Finward Bancorp - Quarter Report: 2014 March (Form 10-Q)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended March 31, 2014 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) |
Registrant's 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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ¨
Accelerated filer ¨ Non-accelerated filer ¨
Smaller Reporting Company x
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 2,844,839 shares of the registrant’s Common Stock, without par value, outstanding at March 31, 2014.
NorthWest Indiana Bancorp
Index
Page | |||
Number | |||
PART I. | Financial Information | ||
Item 1. | Unaudited Financial Statements | ||
Consolidated Balance Sheets, March 31, 2014 and December 31, 2013 | 1 | ||
Consolidated Statements of Income, Three Months Ended March 31, 2014 and 2013 | 2 | ||
Consolidated Statements of Comprehensive Income, Three Months Ended March 31, 2014 and 2013 | 3 | ||
Consolidated Statements of Changes in Stockholders' Equity, Three Months Ended March 31, 2014 and 2013 | 3 | ||
Consolidated Statements of Cash Flows, Three Months Ended March 31, 2014 and 2013 | 4 | ||
Notes to Consolidated Financial Statements | 5-17 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18-26 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 27 | |
Item 4. | Controls and Procedures | 27 | |
PART II. | Other Information | 28 | |
SIGNATURES | 29 | ||
EXHIBITS | |||
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | 30 | ||
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | 31 | ||
32.1 Section 1350 Certifications | 32 | ||
101 XBRL Interactive Data File |
NorthWest Indiana Bancorp
Consolidated Balance Sheets
March 31, | ||||||||
2014 | December 31, | |||||||
(Dollars in thousands) | (unaudited) | 2013 | ||||||
ASSETS | ||||||||
Cash and non-interest bearing balances in financial institutions | $ | 9,709 | $ | 11,758 | ||||
Interest bearing balances in financial institutions | 21,094 | 9,256 | ||||||
Federal funds sold | 91 | 110 | ||||||
Total cash and cash equivalents | 30,894 | 21,124 | ||||||
Securities available-for-sale | 198,200 | 194,296 | ||||||
Loans held-for-sale | 1,693 | 136 | ||||||
Loans receivable | 453,045 | 437,821 | ||||||
Less: allowance for loan losses | (7,443 | ) | (7,189 | ) | ||||
Net loans receivable | 445,602 | 430,632 | ||||||
Federal Home Loan Bank stock | 3,967 | 3,086 | ||||||
Accrued interest receivable | 2,565 | 2,480 | ||||||
Premises and equipment | 17,129 | 17,260 | ||||||
Foreclosed real estate | 1,119 | 1,084 | ||||||
Cash value of bank owned life insurance | 16,499 | 16,396 | ||||||
Other assets | 5,928 | 6,959 | ||||||
Total assets | $ | 723,596 | $ | 693,453 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Deposits: | ||||||||
Non-interest bearing | $ | 82,760 | $ | 73,430 | ||||
Interest bearing | 509,044 | 499,463 | ||||||
Total | 591,804 | 572,893 | ||||||
Repurchase agreements | 15,940 | 14,031 | ||||||
Borrowed funds | 38,248 | 30,898 | ||||||
Accrued expenses and other liabilities | 7,849 | 8,870 | ||||||
Total liabilities | 653,841 | 626,692 | ||||||
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: March 31, 2014 - 2,900,877 | 361 | 361 | ||||||
December 31, 2013 - 2,897,202 | ||||||||
shares outstanding: March 31, 2014 - 2,844,839 | ||||||||
December 31, 2013 - 2,841,164 | ||||||||
Additional paid in capital | 5,244 | 5,229 | ||||||
Accumulated other comprehensive income | (1,350 | ) | (3,151 | ) | ||||
Retained earnings | 66,697 | 65,519 | ||||||
Treasury stock, common shares at cost: March 31, 2014 - 56,038 | ||||||||
December 31, 2013 - 56,038 | (1,197 | ) | (1,197 | ) | ||||
Total stockholders' equity | 69,755 | 66,761 | ||||||
Total liabilities and stockholders' equity | $ | 723,596 | $ | 693,453 |
See accompanying notes to consolidated financial statements.
1 |
NorthWest Indiana Bancorp
Consolidated Statements of Income
(unaudited)
Three Months Ended | ||||||||
(Dollars in thousands, except per share data) | March 31, | |||||||
2014 | 2013 | |||||||
Interest income: | ||||||||
Loans receivable | ||||||||
Real estate loans | $ | 4,071 | $ | 4,205 | ||||
Commercial loans | 820 | 795 | ||||||
Consumer loans | 4 | 6 | ||||||
Total loan interest | 4,895 | 5,006 | ||||||
Securities | 1,388 | 1,251 | ||||||
Other interest earning assets | 5 | 6 | ||||||
1,393 | 1,257 | |||||||
Total interest income | 6,288 | 6,263 | ||||||
Interest expense: | ||||||||
Deposits | 275 | 303 | ||||||
Repurchase agreements | 15 | 17 | ||||||
Borrowed funds | 126 | 142 | ||||||
Total interest expense | 416 | 462 | ||||||
Net interest income | 5,872 | 5,801 | ||||||
Provision for loan losses | 245 | 135 | ||||||
Net interest income after provision for loan losses | 5,627 | 5,666 | ||||||
Noninterest income: | ||||||||
Fees and service charges | 594 | 591 | ||||||
Wealth management operations | 378 | 367 | ||||||
Gain on sale of securities, net | 350 | 128 | ||||||
Increase in cash value of bank owned life insurance | 102 | 87 | ||||||
Gain on sale of loans held-for-sale, net | 75 | 159 | ||||||
Gain on foreclosed real estate, net | 12 | 17 | ||||||
Other | 16 | 14 | ||||||
Total noninterest income | 1,527 | 1,363 | ||||||
Noninterest expense: | ||||||||
Compensation and benefits | 2,646 | 2,642 | ||||||
Occupancy and equipment | 790 | 782 | ||||||
Data processing | 276 | 240 | ||||||
Marketing | 118 | 108 | ||||||
Federal deposit insurance premiums | 91 | 122 | ||||||
Other | 908 | 901 | ||||||
Total noninterest expense | 4,829 | 4,795 | ||||||
Income before income tax expenses | 2,325 | 2,234 | ||||||
Income tax expenses | 521 | 564 | ||||||
Net income | $ | 1,804 | $ | 1,670 | ||||
Earnings per common share: | ||||||||
Basic | $ | 0.63 | $ | 0.59 | ||||
Diluted | $ | 0.63 | $ | 0.59 | ||||
Dividends declared per common share | $ | 0.22 | $ | 0.19 |
See accompanying notes to consolidated financial statements.
2 |
NorthWest Indiana Bancorp
Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Ended | ||||||||
(Dollars in thousands) | March 31, | |||||||
2014 | 2013 | |||||||
Net income | $ | 1,804 | $ | 1,670 | ||||
Net change in net unrealized gains and losses on securities available-for-sale: | ||||||||
Unrealized gains/(losses) arising during the period | 3,081 | (843 | ) | |||||
Less: reclassification adjustment for gains included in net income | (350 | ) | (128 | ) | ||||
Net securities gain/(loss) during the period | 2,731 | (971 | ) | |||||
Tax effect | (929 | ) | 336 | |||||
Net of tax amount | 1,802 | (635 | ) | |||||
Net change in unrecognized gain on postretirement benefit: | ||||||||
Amortization of net actuarial gain | (1 | ) | (2 | ) | ||||
Net loss during the period | (1 | ) | (2 | ) | ||||
Tax effect | - | - | ||||||
Net of tax amount | (1 | ) | (2 | ) | ||||
Other comprehensive (loss)/gain, net of tax | 1,801 | (637 | ) | |||||
Comprehensive income, net of tax | $ | 3,605 | $ | 1,033 |
See accompanying notes to consolidated financial statements.
NorthWest Indiana Bancorp
Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Three Months Ended | ||||||||
(Dollars in thousands) | March 31, | |||||||
2014 | 2013 | |||||||
Balance at beginning of period | $ | 66,761 | $ | 67,651 | ||||
Comprehensive income: | ||||||||
Net income | 1,804 | 1,670 | ||||||
Net unrealized change on securities | ||||||||
available-for-sale, net of reclassifications and tax effects | 1,802 | (635 | ) | |||||
Amortization of unrecognized gain on postretirement benefit | (1 | ) | (2 | ) | ||||
Comprehensive income, net of tax | 3,605 | 1,033 | ||||||
Stock based compensation expense | 15 | 6 | ||||||
Sale of treasury stock | - | 22 | ||||||
Stock repurchase | - | (57 | ) | |||||
Cash dividends | (626 | ) | (540 | ) | ||||
Balance at end of period | $ | 69,755 | $ | 68,115 |
See accompanying notes to consolidated financial statements.
3 |
NorthWest Indiana Bancorp
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended | ||||||||
(Dollars in thousands) | March 31, | |||||||
2014 | 2013 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 1,804 | $ | 1,670 | ||||
Adjustments to reconcile net income to net cash (used in)/provided by operating activities: | ||||||||
Origination of loans for sale | (5,007 | ) | (4,755 | ) | ||||
Sale of loans originated for sale | 3,522 | 5,081 | ||||||
Depreciation and amortization, net of accretion | 479 | 557 | ||||||
Amortization of mortgage servicing rights | 21 | 36 | ||||||
Stock based compensation expense | 15 | 6 | ||||||
Gain on sale of securities, net | (350 | ) | (128 | ) | ||||
Gain on sale of loans held-for-sale, net | (75 | ) | (159 | ) | ||||
Gain on foreclosed real estate, net | (12 | ) | (17 | ) | ||||
Provision for loan losses | 245 | 135 | ||||||
Net change in: | ||||||||
Interest receivable | (85 | ) | 116 | |||||
Other assets | 56 | 526 | ||||||
Accrued expenses and other liabilities | (1,021 | ) | (896 | ) | ||||
Total adjustments | (2,212 | ) | 502 | |||||
Net cash - operating activities | (408 | ) | 2,172 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from maturities and pay downs of securities available-for-sale | 4,996 | 13,515 | ||||||
Proceeds from sales of securities available-for-sale | 21,559 | 2,983 | ||||||
Purchases of securities available-for-sale | (27,488 | ) | (20,525 | ) | ||||
Loan participations purchased | (427 | ) | - | |||||
Net change in loans receivable | (14,811 | ) | (4,249 | ) | ||||
Proceeds from sales of foreclosed real estate | - | 90 | ||||||
Purchase of Federal Home Loan Bank Stock | (881 | ) | - | |||||
Purchase of premises and equipment, net | (211 | ) | (101 | ) | ||||
Increase in cash value of bank owned life insurance | (103 | ) | (87 | ) | ||||
Net cash - investing activities | (17,366 | ) | (8,374 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net change in deposits | 18,911 | (4,055 | ) | |||||
Proceeds from FHLB advances | 45,000 | 11,000 | ||||||
Repayment of FHLB advances | (37,000 | ) | (10,000 | ) | ||||
Change in other borrowed funds | 1,259 | 460 | ||||||
Proceeds from sale of treasury stock | - | 22 | ||||||
Common stock repurchased | - | (57 | ) | |||||
Dividends paid | (626 | ) | (539 | ) | ||||
Net cash - financing activities | 27,544 | (3,169 | ) | |||||
Net change in cash and cash equivalents | 9,770 | (9,371 | ) | |||||
Cash and cash equivalents at beginning of period | 21,124 | 33,751 | ||||||
Cash and cash equivalents at end of period | $ | 30,894 | $ | 24,380 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 416 | $ | 466 | ||||
Income taxes | - | - | ||||||
SUPPLEMENTAL NONCASH INFORMATION: | ||||||||
Transfers from loans to foreclosed real estate | $ | 35 | $ | 95 |
See accompanying notes to consolidated financial statements.
