SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended June 30, 2015 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 or organization) | (I.R.S. Employer Identification Number) |
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 o
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 o
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 o Accelerated filer o Non-accelerated filer o 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 o No x
There were 2,851,417 shares of the registrant’s Common Stock, without par value, outstanding at July 30, 2015.
NorthWest Indiana Bancorp
Index
Consolidated Balance Sheets
June 30, | ||||||||
(Dollars in thousands) | 2015 | December 31, | ||||||
(unaudited) | 2014 | |||||||
ASSETS | ||||||||
Cash and non-interest bearing deposits in other financial institutions | $ | 16,185 | $ | 8,057 | ||||
Interest bearing deposits in other financial institutions | 18,801 | 5,866 | ||||||
Federal funds sold | 139 | 8,040 | ||||||
Total cash and cash equivalents | 35,125 | 21,963 | ||||||
Securities available-for-sale | 227,350 | 220,053 | ||||||
Loans held-for-sale | 1,734 | 2,913 | ||||||
Loans receivable | 506,988 | 488,153 | ||||||
Less: allowance for loan losses | (6,699 | ) | (6,361 | ) | ||||
Net loans receivable | 500,289 | 481,792 | ||||||
Federal Home Loan Bank stock | 2,626 | 3,681 | ||||||
Accrued interest receivable | 2,788 | 2,727 | ||||||
Premises and equipment | 17,376 | 17,724 | ||||||
Foreclosed real estate | 1,530 | 1,745 | ||||||
Cash value of bank owned life insurance | 17,024 | 16,814 | ||||||
Goodwill | 1,988 | 1,611 | ||||||
Other assets | 5,493 | 4,021 | ||||||
Total assets | $ | 813,323 | $ | 775,044 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Deposits: | ||||||||
Non-interest bearing | $ | 91,256 | $ | 80,352 | ||||
Interest bearing | 576,878 | 553,594 | ||||||
Total | 668,134 | 633,946 | ||||||
Repurchase agreements | 19,276 | 17,525 | ||||||
Borrowed funds | 34,230 | 36,381 | ||||||
Accrued expenses and other liabilities | 14,634 | 11,027 | ||||||
Total liabilities | 736,274 | 698,879 | ||||||
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: June 30, 2015 - 2,907,455 | 361 | 361 | ||||||
December 31, 2014 - 2,900,205 | ||||||||
shares outstanding: June 30, 2015 - 2,851,417 | ||||||||
December 31, 2014 - 2,844,167 | ||||||||
Additional paid-in capital | 4,109 | 4,062 | ||||||
Accumulated other comprehensive income | 5 | 1,588 | ||||||
Retained earnings | 72,574 | 70,154 | ||||||
Total stockholders' equity | 77,049 | 76,165 | ||||||
Total liabilities and stockholders' equity | $ | 813,323 | $ | 775,044 |
See accompanying notes to consolidated financial statements
1 |
Consolidated Statements of Income
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
(Dollars in thousands, except per share data) | June 30, | June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Interest income: | ||||||||||||||||
Loans receivable | ||||||||||||||||
Real estate loans | $ | 4,709 | $ | 4,573 | $ | 9,230 | $ | 8,644 | ||||||||
Commercial loans | 855 | 834 | 1,669 | 1,654 | ||||||||||||
Consumer loans | 5 | 5 | 9 | 9 | ||||||||||||
Total loan interest | 5,569 | 5,412 | 10,908 | 10,307 | ||||||||||||
Securities | 1,505 | 1,502 | 3,019 | 2,890 | ||||||||||||
Other interest earning assets | 11 | 2 | 20 | 7 | ||||||||||||
Total interest income | 7,085 | 6,916 | 13,947 | 13,204 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 345 | 307 | 679 | 582 | ||||||||||||
Repurchase agreements | 17 | 17 | 33 | 32 | ||||||||||||
Borrowed funds | 113 | 130 | 228 | 256 | ||||||||||||
Total interest expense | 475 | 454 | 940 | 870 | ||||||||||||
Net interest income | 6,610 | 6,462 | 13,007 | 12,334 | ||||||||||||
Provision for loan losses | 198 | 165 | 485 | 410 | ||||||||||||
Net interest income after provision for loan losses | 6,412 | 6,297 | 12,522 | 11,924 | ||||||||||||
Noninterest income: | ||||||||||||||||
Fees and service charges | 711 | 703 | 1,343 | 1,297 | ||||||||||||
Wealth management operations | 387 | 441 | 816 | 819 | ||||||||||||
Gain on sale of loans held-for-sale, net | 354 | 141 | 734 | 216 | ||||||||||||
Gain on sale of securities, net | 137 | 107 | 530 | 457 | ||||||||||||
Increase in cash value of bank owned life insurance | 106 | 103 | 210 | 205 | ||||||||||||
Gain/(loss) on sale of foreclosed real estate, net | 23 | (7 | ) | 24 | 5 | |||||||||||
Other | 14 | 72 | 25 | 88 | ||||||||||||
Total noninterest income | 1,732 | 1,560 | 3,682 | 3,087 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Compensation and benefits | 3,198 | 2,793 | 6,371 | 5,439 | ||||||||||||
Occupancy and equipment | 885 | 821 | 1,786 | 1,611 | ||||||||||||
Data processing | 313 | 284 | 628 | 560 | ||||||||||||
Marketing | 145 | 142 | 258 | 260 | ||||||||||||
Federal deposit insurance premiums | 109 | 127 | 243 | 218 | ||||||||||||
Other | 1,020 | 1,138 | 2,016 | 2,046 | ||||||||||||
Total noninterest expense | 5,670 | 5,305 | 11,302 | 10,134 | ||||||||||||
Income before income tax expenses | 2,474 | 2,552 | 4,902 | 4,877 | ||||||||||||
Income tax expenses | 498 | 603 | 999 | 1,124 | ||||||||||||
Net income | $ | 1,976 | $ | 1,949 | $ | 3,903 | $ | 3,753 | ||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.69 | $ | 0.69 | $ | 1.37 | $ | 1.32 | ||||||||
Diluted | $ | 0.69 | $ | 0.69 | $ | 1.37 | $ | 1.32 | ||||||||
Dividends declared per common share | $ | 0.27 | $ | 0.25 | $ | 0.52 | $ | 0.47 |
See accompanying notes to consolidated financial statements.
2 |
Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
(Dollars in thousands) | June 30, | June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net income | $ | 1,976 | $ | 1,949 | $ | 3,903 | $ | 3,753 | ||||||||
Net change in net unrealized gains and losses on securities available-for-sale: | ||||||||||||||||
Unrealized gains/(losses) arising during the period | (3,038 | ) | 2,734 | (1,874 | ) | 5,815 | ||||||||||
Less: reclassification adjustment for gains included in net income | (137 | ) | (107 | ) | (530 | ) | (457 | ) | ||||||||
Net securities (loss)/gain during the period | (3,175 | ) | 2,627 | (2,404 | ) | 5,358 | ||||||||||
Tax effect | 1,080 | (892 | ) | 822 | (1,821 | ) | ||||||||||
Net of tax amount | (2,095 | ) | 1,735 | (1,582 | ) | 3,537 | ||||||||||
Net change in unrealized gain on postretirement benefit: | ||||||||||||||||
Amortization of net actuarial gain | - | (2 | ) | (1 | ) | (3 | ) | |||||||||
Net (loss) during the period | - | (2 | ) | (1 | ) | (3 | ) | |||||||||
Tax effect | - | - | - | - | ||||||||||||
Net of tax amount | - | (2 | ) | (1 | ) | (3 | ) | |||||||||
Other comprehensive income, net of tax | (2,095 | ) | 1,733 | (1,583 | ) | 3,534 | ||||||||||
Comprehensive (loss)/income, net of tax | $ | (119 | ) | $ | 3,682 | $ | 2,320 | $ | 7,287 |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
(Dollars in thousands) | June 30, | June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Balance at beginning of period | $ | 77,912 | $ | 69,755 | $ | 76,165 | $ | 66,761 | ||||||||
Comprehensive income: | ||||||||||||||||
Net income | 1,976 | 1,949 | 3,903 | 3,753 | ||||||||||||
Net unrealized change on securities available-for-sale, net of reclassifications and tax effects | (2,095 | ) | 1,735 | (1,582 | ) | 3,537 | ||||||||||
Amortization of unrecognized gain on postretirement benefit | - | (2 | ) | (1 | ) | (3 | ) | |||||||||
Comprehensive (loss) income, net of tax | (119 | ) | 3,682 | 2,320 | 7,287 | |||||||||||
Stock based compensation expense | 25 | 15 | 47 | 30 | ||||||||||||
Stock repurchase | - | (31 | ) | - | (31 | ) | ||||||||||
Cash dividends | (769 | ) | (711 | ) | (1,483 | ) | (1,337 | ) | ||||||||
Balance at end of period | $ | 77,049 | $ | 72,710 | $ | 77,049 | $ | 72,710 |
See accompanying notes to consolidated financial statements.
