the current nine months, compared to 4.10% for the nine months ended
September 30, 2006. Securities balances averaged $105.6 million for the current nine months,
up $8.0 million (8.2%) from $97.6 million for the nine months ended September 30, 2006.
Other interest bearing balances averaged $2.0 million for the current nine months, down $4.8
million (70.5%) from $6.8 million for the nine months ended September 30, 2006.
Interest expense on deposits increased by $1.9 million (20.3%) during the current nine
months compared to the nine months ended September 30, 2006. The change was due to an
increase in the weighted-average rate paid on deposits. The weighted-average rate paid on
deposits for the nine months ended September 30, 2007 was 3.05%, compared to 2.50% for the
nine months ended September 30, 2006. Total deposit balances averaged $494.0 million for the
current nine months, down $7.4 million (1.5%) from $501.4 million for the nine months ended
September 30, 2006. Interest expense on borrowed funds increased by $315 thousand (17.6%)
during the current nine months due to an increase in the weighted-average rate paid and an
increase in average daily balances. The weighted-average cost of borrowed funds was 4.29%
for the current nine months compared to 3.74% for the nine months ended September 30, 2006.
Borrowed funds averaged $65.3 million during the nine months ended September 30, 2007, an
increase of $1.6 million (2.5%) from $63.7 million for the nine months ended September 30,
2006.
Noninterest income for the nine months ended September 30, 2007 was $3.28 million, an
increase of $124 thousand (3.9%) from $3.15 million for the nine months ended September 30,
2006. During the current nine months, fees and service charges totaled $2.15 million, a
decrease of $66 thousand (3.0%) from $2.21 million for the nine months ended September 30,
2006. Fees from Wealth Management operations totaled $530 thousand
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for the nine months ended
September 30, 2007, an increase of $35 thousand (7.1%) from $495 thousand for the nine months
ended September 30, 2006. Gains from the sale of securities totaled $99 thousand for the
current nine months. No security gains were realized during the nine months ended September
30, 2006. Gains from loan sales totaled $172 thousand for the current nine months, an
increase of $65 thousand (60.7%), compared to $107 thousand for the nine months ended
September 30, 2006. Income from increases in the cash value of bank owned life insurance
totaled $302 thousand for the nine months ended September 30, 2007, compared to $266 thousand
for the nine months ended September 30, 2006, an increase of $36 thousand (13.5%). For the
nine months ended September 30, 2007, a $6 thousand gain from the sale of foreclosed real
estate was realized, while net gains of $40 thousand were realized during the nine months
ended September 30, 2006.
Noninterest expense for the nine months ended September 30, 2007 was $10.74 million, a
decrease of $1 thousand (0.0%) from $10.74 million for the nine months ended September 30, 2006.
During the current nine months, compensation and benefits totaled $5.55 million, a decrease of $34
thousand (0.6%) from $5.59 million for the nine months ended September 30, 2006. The decrease was
primarily due to a reduction in benefit accruals. Occupancy and equipment totaled $1.9 million for
the current nine months, an increase of $71 thousand (3.9%) compared to $1.8 million for the nine
months ended September 30, 2006. The increase was a result of additional depreciation expense for
capital expenditures. Data processing expense totaled $658 thousand for the nine months ended
September 30, 2007, an increase of $44 thousand (7.3%) from $614 thousand for the nine months ended
September 30, 2006. The change was a result of increased utilization of the Bancorps core data
processing system. Marketing expense related to banking products totaled $190 thousand for the
current nine months, a decrease of $62 thousand (24.6%) from $252 thousand for the nine months
ended September 30, 2006. Marketing expenses for the current period were down, as the Bank
continues to focus on reengineering its marketing function. Other expenses related to banking
operations totaled $2.46 million for the nine months ended September 30, 2007, a decrease of $20
thousand (0.8%) from $2.48 million for the nine months ended September 30, 2006. The change was a
result of a reduction in losses related to customer fraud. The Bancorps efficiency ratio was
64.8% for the nine months ended September 30, 2007, compared to 60.3% for the nine months ended
September 30, 2006.
Income tax expenses for the nine months ended September 30, 2007 totaled $1.4 million,
compared to $2.1 million for the nine months ended September 30, 2006, a decrease of $748 thousand
(35.0%). The combined effective federal and state tax rates for the Bancorp was 24.2% for the nine
months ended September 30, 2007, compared to 30.0% for the nine months ended September 30, 2006.
The decrease was attributable to an increased investment in municipal securities, bank owned life
insurance and the Banks Real Estate Investment Trust.