4 |
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 Bank’s wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC, NWIN Funding, Incorporated, and Columbia Development Company, LLC. The Bancorp has no other business activity other than being a holding company for the Bank. The Bancorp’s 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 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, 2014 and December 31, 2013, and the consolidated statements of income, comprehensive income, and changes in stockholders’ equity, and cash flows for the three months ended March 31, 2014 and 2013. The income reported for the three month period ended March 31, 2014 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, loan servicing rights, investment securities, deferred tax assets, and the status of contingencies are particularly susceptible to material change in the near term.
Note 3 - Securities
The estimated fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
Gross | Gross | Estimated | ||||||||||||||
(Dollars in thousands) | Cost | Unrealized | Unrealized | Fair | ||||||||||||
Basis | Gains | Losses | Value | |||||||||||||
March 31, 2014 | ||||||||||||||||
U.S. government sponsored entities | $ | 12,500 | $ | - | $ | (287 | ) | $ | 12,213 | |||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 104,018 | 795 | (1,385 | ) | 103,428 | |||||||||||
Municipal securities | 78,572 | 2,249 | (692 | ) | 80,129 | |||||||||||
Collateralized debt obligations | 5,208 | - | (2,778 | ) | 2,430 | |||||||||||
Total securities available-for-sale | $ | 200,298 | $ | 3,044 | $ | (5,142 | ) | $ | 198,200 | |||||||
December 31, 2013 | ||||||||||||||||
U.S. government sponsored entities | $ | 18,997 | $ | - | $ | (637 | ) | $ | 18,360 | |||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 101,056 | 1,181 | (1,922 | ) | 100,315 | |||||||||||
Municipal securities | 73,864 | 1,499 | (1,710 | ) | 73,653 | |||||||||||
Collateralized debt obligations | 5,208 | - | (3,240 | ) | 1,968 | |||||||||||
Total securities available-for-sale | $ | 199,125 | $ | 2,680 | $ | (7,509 | ) | $ | 194,296 |
5 |
The fair value of available-for-sale debt securities at March 31, 2014 by contractual maturity, were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
Available-for-sale | ||||||||
(Dollars in thousands) | Estimated | |||||||
Fair | Tax-Equivalent | |||||||
March 31, 2014 | Value | Yield (%) | ||||||
Due in one year or less | $ | 1,264 | 6.55 | |||||
Due from one to five years | 16,693 | 3.25 | ||||||
Due from five to ten years | 23,148 | 5.18 | ||||||
Due over ten years | 53,667 | 4.75 | ||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 103,428 | 2.68 | ||||||
Total | $ | 198,200 | 3.61 |
Sales of available-for-sale securities were as follows for the three months ended:
March 31, | March 31, | |||||||
(Dollars in thousands) | 2014 | 2013 | ||||||
Proceeds | $ | 21,559 | $ | 2,983 | ||||
Gross gains | 621 | 128 | ||||||
Gross losses | (271 | ) | - |
Accumulated other comprehensive income/(loss) balances, net of tax, related to available-for-sale securities, were as follows:
(Dollars in thousands) | Unrealized gain/(loss) | |||
Beginning balance, December 31, 2013 | $ | (3,209 | ) | |
Current period change | 1,802 | |||
Ending balance, March 31, 2014 | $ | (1,407 | ) |
Securities with carrying values of approximately $31,842,000 and $31,231,000 were pledged as of March 31, 2014 and December 31, 2013, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.
Securities with unrealized losses at March 31, 2014 and December 31, 2013 not recognized in income are as follows:
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Estimated | Estimated | Estimated | ||||||||||||||||||||||
(Dollars in thousands) | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
March 31, 2014 | ||||||||||||||||||||||||
U.S. government sponsored entities | $ | 12,213 | $ | (287 | ) | $ | - | $ | - | $ | 12,213 | $ | (287 | ) | ||||||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 56,642 | (1,276 | ) | 1,833 | (109 | ) | 58,475 | (1,385 | ) | |||||||||||||||
Municipal securities | 17,848 | (516 | ) | 2,602 | (176 | ) | 20,450 | (692 | ) | |||||||||||||||
Collateralized debt obligations | - | - | 2,430 | (2,778 | ) | 2,430 | (2,778 | ) | ||||||||||||||||
Total temporarily impaired | $ | 86,703 | $ | (2,079 | ) | $ | 6,865 | $ | (3,063 | ) | $ | 93,568 | $ | (5,142 | ) | |||||||||
Number of securities | 78 | 13 | 91 |
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Estimated | Estimated | Estimated | ||||||||||||||||||||||
(Dollars in thousands) | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
December 31, 2013 | ||||||||||||||||||||||||
U.S. government sponsored entities | $ | 18,360 | $ | (637 | ) | $ | - | $ | - | $ | 18,360 | $ | (637 | ) | ||||||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 62,748 | (1,922 | ) | - | - | 62,748 | (1,922 | ) | ||||||||||||||||
Municipal securities | 27,890 | (1,571 | ) | 1,478 | (139 | ) | 29,368 | (1,710 | ) | |||||||||||||||
Collateralized debt obligations | - | - | 1,968 | (3,240 | ) | 1,968 | (3,240 | ) | ||||||||||||||||
Total temporarily impaired | $ | 108,998 | $ | (4,130 | ) | $ | 3,446 | $ | (3,379 | ) | $ | 112,444 | $ | (7,509 | ) | |||||||||
Number of securities | 117 | 8 | 125 |
6 |
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 4 - Loans Receivable
Year end loan receivables are summarized below:
(Dollars in thousands) | ||||||||
March 31, 2014 | December 31, 2013 | |||||||
Loans secured by real estate: | ||||||||
Construction and land development | $ | 23,229 | $ | 21,462 | ||||
Residential, including home equity | 161,794 | 161,932 | ||||||
Commercial real estate and other dwelling | 183,702 | 175,160 | ||||||
Total loans secured by real estate | 368,725 | 358,554 | ||||||
Consumer loans | 265 | 237 | ||||||
Commercial business | 61,275 | 57,790 | ||||||
Government and other | 23,114 | 21,587 | ||||||
Subtotal | 453,379 | 438,168 | ||||||
Less: | ||||||||
Net deferred loan origination fees | (234 | ) | (252 | ) | ||||
Undisbursed loan funds | (100 | ) | (95 | ) | ||||
Loan receivables | $ | 453,045 | $ | 437,821 |
Commercial Real | ||||||||||||||||||||||||||||
Estate, | ||||||||||||||||||||||||||||
Construction & | ||||||||||||||||||||||||||||
Residential Real | Land | Commercial | ||||||||||||||||||||||||||
Estate, Including | Development, and | Participations | Commercial | Government | ||||||||||||||||||||||||
(Dollars in thousands) | Home Equity | Consumer Loans | Other Dwellings | Purchased | Business Loans | Loans | Total | |||||||||||||||||||||
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended March 31, 2014: | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance | $ | 1,444 | $ | 12 | $ | 4,789 | $ | 31 | $ | 859 | $ | 54 | $ | 7,189 | ||||||||||||||
Charge-offs | (2 | ) | (7 | ) | - | - | - | - | (9 | ) | ||||||||||||||||||
Recoveries | 2 | 1 | 11 | 2 | 2 | - | 18 | |||||||||||||||||||||
Provisions | 4 | 11 | 169 | 8 | 46 | 7 | 245 | |||||||||||||||||||||
Ending Balance | $ | 1,448 | $ | 17 | $ | 4,969 | $ | 41 | $ | 907 | $ | 61 | $ | 7,443 | ||||||||||||||
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended March 31, 2013: |
||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance | $ | 1,024 | $ | 19 | $ | 4,550 | $ | 1,608 | $ | 1,220 | $ | - | $ | 8,421 | ||||||||||||||
Charge-offs | - | (3 | ) | (40 | ) | - | (170 | ) | - | (213 | ) | |||||||||||||||||
Recoveries | - | 2 | - | - | 2 | - | 4 | |||||||||||||||||||||
Provisions | 23 | (1 | ) | (11 | ) | 106 | (1 | ) | 19 | 135 | ||||||||||||||||||
Ending Balance | $ | 1,047 | $ | 17 | $ | 4,499 | $ | 1,714 | $ | 1,051 | $ | 19 | $ | 8,347 | ||||||||||||||
The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at March 31, 2014: | ||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 12 | $ | - | $ | 1,683 | $ | - | $ | 19 | $ | - | $ | 1,714 | ||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 1,436 | $ | 17 | $ | 3,286 | $ | 41 | $ | 888 | $ | 61 | $ | 5,729 | ||||||||||||||
LOAN RECEIVABLES | ||||||||||||||||||||||||||||
Ending balance | $ | 161,539 | $ | 262 | $ | 205,231 | $ | 1,700 | $ | 61,199 | $ | 23,114 | $ | 453,045 | ||||||||||||||
Ending balance: individually evaluated for impairment | $ | 669 | $ | - | $ | 8,338 | $ | - | $ | 527 | $ | - | $ | 9,534 | ||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 160,870 | $ | 262 | $ | 196,893 | $ | 1,700 | $ | 60,672 | $ | 23,114 | $ | 443,511 | ||||||||||||||
The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2013: | ||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 16 | $ | - | $ | 1,657 | $ | - | $ | 30 | $ | - | $ | 1,703 | ||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 1,428 | $ | 12 | $ | 3,132 | $ | 31 | $ | 829 | $ | 54 | $ | 5,486 | ||||||||||||||
LOAN RECEIVABLES | ||||||||||||||||||||||||||||
Ending balance | $ | 161,664 | $ | 232 | $ | 195,349 | $ | 1,273 | $ | 57,716 | $ | 21,587 | $ | 437,821 | ||||||||||||||
Ending balance: individually evaluated for impairment | $ | 887 | $ | - | $ | 8,446 | $ | - | $ | 534 | $ | - | $ | 9,867 | ||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 160,777 | $ | 232 | $ | 186,903 | $ | 1,273 | $ | 57,182 | $ | 21,587 | $ | 427,954 |
7 |
The Bancorp's credit quality indicators, are summarized below at March 31, 2014 and December 31, 2013:
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||
Corporate Credit Exposure - Credit Risk Portfolio By Creditworthiness Category | ||||||||||||||||||||||||||||||||||
Commercial Real Estate, Construction | Government | |||||||||||||||||||||||||||||||||
& Land Development, and Other Dwellings | Commercial Participations Purchased | Commercial Business Loans | Loans | |||||||||||||||||||||||||||||||
Loan Grades | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||||
2 | Moderate risk | $ | - | $ | - | $ | - | $ | - | $ | 4,117 | $ | 4,279 | $ | - | $ | - | |||||||||||||||||
3 | Acceptable risk | 161,201 | 150,303 | 1,410 | 1,013 | 45,335 | 41,474 | 23,114 | 21,587 | |||||||||||||||||||||||||
4 | Pass/monitor | 32,144 | 33,153 | 186 | 260 | 11,042 | 11,173 | - | - | |||||||||||||||||||||||||
5 | Special mention (watch) | 3,358 | 3,348 | 104 | - | 154 | 88 | - | - | |||||||||||||||||||||||||
6 | Substandard | 8,528 | 8,545 | - | - | 551 | 702 | - | - | |||||||||||||||||||||||||
7 | Doubtful | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Total | $ | 205,231 | $ | 195,349 | $ | 1,700 | $ | 1,273 | $ | 61,199 | $ | 57,716 | $ | 23,114 | $ | 21,587 |
(Dollars in thousands) | ||||||||||||||||
Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity | ||||||||||||||||
Residential Real Estate, | ||||||||||||||||
Including Home Equity | Consumer Loans | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Performing | $ | 158,160 | $ | 158,963 | $ | 262 | $ | 232 | ||||||||
Non-performing | 3,379 | 2,701 | - | - | ||||||||||||
Total | $ | 161,539 | $ | 161,664 | $ | 262 | $ | 232 |
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 theses grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system is as follows:
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 – 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.