3 |
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended | ||||||||
(Dollars in thousands) | June 30, | |||||||
2015 | 2014 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 3,903 | $ | 3,753 | ||||
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | ||||||||
Origination of loans for sale | (28,058 | ) | (11,629 | ) | ||||
Sale of loans originated for sale | 29,963 | 10,147 | ||||||
Depreciation and amortization, net of accretion | 1,115 | 984 | ||||||
Amortization of mortgage servicing rights | 41 | 41 | ||||||
Stock based compensation expense | 47 | 30 | ||||||
Gain on sale of securities, net | (530 | ) | (457 | ) | ||||
Gain on sale of loans held-for-sale, net | (734 | ) | (216 | ) | ||||
Gain on sale of foreclosed real estate, net | (24 | ) | (5 | ) | ||||
Provision for loan losses | 485 | 410 | ||||||
Net change in: | ||||||||
Interest receivable | (61 | ) | (200 | ) | ||||
Other assets | (1,120 | ) | (427 | ) | ||||
Accrued expenses and other liabilities | 3,606 | (2,919 | ) | |||||
Total adjustments | 4,730 | (4,241 | ) | |||||
Net cash - operating activities | 8,633 | (488 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from maturities and pay downs of securities available-for-sale | 20,688 | 8,634 | ||||||
Proceeds from sales of securities available-for-sale | 19,183 | 28,737 | ||||||
Purchase of securities available-for-sale | (49,424 | ) | (43,061 | ) | ||||
Loan participations purchased | - | (427 | ) | |||||
Net change in loans receivable | (19,064 | ) | (24,131 | ) | ||||
Purchase of Federal Home Loan Bank Stock | - | (881 | ) | |||||
Proceeds from sale of Federal Home Loan Bank stock | 1,055 | - | ||||||
Purchase of premises and equipment, net | (386 | ) | (426 | ) | ||||
Proceeds from sale of foreclosed real estate, net | 321 | 507 | ||||||
Cash and cash equivalents from acquisition activity | - | 2,630 | ||||||
Change in cash value of bank owned life insurance | (210 | ) | (205 | ) | ||||
Net cash - investing activities | (27,837 | ) | (28,623 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net change in deposits | 34,188 | 29,762 | ||||||
Proceeds from FHLB advances | - | 47,000 | ||||||
Repayment of FHLB advances | (4,000 | ) | (39,000 | ) | ||||
Change in other borrowed funds | 3,600 | 2,472 | ||||||
Common stock purchased | - | (31 | ) | |||||
Dividends paid | (1,422 | ) | (1,251 | ) | ||||
Net cash - financing activities | 32,366 | 38,952 | ||||||
Net change in cash and cash equivalents | 13,162 | 9,841 | ||||||
Cash and cash equivalents at beginning of period | 21,963 | 21,124 | ||||||
Cash and cash equivalents at end of period | $ | 35,125 | $ | 30,965 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 943 | $ | 868 | ||||
Income taxes | 1,000 | 793 | ||||||
Acquisition activity: | ||||||||
Fair value of assets acquired, including cash and cash equivalents | $ | - | $ | 37,906 | ||||
Value of goodwill and other intangible assets | - | 1,704 | ||||||
Fair value of liabilities assumed | - | 39,610 | ||||||
Noncash activities: | ||||||||
Transfers from loans to foreclosed real estate | $ | 104 | $ | 832 |
See accompanying notes to consolidated financial statements.
4 |
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 June 30, 2015 and December 31, 2014, and the consolidated statements of income, comprehensive income, and changes in stockholders’ equity for the three and six months ended June 30, 2015 and 2014 and consolidated statements of cash flows for the six months ended June 30, 2015 and 2014. The income reported for the six month period ended June 30, 2015 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, goodwill, and the status of contingencies are particularly susceptible to material change in the near term.
Note 3 – Acquisition Activity
On March 20, 2015, the Bancorp announced that the Bank signed a definitive agreement to acquire Liberty Savings Bank, FSB (“Liberty”), a federally chartered mutual savings association based in Whiting, Indiana, with three branch offices in Lake County Indiana. On July 1, 2015, the Bank successfully completed the acquisition of Liberty. The Bank acquired Liberty by merging Liberty with and into the Bank immediately following Liberty’s voluntary supervisory conversion to stock form. The Bank did not issue or pay any shares, cash, or other consideration in the merger. As of June 30, 2015, Liberty reported total assets of $58.5 million, total loans of $29.6 million, and total deposits of $55.6 million. The combined bank has approximately $870.7 million in total assets, $534.9 million in loans, and $724.3 million in deposits. The acquisition expands the Bank’s banking center network into Whiting and Winfield, Indiana.
Note 4 - Securities
The estimated fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
(Dollars in thousands) | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Cost | Unrealized | Unrealized | Fair | |||||||||||||
Basis | Gains | Losses | Value | |||||||||||||
June 30, 2015 | ||||||||||||||||
Money market fund | $ | 2,097 | $ | - | $ | - | $ | 2,097 | ||||||||
U.S. government sponsored entities | 15,249 | 5 | (49 | ) | 15,205 | |||||||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 114,755 | 1,081 | (521 | ) | 115,315 | |||||||||||
Municipal securities | 90,175 | 2,515 | (579 | ) | 92,111 | |||||||||||
Collateralized debt obligations | 5,096 | - | (2,474 | ) | 2,622 | |||||||||||
Total securities available-for-sale | $ | 227,372 | $ | 3,601 | $ | (3,623 | ) | $ | 227,350 |
5 |
(Dollars in thousands) | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Cost | Unrealized | Unrealized | Fair | |||||||||||||
Basis | Gains | Losses | Value | |||||||||||||
December 31, 2014 | ||||||||||||||||
Money market fund | $ | 6,453 | $ | - | $ | - | $ | 6,453 | ||||||||
U.S. government sponsored entities | 13,000 | 2 | (133 | ) | 12,869 | |||||||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 116,088 | 1,870 | (384 | ) | 117,574 | |||||||||||
Municipal securities | 76,989 | 3,749 | (13 | ) | 80,725 | |||||||||||
Collateralized debt obligations | 5,141 | - | (2,709 | ) | 2,432 | |||||||||||
Total securities available-for-sale | $ | 217,671 | $ | 5,621 | $ | (3,239 | ) | $ | 220,053 |
The estimated fair value of available-for-sale debt securities at June 30, 2015, by contractual maturity, were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
(Dollars in thousands) | ||||||||
Available-for-sale | ||||||||
Estimated | ||||||||
Fair | Tax-Equivalent | |||||||
June 30, 2015 | Value | Yield (%) | ||||||
Due in one year or less | $ | 3,168 | 6.65 | |||||
Due from one to five years | 19,348 | 2.34 | ||||||
Due from five to ten years | 21,581 | 6.00 | ||||||
Due over ten years | 67,938 | 4.52 | ||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 115,315 | 2.59 | ||||||
Total | $ | 227,350 | 3.53 |
Sales
of available-for-sale securities were as follows for the six months ended:
(Dollars in thousands) | ||||||||
June 30, | June 30, | |||||||
2015 | 2014 | |||||||
Proceeds | $ | 19,183 | $ | 28,737 | ||||
Gross gains | 532 | 728 | ||||||
Gross losses | (2 | ) | (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) | ||||
Ending balance, December 31, 2014 | $ | 1,556 | ||
Current period change | (1,582 | ) | ||
Ending balance, June 30, 2015 | $ | (26 | ) |
Securities with carrying values of approximately $31.3 million and $34.2 million were pledged as of June 30, 2015 and December 31, 2014, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.
