UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

xQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the quarterly period ended March 31,June 30, 2019 or

 

¨Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the transition period from ______ to ______

 

Commission File Number: 0-26128

 

NorthWest Indiana Bancorp

(Exact name of registrant as specified in its charter)

 

Indiana 35-1927981
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)  

9204 Columbia Avenue  
Munster, Indiana 46321
(Address of principal executive offices) (ZIP code)

 

Registrant's telephone number, including area code:(219) 836-4400

 

N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:None.

Title of each classTrading Symbol(s)Name of each exchange on which registered
N/AN/AN/A

 

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. YesxNo¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yesx             No¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer¨Accelerated filerxNon-accelerated filer¨

Smaller Reporting CompanyxEmerging growth company¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨Nox

 

There were 3,452,1993,451,797 shares of the registrant’s Common Stock, without par value, outstanding at April 19,August 7, 2019.

 

 

 

 

 

 

NorthWest Indiana Bancorp

Index

  

 Page
 Number
PART I. Financial Information 
  
Item 1. Unaudited Financial Statements and Notes1
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations2224
  
Item 3. Quantitative and Qualitative Disclosures about Market Risk3337
  
Item 4. Controls and Procedures3338
  
PART II. Other Information3439
  
SIGNATURES3540
  
EXHIBITS 
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications
101 XBRL Interactive Data File 

 

 

 

 

NorthWest Indiana Bancorp

Consolidated Balance Sheets

  March 31,    
(Dollars in thousands) 2019  December 31, 
  (unaudited)  2018 
ASSETS        
         
Cash and non-interest bearing deposits in other financial institutions $29,991  $13,260 
Interest bearing deposits in other financial institutions  15,255   3,116 
Federal funds sold  15,518   763 
         
Total cash and cash equivalents  60,764   17,139 
         
Certificates of deposit in other financial institutions  2,215   2,024 
         
Securities available-for-sale  251,331   241,768 
Loans held-for-sale  2,966   2,863 
Loans receivable  864,995   764,400 
Less: allowance for loan losses  (8,236)  (7,962)
Net loans receivable  856,759   756,438 
Federal Home Loan Bank stock  3,971   3,460 
Accrued interest receivable  4,062   3,632 
Premises and equipment  27,933   24,824 
Foreclosed real estate  1,494   1,627 
Cash value of bank owned life insurance  29,740   23,142 
Goodwill  10,744   8,170 
Other assets  16,374   11,071 
         
Total assets $1,268,353  $1,096,158 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
Deposits:        
Non-interest bearing $177,317  $127,277 
Interest bearing  924,336   802,509 
Total  1,101,653   929,786 
Repurchase agreements  12,691   11,628 
Borrowed funds  20,000   43,000 
Accrued expenses and other liabilities  10,762   10,280 
         
Total liabilities  1,145,106   994,694 
         
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 and outstanding: March 31, 2019 - 3,452,199  -   - 
December 31, 2018 - 3,029,157        
Additional paid-in capital  29,490   11,927 
Accumulated other comprehensive income/(loss)  237   (2,796)
Retained earnings  93,520   92,333 
         
Total stockholders' equity  123,247   101,464 
         
Total liabilities and stockholders' equity $1,268,353  $1,096,158 

  June 30,    
(Dollars in thousands) 2019  December 31, 
  (unaudited)  2018 
ASSETS        
         
Cash and non-interest bearing deposits in other financial institutions $24,713  $13,260 
Interest bearing deposits in other financial institutions  27,739   3,116 
Federal funds sold  8,720   763 
         
Total cash and cash equivalents  61,172   17,139 
         
Certificates of deposit in other financial institutions  1,970   2,024 
         
Securities available-for-sale  258,742   241,768 
Loans held-for-sale  3,835   2,863 
Loans receivable  894,274   764,400 
Less: allowance for loan losses  (8,744)  (7,962)
Net loans receivable  885,530   756,438 
Federal Home Loan Bank stock  3,912   3,460 
Accrued interest receivable  4,131   3,632 
Premises and equipment  28,355   24,824 
Foreclosed real estate  1,501   1,627 
Cash value of bank owned life insurance  29,920   23,142 
Goodwill  11,109   8,170 
Other assets  19,172   11,071 
         
Total assets $1,309,349  $1,096,158 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
Deposits:        
Non-interest bearing $178,394  $127,277 
Interest bearing  948,727   802,509 
Total  1,127,121   929,786 
Repurchase agreements  20,628   11,628 
Borrowed funds  18,000   43,000 
Accrued expenses and other liabilities  14,788   10,280 
         
Total liabilities  1,180,537   994,694 
         
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 and outstanding: June 30, 2019 - 3,451,797  -   - 
December 31, 2018 - 3,029,157        
Additional paid-in capital  29,510   11,927 
Accumulated other comprehensive income/(loss)  2,830   (2,796)
Retained earnings  96,472   92,333 
         
Total stockholders' equity  128,812   101,464 
         
Total liabilities and stockholders' equity $1,309,349  $1,096,158 

See accompanying notes to consolidated financial statements.


