Business context and reporting period
NorthWest Indiana Bancorp filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company is a bank holding company whose principal business is conducted through Peoples Bank SB. Dollar figures below are in millions unless otherwise noted.
Financial performance and condition
- Second-quarter results: Net income was $1.949 million, up 14.2% from $1.707 million in Q2 2013; diluted EPS was $0.69 versus $0.60. ROA was 1.02% and ROE was 10.77%.
- First-half results: Net income was $3.753 million, up 11.1% from $3.377 million; diluted EPS was $1.32 versus $1.19. ROA was 1.02% and ROE was 10.59%.
- Revenue and margins: Q2 net interest income increased 12.0% to $6.462 million; first-half net interest income rose 6.6% to $12.334 million. Reported net interest margin was 3.62% for Q2 and 3.58% for the first half. Noninterest income was $1.560 million in Q2 and $3.087 million in the first half. The first-half efficiency ratio improved to 65.7% from 66.7%.
- Expenses and credit provision: Noninterest expense rose 9.9% in Q2 to $5.305 million and 5.3% for the first half to $10.134 million. Loan-loss provision was $0.165 million in Q2 and $0.410 million for the first half, versus $0.095 million and $0.230 million, respectively, a year earlier.
- Balance sheet at June 30: Assets were $776.3 million, up 12.0% from year-end 2013; loans receivable were $490.0 million gross ($483.8 million net), deposits were $639.6 million, and available-for-sale securities were $209.4 million. Stockholders’ equity was $72.7 million, or 9.37% of assets; book value per share was $25.56.
- Funding and liquidity: Cash and cash equivalents were $31.0 million, compared with $21.1 million at year-end. Repurchase agreements were $18.4 million and borrowed funds were $39.0 million. Deposits grew 11.6% from year-end, including 20.9% growth in certificates of deposit. Management said available cash flow and borrowing capacity were sufficient for $92.5 million of loan commitments and $8.6 million of standby letters of credit.
- Cash flow, first half: Operating activities used $0.488 million, versus $2.821 million provided in 2013; investing activities used $28.623 million; financing activities provided $38.952 million. Cash increased $9.841 million. Dividends paid were $1.251 million.
- Capital: At June 30, reported total risk-based capital was 14.3%, Tier 1 risk-based capital 13.1%, and Tier 1 leverage 9.1%. The company said it exceeded current requirements and believed it would comply with the described Basel III rules if then in effect.
Material changes and notable items
- On April 1, 2014, the Bank acquired First Federal Savings and Loan Association of Hammond, adding two banking locations. No cash, shares, or other consideration was paid. The acquisition added assets with fair value of $37.9 million and liabilities of $39.6 million, and resulted in $1.6 million of goodwill and $93,000 of core-deposit intangible assets. Acquisition activity contributed to balance-sheet growth and higher occupancy and other operating expenses.
- Gross loans increased to $490.0 million from $437.8 million at year-end. Nonperforming loans rose to $5.2 million from $4.0 million; the ratio to total loans increased to 1.07% from 0.90%. The allowance for loan losses was $6.176 million, or 1.26% of loans, versus 1.64% at year-end; coverage of nonperforming loans was 118.12%, down from 181.82%.
- Net charge-offs were $1.4 million for the first half, versus $887,000 in 2013, mainly reflecting a commercial real estate charge-off. Watch loans increased to $12.4 million from $7.5 million. Substandard loans declined to $10.3 million from $12.2 million. Five loans totaling $6.5 million were classified as troubled debt restructurings at June 30.
- First-half available-for-sale securities generated a $3.537 million after-tax unrealized gain in other comprehensive income, compared with a $4.276 million loss in the prior-year period. Four pooled trust-preferred securities had $4.062 million of unrealized losses; management recorded no additional other-than-temporary impairment in Q2. Three remained in payment-in-kind status.
- The Board authorized a new repurchase program for up to 50,000 shares on April 24. The company repurchased 1,172 shares in Q2 at an average $26.50 per share. The quarterly dividend declared was $0.25 per share.
Outlook, risks and controls
The filing provides no numerical earnings or revenue guidance. Management described the economic and regulatory environment as uncertain and cited risks from regulatory changes, interest-rate and market movements, credit quality, local economic conditions, and the estimates used for loan-loss allowances, securities, foreclosed real estate, and goodwill. The company noted that increased regulatory compliance requirements could raise costs or constrain products and business activity. It expected no material financial impact from the Volcker Rule and said its trust-preferred CDO holdings qualified for the interim exemption described in the filing. Management stated that it did not expect identified nonperforming or classified loans to materially affect future operations, liquidity, or capital.
Management concluded disclosure controls were effective as of June 30, 2014, and reported no material change in internal control over financial reporting during the first half. No reportable legal proceedings were disclosed.
Important facts for investors to verify
- How much of reported growth and earnings reflects the April First Federal acquisition, and what integration or ongoing costs may follow.
- Whether the rise in nonperforming and watch loans, elevated net charge-offs, and lower allowance coverage lead to further provisions or credit losses.
- The valuation, payment status, and potential future impairment of the pooled trust-preferred securities, including the impact of their below-investment-grade ratings.
- Deposit mix and funding costs, reliance on borrowings, and the ability to meet commitments while sustaining loan growth and dividends.
- Whether the reported capital cushion remains adequate as Basel III requirements phase in and balance-sheet growth continues.