Securities with gross unrealized losses at June 30, 2015 and December 31, 2014 not recognized in income are as follows:
(Dollars in thousands) | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Estimated | Gross | Estimated | Gross | Estimated | Gross | |||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
June 30, 2015 | ||||||||||||||||||||||||
U.S. government sponsored entities | $ | 4,976 | $ | (24 | ) | $ | 3,975 | $ | (25 | ) | $ | 8,951 | $ | (49 | ) | |||||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 43,061 | (284 | ) | 8,816 | (237 | ) | 51,877 | (521 | ) | |||||||||||||||
Municipal securities | 24,902 | (579 | ) | - | - | 24,902 | (579 | ) | ||||||||||||||||
Collateralized debt obligations | - | - | 2,622 | (2,474 | ) | 2,622 | (2,474 | ) | ||||||||||||||||
Total temporarily impaired | $ | 72,939 | $ | (887 | ) | $ | 15,413 | $ | (2,736 | ) | $ | 88,352 | $ | (3,623 | ) | |||||||||
Number of securities | 79 | 15 | 94 |
6 |
(Dollars in thousands) | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Estimated | Gross | Estimated | Gross | Estimated | Gross | |||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||
U.S. government sponsored entities | $ | 1,496 | $ | (4 | ) | $ | 10,371 | $ | (129 | ) | $ | 11,867 | $ | (133 | ) | |||||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 8,169 | (40 | ) | 14,486 | (344 | ) | 22,655 | (384 | ) | |||||||||||||||
Municipal securities | 687 | (3 | ) | 1,459 | (10 | ) | 2,146 | (13 | ) | |||||||||||||||
Collateralized debt obligations | - | - | 2,432 | (2,709 | ) | 2,432 | (2,709 | ) | ||||||||||||||||
Total temporarily impaired | $ | 10,352 | $ | (47 | ) | $ | 28,748 | $ | (3,192 | ) | $ | 39,100 | $ | (3,239 | ) | |||||||||
Number of securities | 9 | 29 | 38 |
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.
7 |
Note 5 - Loans Receivable
Loans receivable are summarized below:
(Dollars in thousands) | ||||||||
June 30, 2015 | December 31, 2014 | |||||||
Loans secured by real estate: | ||||||||
Residential, including home equity | $ | 182,729 | $ | 189,743 | ||||
Commercial real estate, construction & land development, and other dwellings | 230,466 | 211,162 | ||||||
Commercial participations purchased | 321 | 2,289 | ||||||
Total loans secured by real estate | 413,516 | 403,194 | ||||||
Consumer loans | 398 | 358 | ||||||
Commercial business | 66,345 | 58,790 | ||||||
Government loans | 26,985 | 26,134 | ||||||
Subtotal | 507,244 | 488,476 | ||||||
Less: | ||||||||
Net deferred loan origination fees | (172 | ) | (197 | ) | ||||
Undisbursed loan funds | (84 | ) | (126 | ) | ||||
Loan receivables | $ | 506,988 | $ | 488,153 |
(Dollars in thousands) | Residential
Real Estate, Including Home Equity | Consumer Loans | Commercial
Real Estate, Construction & Land Development, and Other Dwellings | Commercial Participations Purchased | Commercial Business Loans | Government Loans | Total | |||||||||||||||||||||
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2015: | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance | $ | 1,965 | $ | 21 | $ | 3,694 | $ | 10 | $ | 815 | $ | 81 | $ | 6,586 | ||||||||||||||
Charge-offs | (73 | ) | (9 | ) | (5 | ) | - | - | - | (87 | ) | |||||||||||||||||
Recoveries | - | - | - | - | 2 | - | 2 | |||||||||||||||||||||
Provisions | (364 | ) | 19 | 527 | 9 | 13 | (6 | ) | 198 | |||||||||||||||||||
Ending Balance | $ | 1,528 | $ | 31 | $ | 4,216 | $ | 19 | $ | 830 | $ | 75 | $ | 6,699 |
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2014:
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance | $ | 1,448 | $ | 17 | $ | 4,969 | $ | 41 | $ | 907 | $ | 61 | $ | 7,443 | ||||||||||||||
Charge-offs | (11 | ) | (5 | ) | (1,417 | ) | - | - | - | (1,433 | ) | |||||||||||||||||
Recoveries | - | - | 1 | - | - | - | 1 | |||||||||||||||||||||
Provisions | 11 | 17 | 172 | (16 | ) | (38 | ) | 19 | 165 | |||||||||||||||||||
Ending Balance | $ | 1,448 | $ | 29 | $ | 3,725 | $ | 25 | $ | 869 | $ | 80 | $ | 6,176 |
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2015:
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance | $ | 1,878 | $ | 17 | $ | 3,645 | $ | 13 | $ | 733 | $ | 75 | $ | 6,361 | ||||||||||||||
Charge-offs | (101 | ) | (14 | ) | (59 | ) | - | - | - | (174 | ) | |||||||||||||||||
Recoveries | - | 1 | 22 | - | 4 | - | 27 | |||||||||||||||||||||
Provisions | (249 | ) | 27 | 608 | 6 | 93 | - | 485 | ||||||||||||||||||||
Ending Balance | $ | 1,528 | $ | 31 | $ | 4,216 | $ | 19 | $ | 830 | $ | 75 | $ | 6,699 |
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2014:
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance | $ | 1,444 | $ | 12 | $ | 4,789 | $ | 31 | $ | 859 | $ | 54 | $ | 7,189 | ||||||||||||||
Charge-offs | (13 | ) | (12 | ) | (1,418 | ) | - | - | - | (1,443 | ) | |||||||||||||||||
Recoveries | 2 | 1 | 12 | 2 | 3 | - | 20 | |||||||||||||||||||||
Provisions | 15 | 28 | 342 | (8 | ) | 7 | 26 | 410 | ||||||||||||||||||||
Ending Balance | $ | 1,448 | $ | 29 | $ | 3,725 | $ | 25 | $ | 869 | $ | 80 | $ | 6,176 |
8 |
(Dollars in thousands) | Residential
Real Estate, Including Home Equity | Consumer Loans | Commercial
Real Estate, Construction & Land Development, and Other Dwellings | Commercial Participations Purchased | Commercial Business Loans | Government Loans | Total | |||||||||||||||||||||
The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at June 30, 2015: | ||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | - | $ | - | $ | 336 | $ | 18 | $ | 67 | $ | - | $ | 421 | ||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 1,528 | $ | 31 | $ | 3,880 | $ | 1 | $ | 763 | $ | 75 | $ | 6,278 | ||||||||||||||
LOAN RECEIVABLES | ||||||||||||||||||||||||||||
Ending balance | $ | 182,538 | $ | 478 | $ | 230,464 | $ | 322 | $ | 66,283 | $ | 26,903 | $ | 506,988 | ||||||||||||||
Ending balance: individually evaluated for impairment | $ | 342 | $ | - | $ | 5,052 | $ | 96 | $ | 261 | $ | - | $ | 5,751 | ||||||||||||||
Ending balance: purchased credit impaired individually evaluated for impairment | $ | 880 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 880 | ||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 181,316 | $ | 478 | $ | 225,412 | $ | 226 | $ | 66,022 | $ | 26,903 | $ | 500,357 | ||||||||||||||
The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2014: | ||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 15 | $ | - | $ | 366 | $ | 11 | $ | 34 | $ | - | $ | 426 | ||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 1,863 | $ | 17 | $ | 3,279 | $ | 2 | $ | 699 | $ | 75 | $ | 5,935 | ||||||||||||||
LOAN RECEIVABLES | ||||||||||||||||||||||||||||
Ending balance | $ | 189,529 | $ | 357 | $ | 211,162 | $ | 2,289 | $ | 58,682 | $ | 26,134 | $ | 488,153 | ||||||||||||||
Ending balance: individually evaluated for impairment | $ | 97 | $ | - | $ | 6,240 | $ | 103 | $ | 328 | $ | - | $ | 6,768 | ||||||||||||||
Ending balance: purchased credit impaired individually evaluated for impairment | $ | 588 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 588 | ||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 188,844 | $ | 357 | $ | 204,922 | $ | 2,186 | $ | 58,354 | $ | 26,134 | $ | 480,797 |
The Bancorp's credit quality indicators are summarized below at June 30, 2015 and December 31, 2014:
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||
Corporate Credit Exposure - Credit Risk Portfolio By Creditworthiness Category | ||||||||||||||||||||||||||||||||||
Commercial Real Estate,
Construction & Land Development, and Other Dwellings | Commercial Participations Purchased | Commercial Business Loans | Government Loans | |||||||||||||||||||||||||||||||
Loan Grades | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||||||||||||
2 | Moderate risk | $ | - | $ | - | $ | - | $ | - | $ | 4,495 | $ | 4,920 | $ | - | $ | - | |||||||||||||||||
3 | Acceptable risk | 183,786 | 170,423 | 205 | 2,071 | 48,446 | 41,197 | 26,903 | 26,134 | |||||||||||||||||||||||||
4 | Pass/monitor | 37,028 | 29,678 | 21 | 115 | 11,739 | 10,893 | - | - | |||||||||||||||||||||||||
5 | Special mention (watch) | 4,604 | 4,649 | - | - | 1,342 | 1,343 | - | - | |||||||||||||||||||||||||
6 | Substandard | 5,046 | 6,412 | 96 | 103 | 261 | 329 | - | - | |||||||||||||||||||||||||
7 | Doubtful | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Total | $ | 230,464 | $ | 211,162 | $ | 322 | $ | 2,289 | $ | 66,283 | $ | 58,682 | $ | 26,903 | $ | 26,134 |
(Dollars in thousands) | ||||||||||||||||
Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity | ||||||||||||||||
Residential
Real Estate, Including Home Equity | Consumer Loans | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Performing | $ | 180,144 | $ | 185,996 | $ | 478 | $ | 357 | ||||||||
Non-performing | 2,394 | 3,533 | - | - | ||||||||||||
Total | $ | 182,538 | $ | 189,529 | $ | 478 | $ | 357 |
The Bancorp has established a standard loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio. The use and application of these grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system is as follows:
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 peers. 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.