4 – 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.
5 – 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.
6 – 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.
7 – Doubtful
This classification consists of loans where the possibility of loss is high after collateral liquidation based upon existing facts, market conditions, and value. Loss is deferred until certain important and reasonably specific pending factors which may strengthen the credit can be exactly determined. These factors may include proposed acquisitions, liquidation procedures, capital injection and receipt of additional collateral, mergers or refinancing plans.
Performing loans are loans that are paying as agreed and are less than ninety days past due on payments of interest and principal.
No loans were modified in a troubled debt restructuring, nor have any previous troubled debt restructurings subsequently defaulted, during the quarters ended March 31, 2014 or 2013.
8 |
The Bancorp's individually evaluated impaired loans are summarized below:
For the three months ended | ||||||||||||||||||||
As of March 31, 2014 | March 31, 2014 | |||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||
(Dollars in thousands) | Recorded | Principal | Related | Recorded | Income | |||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Residential real estate, including home equity | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Commercial real estate, construction & land development, and other dwellings | 568 | 568 | - | 593 | 9 | |||||||||||||||
Commercial participations purchased | - | - | - | - | - | |||||||||||||||
Commercial business loans | 311 | 311 | - | 270 | 2 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Residential real estate, including home equity | 669 | 681 | 12 | 778 | 9 | |||||||||||||||
Commercial real estate, construction & land development, and other dwellings | 7,770 | 7,770 | 1,683 | 7,800 | 74 | |||||||||||||||
Commercial participations purchased | - | - | - | - | - | |||||||||||||||
Commercial business loans | 216 | 484 | 19 | 261 | - | |||||||||||||||
Total: | ||||||||||||||||||||
Residential real estate, including home equity | $ | 669 | $ | 681 | $ | 12 | $ | 778 | $ | 9 | ||||||||||
Commercial real estate, construction & land development, and other dwellings | $ | 8,338 | $ | 8,338 | $ | 1,683 | $ | 8,393 | $ | 83 | ||||||||||
Commercial participations purchased | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Commercial business loans | $ | 527 | $ | 795 | $ | 19 | $ | 531 | $ | 2 |
For the three months ended | ||||||||||||||||||||
As of December 31, 2013 | March 31, 2013 | |||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||
(Dollars in thousands) | Recorded | Principal | Related | Recorded | Income | |||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Residential real estate, including home equity | $ | - | $ | - | $ | - | $ | - | $ | 6 | ||||||||||
Commercial real estate, construction & land development, and other dwellings | 617 | 617 | - | 681 | 73 | |||||||||||||||
Commercial participations purchased | - | - | - | 5,856 | - | |||||||||||||||
Commercial business loans | 228 | 228 | - | 972 | 3 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Residential real estate, including home equity | 887 | 899 | 16 | 777 | - | |||||||||||||||
Commercial real estate, construction & land development, and other dwellings | 7,829 | 7,829 | 1,657 | 10,079 | 7 | |||||||||||||||
Commercial participations purchased | - | - | - | 189 | 18 | |||||||||||||||
Commercial business loans | 306 | 574 | 30 | 802 | 1 | |||||||||||||||
Total: | ||||||||||||||||||||
Residential real estate, including home equity | $ | 887 | $ | 899 | $ | 16 | $ | 777 | $ | 6 | ||||||||||
Commercial real estate, construction & land development, and other dwellings | $ | 8,446 | $ | 8,446 | $ | 1,657 | $ | 10,760 | $ | 80 | ||||||||||
Commercial participations purchased | $ | - | $ | - | $ | - | $ | 6,045 | $ | 18 | ||||||||||
Commercial business loans | $ | 534 | $ | 802 | $ | 30 | $ | 1,774 | $ | 4 |
9 |
The Bancorp's age analysis of past due loans is summarized below:
(Dollars in thousands) | ||||||||||||||||||||||||||||
Recorded | ||||||||||||||||||||||||||||
Investments | ||||||||||||||||||||||||||||
Greater than | ||||||||||||||||||||||||||||
30-59 Days Past | 60-89 Days Past | Greater Than 90 | 90 Days and | |||||||||||||||||||||||||
Due | Due | Days Past Due | Total Past Due | Current | Total Loans | Accruing | ||||||||||||||||||||||
March 31, 2014 | ||||||||||||||||||||||||||||
Residential real estate, including home equity | $ | 3,969 | $ | 912 | $ | 2,950 | $ | 7,831 | $ | 153,708 | $ | 161,539 | $ | 568 | ||||||||||||||
Consumer loans | - | - | - | - | 262 | 262 | - | |||||||||||||||||||||
Commercial real estate, construction & land development, and other dwellings | 1,083 | 45 | 3,144 | 4,272 | 200,959 | 205,231 | - | |||||||||||||||||||||
Commercial participations purchased | - | - | - | - | 1,700 | 1,700 | - | |||||||||||||||||||||
Commercial business loans | 300 | 54 | 444 | 798 | 60,401 | 61,199 | - | |||||||||||||||||||||
Government loans | - | - | - | - | 23,114 | 23,114 | - | |||||||||||||||||||||
Total | $ | 5,352 | $ | 1,011 | $ | 6,538 | $ | 12,901 | $ | 440,144 | $ | 453,045 | $ | 568 | ||||||||||||||
December 31, 2013 | ||||||||||||||||||||||||||||
Residential real estate, including home equity | $ | 3,721 | $ | 1,090 | $ | 1,502 | $ | 6,313 | $ | 155,351 | $ | 161,664 | $ | 174 | ||||||||||||||
Consumer loans | 1 | - | - | 1 | 231 | 232 | - | |||||||||||||||||||||
Commercial real estate, construction & land development, and other dwellings | 1,083 | 2,626 | 768 | 4,477 | 190,872 | 195,349 | - | |||||||||||||||||||||
Commercial participations purchased | - | - | - | - | 1,273 | 1,273 | - | |||||||||||||||||||||
Commercial business loans | 1,032 | 25 | 447 | 1,504 | 56,212 | 57,716 | - | |||||||||||||||||||||
Government loans | - | - | - | - | 21,587 | 21,587 | - | |||||||||||||||||||||
Total | $ | 5,837 | $ | 3,741 | $ | 2,717 | $ | 12,295 | $ | 425,526 | $ | 437,821 | $ | 174 |
The Bancorp's loans on nonaccrual status are summarized below:
(Dollars in thousands) | ||||||||
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
Residential real estate, including home equity | $ | 2,811 | $ | 2,526 | ||||
Consumer loans | - | - | ||||||
Commercial real estate, construction & land development, and other dwellings | 3,182 | 807 | ||||||
Commercial participations purchased | - | - | ||||||
Commercial business loans | 444 | 447 | ||||||
Government loans | - | - | ||||||
Total | $ | 6,437 | $ | 3,780 |
Note 5 - Foreclosed Real Estate
Foreclosed real estate at period-end is summarized below:
(Dollars in thousands) | ||||||||
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
Residential real estate | $ | 129 | $ | 94 | ||||
Commercial real estate and other dwellings | 716 | 716 | ||||||
Construction and land development | 274 | 274 | ||||||
Total | $ | 1,119 | $ | 1,084 |
Note 6 - 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, commercial real estate, land development, business assets and consumer assets.
10 |
Note 7 - 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 computations for the three months ended March 31, 2014 and 2013 are as follows:
Three Months Ended | ||||||||
(Dollars in thousands, except per share data) | March 31, | |||||||
2014 | 2013 | |||||||
Basic earnings per common share: | ||||||||
Net income as reported | $ | 1,804 | $ | 1,670 | ||||
Weighted average common shares outstanding | 2,843,573 | 2,839,985 | ||||||
Basic earnings per common share | $ | 0.63 | $ | 0.59 | ||||
Diluted earnings per common share: | ||||||||
Net income as reported | $ | 1,804 | $ | 1,670 | ||||
Weighted average common shares outstanding | 2,843,573 | 2,839,985 | ||||||
Add: Dilutive effect of assumed stock option exercises | - | - | ||||||
Weighted average common and dilutive potential common shares outstanding | 2,843,573 | 2,839,985 | ||||||
Diluted earnings per common share | $ | 0.63 | $ | 0.59 |
Note 8 - Stock Based Compensation
The Bancorp’s 2004 Stock Option Plan (the Plan), which is stockholder-approved, permits the grant of share options to its employees for up to 250,000 shares of common stock. Awards granted under the Plan may be in the form of incentive stock options, non-incentive stock options, or restricted stock awards.