NorthWest Indiana Bancorp

Consolidated Statements of Income

(unaudited)

  Three Months Ended  Six Months Ended 
(Dollars in thousands) June 30,  June 30, 
  2019  2018  2019  2018 
Interest income:                
Loans receivable                
Real estate loans $9,653  $6,134  $18,401  $12,051 
Commercial loans  1,651   1,119   3,335   2,191 
Consumer loans  181   4   292   9 
Total loan interest  11,485   7,257   22,028   14,251 
Securities  1,777   1,696   3,578   3,418 
Other interest earning assets  143   43   285   60 
                 
Total interest income  13,405   8,996   25,891   17,729 
                 
Interest expense:                
Deposits  2,011   838   3,683   1,513 
Repurchase agreements  66   45   115   77 
Borrowed funds  128   237   294   428 
                 
Total interest expense  2,205   1,120   4,092   2,018 
                 
Net interest income  11,200   7,876   21,799   15,711 
Provision for loan losses  511   297   828   638 
                 
Net interest income after provision for loan losses  10,689   7,579   20,971   15,073 
                 
Noninterest income:                
Fees and service charges $1,243  $947  $2,405  $1,839 
Wealth management operations  479   424   979   839 
Gain on sale of securities, net  301   246   652   1,004 
Gain on sale of loans held-for-sale, net  400   359   642   570 
Increase in cash value of bank owned life insurance  179   120   342   228 
Gain on sale of foreclosed real estate, net  13   68   40   100 
Other  54   39   178   72 
Total noninterest income $2,669  $2,203  $5,238  $4,652 
                 
Noninterest expense:                
Compensation and benefits $4,600  $3,516  $9,401  $7,376 
Occupancy and equipment  1,169   842   2,291   1,695 
Data processing  351   703   1,947   1,064 
Marketing  176   166   613   300 
Federal deposit insurance premiums  177   75   268   159 
Other  1,951   1,604   4,193   3,279 
Total noninterest expense $8,424  $6,906  $18,713  $13,873 
                 
Income before income tax expenses  4,934   2,876   7,496   5,852 
Income tax expenses  911   365   1,251   780 
Net income $4,023  $2,511  $6,245  $5,072 
                 
Earnings per common share:                
Basic $1.17  $0.88  $1.84  $1.77 
Diluted $1.17  $0.88  $1.84  $1.77 
                 
Dividends declared per common share $0.31  $0.30  $0.61  $0.59 

 

See accompanying notes to consolidated financial statements.

 

1

2

NorthWest Indiana Bancorp

Consolidated Statements of Income

(unaudited)

  Three Months Ended 
(Dollars in thousands) March 31, 
  2019  2018 
Interest income:        
Loans receivable        
Real estate loans $8,748  $5,917 
Commercial loans  1,684   1,072 
Consumer loans  111   5 
Total loan interest  10,543   6,994 
Securities  1,801   1,722 
Other interest earning assets  143   17 
         
Total interest income  12,487   8,733 
         
Interest expense:        
Deposits  1,672   675 
Repurchase agreements  49   32 
Borrowed funds  166   191 
         
Total interest expense  1,887   898 
         
Net interest income  10,600   7,835 
Provision for loan losses  317   341 
         
Net interest income after provision for loan losses  10,283   7,494 
         
Noninterest income:        
Fees and service charges $1,162  $892 
Wealth management operations  500   415 
Gain on sale of securities, net  352   758 
Gain on sale of loans held-for-sale, net  242   211 
Increase in cash value of bank owned life insurance  163   108 
Gain on sale of foreclosed real estate, net  27   32 
Other  124   33 
Total noninterest income $2,570  $2,449 
         
Noninterest expense:        
Compensation and benefits $4,676  $3,860 
Occupancy and equipment  1,123   853 
Data processing  703   361 
Marketing  263   134 
Federal deposit insurance premiums  91   84 
Other  3,435   1,675 
Total noninterest expense $10,291  $6,967 
         
Income before income tax expenses  2,562   2,976 
Income tax expenses  340   415 
Net income $2,222  $2,561 
         
Earnings per common share:        
Basic $0.66  $0.89 
Diluted $0.66  $0.89 
         
Dividends declared per common share $0.30  $0.29 

See accompanying notes to consolidated financial statements.

2

 

 

NorthWest Indiana Bancorp

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

 Three Months Ended  Three Months Ended Six Months Ended 
(Dollars in thousands) March 31,  June 30, June 30, 
 2019 2018  2019 2018 2019 2018 
              
Net income $2,222  $2,561  $4,023  $2,511  $6,245  $5,072 
                        
Net change in net unrealized gains and losses on securities available-for-sale:                        
Unrealized gains/(losses) arising during the period  4,183   (4,350)  3,584   (880)  7,766   (5,230)
Less: reclassification adjustment for gains included in net income  (352)  (758)  (301)  (246)  (652)  (1,004)
Net securities gain/(loss) during the period  3,831   (5,108)  3,283   (1,126)  7,114   (6,234)
Tax effect  (798)  1,076   (690)  237   (1,488)  1,313 
Net of tax amount  3,033   (4,032)  2,593   (889)  5,626   (4,921)
                        
Other comprehensive income/(loss), net of tax  3,033   (4,032)
        
Comprehensive income/(loss), net of tax $5,255  $(1,471) $6,616  $1,622  $11,871  $151 

 

See accompanying notes to consolidated financial statements.

 

3

NorthWest Indiana Bancorp

Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

 

  Three Months Ended 
(Dollars in thousands) March 31, 
  2019  2018 
       
Balance at beginning of period $101,464  $92,060 
         
Comprehensive income:        
Net income  2,222   2,561 
Net unrealized gains/(losses) on securities        
available-for-sale, net of reclassifications and tax effects  3,033   (4,032)
Comprehensive income, net of tax  5,255   (1,471)
         
Stock based compensation expense  71   52 
Issuance of 416,478 shares at $42.00 per share, for acquisition of AJS Bancorp, Inc  17,492   - 
         
Cash dividends  (1,035)  (833)
         
Balance at end of period $123,247  $89,808 
        Accumulated       
     Additional  Other       
  Common  Paid-in  Comprehensive  Retained  Total 
(Dollars in thousands, except per share data) Stock  Capital  (Loss)/Income  Earnings  Equity 
                
