NorthWest Indiana Bancorp — 2015 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; unaudited. The filing registrant is NorthWest Indiana Bancorp, the bank holding company for Peoples Bank SB. The filing describes the July 1, 2015 acquisition of Liberty Savings Bank; it involved no shares, cash, or other consideration. Liberty added banking locations and contributed approximately $27.0 million of loans and $48.2 million of deposits as of September 30. The acquisition expanded the company’s Northwest Indiana footprint.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and ratios. Comparable periods are the three or nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2014.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $7.100 | $6.571 | $20.107 | $18.905 |
| Provision for loan losses | $0.100 | $0.165 | $0.585 | $0.575 |
| Noninterest income | $1.615 | $1.471 | $5.297 | $4.558 |
| Noninterest expense | $6.225 | $5.372 | $17.528 | $15.506 |
| Net income | $1.921 | $1.913 | $5.823 | $5.666 |
| Diluted earnings per share | $0.67 | $0.67 | $2.04 | $1.99 |
| Net interest margin | 3.60% | 3.59% | 3.55% | 3.59% |
| Efficiency ratio | 71.4% | 66.79% | 69.00% | 66.09% |
- Balance sheet: Total assets were $842.2 million, up 8.7% since year-end; loans were $552.9 million, up from $488.2 million; deposits were $698.5 million, up 10.2%; and stockholders’ equity was $80.1 million, or 9.51% of assets. Book value per share was $28.08.
- Returns and dividends: Q3 return on average assets (ROA) was 0.91% and return on average equity (ROE) was 9.73%. Nine-month ROA was 0.96% and ROE was 9.88%. Dividends declared were $0.27 per share for Q3 and $0.79 per share year to date.
- Cash flow and liquidity: Nine-month operating cash flow was $6.8 million, investing cash flow was negative $23.4 million, and financing cash flow was $5.9 million. Cash and cash equivalents declined $10.8 million to $11.2 million. Outstanding loan commitments were $124.5 million, 56.9% at variable rates; standby letters of credit were $9.1 million. Management stated it believed available cash flow and borrowing capacity were sufficient to meet these commitments.
- Funding and capital: Repurchase agreements were $21.4 million and borrowed funds were $32.2 million, for total borrowings of $53.6 million. Reported September 30 regulatory capital ratios were 12.6% common equity Tier 1, 12.6% Tier 1, 13.7% total capital, and 8.9% Tier 1 leverage; the filing says capital exceeded applicable requirements.
- Credit quality: The allowance for loan losses was $6.7 million, 1.22% of loans and 136.47% of nonperforming loans. Nonperforming loans were $4.9 million (0.89% of loans), down from $5.5 million at year-end. Substandard loans rose to $11.2 million from $9.5 million; watch loans were $13.5 million. Net charge-offs were $0.221 million for the nine months, versus $1.5 million in 2014.
Material changes versus comparable periods
- Q3 net income was nearly unchanged year over year; nine-month net income increased 2.8%. Asset and loan growth, including Liberty, lifted net interest income, while higher expenses pressured profitability.
- Q3 net interest margin edged up to 3.60% from 3.59%; the nine-month margin declined to 3.55% from 3.59%. Nine-month net interest income increased 6.4%, while total noninterest expense increased 13.0%; the efficiency ratio worsened to 69.00% from 66.09%.
- Nine-month noninterest income increased 16.2%, led by loan-sale gains of $1.010 million versus $0.383 million. Compensation and benefits, occupancy, data processing, and other expenses also rose, with management citing staffing and the Liberty acquisition.
- Loans grew 13.3% from year-end, and deposits grew 10.2%. Available-for-sale securities increased to $232.9 million from $220.1 million. Cash and cash equivalents fell as funds were deployed into loans and securities.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management cautioned that nine-month results are not necessarily indicative of full-year results.
- Management cited regulatory uncertainty and compliance costs, local economic and credit conditions, interest-rate and market risks, and risks affecting forward-looking statements. It stated that the company believed it complied with current capital rules. No material change in internal control over financial reporting was reported, and disclosure controls were considered effective.
- The available-for-sale portfolio included $2.8 million of collateralized debt obligations (CDOs), with $2.3 million of gross unrealized losses; three pooled trust-preferred securities with $3.8 million cost basis remained in payment-in-kind status. Management recorded no additional impairment at September 30 and expected to review them again at year-end. Existing credit-loss impairment on the CDOs was $0.271 million. Management attributed unrealized losses to market and interest-rate factors and said it intended and was able to hold the affected securities.
- Five troubled debt restructurings totaling $5.2 million were outstanding at September 30, including a $4.5 million commercial real estate hotel loan. The filing reported no TDR modifications or subsequent TDR defaults during the nine months, while separately describing the existing TDR portfolio. Management said it did not anticipate classified or nonperforming loans materially affecting operations, liquidity, or capital.
- The Liberty acquisition added $0.573 million of goodwill and $0.471 million of core deposit intangible. A first-quarter revision to estimated fair values for a purchased loan pool added $0.377 million to goodwill and $0.423 million to purchased credit-impaired loans. Management reported no goodwill impairment.
- The filing reported no reportable legal proceedings. Its Risk Factors item was marked “Not Applicable”; quantitative and qualitative market-risk disclosure was also marked “Not Applicable.”
Key facts for investors to verify
- How much of reported loan, deposit, and earnings growth is attributable to Liberty versus organic growth, and how integration costs and branch consolidation affect future results.
- Whether expense growth moderates and the efficiency ratio improves, given the increase in operating costs relative to income.
- Trends in commercial real estate credit quality, particularly the $4.5 million hotel TDR, the rise in substandard loans, and the allowance’s coverage of losses.
- Valuation, cash-flow performance, and future impairment risk for the pooled trust-preferred CDOs, including their payment-in-kind status and substantial unrealized losses.
- Liquidity against $124.5 million of loan commitments and $9.1 million of standby letters of credit, and the effect of changing deposit costs or interest rates on margins.
- Regulatory capital headroom as Basel III capital-conservation requirements phase in, and any effect on dividend capacity.