As required by the Stock Compensation Topic, companies are required to record compensation cost for stock options and awards provided to employees in return for employment service. For the three months ended March 31, 2014, stock based compensation expense of $15 thousand was recorded, compared to $6 thousand for the three months ended March 31, 2013. It is anticipated that current outstanding vested and unvested options and awards will result in additional compensation expense of approximately $44 thousand in 2014 and $57 thousand in 2015.
There were no incentive stock options granted during the first three months of 2014 or 2013. When options are granted, 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 or awards. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. A summary of incentive option activity under the Bancorp’s incentive stock option plan for the three months ended March 31, 2014 follows:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Incentive options | Shares | Price | Term | Value | ||||||||||||
Outstanding at January 1, 2014 | 6,350 | $ | 29.82 | |||||||||||||
Granted | - | - | ||||||||||||||
Exercised | - | - | ||||||||||||||
Forfeited | - | - | ||||||||||||||
Expired | (5,600 | ) | $ | 30.00 | ||||||||||||
Outstanding at March 31, 2014 | 750 | $ | 28.50 | 3.9 | - | |||||||||||
Exercisable at March 31, 2014 | 750 | $ | 28.50 | 3.9 | - |
There were 3,675 shares of restricted stock granted during the first three months of 2014 compared to 3,950 shares granted during the first three months of 2013. Restricted stock awards are issued with an award price equal to the market price of the Bancorp’s common stock on the award date and with a five year vesting period. Forfeiture provisions exist for personnel that separate employment before the vesting period expires. A summary of restricted stock activity under the Bancorp’s incentive stock option plan for the three months ended March 31, 2014 follows:
11 |
Weighted- | Weighted- | |||||||||||||||
Average | Average | Aggregate | ||||||||||||||
Exercise | Grant Date | Intrinsic | ||||||||||||||
Restricted stock | Shares | Price | Fair Value | Value | ||||||||||||
Nonvested at January 1, 2014 | 11,100 | $ | 21.54 | $ | 21.54 | $ | 55,408 | |||||||||
Granted | 3,675 | 26.50 | 26.50 | 110 | ||||||||||||
Vested | - | - | - | - | ||||||||||||
Forfeited | - | - | - | - | ||||||||||||
Nonvested at March 31, 2014 | 14,775 | $ | 22.77 | $ | 22.77 | $ | 55,518 |
Note 9 - Adoption of New Accounting Standards
Update Number 2014-04 – Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. This amendment is intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. The amendments are effective for the Bancorp for annual periods and interim periods within those annual periods beginning after December 15, 2014.
Note 10 - Fair Value
The Fair Value Measurements Topic establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Topic describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgments and assumptions used in pricing could result in different estimates of value. In certain cases where market data is not readily available because of a lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy.
At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with the Investments – Debt and Equity Securities Topic. Impairment is other-than-temporary if the decline in the fair value is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received. Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates. The Bancorp considers the following factors when determining an other-than-temporary impairment for a security: the length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; an assessment of whether the Bancorp (1) has the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before their anticipated market recovery. If either of these conditions is met, management will recognize other-than-temporary impairment. If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.
12 |
For the quarter ended March 31, 2014, the Bancorp’s management utilized a specialist to perform an other-than-temporary impairment analysis for each of its four pooled trust preferred securities. The analysis utilizes analytical models used to project future cash flows for the pooled trust preferred securities based on current assumptions for prepayments, default and deferral rates, and recoveries. The projected cash flows are then tested for impairment consistent with the Investments – Other Topic and the Investments – Debt and Equity Securities Topic. The other-than-temporary impairment testing compares the present value of the cash flows from quarter to quarter to determine if there is a “favorable” or “adverse” change. Other-than-temporary impairment is recorded if the projected present value of cash flows is lower than the book value of the security. To perform the quarterly other-than-temporary impairment analysis, management utilizes current reports issued by the trustee, which contain principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled trust preferred security. In addition, a detailed review of the performing collateral was performed. The review of the collateral began with a review of financial information provided by SNL Financial, a comprehensive database, widely used in the industry, which gathers financial data on banks and thrifts from U.S. GAAP financial statements for public companies (annual and quarterly reports on Forms 10-K and 10-Q, respectively), as well as regulatory reports for private companies, including consolidated financial statements for bank holding companies (FR Y-9C reports) and parent company-only financial statements for bank holding companies (FR Y-9LP reports) filed with the Federal Reserve, and bank call reports filed with the FDIC and the Office of the Comptroller of Currency. Using the information sources described above, for each bank and thrift examined the following items were examined: nature of the issuer’s business, years of operating history, corporate structure, loan composition and loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. The issuers’ historical financial performance was reviewed and their financial ratios were compared to appropriate peer groups of regional banks or thrifts with similar asset sizes. The analysis focused on six broad categories: profitability (revenue streams and earnings quality, return on assets and shareholder’s equity, net interest margin and interest rate sensitivity), credit quality (charge-offs and recoveries, non-current loans and total non-performing assets as a percentage of total loans, loan loss reserve coverage and the adequacy of the loan loss provision), operating efficiency (non-interest expense compared to total revenue), capital adequacy (Tier-1, total capital and leverage ratios and equity capital growth), leverage (tangible equity as a percentage of tangible assets, short-term and long-term borrowings and double leverage at the holding company) and liquidity (the nature and availability of funding sources, net non-core funding dependence and quality of deposits). In addition, for publicly traded companies’ stock price movements were reviewed and the market price of publicly traded debt instruments was examined. The other-than-temporary impairment analysis indicated that the Bancorp’s four pooled trust preferred securities had no additional other-than-temporary impairment during the quarter ended March 31, 2014.
The table below shows the credit loss roll forward on a year-to-date basis for the Bancorp’s pooled trust preferred securities that have been classified with other-than-temporary impairment:
(Dollars in thousands) | ||||
Other-than-temporary impairment | ||||
Ending balance, December 31, 2013 | $ | 271 | ||
Additions not previously recognized | - | |||
Ending balance, March 31, 2014 | $ | 271 |
13 |
The following table contains information regarding the Bancorp’s pooled trust preferred securities as of March 31, 2014:
(Dollars in thousands) | ||||||||||||||||
Cusip | 74043CAC1 | 74042TAJ0 | 01449TAB9 | 01450NAC6 | ||||||||||||
Deal name | PreTSL XXIV | PreTSL XXVII | Alesco IX | Alesco XVII | ||||||||||||
Class | B-1 | C-1 | A-2A | B | ||||||||||||
Book value | $ | 1,257 | $ | 1,296 | $ | 1,303 | $ | 1,352 | ||||||||
Fair value | $ | 533 | $ | 492 | $ | 839 | $ | 566 | ||||||||
Unrealized gains/(losses) | ($ | 724 | ) | ($ | 804 | ) | ($ | 464 | ) | ($ | 786 | ) | ||||
Lowest credit rating assigned | CC | C | BB | CC | ||||||||||||
Number of performing banks | 51 | 29 | 55 | 46 | ||||||||||||
Number of performing insurance companies | 13 | 7 | 10 | n/a | ||||||||||||
Number of issuers in default | 17 | 9 | 1 | 3 | ||||||||||||
Number of issuers in deferral | 12 | 4 | 10 | 7 | ||||||||||||
Defaults & deferrals as a % of performing collateral | 45.04 | % | 29.24 | % | 17.22 | % | 22.89 | % | ||||||||
Subordination: | ||||||||||||||||
As a % of performing collateral | 3.13 | % | -6.04 | % | 40.59 | % | 22.09 | % | ||||||||
As a % of performing collateral - adjusted for projected future defaults | -4.39 | % | -15.77 | % | 36.80 | % | 17.38 | % | ||||||||
Other-than-temporary impairment model assumptions: | ||||||||||||||||
Defaults: | ||||||||||||||||
Year 1 - issuer average | 2.40 | % | 2.80 | % | 2.00 | % | 1.90 | % | ||||||||
Year 2 - issuer average | 2.40 | % | 2.80 | % | 2.00 | % | 1.90 | % | ||||||||
Year 3 - issuer average | 2.40 | % | 2.80 | % | 2.00 | % | 1.90 | % | ||||||||
> 3 Years - issuer average | (1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||
Discount rate - 3 month Libor, plus implicit yield spread at purchase | 1.48 | % | 1.23 | % | 1.27 | % | 1.44 | % | ||||||||
Recovery assumptions | (2 | ) | (2 | ) | (2 | ) | (2 | ) | ||||||||
Prepayments | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
Other-than-temporary impairment | $ | 41 | $ | 132 | $ | 36 | $ | 62 |
(1) - Default rates > 3 years are evaluated on a issuer by issuer basis and range from 0.25% to 5.00%.
(2) - Recovery assumptions are evaluated on a issuer by issuer basis and range from 0% to 15% with a five year lag.
In the table above, the Bancorp’s subordination for each trust preferred security is calculated by taking the total performing collateral and subtracting the sum of the total collateral within the Bancorp’s class and the total collateral within all senior classes, and then stating this result as a percentage of the total performing collateral. This measure is an indicator of the level of collateral that can default before potential cash flow disruptions may occur. In addition, management calculates subordination assuming future collateral defaults by utilizing the default/deferral assumptions in the Bancorp’s other-than-temporary-impairment analysis. Subordination assuming future default/deferral assumptions is calculated by deducting future defaults from the current performing collateral. At March 31, 2014, management reviewed the subordination levels for each security in context of the level of current collateral defaults and deferrals within each security; the potential for additional defaults and deferrals within each security; the length of time that the security has been in “payment in kind” status; and the Bancorp’s class position within each security.
Management calculated the other-than-temporary impairment model assumptions based on the specific collateral underlying each individual security. The following assumption methodology was applied consistently to each of the four pooled trust preferred securities: For collateral that has already defaulted, no recovery was assumed; no cash flows were assumed from collateral currently in deferral, with the exception of the recovery assumptions. The default and recovery assumptions were calculated based on a detailed collateral review. The discount rate assumption used in the calculation of the present value of cash flows is based on the discount margin (i.e., credit spread) at the time each security was purchased using the original purchase price. The discount margin is then added to the appropriate 3-month LIBOR forward rate obtained from the forward LIBOR curve.
At March 31, 2014, three of the trust preferred securities with a cost basis of $3.9 million continue to be in “payment in kind” status. The Bancorp’s securities that are classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For the securities in “payment in kind” status, management anticipates to receive the unpaid contractual interest payments from the issuer, because of the self correcting cash flow waterfall provisions within the structure of the securities. When a tranche senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest cash flows are paid to the senior tranche and recorded as a reduction of principal. The coverage test represents an over collateralization target by stating the balance of the performing collateral as a percentage of the balance of the Bancorp’s tranche, plus the balance of all senior tranches. The principal reduction in the senior tranche continues until the appropriate coverage test is passed. As a result of the principal reduction in the senior tranche, more cash is available for future payments to the Bancorp’s tranche. Consistent with the Investments – Debt and Equity Securities Topic, management considered the failure of the issuer of the security to make scheduled interest payments in determining whether a credit loss existed. Management will not capitalize the “payment in kind” interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume.