Balance at January 1, 2018 $     -  $4,867  $684  $86,509  $92,060 
                     
Comprehensive income:                    
Net income  -   -   -   2,561   2,561 
Net unrealized loss on securities available-for-sale, net of reclassification and tax effects  -   -   (4,032)  -   (4,032)
Comprehensive income                  (1,471)
Stock-based compensation expense  -   52   -   -   52 
Cash dividends, $0.29 per share  -   -   -   (833)  (833)
                     
Balance at March 31, 2018��$-  $4,919  $(3,348) $88,237  $89,808 
                     
Comprehensive income:                    
Net income  -   -   -   2,511   2,511 
Net unrealized loss on securities available-for-sale, net of reclassification and tax effects  -   -   (889)  -   (889)
Comprehensive income                  1,622 
Net surrender value of 1,029 restricted stock awards      (45)          (45)
Stock-based compensation expense  -   51   -   -   51 
Cash dividends, $0.30 per share  -   -   -   (859)  (859)
                     
Balance at June 30, 2018 $-  $4,925  $(4,237) $89,889  $90,577 
                     
Balance at January 1, 2019 $-  $11,927  $(2,796) $92,333  $101,464 
                     
Comprehensive income:                    
Net income  -   -   -   2,222   2,222 
Net unrealized gain on securities available-for-sale, net of reclassification and tax effects  -   -   3,033   -   3,033 
Comprehensive income                  5,255 
Stock-based compensation expense  -   71   -   -   71 
Issuance of 416,478 shares at $42.00 per share, for acquisition of AJS Bancorp, Inc.      17,492           17,492 
Cash dividends, $0.30 per share  -   -   -   (1,035)  (1,035)
                     
Balance at March 31, 2019 $-  $29,490  $237  $93,520  $123,247 
                     
Comprehensive income:                    
Net income  -   -   -   4,023   4,023 
Net unrealized gain on securities available-for-sale, net of reclassification and tax effects  -   -   2,593   -   2,593 
Comprehensive income                  6,616 
Net surrender value of 1,245 restricted stock awards      (63)          (63)
Stock-based compensation expense  -   83   -   -   83 
Cash dividends, $0.31 per share  -   -   -   (1,071)  (1,071)
                     
Balance at June 30, 2019 $-  $29,510  $2,830  $96,472  $128,812 

 

See accompanying notes to consolidated financial statements.

 

4

3

 

  

NorthWest Indiana Bancorp

Consolidated Statements of Cash Flows

(unaudited)

  Three Months Ended 
(Dollars in thousands) March 31, 
  2019  2018 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income $2,222  $2,561 
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:        
Origination of loans for sale  (9,760)  (8,250)
Sale of loans originated for sale  9,883   8,145 
Depreciation and amortization, net of accretion  731   650 
Amortization of mortgage servicing rights  17   16 
Stock based compensation expense  71   52 
Gain on sale of securities, net  (352)  (758)
Gain on sale of loans held-for-sale, net  (242)  (211)
Gain on sale of foreclosed real estate, net  (27)  (32)
Provision for loan losses  317   341 
Net change in:        
Interest receivable  (430)  210 
Other assets  (50)  690 
Accrued expenses and other liabilities  (964)  (443)
Total adjustments  (806)  410 
Net cash - operating activities  1,416   2,971 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Proceeds from maturities of certificates of deposits in other financial institutions  (191)  150 
Proceeds from maturities and pay downs of securities available-for-sale  5,704   5,313 
Proceeds from sales of securities available-for-sale  13,518   14,668 
Purchase of securities available-for-sale  (21,424)  (21,604)
Net change in loans receivable  (12,985)  (5,430)
Purchase of premises and equipment, net  (44)  (235)
Proceeds from sale of foreclosed real estate, net  439   552 
Cash and cash equivalents from acquisition activity, net  52,560   - 
Change in cash value of bank owned life insurance  (163)  (108)
Net cash - investing activities  37,414   (6,694)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Net change in deposits  27,641   2,369 
Proceeds from FHLB advances  -   32,000 
Repayment of FHLB advances  (23,000)  (19,000)
Change in other borrowed funds  1,063   (1,425)
Dividends paid  (909)  (831)
Net cash - financing activities  4,795   13,113 
Net change in cash and cash equivalents  43,625   9,390 
Cash and cash equivalents at beginning of period  17,139   11,025 
Cash and cash equivalents at end of period $60,764  $20,415 
         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
Interest $1,907  $873 
Income taxes  -   - 
Acquisition activity:        
Fair value of assets acquired, including cash and cash equivalents $172,925  $- 
Value of goodwill and other intangible assets  5,491   - 
Fair value of liabilities assumed  145,546   - 
Cash paid for acquisition  15,378   - 
Issuance of common stock for acquisition  17,492   - 
Noncash activities:        
Transfers from loans to foreclosed real estate $193  $253 