9 |
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 approximately 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 six months ended June 30, 2015 or 2014.
The Bancorp's individually evaluated impaired loans are summarized below:
As of June 30, 2015 | For the six months
ended June 30, 2015 | |||||||||||||||||||
(Dollars in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Residential real estate, including home equity | $ | 1,222 | $ | 2,210 | $ | - | $ | 1,246 | $ | 14 | ||||||||||
Commercial real estate, construction & land development, and other dwellings | - | - | - | - | - | |||||||||||||||
Commercial participations purchased | - | - | - | - | - | |||||||||||||||
Commercial business loans | - | - | - | - | - | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Residential real estate, including home equity | - | - | - | - | - | |||||||||||||||
Commercial real estate, construction & land development, and other dwellings | 5,052 | 5,052 | 336 | 5,068 | 43 | |||||||||||||||
Commercial participations purchased | 96 | 96 | 18 | 98 | 4 | |||||||||||||||
Commercial business loans | 261 | 529 | 67 | 287 | 2 | |||||||||||||||
Total: | ||||||||||||||||||||
Residential real estate, including home equity | $ | 1,222 | $ | 2,210 | $ | - | $ | 1,246 | $ | 14 | ||||||||||
Commercial real estate, construction & land development, and other dwellings | $ | 5,052 | $ | 5,052 | $ | 336 | $ | 5,068 | $ | 43 | ||||||||||
Commercial participations purchased | $ | 96 | $ | 96 | $ | 18 | $ | 98 | $ | 4 | ||||||||||
Commercial business loans | $ | 261 | $ | 529 | $ | 67 | $ | 287 | $ | 2 |
10 |
As of December 31, 2014 | For the six months
ended June 30, 2014 | |||||||||||||||||||
(Dollars in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Residential real estate, including home equity | $ | - | $ | - | $ | - | $ | 160 | $ | 9 | ||||||||||
Commercial real estate, construction & land development, and other dwellings | 524 | 524 | - | 956 | 38 | |||||||||||||||
Commercial participations purchased | - | - | - | - | - | |||||||||||||||
Commercial business loans | 25 | 25 | - | 256 | 1 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Residential real estate, including home equity | 685 | 1,258 | 15 | 519 | - | |||||||||||||||
Commercial real estate, construction & land development, and other dwellings | 5,716 | 6,952 | 366 | 6,795 | 46 | |||||||||||||||
Commercial participations purchased | 103 | 103 | 11 | - | - | |||||||||||||||
Commercial business loans | 303 | 571 | 34 | 278 | 1 | |||||||||||||||
Total: | ||||||||||||||||||||
Residential real estate, including home equity | $ | 685 | $ | 1,258 | $ | 15 | $ | 679 | $ | 9 | ||||||||||
Commercial real estate, construction & land development, and other dwellings | $ | 6,240 | $ | 7,476 | $ | 366 | $ | 7,751 | $ | 84 | ||||||||||
Commercial participations purchased | $ | 103 | $ | 103 | $ | 11 | $ | - | $ | - | ||||||||||
Commercial business loans | $ | 328 | $ | 596 | $ | 34 | $ | 534 | $ | 2 |
As part of the previously disclosed acquisition of First Federal Savings and Loan Association of Hammond (“First Federal”) which closed during the second quarter of 2014, the Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At June 30, 2015, purchased credit impaired loans with unpaid principal balances totaled $1.9 million with a recorded investment of $880 thousand.
The Bancorp’s age analysis of past due loans is summarized below:
(Dollars in thousands)
30-59
Days Past Due | 60-89
Days Past Due | Greater
Than 90 Days Past Due | Total Past Due | Current | Total Loans | Recorded
Investments Greater than 90 Days and Accruing | ||||||||||||||||||||||
June 30, 2015 | ||||||||||||||||||||||||||||
Residential real estate, including home equity | $ | 4,501 | $ | 1,114 | $ | 1,539 | $ | 7,154 | $ | 175,384 | $ | 182,538 | $ | 131 | ||||||||||||||
Consumer loans | 1 | - | - | 1 | 477 | 478 | - | |||||||||||||||||||||
Commercial real estate, construction & land development, and other dwellings | 543 | 421 | 537 | 1,501 | 228,963 | 230,464 | - | |||||||||||||||||||||
Commercial participations purchased | - | - | 96 | 96 | 226 | 322 | - | |||||||||||||||||||||
Commercial business loans | 212 | 149 | 178 | 539 | 65,744 | 66,283 | - | |||||||||||||||||||||
Government loans | - | - | - | - | 26,903 | 26,903 | - | |||||||||||||||||||||
Total | $ | 5,257 | $ | 1,684 | $ | 2,350 | $ | 9,291 | $ | 497,697 | $ | 506,988 | $ | 131 | ||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||||||
Residential real estate, including home equity | $ | 4,405 | $ | 2,693 | $ | 2,579 | $ | 9,677 | $ | 179,852 | $ | 189,529 | $ | 941 | ||||||||||||||
Consumer loans | - | - | - | - | 357 | 357 | - | |||||||||||||||||||||
Commercial real estate, construction & land development, and other dwellings | 855 | 190 | 1,783 | 2,828 | 208,334 | 211,162 | - | |||||||||||||||||||||
Commercial participations purchased | - | - | 103 | 103 | 2,186 | 2,289 | - | |||||||||||||||||||||
Commercial business loans | 339 | 76 | 238 | 653 | 58,029 | 58,682 | - | |||||||||||||||||||||
Government loans | - | - | - | - | 26,134 | 26,134 | - | |||||||||||||||||||||
Total | $ | 5,599 | $ | 2,959 | $ | 4,703 | $ | 13,261 | $ | 474,892 | $ | 488,153 | $ | 941 |
The Bancorp's loans on nonaccrual status are summarized below:
(Dollars in thousands) | ||||||||
June 30, 2015 | December 31, 2014 | |||||||
Residential real estate, including home equity | $ | 2,394 | $ | 2,443 | ||||
Consumer loans | - | - | ||||||
Commercial real estate, construction & land development, and other dwellings | 538 | 1,815 | ||||||
Commercial participations purchased | 96 | 103 | ||||||
Commercial business loans | 178 | 238 | ||||||
Government loans | - | - | ||||||
Total | $ | 3,206 | $ | 4,599 |
Note 6 - Foreclosed Real Estate
Foreclosed real estate at period-end is summarized below:
(Dollars in thousands) | ||||||||
June 30, | December 31, | |||||||
2015 | 2014 | |||||||
Residential real estate, including home equity | $ | 113 | $ | 324 | ||||
Commercial real estate, construction & land development and other dwellings | 1,218 | 1,218 | ||||||
Commercial business | 199 | 203 | ||||||
Total | $ | 1,530 | $ | 1,745 |
11 |
Note 7 – Goodwill, Other Intangible Assets, and Acquisition Related Accounting
The Bancorp established a goodwill balance of approximately $2.0 million with the acquisition of First Federal. In addition to goodwill, a core deposit intangible of $93 thousand was established and is being amortized over 7.9 years on a straight line basis. Approximately $6 thousand of amortization was taken during the six months ended June 30, 2015 compared to $3 thousand during the six months ended June 30, 2014. It is estimated that $6 thousand of additional amortization will occur during 2015 and the remaining amount will be equally amortized through to the first quarter of 2022.