14 |
Assets and Liabilities Measured on a Recurring Basis
There were no transfers to or from Levels 1 and 2 during the three months ended March 31, 2014. Assets measured at fair value on a recurring basis are summarized below:
Fair Value Measurements at March 31, 2014 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
(Dollars in thousands) | Estimated | Active Markets for | Significant Other | Significant | ||||||||||||
Fair | Identical Assets | Observable Inputs | Unobservable Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Available-for-sale debt securities | ||||||||||||||||
U.S. government sponsored entities | $ | 12,213 | $ | - | $ | 12,213 | $ | - | ||||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 103,428 | - | 103,428 | - | ||||||||||||
Municipal securities | 80,129 | - | 80,129 | - | ||||||||||||
Collateralized debt obligations | 2,430 | - | - | 2,430 | ||||||||||||
Total securities available-for-sale | $ | 198,200 | $ | - | $ | 195,770 | $ | 2,430 |
Fair Value Measurements at December 31, 2013 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
(Dollars in thousands) | Estimated | Active Markets for | Significant Other | Significant | ||||||||||||
Fair | Identical Assets | Observable Inputs | Unobservable Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Available-for-sale debt securities | ||||||||||||||||
U.S. government sponsored entities | $ | 18,360 | $ | - | $ | 18,360 | $ | - | ||||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 100,315 | - | 100,315 | - | ||||||||||||
Municipal securities | 73,653 | - | 73,653 | - | ||||||||||||
Collateralized debt obligations | 1,968 | - | - | 1,968 | ||||||||||||
Total securities available-for-sale | $ | 194,296 | $ | - | $ | 192,328 | $ | 1,968 |
A roll forward of available-for-sale securities, which require significant adjustment based on unobservable data, are presented in the following table:
Fair Value Measurements | ||||
Using Significant | ||||
Unobservable Inputs | ||||
(Dollars in thousands) | (Level 3) | |||
Available-for-sale securities | ||||
Beginning balance, December 31, 2013 | $ | 1,968 | ||
Transfers in and/or (out) of Level 3 | - | |||
Total gains or (losses) | ||||
Included in earnings | - | |||
Included in other comprehensive income | 462 | |||
Purchases, issuances, sales, and settlements | ||||
Purchases | - | |||
Issuances | - | |||
Sales | - | |||
Settlements | - | |||
Ending balance, March 31, 2014 | $ | 2,430 |
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Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements at March 31, 2014 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
(Dollars in thousands) | Estimated | Active Markets for | Significant Other | Significant | ||||||||||||
Fair | Identical Assets | Observable Inputs | Unobservable Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired loans | $ | 7,820 | $ | - | $ | - | $ | 7,820 | ||||||||
Foreclosed real estate | 1,119 | - | - | 1,119 |
Fair Value Measurements at December 31, 2013 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
(Dollars in thousands) | Estimated | Active Markets for | Significant Other | Significant | ||||||||||||
Fair | Identical Assets | Observable Inputs | Unobservable Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired loans | $ | 8,164 | $ | - | $ | - | $ | 8,164 | ||||||||
Foreclosed real estate | 1,084 | - | - | 1,084 |
The fair value of impaired loans with specific allocations of the allowance for loan losses or loans for which charge-offs have been taken is generally based on a present value of cash flows or, for collateral dependent loans, based on recent real estate appraisals. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The recorded investment of impaired loans was $9.5 million and the related specific reserves totaled $1.7 million, resulting in a fair value of impaired loans totaling $7.8 million, at March 31, 2014. The recorded investment of impaired loans was $9.9 million and the related specific reserves totaled $1.7 million, resulting in a fair value of impaired loans totaling $8.2 million, at December 31, 2013. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. The fair value of foreclosed real estate is similarly determined by using the results of recent real estate appraisals. The numerical range of unobservable inputs for these valuation assumptions is not meaningful to this presentation.
The following table shows carrying values and related estimated fair values of financial instruments as of the dates indicated. Estimated fair values are further categorized by the inputs used to measure fair value. Items that are not financial instruments are not included.
March 31, 2014 | Estimated Fair Value Measurements at March 31, 2014 Using | |||||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||||||
(Dollars in thousands) | Active Markets for | Other Observable | Unobservable | |||||||||||||||||
Carrying | Estimated | Identical Assets | Inputs | Inputs | ||||||||||||||||
Value | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 30,894 | $ | 30,894 | $ | 30,894 | $ | - | $ | - | ||||||||||
Securities available-for-sale | 198,200 | 198,200 | - | 195,770 | 2,430 | |||||||||||||||
Loans held-for-sale | 1,693 | 1,712 | 1,712 | - | - | |||||||||||||||
Loans receivable, net | 445,602 | 441,526 | - | - | 441,526 | |||||||||||||||
Federal Home Loan Bank stock | 3,967 | 3,967 | - | 3,967 | - | |||||||||||||||
Accrued interest receivable | 2,565 | 2,565 | - | 2,565 | - | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-interest bearing deposits | 82,760 | 82,760 | 82,760 | - | - | |||||||||||||||
Interest bearing deposits | 509,044 | 509,063 | 349,178 | 159,885 | - | |||||||||||||||
Repurchase agreements | 15,940 | 15,954 | 10,085 | 5,869 | - | |||||||||||||||
Borrowed funds | 38,248 | 38,261 | 148 | 38,113 | - | |||||||||||||||
Accrued interest payable | 47 | 47 | - | 47 | - |
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December 31, 2013 | Estimated Fair Value Measurements at December 31, 2013 Using | |||||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||||||
(Dollars in thousands) | Active Markets for | Other Observable | Unobservable | |||||||||||||||||
Carrying | Estimated | Identical Assets | Inputs | Inputs | ||||||||||||||||
Value | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 21,124 | $ | 21,124 | $ | 21,124 | $ | - | $ | - | ||||||||||
Securities available-for-sale | 194,296 | 194,296 | - | 192,328 | 1,968 | |||||||||||||||
Loans held-for-sale | 136 | 138 | 138 | - | - | |||||||||||||||
Loans receivable, net | 430,632 | 427,719 | - | - | 427,719 | |||||||||||||||
Federal Home Loan Bank stock | 3,086 | 3,086 | - | 3,086 | - | |||||||||||||||
Accrued interest receivable | 2,480 | 2,480 | - | 2,480 | - | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-interest bearing deposits | 73,430 | 73,430 | 73,430 | - | - | |||||||||||||||
Interest bearing deposits | 499,463 | 499,470 | 343,847 | 155,623 | - | |||||||||||||||
Repurchase agreements | 14,031 | 14,043 | 8,042 | 6,001 | - | |||||||||||||||
Borrowed funds | 30,898 | 30,956 | 799 | 30,157 | - | |||||||||||||||
Accrued interest payable | 47 | 47 | - | 47 | - |
The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended March 31, 2014 and December 31, 2013:
Cash and cash equivalents carrying amounts approximate fair value. The fair values of securities available-for-sale are obtained from broker pricing (Level 2), with the exception of collateralized debt obligations, which are valued by a third-party specialist (Level 3). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 1). The estimated fair value for net loans receivable is based on estimates of the rate the Bancorp would charge for similar such loans, applied for the time period until estimated repayment, in addition to appraisals which may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach (Level 3). Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer the security. Fair value of accrued interest receivable and payable approximates book value, as the carrying values are determined using the observable interest rate, balance, and last payment date.
Non-interest and interest bearing deposits, which include checking, savings, and money market deposits, are estimated to have fair values based on the amount payable as of the reporting date (Level 1). The fair value of fixed-maturity certificates of deposit (included in interest bearing deposits) are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Estimated fair values for short-term repurchase agreements, which represent sweeps from demand deposits to accounts secured by pledged securities, are estimated based on the amount payable as of the reporting date (Level 1). Longer-term repurchase agreements, with contractual maturity dates of three months or more, are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Short-term borrowings are generally only held overnight, therefore, their carrying amount is a reasonable estimate of fair value (Level 1). The fair value of FHLB Advances (included in borrowed funds) are estimated by discounting the future cash flows using quoted rates from the FHLB for similar advances with similar maturities (Level 2). The estimated fair value of other financial instruments, and off-balance sheet loan commitments, approximate cost and are not considered significant to this presentation.
Note 11 - Acquisition Activity
On December 20, 2013, the Bancorp announced that its bank subsidiary, Peoples Bank, signed a definitive agreement (the "Agreement") to acquire First Federal Savings and Loan Association of Hammond ("First Federal"), a federal mutual savings association headquartered in Hammond, Indiana. Pursuant to the Agreement, Peoples Bank was to acquire First Federal by merging First Federal with and into Peoples Bank immediately following First Federal's voluntary supervisory conversion to stock form. Peoples Bank was not required to issue or pay any shares, cash, or other consideration in the merger. The Agreement sets forth the terms and conditions of Peoples Banks' acquisition of First Federal.
On April 1, 2014, Peoples Bank, a subsidiary of the Bancorp, has successfully completed the previously announced acquisition of First Federal. First Federal has a home office and branch office in Lake County, Indiana, and is adding approximately $36.4 million in assets to the Bank, based on First Federal’s December 31, 2013 financial statements.
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Item 2. Management's 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 (“the Bank”), 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 March 31, 2014, the Bancorp had total assets of $723.6 million, total loans of $445.6 million and total deposits of $591.8 million. Stockholders' equity totaled $69.8 million or 9.64% of total assets, with a book value per share of $24.52. Net income for the quarter ended March 31, 2014, was $1.8 million, or $0.63 earnings per common share for both basic and diluted calculations. For the quarter ended March 31, 2014, the return on average assets (ROA) was 1.01%, while the return on average stockholders’ equity (ROE) was 10.11%.
Recent Developments
The Current Economic and Regulatory Environment. We continue to operate in an uncertain economic and regulatory environment, which presents risks associated with our business. In this regard, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") contains comprehensive provisions governing the practices and oversight of large and small financial institutions alike, including several provisions that profoundly affect the regulation of community banks, thrifts, and small bank and thrift holding companies, such as the Bancorp. The Dodd-Frank Act also established a new financial regulator, the Consumer Financial Protection Bureau (the "CFPB"), which has broad authority to regulate consumer financial products and services and entities offering such products and services, including banks. Additional legislative or regulatory action that may impact our business may result from the numerous provisions and multiple studies mandated under the Dodd-Frank Act.