  Six Months Ended 
(Dollars in thousands) June 30, 
  2019  2018 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income $6,245  $5,072 
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:        
Origination of loans for sale  (29,585)  (24,266)
Sale of loans originated for sale  29,252   22,099 
Depreciation and amortization, net of accretion  1,516   1,312 
Amortization of mortgage servicing rights  33   32 
Stock based compensation expense  154   104 
Net surrender value of restricted stock awards  (63)  (45)
Gain on sale of securities, net  (652)  (1,004)
Gain on sale of loans held-for-sale, net  (642)  (570)
Gain on sale of foreclosed real estate, net  (40)  (100)
Provision for loan losses  828   638 
Net change in:        
Interest receivable  (499)  9 
Other assets  (3,567)  (17)
Accrued expenses and other liabilities  3,026   2,468 
Total adjustments  (239)  660 
Net cash - operating activities  6,006   5,732 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Proceeds from maturities of certificates of deposits in other financial institutions  54   150 
Proceeds from maturities and pay downs of securities available-for-sale  11,747   10,314 
Proceeds from sales of securities available-for-sale  30,281   22,545 
Purchase of securities available-for-sale  (48,347)  (32,339)
Net change in loans receivable  (42,336)  (27,002)
Purchase of Federal Home Loan Bank Stock  59   (17)
Purchase of premises and equipment, net  (962)  (398)
Proceeds from sale of foreclosed real estate, net  514   965 
Cash and cash equivalents from acquisition activity, net  52,195   - 
Change in cash value of bank owned life insurance  (343)  (228)
Net cash - investing activities  2,862   (26,010)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Net change in deposits  53,109   12,973 
Proceeds from FHLB advances  -   44,000 
Repayment of FHLB advances  (25,000)  (29,000)
Change in other borrowed funds  9,000   2,734 
Dividends paid  (1,944)  (1,662)
Net cash - financing activities  35,165   29,045 
Net change in cash and cash equivalents  44,033   8,767 
Cash and cash equivalents at beginning of period  17,139   11,025 
Cash and cash equivalents at end of period $61,172  $19,792 
         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
Interest $4,112  $1,949 
Income taxes  650   955 
Acquisition activity:        
Fair value of assets acquired, including cash and cash equivalents $172,560  $- 
Value of goodwill and other intangible assets  5,856   - 
Fair value of liabilities assumed  145,546   - 
Cash paid for acquisition  15,743   - 
Issuance of common stock for acquisition  17,492   - 
Noncash activities:        
Transfers from loans to foreclosed real estate $193  $253 

 

See accompanying notes to consolidated financial statements.

 

4

5

 

  

NorthWest Indiana Bancorp

Notes to Consolidated Financial Statements

(unaudited)

 

Note 1 - Basis of Presentation

 

The consolidated financial statements include the accounts of NorthWest Indiana Bancorp (the “Bancorp” or “NWIN”), its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary) and 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., and Alliance NMTC Investment Fund, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are primarily dependent upon the earnings of the Bank. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by U.S. generally accepted accounting principles for complete presentation of consolidated financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of the Bancorp as of March 31,June 30, 2019 and December 31, 2018, and the consolidated statements of income and comprehensive income and changes in stockholders’ equity for the three and six months ended March 31,June 30, 2019 and 2018, and consolidated statements of cash flows and changes in stockholders’ equity for the threesix months ended March 31,June 30, 2019 and 2018. The income reported for the threesix month period ended March 31,June 30, 2019 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 July 26, 2018, the Bancorp completed its acquisition of First Personal Financial Corp., a Delaware corporation (“First Personal”), pursuant to an Agreement and Plan of Merger dated February 20, 2018 between the Bancorp and First Personal.Personal (the “First Personal Merger Agreement”). Pursuant to the terms of the First Personal Merger Agreement, First Personal merged with and into the Bancorp, with the Bancorp as the surviving corporation. Simultaneous with the First Personal Merger, First Personal Bank, an Illinois state chartered commercial bank and wholly-owned subsidiary of First Personal, merged with and into the Bank, with the Bank as the surviving institution.

 

In connection with the First Personal Merger, each First Personal stockholder holding 100 or more shares of First Personal common stock received fixed consideration of (i) 0.1246 shares of Bancorp common stock, and (ii) $6.67 per share in cash for each outstanding share of First Personal common stock. Stockholders holding less than 100 shares of First Personal common stock received $12.12 in cash and no stock consideration for each outstanding share of First Personal common stock. Any fractional shares of Bancorp common stock that a First Personal stockholder would have otherwise received in the First Personal Merger were cashed out in the amount of such fraction multiplied by $42.95.

 

The Bancorp issued a total of approximately 161,875 shares of Bancorp common stock to the former First Personal stockholders, and paid cash consideration of approximately $8.7 million. Based upon the closing price of Bancorp’s common stock on July 25, 2018, the transaction had an implied valuation of approximately $15.6 million. As of March 31, 2019,The acquisition costs related to the First Personal Merger equaled approximately $1.8 million. The acquisition represented the Bank’s first expansion into the South Suburban Chicagoland market, and expanded the Bank’s full-service retail banking network to 19 banking centers. Additionally, upon the closing of the merger the three former First Personal Bank branches in Cook County, Illinois became branches of Peoples Bank, thereby expanding the Peoples Bank branch network into Illinois.


Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the First Personal acquisition is allocated as follows:

  

5

ASSETS    
Cash and due from banks $30,178 
Investment securities, available for sale  2 
     
Commercial  53,026 
Residential mortgage  32,542 
Consumer  9,004 
Total Loans  94,572 
     
Premises and equipment, net  5,799 
FHLB stock  219 
Goodwill  5,437 
Core deposit intangible  3,044 
Interest receivable  274 
Other assets  6,405 
Total assets purchased $145,930 
Common shares issued  6,928 
Cash paid  8,689 
Total purchase price $15,617 

LIABILITIES    
Deposits    
Non-interest bearing $14,517 
NOW accounts  22,177 
Savings and money market  41,852 
Certificates of deposits  46,355 
Total Deposits  124,901 
     
     
Borrowings  4,124 
Interest payable  32 
Other liabilities  1,256 
     
     
     
     
     
     
Total liabilities assumed $130,313 

As part of the First Personal merger, the Bancorp acquired First Personal Statutory Trust I. NWIN guaranteed the payment of distributions on the trust preferred securities issued by First Personal Statutory Trust I. First Personal Statutory Trust I issued $4.124 million in trust preferred securities in May 2004. The trust preferred securities carried a variable rate of interest priced at the three-month LIBOR plus 275 basis points, payable quarterly and due to mature on June 17, 2034. Management of the Bancorp determined that the continued maintenance of the trust preferred securities issued by First Personal Statutory Trust I and the corresponding junior subordinated debentures was unnecessary to the Bancorp’s ongoing operations. As a result, the Bancorp’s board of directors approved the redemption of the junior subordinated debentures, which resulted in the trustee of the First Personal Statutory Trust I redeeming all $4.124 million of the trust preferred securities as of December 17, 2018.