Goodwill is tested annually for impairment. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Bancorp’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Bancorp to provide quality, cost effective banking services in a competitive marketplace. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. There has not been any impairment of goodwill. During the first quarter of 2015, initial estimates of fair values related to a pool of loans with a single borrower were determined to be lower than originally estimated. This change, net of related estimated adjustments, led to the addition of $377 thousand to goodwill and $423 thousand to purchased credit impaired loan balances during the period ended March 31, 2015. Goodwill totaled approximately $2.0 million at June 30, 2015 and approximately$1.6 million at June 30, 2014.
As part of the fair value of loans receivable, a net fair value discount was established for residential real estate loans, including home equity lines of credit, of $1.1 million that is being accreted over 55 months on a straight line basis. Approximately $118 thousand of accretion was taken into income for the six months ended June 30, 2015, compared to $67 thousand during the six months ended June 30, 2014. It is estimated that $98 thousand of accretion will occur during the remainder of 2015 and $197 thousand of accretion will occur annually through to 2017, and accretion of $164 thousand will occur during 2018.
As part of the fair value of certificates of deposit, a fair value premium was established of $276 thousand that is being amortized over 17 months on a straight line basis. Approximately $100 thousand of amortization was taken as expense during the six months ended June 30, 2015 compared to $50 thousand during the six months ended June 30, 2014. It is estimated that an additional $27 thousand of amortization will occur during 2015.
Note 8 - 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.
Note 9 - 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 and six months ended June 30, 2015 and 2014 are as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
(Dollars in thousands, except per share data) | June 30, | June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Basic earnings per common share: | ||||||||||||||||
Net income as reported | $ | 1,976 | $ | 1,949 | $ | 3,903 | $ | 3,753 | ||||||||
Weighted average common shares outstanding | 2,851,417 | 2,844,218 | 2,850,175 | 2,843,897 | ||||||||||||
Basic earnings per common share | $ | 0.69 | $ | 0.69 | $ | 1.37 | $ | 1.32 | ||||||||
Diluted earnings per common share: | ||||||||||||||||
Net income as reported | $ | 1,976 | $ | 1,949 | $ | 3,903 | $ | 3,753 | ||||||||
Weighted average common shares outstanding | 2,851,417 | 2,844,218 | 2,850,175 | 2,843,897 | ||||||||||||
Add: Dilutive effect of assumed stock option exercises | - | - | - | - | ||||||||||||
Weighted average common and dilutive potential common shares outstanding | 2,851,417 | 2,844,218 | 2,850,175 | 2,843,897 | ||||||||||||
Diluted earnings per common share | $ | 0.69 | $ | 0.69 | $ | 1.37 | $ | 1.32 |
12 |
Note 10 - Stock Based Compensation
The Bancorp’s 2015 Stock Option and Incentive Plan (the Plan), which was adopted by the Bancorp’s Board of Directors on February 27, 2015 and approved by the Bancorp’s shareholders on April 24, 2015, permits the grant of equity awards for up to 250,000 shares of common stock. Awards granted under the Plan may be in the form of incentive stock options, non-qualified stock options, restricted stock, unrestricted stock, performance shares, or performance units. The Plan was adopted to replace the Bancorp’s 2004 Option Plan, which terminated on April 20, 2015. No further awards will be made under the 2004 Option Plan.
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 six months ended June 30, 2015, stock based compensation expense of $47 thousand was recorded, compared to $30 thousand for the six months ended June 30, 2014. It is anticipated that current outstanding unvested options and awards will result in additional compensation expense of approximately $50 thousand in 2015 and $99 thousand in 2016.
There were no incentive stock options granted during the first six months of 2015 or 2014. 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.
A summary of incentive option activity under the Bancorp’s stock option and incentive plans described above for the six months ended June 30, 2015 follows:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Incentive options | Shares | Price | Term | Value | ||||||||||||
Outstanding at January 1, 2015 | 750 | $ | 28.50 | |||||||||||||
Granted | - | - | ||||||||||||||
Exercised | - | - | ||||||||||||||
Forfeited | - | - | ||||||||||||||
Expired | - | $ | - | |||||||||||||
Outstanding at June 30, 2015 | 750 | $ | 28.50 | 2.7 | - | |||||||||||
Exercisable at June 30, 2015 | 750 | $ | 28.50 | 2.7 | - |
There were 7,250 shares of restricted stock granted during the first six months of 2015 compared to 3,675 shares granted during the first six months of 2014. 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 vests five years after the grant date. 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 and incentive plans described above for the six months ended June 30, 2015 follows:
Weighted- | ||||||||
Average | ||||||||
Grant Date | ||||||||
Restricted stock | Shares | Fair Value | ||||||
Nonvested at January 1, 2015 | 12,775 | $ | 23.63 | |||||
Granted | 7,250 | 27.50 | ||||||
Vested | (300 | ) | 16.75 | |||||
Forfeited | - | - | ||||||
Nonvested at June 30, 2015 | 19,725 | $ | 25.15 |
Note 11 - 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. The amendments are effective for the Bancorp for annual periods and interim periods within those annual periods beginning after December 15, 2014. Management has updated policies for this new accounting pronouncement. This pronouncement has not had a material impact on the Bancorp’s consolidated financial statements.
Update Number 2014-09 – Revenue from Contracts with Customers (Topic 606). This accounting standard update adopts a standardized approach for revenue recognition and was a joint effort with the International Accounting Standards Board (IASB). The new revenue recognition standard is based on a core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update does not apply to financial instruments. The update is effective for public entities for reporting periods beginning after December 15, 2017. Early implementation is not allowed for public companies. Management does not believe the adoption of this update will have a material effect on the Bancorp’s consolidated financial statements.
13 |
Note 12 - 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.
The Bancorp’s management utilizes a specialist to perform an other-than-temporary impairment analysis for each of its four pooled trust preferred securities. The analysis is performed semiannually on June 30 and December 31 and 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 semi-annual 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 period ended June 30, 2015.
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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) | ||||
Collateralized debt obligations | ||||
other-than-temporary impairment | ||||
Ending balance, December 31, 2014 | $ | 271 | ||
Additions not previously recognized | - | |||
Ending balance, June 30, 2015 | $ | 271 |
The following table contains information
regarding the Bancorp’s pooled trust preferred securities impairment evaluation as of June 30, 2015:
Cusip | 74043CAC1 | 74042TAJ0 | 01449TAB9 | 01450NAC6 | ||||||||||||
Deal name | PreTSL XXIV | PreTSL XXVII | Alesco IX | Alesco XVII | ||||||||||||
Class | B-1 | C-1 | A-2A | B | ||||||||||||
Lowest credit rating assigned | CC | C | BB | CCC | ||||||||||||
Number of performing banks | 55 | 30 | 58 | 48 | ||||||||||||
Number of performing insurance companies | 13 | 7 | 10 | n/a | ||||||||||||
Number of issuers in default | 19 | 8 | 1 | 4 | ||||||||||||
Number of issuers in deferral | 6 | 4 | 7 | 4 | ||||||||||||
Defaults & deferrals as a % of performing collateral | 39.90 | % | 29.34 | % | 8.28 | % | 16.96 | % | ||||||||
Subordination: | ||||||||||||||||
As a % of performing collateral | 7.23 | % | -5.34 | % | 45.64 | % | 25.85 | % | ||||||||
As a % of performing collateral - adjusted for projected future defaults | 2.25 | % | -13.14 | % | 42.53 | % | 21.62 | % | ||||||||
Other-than-temporary impairment model assumptions: | ||||||||||||||||
Defaults: | ||||||||||||||||
Year 1 - issuer average | 1.70 | % | 2.30 | % | 1.80 | % | 1.80 | % | ||||||||
Year 2 - issuer average | 1.70 | % | 2.30 | % | 1.80 | % | 1.80 | % | ||||||||
Year 3 - issuer average | 1.70 | % | 2.30 | % | 1.80 | % | 1.80 | % | ||||||||
> 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.