The evolving regulatory environment causes uncertainty with respect to the manner in which we conduct our business and requirements that may be imposed by our regulators. Regulators have implemented and continue to propose new regulations and supervisory guidance and have been increasing their examination and enforcement action activities. We expect that regulators will continue taking formal enforcement actions against financial institutions in addition to addressing supervisory concerns through non-public supervisory actions or criticisms. We are unable to predict the nature, extent or impact of any additional changes to statutes or regulations, including the interpretation, implementation or enforcement thereof, that may occur in the future.
The impact of the evolving regulatory environment on our business and operations depends upon final implementing regulations and guidance issued by the regulatory agencies, the actions of our competitors and other marketplace participants, and the behavior of consumers. Regulatory actions could require us to limit or change our business practices, limit our ability to pursue business opportunities, limit our product offerings, require continued investment of management time and resources in compliance efforts, limit fees we can charge for services, require us to meet more stringent capital, liquidity, and leverage ratio requirements (including those under Basel III, as discussed below), increase costs, impact the value of our assets, or otherwise adversely affect our business.
Compliance and other regulatory requirements and expenditures have increased for the Bancorp and other financial institutions, and we expect them to continue to increase as regulators adopt new rules and increase their scrutiny of financial institutions, including controls and operational processes. The additional expense, time, and resources needed to comply with ongoing regulatory requirements may impact our business and results of operations.
New Capital Rules. On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Bancorp and the Bank. The FDIC and the Office of the Comptroller of the Currency (“OCC”) have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
The rules include new risk-based capital and leverage ratios, which would be phased in from 2015 to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Bancorp and the Bank under the final rules would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
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Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the final rules permit the countercyclical buffer to be applied only to “advanced approach banks” (i.e. , banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes the Bancorp and the Bank. The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Bancorp) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).
The final rules set forth certain changes for the calculation of risk-weighted assets, which we will be required to utilize beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets. Based on our current capital composition and levels, we believe that we would be in compliance with the requirements as set forth in the final rules if they were presently in effect.
Volker Rule. In December 2013, five federal agencies adopted a final regulation implementing the Volcker Rule provision of the Dodd-Frank Act (the “Volcker Rule”). The Volcker Rule places limits on the trading activity of insured depository institutions and entities affiliated with a depository institution, subject to certain exceptions. In this regard, the final Volcker Rule prohibits banking entities from (i) engaging in short-term proprietary trading for their own accounts, and (ii) having certain ownership interests in and relationships with hedge funds or private equity funds. The final rule is intended to provide greater clarity with respect to both the extent of those primary prohibitions and of the related exemptions and exclusions. The Volcker Rule also requires each regulated entity to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the rule, which must include (for the largest entities) making regular reports about those activities to regulators. Although the final Volcker Rule provides some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the rule apply to banking entities of any size, including the Bancorp and the Bank. The final rule became effective April 1, 2014, but the conformance period has been extended from its statutory end date of July 21, 2014 until July 21, 2015. The Bancorp continues to evaluate the implications of the final Volcker Rule on its investments and does not expect any material financial implications.
Under the final Volcker Rule, banking entities would have been prohibited from owning certain collateralized debt obligations (“CDOs”) backed by trust preferred securities (“TruPS”) as of July 21, 2015, which could have forced banking entities to recognize unrealized market losses based on the inability to hold any such investments to maturity. However, on January 14, 2014, the federal bank regulatory agencies issued an interim rule, effective April 1, 2014, exempting TruPS CDOs from the Volcker Rule if (i) the CDO was established prior to May 19, 2010, (ii) the banking entity reasonably believes that the offering proceeds of the CDO were used to invest primarily in TruPS issued by banks with less than $15 billion in assets, and (iii) the banking entity acquired the CDO on or before December 10, 2013. The Bancorp currently does not have any impermissible holdings of TruPS CDOs under the interim rule, and therefore, will not be required to divest any such investments or change their accounting treatment.
Acquisition Activity. On December 20, 2013, the Bancorp announced that the Bank signed a definitive agreement (the "Agreement") to acquire First Federal Savings and Loan Association of Hammond ("First Federal"), a federal mutual savings association headquartered in Hammond, Indiana. Pursuant to the Agreement, the Bank was to acquire First Federal by merging First Federal with and into the Bank immediately following First Federal's voluntary supervisory conversion to stock form. The Bank was not required to issue or pay any shares, cash, or other consideration in the merger. On April 1, 2014, the Bank successfully completed the acquisition of First Federal. First Federal has a home office and branch office in Lake County, Indiana, and is adding approximately $36.4 million in assets to the Bank, based on First Federal’s December 31, 2013 financial statements.
Financial Condition
During the three months ended March 31, 2014, total assets increased by $30.1 million (4.3%), with interest-earning assets increasing by $33.4 million (5.2%). At March 31, 2014, interest-earning assets totaled $678.1 million compared to $644.7 million at December 31, 2013. Earning assets represented 93.7% of total assets at March 31, 2014, compared to 93.0% at December 31, 2013.
Loans receivable totaled $445.6 million at March 31, 2014, compared to $430.6 million at December 31, 2013. The loan portfolio, which is the Bancorp’s largest asset, is the primary source of both interest and fee income. The Bancorp’s lending strategy emphasizes quality loan growth, product diversification, and competitive and profitable pricing.
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The Bancorp’s end-of-period loan balances were as follows:
March 31, | ||||||||||||||||
2014 | December 31, | |||||||||||||||
(Dollars in thousands) | (unaudited) | 2013 | ||||||||||||||
Balance | % Loans | Balance | % Loans | |||||||||||||
Construction & land development | $ | 23,229 | 5.1 | % | $ | 21,462 | 4.9 | % | ||||||||
1-4 first liens | 140,051 | 30.9 | % | 141,186 | 32.2 | % | ||||||||||
Multifamily | 32,373 | 7.1 | % | 30,782 | 7.0 | % | ||||||||||
Commercial real estate | 151,329 | 33.4 | % | 144,378 | 33.0 | % | ||||||||||
Commercial business | 61,199 | 13.5 | % | 57,716 | 13.2 | % | ||||||||||
1-4 Junior Liens | 1,117 | 0.2 | % | 1,186 | 0.3 | % | ||||||||||
HELOC | 18,060 | 4.0 | % | 16,903 | 3.9 | % | ||||||||||
Lot loans | 2,311 | 0.5 | % | 2,389 | 0.5 | % | ||||||||||
Consumer | 262 | 0.1 | % | 232 | 0.1 | % | ||||||||||
Government and other | 23,114 | 5.2 | % | 21,587 | 4.9 | % | ||||||||||
Total loans | $ | 453,045 | 100.0 | % | $ | 437,821 | 100.0 | % | ||||||||
Adjustable rate loans / total loans | $ | 273,737 | 60.4 | % | $ | 261,329 | 59.7 | % |
March 31, | ||||||||
2014 | December 31, | |||||||
(unaudited) | 2013 | |||||||
Total loans to total assets | 62.6 | % | 63.1 | % | ||||
Total loans to earning assets | 66.8 | % | 67.9 | % | ||||
Total loans to total deposits | 76.6 | % | 76.4 | % |
The Bancorp is primarily a portfolio lender. Mortgage banking activities historically have been 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 loan-by-loan basis, in the secondary market. The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the three months ended March 31, 2014, the Bancorp sold $3.5 million in newly originated fixed rate mortgage loans, compared to $5.1 million during the three months ended March 31, 2013. Net gains realized from the mortgage loan sales totaled $75 thousand for the three months ended March 31, 2014, compared to $159 thousand for the three months ended March 31, 2013. At March 31, 2014, the Bancorp had $1.7 million in loans that were classified as held for sale, compared to $136 thousand at December 31, 2013.
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 net of 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. The determination of the amounts of the ALL and provisions for loan losses is based on management’s 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 period provision and the overall adequacy of the ALL are determined through a disciplined and consistently applied quarterly process that reviews the Bancorp’s current credit risk within the loan portfolio and identifies the required allowance for loan losses given the current risk estimates.
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 $7.0 million at March 31, 2014, compared to $4.0 million at December 31, 2013, an increase of $3.0 million or 75%. The increase in non-performing loans for the first three months of 2014 is primarily the result of the addition of one commercial real estate loan and twelve residential real estate loans. The ratio of non-performing loans to total loans was 1.55% at March 31, 2014, compared to 0.90% at December 31, 2013. The ratio of non-performing loans to total assets was 0.97% at March 31, 2014, compared to 0.57% at December 31, 2013. At March 31, 2014, all non-performing loans are also accounted for on a non accrual basis, except for four loans totaling $568 thousand that were classified as accruing and more than 90 days past due.
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Loans internally classified as substandard totaled $12.4 million at March 31, 2014, compared to $12.2 million at December 31, 2013 an increase of $202 thousand or 1.7%. The current level of substandard loans is concentrated in one accruing commercial real estate hotel loan in the amount of $4.7 million, which is the largest loan in this group. 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. No loans were internally classified as doubtful or loss at March 31, 2014 or December 31, 2013. 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 as substandard. Watch loans totaled $8.7 million at March 31, 2014, compared to $7.5 million at December 31, 2013 an increase of $1.2 million or 16.0%. The increase in watch loans is related to the downgrades of residential and commercial real estate.
A loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. At March 31, 2014, impaired loans totaled $9.5 million, compared to $9.9 million at December 31, 2013 a decrease of $333 thousand or 3.4%. The decrease in impaired loans for the first three months of 2014 is primarily the result of the payoff of one development loan. The March 31, 2014, impaired loan balances consist of nine commercial real estate and commercial business loans totaling $8.9 million that are secured by business assets and real estate, and are personally guaranteed by the owners of the businesses. In addition, six mortgage loans totaling $669 thousand, which are troubled debt restructurings, have also been classified as impaired. The March 31, 2014, as well as the December 31, 2013, ALL contained $1.7 million in specific allowances for specific reserves on impaired loans. There were no other loans considered to be impaired loans as of March 31, 2014. Typically, management does not individually classify smaller-balance homogeneous loans, such as residential mortgages or consumer loans, as impaired, unless they are troubled debt restructurings.
At March 31, 2014, the Bancorp classified ten loans totaling $9.0 million as troubled debt restructurings, which involves modifying the terms of a loan to forego a portion of interest or principal or reducing the interest rate on the loan to a rate materially less than market rates, or materially extending the maturity date of a loan. The Bancorp’s troubled debt restructurings include one commercial real estate hotel loan in the amount of $4.7 million, for which significant deferrals of principal repayments were granted; one commercial real estate loan in the amount of $2.4 million for which a significant deferral of principal and interest repayment was granted; one commercial real estate loan in the amount of $530 thousand for which a significant deferral of principal and interest repayment was granted by the Bank as required by a bankruptcy plan; one development loan in the amount of $690 thousand for which credit underwriting concessions were granted; and six mortgage loans totaling $669 thousand, for which maturity dates were materially extended. At March 31, 2014, $5.7 million of the Bancorp’s loans classified as troubled debt restructurings are accruing loans. 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.