 

Final estimates of fair value on the date of acquisition have not been finalized yet. Prior to the end of the one year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.

On January 24, 2019, the Bancorp completed its previously announced acquisition of AJS Bancorp, Inc., a Maryland corporation (“AJSB”), pursuant to an Agreement and Plan of Merger dated July 30, 2018 between the Bancorp and AJSB.AJSB (the “AJSB Merger Agreement”). Pursuant to the terms of the AJSB Merger Agreement, AJSB merged with and into NWIN, with NWIN as the surviving corporation. Simultaneously with the AJSB Merger, A.J. Smith Federal Savings Bank, a federally chartered savings bank and wholly-owned subsidiary of AJSB, merged with and into Peoples Bank SB, with Peoples Bank as the surviving bank.

 

In connection with the AJSB Merger, each AJSB stockholder holding 100 or more shares of AJSB common stock received fixed consideration of (i) 0.2030 shares of NWIN common stock, and (ii) $7.20 per share in cash for each outstanding share of AJSB’s common stock. Stockholders holding less than 100 shares of AJSB common stock received $16.00 in cash and no stock consideration for each outstanding share of AJSB common stock. Any fractional shares of NWIN common stock that an AJSB stockholder would have otherwise received in the AJSB Merger were cashed out in the amount of such fraction multiplied by $43.01.

 

The Bancorp issued 416,478 shares of Bancorp common stock to the former AJSB stockholders, and paid cash consideration of approximately $15.4 million. Based upon the closing price of NWIN’s common stock on January 23, 2019, the transaction had an implied valuation of approximately $32.9 million, which includes unallocated shares held by the AJSB Employee Stock Ownership Plan (“ESOP”), some of which were cancelled in connection with the closing to satisfy the ESOP’s outstanding loan balance. As of March 31,June 30, 2019, acquisition costs related to the AJSB Merger equaled approximately $2.1 million. The acquisition further expanded the Bank’s banking center network in Cook County, Illinois, expanding the Bank’s full-service retail banking network to 22 banking centers.

6

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the AJSB acquisition is allocated as follows:

 

ASSETS       
Cash and due from banks $67,938  $68,303 
Investment securities, available for sale  3,432  3,432 
       
Commercial  712  712 
Residential mortgage  85,635  85,635 
Multifamily  1,442  1,442 
Consumer  57   57 
Total Loans  87,846  87,846 
       
Premises and equipment, net  3,542  3,542 
FHLB stock  512  512 
Goodwill  2,574  2,939 
Core deposit intangible  2,917  2,917 
Interest receivable  351  351 
Other assets  9,304   8,939 
Total assets purchased $178,416  $178,781 
Common shares issued  17,492  17,492 
Cash paid  15,378   15,743 
Total purchase price $32,870  $33,235 

LIABILITIES    
Deposits    
Non-interest bearing $24,502 
NOW accounts  10,712 
Savings and money market  68,875 
Certificates of deposits  40,137 
Total Deposits  144,226 
     
     
Interest payable  50 
Other liabilities  1,270 
     
     
     
     
     
     
     
     
Total liabilities assumed $145,546 

During the second quarter of 2019, it was discovered that $365 thousand that was paid to the holders of AJSB stock options as of the effective time of the merger (during the first quarter of 2019) for the cash-out of those options, per the terms of the AJSB Merger Agreement had not been recognized as part of the consideration paid in connection with the acquisition. This was corrected during the second quarter and properly applied as an adjustment to goodwill and an increase in the consideration paid for AJSB.

Final estimates of fair value on the date of acquisition have not been finalized yet. Prior to the end of the one year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.

 

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 were as follows:

 

 (Dollars in thousands)  (Dollars in thousands) 
   Gross Gross Estimated    Gross Gross Estimated 
 Cost Unrealized Unrealized Fair  Cost Unrealized Unrealized Fair 
March 31, 2019 Basis Gains Losses Value 
         
June 30, 2019 Basis Gains Losses Value 
Money market fund $4,254  $-  $-  $4,254  $5,598  $-  $-  $5,598 
U.S. government sponsored entities  12,986   96   -   13,082 
U.S. treasury securities  594   -   -   594   599   -   -   599 
U.S. government sponsored entities  14,989   40   (76)  14,953 
Collateralized mortgage obligations and residential mortgage-backed securities  143,327   443   (1,164)  142,606   144,079   1,368   (273)  145,174 
Municipal securities  84,407   2,478   (40)  86,845   88,451   3,819   (28)  92,242 
Collateralized debt obligations  3,469   -   (1,390)  2,079   3,455   -   (1,408)  2,047 
Total securities available-for-sale $251,040  $2,961  $(2,670) $251,331  $255,168  $5,283  $(1,709) $258,742 

 

  (Dollars in thousands) 
     Gross  Gross  Estimated 
  Cost  Unrealized  Unrealized  Fair 
December 31, 2018 Basis  Gains  Losses  Value 
             
Money market fund $2,480  $-  $-  $2,480 
U.S. treasury securities                
U.S. government sponsored entities  7,997   28   (131)  7,894 
Collateralized mortgage obligations and residential mortgage-backed securities  137,834   135   (2,688)  135,281 
Municipal securities  93,516   1,072   (524)  94,064 
Collateralized debt obligations  3,481   -   (1,432)  2,049 
Total securities available-for-sale $245,308  $1,235  $(4,775) $241,768 

  (Dollars in thousands) 
     Gross  Gross  Estimated 
  Cost  Unrealized  Unrealized  Fair 
December 31, 2018 Basis  Gains  Losses  Value 
Money market fund $2,480  $-  $-  $2,480 
U.S. government sponsored entities  7,997   28   (131)  7,894 
U.S. treasury securities  -   -   -   - 
Collateralized mortgage obligations and residential mortgage-backed securities  137,834   135   (2,688)  135,281 
Municipal securities  93,516   1,072   (524)  94,064 
Collateralized debt obligations  3,481   -   (1,432)  2,049 
Total securities available-for-sale $245,308  $1,235  $(4,775) $241,768 
7

The estimated fair value of available-for-sale debt securities at March 31,June 30, 2019, by contractual maturity, were as follows. Securities not due at a single maturity date, primarily collateralized mortgage obligations and residential mortgage-backed securities, are shown separately.