Critical Accounting Policies
Critical accounting policies are those accounting policies that management believes are most
important to the portrayal of the Bancorps financial condition and that require managements most
difficult, subjective or complex judgments. The Bancorps critical accounting policies from
December 31, 2006 remain unchanged.
Forward-Looking Statements
Statements contained in this report that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words
or phrases would be, will allow, intends to, will likely result, are expected to, will
continue, is anticipated, estimate, project, or similar expressions are also intended to
identify forward-looking statements within the meaning of the Private Securities Litigation
Reform Act. The Bancorp cautions readers that forward-looking statements, including without
limitation those relating to the
Bancorps future business prospects, interest income and expense, net income, liquidity, and
capital needs are subject to certain risks and uncertainties that could cause actual results to
differ materially from those indicated in the forward-looking statements, due to, among other
things, factors identified in this report, including those identified in Item 1A of the Bancorps
2006 Form 10-K.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Bancorps primary market risk exposure is interest rate risk. Interest rate risk is the
risk that the Bancorps earnings and capital will be adversely affected by changes in interest
rates. The primary approach to interest rate risk management is one that focuses on adjustments to
the Bancorps asset/liability mix in order to limit the magnitude of interest rate risk. The Board
of Directors has delegated the responsibility for measuring, monitoring and controlling interest
rate risk to the Bancorps asset/liability, capital and technology management committee (ALCTM).
The ALCTM is responsible for developing and implementing interest rate risk management strategies,
establishing and maintaining a system of limits and controls, and establishing and utilizing an
interest rate risk measurement system. The ALCTM, which is made up of members of senior
management, generally meets monthly with board presentations occurring quarterly.
Performance from an interest rate risk perspective can be measured in many ways.
Methodologies used by the Bancorp focus on net interest income and the net economic value of
equity. Net interest income is defined as interest income less interest expense. Variability in
net interest income arises because its components interest income and interest expense do not
change equally as rates vary. This mismatch occurs because individual assets and liabilities
reprice differently as rates change. Factors which affect net interest income include changes in
the level of interest rates, changes in the relationship between Bancorp yield rates and interest
costs, changes in the volume of assets and liabilities outstanding, and changes in the composition
or mix of assets and liabilities. Management uses rate shock (i.e., instantaneous and sustained
parallel shifts in the yield curve in 1% increments up and down 2%) for stress testing the net
interest income under several rate change levels. In order to simulate activity, maturing balances
are replaced with new balances at the new rate level and repricing balances are adjusted to the new
rate shock level. The results are compared to limits set by the Board of Directors and are
monitored to identify unfavorable trends. Net economic value of equity is the net present value of
the Bancorps portfolio of assets and liabilities. By marking-to-market the components of the
balance sheet, management can compute the net economic value of equity. As rates change over time,
the market values of Bancorp assets and liabilities will change, with longer-term products
fluctuating more than short-term products. In most cases, rate-sensitive assets and liabilities
will not have the same maturity characteristics. Therefore, as rates vary, the market value of the
rate-sensitive assets will not change equally with the market value of rate-sensitive liabilities.
This will cause the net economic value of equity to vary. The focus of the net economic value of
equity is to determine the percentage decline in the net economic value of equity caused by a 2%
increase or decrease in interest rates, whichever produces the larger decline. A large value
indicates a large percentage decline in the net economic value of equity due to changes in interest
rates and, thus, high interest rate sensitivity. A low value indicates a small percentage decline
in the net economic value of equity due to changes in interest rates and, thus, low interest rate
sensitivity. As with net interest income, the results are compared to limits set by the Board of
Directors and are monitored to identify unfavorable trends.
Presented in the following tables is forward-looking information about the Bancorps
sensitivity to changes in interest rates as of September 30, 2007 and December 31, 2006. The
tables incorporate the Bancorps internal system generated data as related to the maturity and
repayment/withdrawal of interest-earning assets and interest-bearing liabilities. Prepayment
assumptions are based on published data. Present value calculations use current published market
interest rates. For core deposits that have no contractual maturity, the table presents principal
cash flows and, as applicable, related weighted-average interest rates based on the Bancorps
historical experience, managements judgment, and statistical analysis, as applicable, concerning
their most likely withdrawal behaviors, but not as to when they could be repriced.