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In the preceding table, 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 June 30, 2015, 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 June 30, 2015, three of the trust preferred securities with a cost basis of $3.8 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.
Assets and Liabilities Measured on a Recurring Basis
There were no transfers to or from Levels 1 and 2 during the six months ended June 30, 2015. Assets measured at fair value on a recurring basis are summarized below:
Fair Value Measurements at June 30, 2015 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
(Dollars in thousands) | Estimated | for Identical | Observable | Unobservable | ||||||||||||
Fair | Assets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Available-for-sale debt securities: | ||||||||||||||||
Money market fund | $ | 2,097 | $ | 2,097 | $ | - | $ | - | ||||||||
U.S. government sponsored entities | 15,205 | - | 15,205 | - | ||||||||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 115,315 | - | 115,315 | - | ||||||||||||
Municipal securities | 92,111 | - | 92,111 | - | ||||||||||||
Collateralized debt obligations | 2,622 | - | - | 2,622 | ||||||||||||
Total securities available-for-sale | $ | 227,350 | $ | 2,097 | $ | 222,631 | $ | 2,622 |
Fair Value Measurements at December 31, 2014 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
(Dollars in thousands) | Estimated | for Identical | Observable | Unobservable | ||||||||||||
Fair | Assets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Available-for-sale debt securities: | ||||||||||||||||
Money market fund | $ | 6,453 | $ | 6,453 | $ | - | $ | - | ||||||||
U.S. government sponsored entities | 12,869 | - | 12,869 | - | ||||||||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 117,574 | - | 117,574 | - | ||||||||||||
Municipal securities | 80,725 | - | 80,725 | - | ||||||||||||
Collateralized debt obligations | 2,432 | - | - | 2,432 | ||||||||||||
Total securities available-for-sale | $ | 220,053 | $ | 6,453 | $ | 211,168 | $ | 2,432 |
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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 | ||||
Total realized/unrealized (losses)/gains, January 1, 2014 | $ | 1,968 | ||
Included in earnings | - | |||
Included in other comprehensive income | 464 | |||
Transfers in and/or (out) of Level 3 | - | |||
Ending balance, December 31, 2014 | $ | 2,432 | ||
Total realized/unrealized (losses)/gains, January 1, 2015 | $ | 2,432 | ||
Included in earnings | - | |||
Included in other comprehensive income | 190 | |||
Transfers in and/or (out) of Level 3 | - | |||
Ending balance, June 30, 2015 | $ | 2,622 |
Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements at June 30, 2015 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
(Dollars in thousands) | Estimated | for Identical | Observable | Unobservable | ||||||||||||
Fair | Assets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired loans | $ | 6,210 | $ | - | $ | - | $ | 6,210 | ||||||||
Foreclosed real estate | 1,530 | - | - | 1,530 |
Fair Value Measurements at December 31, 2014 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
(Dollars in thousands) | Estimated | for Identical | Observable | Unobservable | ||||||||||||
Fair | Assets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired loans | $ | 6,930 | $ | - | $ | - | $ | 6,930 | ||||||||
Foreclosed real estate | 1,745 | - | - | 1,745 |
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 approximately $6.6 million and the related specific reserves totaled approximately $421 thousand, resulting in a fair value of impaired loans totaling approximately $6.2 million, at June 30, 2015. The recorded investment of impaired loans was approximately $7.3 million and the related specific reserves totaled approximately $426 thousand, resulting in a fair value of impaired loans totaling approximately $6.9 million, at December 31, 2014. 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.
17 |
June 30, 2015 | Estimated Fair Value Measurements at June 30, 2015 Using | |||||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||||||
Active Markets for | Other Observable | Unobservable | ||||||||||||||||||
(Dollars in thousands) | Carrying | Estimated | Identical Assets | Inputs | Inputs | |||||||||||||||
Value | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 35,125 | $ | 35,125 | $ | 35,125 | $ | - | $ | - | ||||||||||
Securities available-for-sale | 227,350 | 227,350 | 2,097 | 222,631 | 2,622 | |||||||||||||||
Loans held-for-sale | 1,734 | 1,762 | 1,762 | - | - | |||||||||||||||
Loans receivable, net | 500,289 | 494,478 | - | - | 494,478 | |||||||||||||||
Federal Home Loan Bank stock | 2,626 | 2,626 | - | 2,626 | - | |||||||||||||||
Accrued interest receivable | 2,788 | 2,788 | - | 2,788 | - | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-interest bearing deposits | 91,256 | 91,256 | 91,256 | - | - | |||||||||||||||
Interest bearing deposits | 576,878 | 576,862 | 393,153 | 183,709 | - | |||||||||||||||
Repurchase agreements | 19,276 | 19,292 | 13,887 | 5,405 | - | |||||||||||||||
Borrowed funds | 34,230 | 34,332 | 2,130 | 32,202 | - | |||||||||||||||
Accrued interest payable | 46 | 46 | - | 46 | - |
December 31, 2014 | Estimated Fair Value Measurements at December 31, 2014 Using | |||||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||||||
Active Markets for | Other Observable | Unobservable | ||||||||||||||||||
(Dollars in thousands) | Carrying | Estimated | Identical Assets | Inputs | Inputs | |||||||||||||||
Value | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 21,963 | $ | 21,963 | $ | 21,963 | $ | - | $ | - | ||||||||||
Securities available-for-sale | 220,053 | 220,053 | 6,453 | 211,168 | 2,432 | |||||||||||||||
Loans held-for-sale | 2,913 | 2,983 | 2,983 | - | - | |||||||||||||||
Loans receivable, net | 481,792 | 480,736 | - | - | 480,736 | |||||||||||||||
Federal Home Loan Bank stock | 3,681 | 3,681 | - | 3,681 | - | |||||||||||||||
Accrued interest receivable | 2,727 | 2,727 | - | 2,727 | - | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-interest bearing deposits | 80,352 | 80,352 | 80,352 | - | - | |||||||||||||||
Interest bearing deposits | 553,594 | 552,872 | 368,501 | 184,371 | - | |||||||||||||||
Repurchase agreements | 17,525 | 17,528 | 12,010 | 5,518 | - | |||||||||||||||
Borrowed funds | 36,381 | 36,424 | 281 | 36,143 | - | |||||||||||||||
Accrued interest payable | 49 | 49 | - | 49 | - |
The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended June 30, 2015 and December 31, 2014:
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 of 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.
18 |
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 June 30, 2015, the Bancorp had total assets of $813.3 million, total loans of $507.0 million and total deposits of $668.1 million. Stockholders' equity totaled $77.0 million or 9.47% of total assets, with book value per share of $27.02. Net income for the quarter ended June 30, 2015, was $2.0 million, or $0.69 earnings per common share for both basic and diluted calculations. For the quarter ended June 30, 2015, the return on average assets (ROA) was 1.00%, while the return on average stockholders’ equity (ROE) was 10.03%. Net income for the six months ended June 30, 2015, was $3.9 million, or $1.37 earnings per common share for both basic and diluted calculations. For the six months ended June 30, 2015, the return on average assets (ROA) was 0.99%, while the ROE was 9.95%.
Recent Developments
Regulatory Environment. In 2010 and 2011, in response to the financial crisis and recession that began in 2008, significant regulatory and legislative changes resulted in broad reform and increased regulation impacting financial institutions. In this regard, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") created a significant shift in the way financial institutions operate, 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 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.
The full impact of these regulatory changes will not be known until final implementing regulations are written and adopted. 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. 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 additional expense, time, and resources needed to comply with ongoing regulatory requirements may impact our business and results of operations.