 

 (Dollars in thousands)  (Dollars in thousands) 
 Available-for-sale  Available-for-sale 
 Estimated    Estimated   
 Fair Tax-Equivalent  Fair Tax-Equivalent 
March 31, 2019 Value Yield (%) 
June 30, 2019 Value Yield (%) 
Due in one year or less $4,913   6.30  $9,263   2.71 
Due from one to five years  7,233   3.21   3,311   4.91 
        
Due from five to ten years  16,593   3.86   17,524   3.79 
Due over ten years  79,986   4.10   83,470   4.06 
Collateralized mortgage obligations and residential mortgage-backed securities  142,606   2.80   145,174   2.69 
Total $251,331   3.37  $258,742   3.24 

 

Sales of available-for-sale securities were as follows for the threesix months ended:

 

 (Dollars in thousands)  (Dollars in thousands) 
 March 31, March 31,  June 30, June 30, 
 2019 2018  2019 2018 
          
Proceeds $13,518  $14,668  $30,281  $22,545 
Gross gains  356   758   733   1,004 
Gross losses  (4)  -    (81)  - 

 

Accumulated other comprehensive income/(loss) balances, net of tax, related to available-for-sale securities, were as follows:

 

 (Dollars in thousands)  (Dollars in thousands) 
 Unrealized
gain/(loss)
  Unrealized
gain/(loss)
 
Ending balance, December 31, 2018 $(2,796) $(2,796)
Current period change  3,033   5,626 
Ending balance, March 31, 2019 $237 
Ending balance, June 30, 2019 $2,830 

 

Securities with carrying values of approximately $83.3$76.2 million and $16.3 million were pledged as of March 31,June 30, 2019 and December 31, 2018, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law. The increase in pledged securities for March 31,June 30, 2019, was the result of new pledging requirements for Indiana public funds deposits.

 

Securities with gross unrealized losses at March 31,June 30, 2019 and December 31, 2018 not recognized in income are as follows:

 

  (Dollars in thousands) 
  Less than 12 months  12 months or longer  Total 
  Estimated     Estimated     Estimated    
  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
March 31, 2019 Value  Losses  Value  Losses  Value  Losses 
                         
U.S. government sponsored entities $-  $-  $6,920  $(76) $6,920  $(76)
Collateralized mortgage obligations and residential mortgage-backed securities  -   -   97,654   (1,164)  97,654   (1,164)
Municipal securities  -   -   3,102   (40)  3,102   (40)
Collateralized debt obligations  -   -   2,079   (1,390)  2,079   (1,390)
Total temporarily impaired $-  $-  $109,755  $(2,670) $109,755  $(2,670)
Number of securities      0       84       84 

  (Dollars in thousands) 
  Less than 12 months  12 months or longer  Total 
  Estimated     Estimated     Estimated    
  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
December 31, 2018 Value  Losses  Value  Losses  Value  Losses 
                        
U.S. government sponsored entities $-  $-  $3,866  $(131) $3,866  $(131)
Collateralized mortgage obligations and residential mortgage-backed securities  28,388   (304)  89,234   (2,384)  117,622   (2,688)
Municipal securities  22,678   (367)  3,495   (157)  26,173   (524)
Collateralized debt obligations  -   -   2,049   (1,432)  2,049   (1,432)
Total temporarily impaired $51,066  $(671) $98,644  $(4,104) $149,710  $(4,775)
Number of securities      52       75       127 

  (Dollars in thousands) 
  Less than 12 months  12 months or longer  Total 
  Estimated     Estimated     Estimated    
  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
June 30, 2019 Value  Losses  Value  Losses  Value  Losses 
U.S. government sponsored entities $-  $-  $-  $-  $     -  $- 
Collateralized mortgage obligations and residential mortgage-backed securities  -   -   34,364   (273)    34,364   (273)
Municipal securities  -   -   607   (28)     607   (28)
Collateralized debt obligations  -   -   2,047   (1,408)    2,047   (1,408)
Total temporarily impaired $-  $-  $37,018  $(1,709) $ 37,018  $(1,709)
Number of securities      0       31       31 
                         
  (Dollars in thousands) 
  Less than 12 months  12 months or longer  Total 
  Estimated     Estimated     Estimated    
  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
December 31, 2018 Value  Losses  Value  Losses  Value  Losses 
U.S. government sponsored entities $-  $-  $3,866  $(131) $3,866  $(131)
Collateralized mortgage obligations and residential mortgage-backed securities  28,388   (304)  89,234   (2,384)  117,622   (2,688)
Municipal securities  22,678   (367)  3,495   (157)  26,173   (524)
Collateralized debt obligations  -   -   2,049   (1,432)  2,049   (1,432)
Total temporarily impaired $51,066  $(671) $98,644  $(4,104) $149,710  $(4,775)
Number of securities      52       75       127 

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.