At March 31, 2014, 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 will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure. Management does not presently anticipate that any of the non-performing loans or classified loans would materially impact future operations, liquidity or capital resources.
For the three months ended March 31, 2014, $245 thousand in provisions to the ALL were required, compared to $135 thousand for the three months ended March 31, 2013, an increase of $110 thousand or 81.5%. The ALL provision increase for the current three month period is primarily a result of increased originations and overall loan portfolio growth. For the three months ended March 31, 2014, recoveries, net of charge-offs, totaled $9 thousand, compared to charge-offs, net of recoveries of $209 thousand for the three months ended March 31, 2013. The net loan recoveries for 2014 were comprised of $2 thousand in commercial business loans, $13 thousand in commercial real estate loans, and charge-offs of $6 thousand in consumer loans. The ALL provisions take into consideration management’s 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 losses for the current period, management has given consideration to historically elevated risks associated with the local economy, changes in loan balances and mix, and asset quality.
The ALL to total loans was 1.64% at March 31, 2014, compared to 1.64% at December 31, 2013. The ALL to non-performing loans (coverage ratio) was 106.25% at March 31, 2014, compared to 181.82% at December 31, 2013. The March 31, 2014 balance in the ALL account of $7.4 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 reserves to both performing and non-performing loans based on current information available.
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At March 31, 2014, foreclosed real estate totaled $1.12 million, which was comprised of ten properties, compared to $1.08 million and nine properties at December 31, 2013. One residential real estate loan was the primary cause for the increase. Net gains from foreclosed real estate totaled $12 thousand for the three months ended March 31, 2014, and were the result of proceeds received from a foreclosed property previously sold. At the end of March 2014 all of the Bancorp’s foreclosed real estate is located within its primary market area.
The primary objective of the Bancorp’s 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, obligations of state and local municipalities and corporate securities. The securities portfolio, all of which is designated as available-for-sale, totaled $198.2 million at March 31, 2014, compared to $194.3 million at December 31, 2013, an increase of $3.9 million (2.0%). The increase in the securities portfolio is a result of continued market opportunities. At March 31, 2014, the securities portfolio represented 29.2% of interest-earning assets and 27.4% of total assets compared to 30.1% of interest-earning assets and 28.0% of total assets at December 31, 2013. The Bancorp’s end-of-period investment portfolio and other short-term investments and stock balances were as follows:
March 31, | ||||||||||||||||
2014 | December 31, | |||||||||||||||
(Dollars in thousands) | (unaudited) | 2013 | ||||||||||||||
Balance | % Securities | Balance | % Securities | |||||||||||||
U.S. government sponsored entities | $ | 12,213 | 6.2 | % | $ | 18,360 | 9.4 | % | ||||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 103,428 | 52.2 | % | 100,315 | 51.6 | % | ||||||||||
Municipal securities | 80,129 | 40.4 | % | 73,653 | 37.9 | % | ||||||||||
Collateralized debt obligations | 2,430 | 1.2 | % | 1,968 | 1.1 | % | ||||||||||
Total securities available-for-sale | $ | 198,200 | 100.0 | % | $ | 194,296 | 100.0 | % |
March 31, | ||||||||||||||||
2014 | December 31, | YTD | ||||||||||||||
(Dollars in thousands) | (unaudited) | 2013 | Change | |||||||||||||
Balance | Balance | $ | % | |||||||||||||
Interest bearing balances in financial institutions | $ | 21,094 | $ | 9,256 | $ | 11,838 | 127.9 | % | ||||||||
Fed funds sold | 91 | 110 | (19 | ) | -17.3 | % | ||||||||||
Federal Home Loan Bank stock | 3,967 | 3,086 | 881 | 28.5 | % |
The increase in interest bearing balances in financial institutions is primarily a result of cash from sales from the securities portfolio that are in the process of being reinvested. Federal Home Loan Bank stock increased as a result of additional use of Federal Home Loan Bank’s advances during the period ended March 31, 2014.
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. The Bancorp’s end-of-period deposit portfolio balances were as follows:
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March 31, | ||||||||||||||||
2014 | December 31, | YTD | ||||||||||||||
(Dollars in thousands) | (unaudited) | 2013 | Change | |||||||||||||
Balance | Balance | $ | % | |||||||||||||
Checking | $ | 198,263 | $ | 196,729 | $ | 1,534 | 0.8 | % | ||||||||
Savings | 89,581 | 84,460 | 5,121 | 6.1 | % | |||||||||||
Money market | 144,094 | 136,088 | 8,006 | 5.9 | % | |||||||||||
Certificates of deposit | 159,866 | 155,616 | 4,250 | 2.7 | % | |||||||||||
Total deposits | $ | 591,804 | $ | 572,893 | $ | 18,911 | 3.3 | % |
The Bancorp’s core deposits include checking, savings, and money market accounts. The overall increase in core deposits is a result of managements’ sales efforts along with current customer preferences for short-term, liquid investment alternatives.
The Bancorp’s borrowed funds are primarily used to fund asset growth not supported by deposit generation. The Bancorp’s end-of-period borrowing balances were as follows:
March 31, | ||||||||||||||||
2014 | December 31, | YTD | ||||||||||||||
(Dollars in thousands) | (unaudited) | 2013 | Change | |||||||||||||
Balance | Balance | $ | % | |||||||||||||
Repurchase agreements | $ | 15,940 | $ | 14,031 | $ | 1,909 | 13.6 | % | ||||||||
Borrowed funds | 38,248 | 30,898 | 7,350 | 23.8 | % | |||||||||||
Total borrowed funds | $ | 54,188 | $ | 44,929 | $ | 9,259 | 20.6 | % |
Repurchase agreements increased as a result of growth in the Bancorp’s business sweep accounts. Borrowed funds increased as loan origination and security portfolio opportunities were greater than deposit funding.
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 profit and liquidity are often conflicting objectives, management attempts to maximize the Bank’s net interest margin by making adequate, but not excessive, liquidity provisions. Furthermore, funds are managed so that future profits will not be significantly impacted as funding costs increase.
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., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds.
During the three months ended March 31, 2014, cash and cash equivalents increased by $9.8 million compared to a $9.4 million decrease for the three months ended March 31, 2013. The primary sources of cash and cash equivalents were proceeds from maturities, pay downs, calls, and sales of available-for-sale securities, proceeds from FHLB advances, and repayments of loan receivables. The primary uses of cash and cash equivalents were the purchase of securities, loan originations, repayment of FHLB advances, and the payment of common stock dividends. Cash used by operating activities totaled $408 thousand for the three months ended March 31, 2014, compared to cash provided of $2.2 million for the three month period ended March 31, 2013. The decrease in cash from operating activities was primarily a result of increased origination of loans held for sale. Cash outflows from investing activities totaled $17.4 million for the current period, compared to cash outflows of $8.4 million for the three months ended March 31, 2013. The increased cash outflows for the current three months were primarily related to increased loan originations, increased securities purchases, and less pay downs and maturities from securities. Net cash inflows from financing activities totaled $27.5 million during the current period compared to net cash outflows of $3.2 million for the three months ended March 31, 2013. The increase in net cash inflows from financing activities was a result of net deposit and borrowing inflows. On a cash basis, the Bancorp paid dividends on common stock of $626 thousand for the three months ended March 31, 2014 and $539 thousand for the three months ended March 31, 2013.
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At March 31, 2014, outstanding commitments to fund loans totaled $82.9 million. Approximately 51.7% of the commitments were at variable rates. Standby letters of credit, which are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party, totaled $9.4 million at March 31, 2014. Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity.
Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the three months ended March 31, 2014, stockholders' equity increased by $3.0 million (4.5%). During the three months ended March 31, 2014, stockholders’ equity was primarily increased by net income of $1.8 million and change in the valuation of available-for-sale securities of $1.8 million. Decreasing stockholders’ equity was the declaration of $626 thousand in cash dividends. On April 18, 2000 the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. This stock repurchase program does not expire and is only limited by the number of shares that can be purchased. No shares were repurchased during the first quarter of 2014. As of March 31, 2014, the Bancorp has repurchased 43,812 shares of its outstanding common stock under the program at an average price per share of $22.64.
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 the same. These regulations divide capital into two tiers. The first tier (Tier 1) includes common equity, certain non-cumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets. Supplementary (Tier 2) capital includes, among other things, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan losses, subject to certain limitations, less required deductions. 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 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. See “Recent Developments - New Capital Rules” for a description of the new capital ratios that will be phased-in beginning in 2015.
The following table shows that, at March 31, 2014, and December 31, 2013, the Bancorp’s capital exceeded all regulatory capital requirements. During the three months ended March 31, 2014, the Bancorp’s regulatory capital ratios continued to be negatively impacted by regulatory requirements regarding collateralized debt obligations. The regulatory requirements state that for collateralized debt obligations that have been downgraded below investment grade by the rating agencies, increased risk based asset weightings are required. The Bancorp currently holds four pooled trust preferred securities with a cost basis of $5.2 million. These investments currently have ratings that are below investment grade. As a result, approximately $26.7 million of risk based assets are generated by the trust preferred securities in the Bancorp’s and Bank’s total risk based capital calculation. The Bancorp’s and the Bank’s regulatory capital ratios were substantially the same at both March 31, 2014 and December 31, 2013. The dollar amounts are in millions.
(Dollars in millions) | Minimum Required To Be | |||||||||||||||||||||||
Minimum Required For | Well Capitalized Under Prompt | |||||||||||||||||||||||
Actual | Capital Adequacy Purposes | Corrective Action Regulations | ||||||||||||||||||||||
At March 31, 2014 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total capital to risk-weighted assets | $ | 76.5 | 15.2 | % | $ | 40.2 | 8.0 | % | $ | 50.2 | 10.0 | % | ||||||||||||
Tier 1 capital to risk-weighted assets | $ | 70.2 | 14.0 | % | $ | 20.1 | 4.0 | % | $ | 30.1 | 6.0 | % | ||||||||||||
Tier 1 capital to adjusted average assets | $ | 70.2 | 9.9 | % | $ | 21.3 | 3.0 | % | $ | 35.5 | 5.0 | % |
(Dollars in millions) | Minimum Required To Be | |||||||||||||||||||||||
Minimum Required For | Well Capitalized Under Prompt | |||||||||||||||||||||||
Actual | Capital Adequacy Purposes | Corrective Action Regulations | ||||||||||||||||||||||
At December 31, 2013 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total capital to risk-weighted assets | $ | 75.0 | 15.6 | % | $ | 38.5 | 8.0 | % | $ | 48.2 | 10.0 | % | ||||||||||||
Tier 1 capital to risk-weighted assets | $ | 69.0 | 14.3 | % | $ | 19.3 | 4.0 | % | $ | 28.9 | 6.0 | % | ||||||||||||
Tier 1 capital to adjusted average assets | $ | 69.0 | 10.0 | % | $ | 20.8 | 3.0 | % | $ | 34.6 | 5.0 | % |
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The Bancorp’s ability to pay dividends to its shareholders is entirely dependent upon the Bank’s 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 Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) 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. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. The aggregate amount of dividends that may be declared by the Bank in 2014, without the need for qualifying for an exemption or prior DFI approval is $9.4 million plus 2014 net profits. 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. On February 28, 2014, the Board of Directors of the Bancorp declared a first quarter dividend of $0.22 per share. The Bancorp’s first quarter dividend was paid to shareholders on April 4, 2014.