Regulatory Capital Rules. In 2013, the Federal Reserve approved final rules that substantially amended 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”) subsequently approved these rules. The final rules 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 will be phased in from 2015 to 2019, and 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 will 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.
19 |
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 took effect on January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are now 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 have been required to utilize effective as of 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 we are in compliance with the requirements as set forth in the final rules.
Volcker 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. However, the conformance period for banking entities to conform their investments in and relationships with covered funds that were in place prior to December 31, 2013 (referred to as “legacy funds” in the final rule) has been extended from its statutory end date of July 21, 2014 until July 21, 2016. The Federal Reserve did not grant an extension for the conformance period for proprietary trading activities. As a result, banking entities were required to conform to the Volcker Rule’s regulations regarding proprietary trading activities by 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.
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Acquisition Activity. On March 20, 2015, the Bancorp announced that the Bank signed a definitive agreement to acquire Liberty Savings Bank, FSB (“Liberty”), a federally chartered mutual savings association based in Whiting, Indiana, with three branch offices in Lake County Indiana. On July 1, 2015, the Bank successfully completed the acquisition of Liberty. The Bank acquired Liberty by merging Liberty with and into the Bank immediately following Liberty’s voluntary supervisory conversion to stock form. The Bank did not issue or pay any shares, cash, or other consideration in the merger. As of June 30, 2015, Liberty reported total assets of $58.5 million, total loans of $29.6 million, and total deposits of $55.6 million. The combined bank has approximately $870.7 million in total assets, $534.9 million in loans, and $724.3 million in deposits. The acquisition expands the Bank’s banking center network into Whiting and Winfield, Indiana.
Financial Condition
During the six months ended June 30, 2015, total assets increased by $38.3 million (4.9%), with interest-earning assets increasing by $28.9 million (4.0%). At June 30, 2015, interest-earning assets totaled $757.6 million compared to $728.7 million at December 31, 2014. Earning assets represented 93.2% of total assets at June 30, 2015 and 94.0% of total assets at December 31, 2014. Growth in total assets and interest earning assets for the six months was the result of strong internally generated growth.
Loans receivable totaled $507.0 million at June 30, 2015, compared to $488.2 million at December 31, 2014. 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.
The Bancorp’s end-of-period loan balances were as follows:
June 30, | ||||||||||||||||
2015 | December 31, | |||||||||||||||
(Dollars in thousands) | (unaudited) | 2014 | ||||||||||||||
Balance | % Loans | Balance | % Loans | |||||||||||||
Construction & land development | $ | 33,561 | 6.6 | % | $ | 25,733 | 5.3 | % | ||||||||
1-4 first liens | 150,562 | 29.7 | % | 160,526 | 32.9 | % | ||||||||||
Multifamily | 35,379 | 7.0 | % | 31,703 | 6.5 | % | ||||||||||
Commercial real estate | 161,847 | 31.9 | % | 156,015 | 32.0 | % | ||||||||||
Commercial business | 66,283 | 13.1 | % | 58,682 | 12.0 | % | ||||||||||
1-4 Junior Liens | 1,368 | 0.3 | % | 1,507 | 0.3 | % | ||||||||||
HELOC | 27,831 | 5.5 | % | 25,564 | 5.2 | % | ||||||||||
Lot loans | 2,777 | 0.5 | % | 1,932 | 0.4 | % | ||||||||||
Consumer | 478 | 0.1 | % | 357 | 0.1 | % | ||||||||||
Government and other | 26,902 | 5.3 | % | 26,134 | 5.3 | % | ||||||||||
Total loans | $ | 506,988 | 100.0 | % | $ | 488,153 | 100.0 | % | ||||||||
Adjustable rate loans / total loans | $ | 285,233 | 56.3 | % | $ | 284,666 | 58.3 | % |
June 30, | ||||||||
2015 | December 31, | |||||||
(unaudited) | 2014 | |||||||
Total loans to total assets | 62.3 | % | 63.0 | % | ||||
Total loans to earning assets | 66.9 | % | 67.0 | % | ||||
Total loans to total deposits | 75.9 | % | 77.0 | % |
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 six months ended June 30, 2015, the Bancorp sold $28.1 million in newly originated fixed rate mortgage loans, compared to $11.6 million during the six months ended June 30, 2014. Net gains realized from the mortgage loan sales totaled $734 thousand for the six months ended June 30, 2015, compared to $216 thousand for the six months ended June 30, 2014. At June 30, 2015, the Bancorp had $1.7 million in loans that were classified as held for sale, compared to $2.9 million at December 31, 2014.
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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 $3.3 million at June 30, 2015, compared to $5.5 million at December 31, 2014, a decrease of $2.2 million or 39.7%. The decrease in non-performing loans for the first six months of 2015 is primarily the result of a short sale and subsequent payoff of one commercial real estate loan with a balance of $1.1 million and overall improvement in the residential real estate market. The ratio of non-performing loans to total loans was 0.66% at June 30, 2015, compared to 1.10% at December 31, 2014. The ratio of non-performing loans to total assets was 0.41% at June 30, 2015, compared to 0.71% at December 31, 2014. At June 30, 2015, all non-performing loans are also accounted for on a non-accrual basis, except for one loan totaling $131 thousand that was classified as accruing and more than 90 days past due.
Loans internally classified as substandard totaled $7.8 million at June 30, 2015, compared to $9.5 million at December 31, 2014 a decrease of $1.8 million or 18.5%. The current level of substandard loans is concentrated in one accruing commercial real estate hotel loan in the amount of $4.5 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 June 30, 2015 or December 31, 2014. 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 $14.8 million at June 30, 2015, compared to $14.5 million at December 31, 2014, an increase of $230 thousand or 1.6%. The increase in watch loans is related to the downgrades of residential and commercial loans.
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 June 30, 2015, impaired loans totaled $6.6 million, compared to $7.4 million at December 31, 2014 a decrease of $725 thousand or 9.9%. The decrease in impaired loans for the first six months of 2015 is primarily the result of the aforementioned short sale and subsequent payoff of one commercial real estate loan. The June 30, 2015, impaired loan balances consist of nine commercial real estate and commercial business loans totaling $5.4 million that are secured by business assets and real estate, and are personally guaranteed by the owners of the businesses. In addition, thirty-two residential real estate and home equity line of credit loans totaling $1.2 million, which are troubled debt restructurings or purchased credit impaired, have also been classified as impaired. At June 30, 2015 the ALL contained $421 thousand in specific reserves for impaired loans, compared to $426 thousand at December 31, 2014. There were no other loans considered to be impaired loans as of June 30, 2015. 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.
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. Purchased loans with evidence of credit quality deterioration since origination are considered purchased credit impaired loans. Expected future cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable (“accretable yield”). The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and represents probable losses in the portfolio. In determining the acquisition date fair value of purchased credit impaired loans, and in subsequent accounting, the Bancorp aggregates these purchased loans into pools of loans by common risk characteristics, such as credit risk rating and loan type. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. During the first six months of 2015, initial estimates of fair values related to a pool of loans with a single borrower were found to be lower than expected. This change led to the addition of $423 thousand to purchased credit impaired loan balances. At June 30, 2015, purchased credit impaired loans with unpaid principal balances totaled $1.9 million with a recorded investment of $880 thousand.
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At June 30, 2015, the Bancorp classified five loans totaling $5.2 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 $4.5 million, for which significant deferrals of principal repayments were granted; one commercial real estate loan in the amount of $520 thousand for which a significant deferral of principal and interest repayment was granted by the Bank as required by a bankruptcy plan; two commercial business loans totaling $82 thousand for which a reduction in principal payments was granted; and one mortgage loan totaling $94 thousand, for which maturity dates were materially extended. At June 30, 2015, $4.6 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 expected future 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 June 30, 2015, management is of the opinion that there are no loans, except certain of 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 six months ended June 30, 2015, $485 thousand in provisions to the ALL were required, compared to $410 thousand for the six months ended June 30, 2014, an increase of $75 thousand or 18.3%. The ALL provision increase for the current six month period is primarily a result of increased originations and overall loan portfolio growth. For the six months ended June 30, 2015, charge-offs, net of recoveries, totaled $147 thousand, compared to charge-offs, net of recoveries of $1.4 million for the six months ended June 30, 2014. The net loan charge-offs for 2015 were comprised of $101 thousand in residential real estate loans, $37 thousand in commercial real estate loans, $13 thousand in consumer loans, and recoveries of $4 thousand in commercial business 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 1.32% at June 30, 2015, compared to 1.30% at December 31, 2014. The ALL-to-non-performing loans (coverage ratio) was 200.73% at June 30, 2015, compared to 114.83% at December 31, 2014. The June 30, 2015 balance in the ALL account of $6.7 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.