8

 

Note 5 - Loans Receivable

 

Loans receivable are summarized below:

 

(Dollars in thousands)      
  March 31, 2019  December 31, 2018 
Loans secured by real estate:        
Residential real estate $303,111  $224,082 
Home equity  49,658   45,423 
Commercial real estate  265,013   253,104 
Construction and land development  66,920   64,433 
Multifamily  49,316   47,234 
Farmland  236   240 
Total loans secured by real estate  734,254   634,516 
Commercial business  103,734   103,628 
Consumer  6,713   5,293 
Government  19,591   21,101 
Subtotal  864,292   764,538 
Less:        
Net deferred loan origination fees  844   530 
Undisbursed loan funds  (141)  (668)
Loans receivable $864,995  $764,400 

(Dollars in thousands) Beginning Balance  Charge-offs  Recoveries  Provisions  Ending Balance 
                
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended March 31, 2019: 
                     
Allowance for loan losses:                    
Residential real estate $1,715  $(48) $14  $(1) $1,680 
Home equity  202   -   -   (8)  194 
Commercial real estate  3,335   -   -   150   3,485 
Construction and land development  756   -   -   21   777 
Multifamily  472   -   -   (38)  434 
Farmland  -   -   -   -   - 
Commercial business  1,362   -   6   23   1,391 
Consumer  82   (18)  3   187   254 
Government  38   -   -   (17)  21 
Total $7,962  $(66) $23  $317  $8,236 
                     
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended March 31, 2018: 
  
Allowance for loan losses:                    
Residential real estate $1,568  $(68) $-  $(7) $1,493 
Home equity  166   (19)  -   12   159 
Commercial real estate  3,125   (119)  -   (10)  2,996 
Construction and land development  618   -   -   43   661 
Multifamily  622   -   -   (7)  615 
Farmland  -   -   -   4   4 
Commercial business  1,298   (526)  10   295   1,077 
Consumer  31   (8)  4   8   35 
Government  54   -   -   3   57 
Total $7,482  $(740) $14  $341  $7,097 

(Dollars in thousands)      
  June 30, 2019  December 31, 2018 
Loans secured by real estate:        
Residential real estate $301,770  $224,082 
Home equity  50,093   45,423 
Commercial real estate  275,954   253,104 
Construction and land development  71,655   64,433 
Multifamily  51,149   47,234 
Farmland  234   240 
Total loans secured by real estate  750,855   634,516 
Commercial business  112,238   103,628 
Consumer  10,273   5,293 
Government  19,284   21,101 
Subtotal  892,650   764,538 
Less:        
Net deferred loan origination fees  1,804   530 
Undisbursed loan funds  (180)  (668)
Loans receivable $894,274  $764,400 
9

(Dollars in thousands) Beginning Balance  Charge-offs  Recoveries  Provisions  Ending Balance 
                
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2019:
                     
Allowance for loan losses:                    
Residential real estate $1,680  $(18) $4  $(6) $1,660 
Home equity  194   -   2   6   202 
Commercial real estate  3,485   -   -   44   3,529 
Construction and land development  777   -   -   29   806 
Multifamily  434   -   -   19   453 
Farmland  -   -   -   -   - 
Commercial business  1,391   -   10   116   1,517 
Consumer  254   (7)  6   303   556 
Government  21   -   -   -   21 
Total $8,236  $(25) $22  $511  $8,744 
                     
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2018: 
                     
Allowance for loan losses:                    
Residential real estate $1,493  $(38) $-  $68  $1,523 
Home equity  159   (5)  -   29   183 
Commercial real estate  2,996   -   2   172   3,170 
Construction and land development  661   -   -   (50)  611 
Multifamily  615   -   -   (8)  607 
Farmland  4   -   -   -   4 
Commercial business  1,077   (3)  107   83   1,264 
Consumer  35   (14)  5   10   36 
Government  57   -   -   (7)  50 
Total $7,097  $(60) $114  $297  $7,448 
                     
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2019: 
                     
Allowance for loan losses:                    
Residential real estate $1,715  $(66) $18  $(7) $1,660 
Home equity  202   -   2   (2)  202 
Commercial real estate  3,335   -   -   194   3,529 
Construction and land development  756   -   -   50   806 
Multifamily  472   -   -   (19)  453 
Farmland  -   -   -   -   - 
Commercial business  1,362   -   16   139   1,517 
Consumer  82   (25)  9   490   556 
Government  38   -   -   (17)  21 
Total $7,962  $(91) $45  $828  $8,744 
                     
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2018: 
                     
Allowance for loan losses:                    
Residential real estate $1,568  $(106) $-  $61  $1,523 
Home equity  166   (24)  -   41   183 
Commercial real estate  3,125   (119)  2   162   3,170 
Construction and land development  618   -   -   (7)  611 
Multifamily  622   -   -   (15)  607 
Farmland  -   -   -   4   4 
Commercial business  1,298   (529)  117   378   1,264 
Consumer  31   (22)  9   18   36 
Government  54   -   -   (4)  50 
Total $7,482  $(800) $128  $638  $7,448 


The Bancorp's impairment analysis is summarized below:

 

 Ending Balances  Ending Balances 
(Dollars in thousands) ALLL Individually
evaluated for
impairment
reserves
  ALLL Collectively
evaluated for
impairment
reserves
  Total Loans
receivable
  Loans receivable
Individually
evaluated for
impairment
  Loans receivable
Purchased credit
impaired
individually
evaluated for
impairment
  Loans receivable
Collectively
evaluated for
impairment
  Individually
evaluated for
impairment
reserves
  Collectively
evaluated for
impairment
reserves
  Loan receivables  Loans individually
evaluated for
impairment
  Purchased credit
impaired loans
individually
evaluated for
impairment
  Loans
collectively
evaluated for
impairment
 
                          
The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at March 31, 2019: 
The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at June 30, 2019:The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at June 30, 2019: 
                                                