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September 30, 2007:
Net Interest Income | Net Economic Value of Equity | |||||||||||||||||||||||||||
Policy | Policy | |||||||||||||||||||||||||||
Change in rates | Amount | % Chg. | Limit % | Amount | % Chg. | Limit % | ||||||||||||||||||||||
2 | % | $ | 14,617 | -9.3 | % | -20.0 | % | $ | 76,762 | -17.1 | % | -35 | % | |||||||||||||||
1 | % | $ | 15,593 | -3.2 | % | -7.5 | % | $ | 85,143 | -8.1 | % | -15 | % | |||||||||||||||
0 | % | $ | 16,114 | $ | 92,637 | |||||||||||||||||||||||
-1 | % | $ | 17,255 | 7.1 | % | -7.5 | % | $ | 96,795 | 4.5 | % | -15 | % | |||||||||||||||
-2 | % | $ | 17,852 | 10.8 | % | -20.0 | % | $ | 97,827 | 5.6 | % | -35 | % |
December 31, 2006:
Net Interest Income | Net Economic Value of Equity | |||||||||||||||||||||||||||
Policy | Policy | |||||||||||||||||||||||||||
Change in rates | Amount | % Chg. | Limit % | Amount | % Chg. | Limit % | ||||||||||||||||||||||
2 | % | $ | 15,707 | -8.9 | % | -20.0 | % | $ | 53,318 | -14.1 | % | -35 | % | |||||||||||||||
1 | % | $ | 16,502 | -4.3 | % | -7.5 | % | $ | 57,950 | -6.7 | % | -15 | % | |||||||||||||||
0 | % | $ | 17,247 | 0.0 | % | $ | 62,089 | 0.0 | % | |||||||||||||||||||
-1 | % | $ | 17,656 | 2.4 | % | -7.5 | % | $ | 64,115 | 3.3 | % | -15 | % | |||||||||||||||
-2 | % | $ | 17,740 | 2.9 | % | -20.0 | % | $ | 63,713 | 2.6 | % | -35 | % |
The tables show that the Bancorp has managed interest rate risk within the policy limits set
by the Board of Directors. At September 30, 2007, an increase in interest rates of 2% would have
resulted in an 9.3% decrease in net interest income and a 17.1% decrease in the net economic value
of equity compared to decreases of 8.9% and 14.1% at December 31, 2006. During the nine months
ended September 30, 2007, the Bancorp has managed interest rate risk by generally selling fixed
rate loans with contractual maturities exceeding 15 years, maintaining the short duration of the
securities portfolio, and implementing deposit funding and pricing strategies.
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Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
The Bancorp maintains disclosure controls and procedures (as defined in Sections 13a 15(e)
and 15d 15(e)) of regulations promulgated under the Securities Exchange Act of 1934 (the
Exchange Act) that are designed to ensure that information required to be disclosed by the
Bancorp in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms. These
disclosure controls and procedures include controls and procedures designed to ensure that
information required to be disclosed by the Bancorp in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the Bancorps management, including its
principal executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure. The Bancorps chief executive officer and chief financial
officer evaluate the effectiveness of the Bancorps disclosure controls and procedures as of the
end of each quarter. Based on that evaluation as of September 30, 2007, the Bancorps chief
executive officer and chief financial officer have concluded that such disclosure controls and
procedures were effective as of that date in ensuring that information required to be disclosed by
the Bancorp under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms.
(b) Changes in Internal Control Over Financial Reporting.
There was no significant change in the Bancorps internal control over financial reporting
identified in connection with the Bancorps evaluation of controls that occurred during the nine
months ended September 30, 2007 that has materially affected, or is reasonably likely to materially
affect, the Bancorps internal control over financial reporting.
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PART II Other Information
Item 1. Legal Proceedings
The Bancorp is not party to any material legal proceedings. From time to time, the Bank is a party
to ordinary routine litigation incidental to its business, including foreclosures.
Item 1A. Risk Factors
There are no matters reportable under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There are no matters reportable under this item.
Item 3. Defaults Upon Senior Securities
There are no matters reportable under this item.
Item 4. Submission of Matters to a Vote of Security Holders
There are no matters reportable under this item.
Item 5. Other Information
There are no matters reportable under this item.
Item 6. Exhibits
Exhibit | ||
Number | Description | |
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 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
NORTHWEST INDIANA BANCORP |
||||
Date: November 6, 2007 | /s/ David A. Bochnowski | |||
David A. Bochnowski | ||||
Chairman of the Board and Chief Executive Officer | ||||
Date: November 6, 2007 | /s/ Robert T. Lowry | |||
Robert T. Lowry | ||||
Senior Vice President, Chief Financial Officer and Treasurer |
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