At June 30, 2015, foreclosed real estate totaled $1.5 million, which was comprised of fourteen properties, compared to $1.7 million and eighteen properties at December 31, 2014. The decrease in foreclosed real estate is the result of the sale of properties. Net gains from foreclosed real estate totaled $24 thousand for the six months ended June 30, 2015, and were the result of proceeds received from the sale of foreclosed properties. At the end of June 2015 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 other 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 $227.4 million at June 30, 2015, compared to $220.1 million at December 31, 2014, an increase of $7.3 million (3.3%). The increase in the securities portfolio is a result of continued investment of excess liquidity in securities. At June 30, 2015, the securities portfolio represented 30.0% of interest-earning assets and 28.0% of total assets compared to 30.2% of interest-earning assets and 28.4% of total assets at December 31, 2014.
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The Bancorp’s end-of-period investment portfolio and other short-term investments and stock balances were as follows:
June 30, | ||||||||||||||||
2015 | December 31, | |||||||||||||||
(Dollars in thousands) | (unaudited) | 2014 | ||||||||||||||
Balance | % Securities | Balance | % Securities | |||||||||||||
Money market fund | $ | 2,097 | 0.9 | % | $ | 6,453 | 2.9 | % | ||||||||
U.S. government sponsored entities | 15,205 | 6.7 | % | 12,869 | 5.8 | % | ||||||||||
Collateralized mortgage obligations and residential mortgage-backed securities | 115,315 | 50.7 | % | 117,574 | 53.4 | % | ||||||||||
Municipal securities | 92,111 | 40.5 | % | 80,725 | 36.7 | % | ||||||||||
Collateralized debt obligations | 2,622 | 1.2 | % | 2,432 | 1.2 | % | ||||||||||
Total securities available-for-sale | $ | 227,350 | 100.0 | % | $ | 220,053 | 100.0 | % |
June 30, | ||||||||||||||||
2015 | December 31, | YTD | ||||||||||||||
(Dollars in thousands) | (unaudited) | 2014 | Change | |||||||||||||
Balance | Balance | $ | % | |||||||||||||
Interest bearing deposits in other financial institutions | $ | 18,801 | $ | 5,866 | $ | 12,935 | 220.5 | % | ||||||||
Fed funds sold | 139 | 8,040 | (7,901 | ) | -98.3 | % | ||||||||||
Federal Home Loan Bank stock | 2,626 | 3,681 | (1,055 | ) | -28.7 | % |
The net increase in interest bearing balances in other financial institutions and the decrease in fed funds sold is primarily the result of the Bancorp’s deposit gathering efforts and the timing of investing those funds in earning assets. The decrease in Federal Home Loan Bank stock is the result of taking less advances and the corresponding reduced stock ownership requirements.
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:
June 30, | ||||||||||||||||
2015 | December 31, | YTD | ||||||||||||||
(Dollars in thousands) | (unaudited) | 2014 | Change | |||||||||||||
Balance | Balance | $ | % | |||||||||||||
Checking | $ | 231,923 | $ | 214,314 | $ | 17,609 | 8.2 | % | ||||||||
Savings | 95,058 | 89,866 | 5,192 | 5.8 | % | |||||||||||
Money market | 157,428 | 145,384 | 12,044 | 8.3 | % | |||||||||||
Certificates of deposit | 183,725 | 184,382 | (657 | ) | -0.4 | % | ||||||||||
Total deposits | $ | 668,134 | $ | 633,946 | $ | 34,188 | 5.4 | % |
The Bancorp’s core deposits include checking, savings, and money market accounts. The overall increase in core deposits is a result of management’s 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:
June 30, | ||||||||||||||||
2015 | December 31, | YTD | ||||||||||||||
(Dollars in thousands) | (unaudited) | 2014 | Change | |||||||||||||
Balance | Balance | $ | % | |||||||||||||
Repurchase agreements | $ | 19,276 | $ | 17,525 | $ | 1,751 | 10.0 | % | ||||||||
Borrowed funds | 34,230 | 36,381 | (2,151 | ) | -5.9 | % | ||||||||||
Total borrowed funds | $ | 53,506 | $ | 53,906 | $ | (400 | ) | -0.7 | % |
Repurchase agreements increased as part of normal account fluctuations within that product line. Borrowed funds decreased as FHLB fixed advances matured.
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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 other 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 six months ended June 30, 2015, cash and cash equivalents increased by $13.2 million compared to a $9.8 million increase for the six months ended June 30, 2014. The primary sources of cash and cash equivalents were increased deposits, sales of loans originated for sale, and proceeds from maturities, pay downs, calls, and sales of available-for-sale securities. The primary uses of cash and cash equivalents were loan originations, the purchase of securities, and the payment of common stock dividends. Cash provided by operating activities totaled $8.6 million for the six months ended June 30, 2015, compared to cash used of $488 thousand for the six month period ended June 30, 2014. The increase in cash from operating activities was primarily a result of an increase in loan sales and in clearing accounts that facilitate customer transactions. Cash outflows from investing activities totaled $27.8 million for the current period, compared to cash outflows of $28.6 million for the six months ended June 30, 2014. The decreased cash outflows for the current six months were primarily related to cash received from the redemption of Federal Home Loan Bank stock. Net cash inflows from financing activities totaled $32.4 million during the current period compared to net cash inflows of $39.0 million for the six months ended June 30, 2014. The decrease in net cash inflows from financing activities was a result of less reliance on the Federal Home Loan Bank advances. On a cash basis, the Bancorp paid dividends on common stock of $1.4 million for the six months ended June 30, 2015 and $1.3 million for the six months ended June 30, 2014.
At June 30, 2015, outstanding commitments to fund loans totaled $106.6 million. Approximately 50.7% 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 $8.6 million at June 30, 2015. 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 six months ended June 30, 2015, stockholders' equity increased by $884 thousand (1.2%). During the six months ended June 30, 2015, stockholders’ equity was primarily increased by net income of $3.9 million. Decreasing stockholders’ equity was the declaration of $1.5 million in cash dividends and the change in the valuation of available-for-sale securities of $1.6 million. On April 24, 2014 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. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased during the first six months of 2015 or 2014.
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 discussed above, effective January 1, 2015, we are subject to the new regulatory risk-based capital rules adopted by the federal banking agencies implementing Basel III. See “Recent Developments – Regulatory Capital Rules. As applied to the Bancorp and the Bank, the new capital requirements currently are substantially the same. These regulations divide capital into multiple tiers. The first tier (Common Equity Tier 1 Capital) includes common shareholders’ equity, after deductions for various items including goodwill and certain other intangible assets, and after certain other adjustments. Common Equity Tier 1 Capital also includes accumulated other comprehensive income (for organizations that do not make opt-out elections). The next tier (Tier 1 Capital) is comprised of Common Equity Tier 1 Capital plus other qualifying capital instruments such as perpetual noncumulative preferred stock and junior subordinated debt issued to trusts, and other adjustments. The third tier (Tier 2 Capital) includes instruments such as subordinated debt that have a minimum original maturity of at least five years and are subordinated to the claims of depositors and general creditors, total capital minority interest not included in Tier 1 Capital, and limited amounts of the allowance for loan losses, less applicable regulatory adjustments and deductions. The Bancorp and the Bank are required to maintain a Common Equity Tier 1 Capital ratio of 4.5%, a Tier 1 Capital ratio of 6%, and a total capital ratio (comprised of Tier 1 Capital plus Tier 2 Capital) of 8%. In addition, the new capital regulations provide for a minimum leverage ratio (Tier 1 capital to adjusted average assets) of 4%.
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The Dodd-Frank Act required the FRB to establish for all depository institution holding companies minimum consolidated capital requirements that are as stringent as those required for the insured depository subsidiaries. However, legislation was enacted in December 2014 requiring the FRB to amend its “Small Bank Holding Company” Policy Statement to extend the applicability of the policy statement to bank and savings and loan holding companies which hold up to $1 billion in assets.