Results of Operations - Comparison of the Quarter Ended March 31, 2014 to the Quarter Ended March 31, 2013
For the quarter ended March 31, 2014, the Bancorp reported net income of $1.8 million, compared to net income of $1.7 million for the quarter ended March 31, 2013, an increase of $134 thousand (8.0%). For the current quarter the ROA was 1.01%, compared to 0.97% for the quarter ended March 31, 2013. The ROE was 10.11% for the quarter ended March 31, 2014, compared to 9.52% for the quarter ended March 31, 2013.
Net interest income for the three months ended March 31, 2014 was $5.9 million, an increase of $71 thousand (1.2%), compared to $5.8 million for the quarter ended March 31, 2013. The weighted-average yield on interest-earning assets was 3.79% for the three months ended March 31, 2014, compared to 3.86% for the three months ended March 31, 2013. The weighted-average cost of funds for the quarter ended March 31, 2014, was 0.27%, compared to 0.30% for the quarter ended March 31, 2013. The impact of the 3.79% return on interest earning assets and the 0.27% cost of funds resulted in an interest rate spread of 3.52% for the current quarter, compared to 3.56% for the quarter ended March 31, 2013. During the current quarter, total interest income increased by $25 thousand (0.4%) while total interest expense decreased by $46 thousand (10.0%). The net interest margin was 3.54% for the three months ended March 31, 2014, compared to 3.58% for the quarter ended March 31, 2013. On a tax equivalent basis, the Bancorp’s net interest margin was 3.79% for the three months ended March 31, 2014, compared to 3.77% for the quarter ended March 31, 2013. 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 March 31, 2014, interest income from loans decreased by $111 thousand (2.2%), compared to the three months ended March 31, 2013. The decrease was due to a lower weighted-average yield on loans outstanding. The weighted-average yield on loans outstanding was 4.34% for the current quarter, compared to 4.51% for the three months ended March 31, 2013. Loan balances averaged $450.7 million for the current quarter, an increase of $6.4 million (1.4%) from $444.3 million for the three months ended March 31, 2013. During the three months ended March 31, 2014, interest income on securities and other interest bearing balances increased by $136 thousand (10.8%), compared to the quarter ended March 31, 2013. The change was primarily due to an increase in the weighted-average yield on securities balances. The weighted-average yield on securities and other interest bearing balances was 2.61%, for the current quarter, compared to 2.47% for the three months ended March 31, 2013. Securities balances averaged $190.3 million for the current quarter, down $1.2 million (0.6%) from $191.5 million for the three months ended March 31, 2013. Other interest bearing balances averaged $23.2 million for the current period, up $10.8 million (87.1%) from $12.4 million for the three months ended March 31, 2013. The increase in other interest bearing balances is a result of growth in core deposits as customers seek liquidity during a historically low interest rate environment.
Interest expense on deposits decreased by $28 thousand (9.2%) during the current quarter compared to the three months ended March 31, 2013. The change was due to a decrease in the weighted-average rate paid on deposits, which was the result of a change in the deposit mix as well as lower rates paid. The weighted-average rate paid on deposits for the three months ended March 31, 2014 was 0.19%, compared to 0.22%, for the quarter ended March 31, 2013. Total deposit balances averaged $575.7 million for the current quarter, an increase of $15.0 million (2.7%) from $560.7 million for the quarter ended March 31, 2013. Interest expense on borrowed funds decreased by $16 thousand (11.3%) during the current quarter due to a decrease in the weighted-average cost of funds compared to the three months ended March 31, 2013. The weighted-average cost of borrowed funds was 1.00% for the current quarter, compared to 1.26% for the three months ended March 31, 2013. Borrowed funds averaged $57.3 million during the quarter ended March 31, 2014, an increase of $6.8 million (13.5%) from $50.5 million for the quarter ended March 31, 2013.
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Noninterest income for the quarter ended March 31, 2014 was $1.5 million, an increase of $164 thousand (12.0%) from $1.4 million for the quarter ended March 31, 2013. During the current quarter, fees and service charges totaled $594 thousand, an increase of $3 thousand (0.5%) from $591 thousand for the quarter ended March 31, 2013. Fees from Wealth Management operations totaled $378 thousand for the quarter ended March 31, 2014, an increase of $11 thousand (3.0%) from $367 thousand for the quarter ended March 31, 2013. The increase in Wealth Management income is related to growth in assets under management and market value changes. Gains from the sale of securities totaled $350 thousand for the current quarter, an increase of $222 thousand (173.4%) from $128 thousand for the quarter ended March 31, 2013. Current market conditions continued to provide opportunities to maintain securities cash flows, while recognizing gains from the sales of securities. Income from an increase in the cash value of bank owned life insurance totaled $102 thousand for the quarter ended March 31, 2014, an increase of $15 thousand (17.2%) from $87 thousand the quarter ended March 31, 2013. Gains from loan sales totaled $75 thousand for the current quarter, a decrease of $84 thousand (52.8%), compared to $159 thousand for the quarter ended March 31, 2013. The decrease in gains from the sale of loans is a result of decreased customer refinance activity to low rate fixed rate mortgages. Gain on foreclosed real estate totaled $12 thousand for the quarter ended March 31, 2014, a decrease of $5 thousand (29.4%) from gains of $17 thousand for the quarter ended March 31, 2013. Other noninterest income totaled $16 thousand for the quarter, an increase of $2 thousand (14.3%) compared to $14 thousand for the quarter ended March 31, 2013.
Noninterest expense for the quarter ended March 31, 2014 was $4.83 million, an increase of $34 thousand (0.7%) from $4.80 million for the three months ended March 31, 2013. During the current quarter, compensation and benefits totaled $2.65 million, an increase of $4 thousand (0.2%) from $2.64 million for the quarter ended March 31, 2013. The minimal increase in compensation and benefits is the result of the Bancorp’s continued efforts to closely monitor and manage staffing levels. Occupancy and equipment totaled $790 thousand for the current quarter, an increase of $8 thousand (1.0%), compared to $782 thousand for the quarter ended March 31, 2013. The increase in occupancy and equipment expense is the result of slightly higher building operating expenses. Data processing expense totaled $276 thousand for the three months ended March 31, 2014, an increase of $36 thousand (15.0%) from $240 thousand for the three months ended March 31, 2013. Data processing expense has increased as a result of increased system utilization. Marketing expense related to banking products totaled $118 thousand for the current quarter, an increase of $10 thousand (9.3%) from $108 thousand for the three months ended March 31, 2013. The Bancorp proactively markets its products, but varies its timing based on projected benefits and needs. Federal deposit insurance premium expense totaled $91 thousand for the three months ended March 31, 2014, a decrease of $31 thousand (25.4%) from $122 thousand for the quarter ended March 31, 2013. The decrease was the result of lower FDIC assessment rates. Other expenses related to banking operations totaled $908 thousand for the quarter ended March 31, 2014, a decrease of $7 thousand (0.8%) from $901 thousand for the quarter ended March 31, 2013. The Bancorp’s efficiency ratio was 65.3% for the quarter ended March 31, 2014, compared to 66.9% for the three months ended March 31, 2013. The ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period and the decrease can be attributed to higher noninterest income.
Income tax expenses for the three months ended March 31, 2014 totaled $521 thousand, compared to income tax expense of $564 thousand for the three months ended March 31, 2013, a decrease of $43 thousand (7.6%). The combined effective federal and state tax rates for the Bancorp was 22.4% for the three months ended March 31, 2014, compared to 25.3% for the three months ended March 31, 2013. The Bancorp’s lower current quarter effective tax rate is a result of higher tax preferred income.
Critical Accounting Policies
Critical accounting policies are those accounting policies that management believes are most important to the portrayal of the Bancorp’s financial condition and that require management’s most difficult, subjective or complex judgments. The Bancorp’s critical accounting policies from December 31, 2013 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 Bancorp’s 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 the Bancorp’s 2013 Form 10-K.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
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 SEC’s 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 Bancorp's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The Bancorp's chief executive officer and chief financial officer evaluate the effectiveness of the Bancorp's disclosure controls and procedures as of the end of each quarter. Based on that evaluation as of March 31, 2014, the Bancorp’s 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 SEC’s rules and forms.
(b) | Changes in Internal Control Over Financial Reporting. |
There was no change in the Bancorp's internal control over financial reporting identified in connection with the Bancorp’s evaluation of controls that occurred during the three months ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Bancorp's internal control over financial reporting.
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PART II - Other Information
Item 1. | Legal Proceedings |
There are no matters reportable under this item.
Item 1A. | Risk Factors |
Not Applicable.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On April 18, 2000 the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. This stock repurchase program does not expire and is only limited by the number of shares that can be purchased. As of March 31, 2014, the Bancorp has repurchased 43,812 shares of its outstanding common stock under the program at an average price per share of $22.64. No shares were repurchased during the three months ended March 31, 2014 as shown in the following table:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet Be Purchased Under the Program(1) | ||||||||||
January 1, 2014 – January 31, 2014 | - | N/A | 43,812 | 6,188 | ||||||||||
February 1, 2014 – February 28, 2014 | - | N/A | 43,812 | 6,188 | ||||||||||
March 1, 2014 – March 31, 2014 | - | N/A | 43,812 | 6,188 | ||||||||||
- | N/A | 43,812 | 6,188 |
(1) | The stock repurchase plan was announced on April 18, 2000, whereby the Bancorp is authorized to repurchase up to 50,000 shares of the Bancorp’s common stock outstanding. There is no expiration date for this plan. |
Item 3. | Defaults Upon Senior Securities |
There are no matters reportable under this item.
Item 4. | Mine Safety Disclosures |
Not Applicable.
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 |
101 | The following materials from the Bancorp’s Form 10-Q for the quarterly period ended March 31, 2014, formatted in an XBRL Interactive Data File: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Changes in Stockholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements, with detailed tagging of notes and financial statement schedules. |
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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: April 21, 2014 | /s/ David A. Bochnowski |
David A. Bochnowski | |
Chairman of the Board, Chief Executive | |
Officer and President | |
Date: April 21, 2014 | /s/ Robert T. Lowry |
Robert T. Lowry | |
Executive Vice President, Chief Financial | |
Officer and Treasurer |
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