Residential real estate $23   1,657   302,918  $559  $1,366  $300,993  $22  $1,638  $301,488  $547  $1,894  $299,047 
Home equity  8   186   49,716   136   370   49,210   11   191   50,155   214   225   49,716 
Commercial real estate  202   3,283   265,013   1,673   483   262,857   196   3,333   275,954   1,651   485   273,818 
Construction and land development  -   777   66,920   -   -   66,920   -   806   71,655   -   -   71,655 
Multifamily  -   434   49,316   -   716   48,600   -   453   51,149   -   701   50,448 
Farmland  -   -   236   -   -   236   -   -   234   -   -   234 
Commercial business  32   1,359   103,507   416   1,152   101,939   334   1,183   112,076   1,753   1,152   109,171 
Consumer  -   254   7,778   -   -   7,778   -   556   12,279   -   -   12,279 
Government  -   21   19,591   -   -   19,591   -   21   19,284   -   -   19,284 
Total $265  $7,971  $864,995  $2,784  $4,087  $858,124  $563  $8,181  $894,274  $4,165  $4,457  $885,652 
                                                
The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2018:The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2018: The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2018: 
                         
Residential real estate $22   1,693   223,323  $570  $980  $221,773  $22   1,693   223,323  $570  $980  $221,773 
Home equity  9   193   45,483   141   123   45,219   9   193   45,483   141   123   45,219 
Commercial real estate  210   3,125   253,104   1,703   402   250,999   210   3,125   253,104   1,703   402   250,999 
Construction and land development  -   756   64,433   -   -   64,433   -   756   64,433   -   -   64,433 
Multifamily  -   472   47,234   -   -   47,234   -   472   47,234   -   -   47,234 
Farmland  -   -   240   -   -   240   -   -   240   -   -   240 
Commercial business  5   1,357   103,439   423   1,440   101,576   5   1,357   103,439   423   1,440   101,576 
Consumer  -   82   6,043   -   -   6,043   -   82   6,043   -   -   6,043 
Government  -   38   21,101   -   -   21,101   -   38   21,101   -   -   21,101 
Total $246  $7,716  $764,400  $2,837  $2,945  $758,618  $246  $7,716  $764,400  $2,837  $2,945  $758,618 

 

The Bancorp's credit quality indicators are summarized below at March 31,June 30, 2019 and December 31, 2018:

 

  Credit Exposure - Credit Risk Portfolio By Creditworthiness Category    
  June 30, 2019    
(Dollars in thousands) 2  3  4  5  6  7  8    
                         
Loan Segment Moderate  Above average
acceptable
  Acceptable  Marginally
acceptable
  Pass/monitor  Special mention  Substandard  Total 
Residential real estate $881  $115,857  $105,661  $13,342  $55,872   3,900   5,975  $301,488 
Home equity  64   7,639   39,725   258   1,161   744   564   50,155 
Commercial real estate  -   4,336   85,845   126,413   53,058   4,253   2,049   275,954 
Construction and land development  -   310   23,891   32,407   15,047   -   -   71,655 
Multifamily  -   934   18,915   27,298   3,161   140   701   51,149 
Farmland  -   -   -   -   234   -   -   234 
Commercial business  9,634   21,596   20,230   36,348   20,081   2,423   1,764   112,076 
Consumer  2,155   2,666   6,371   190   897   -   -   12,279 
Government  -   1,889   13,485   3,910   -   -   -   19,284 
Total $12,734  $155,227  $314,123  $240,166  $149,511  $11,460  $11,053  $894,274 

  Credit Exposure - Credit Risk Portfolio By Creditworthiness Category    
  March 31, 2019    
(Dollars in thousands) 2  3  4  5  6  7  8    
                         
Loan Segment Moderate  Above average acceptable  Acceptable  Marginally acceptable  Pass/monitor  Special mention  Substandard  Total 
Residential real estate $862  $116,851  $103,661  $13,038  $58,546   4,466   5,494  $302,918 
Home equity  62   7,486   39,164   345   1,235   866   558   49,716 
Commercial real estate  -   5,186   75,157   123,162   55,123   4,556   1,829   265,013 
Construction and land development  -   316   22,989   32,640   10,975   -   -   66,920 
Multifamily  -   948   19,537   25,117   2,853   178   683   49,316 
Farmland.  -   -   -   -   236   -   -   236 
Commercial business  9,617   18,669   20,326   34,730   16,896   2,839   430   103,507 
Consumer  1,153   2,810   2,716   194   905   -   -   7,778 
Government  -   2,001   13,680   3,910   -   -   -   19,591 
Total $11,694  $154,267  $297,230  $233,136  $146,769  $12,905  $8,994  $864,995 

  December 31, 2018    
(Dollars in thousands) 2  3  4  5  6  7  8    
                         
Loan Segment Moderate  Above average acceptable  Acceptable  Marginally acceptable  Pass/monitor  Special mention  Substandard  Total 
Residential real estate $261  $58,276  $100,374  $10,404  $44,734  $3,908  $5,366  $223,323 
Home equity  192   3,736   40,165   37   323   657   373   45,483 
Commercial real estate  -   5,042   78,611   110,984   51,982   4,715   1,770   253,104 
Construction and land development  -   322   24,271   29,383   10,457   -   -   64,433 
Multifamily  -   569   19,255   23,417   3,844   149   -   47,234 
Farmland  -   -   -   -   240   -   -   240 
Commercial business  10,655   19,127   20,941   34,996   14,034   2,958   728   103,439 
Consumer  925   2,953   1,040   196   909   20   -   6,043 
Government  -   2,111   14,795   4,195   -   -   -   21,101 
Total $12,033  $92,136  $299,452  $213,612  $126,523  $12,407  $8,237  $764,400 

                         
  December 31, 2018    
(Dollars in thousands) 2  3  4  5  6  7  8    
                         
Loan Segment Moderate  Above average
acceptable
  Acceptable  Marginally
acceptable
  Pass/monitor  Special mention  Substandard  Total 
Residential real estate $261  $58,276  $100,374  $10,404  $44,734  $3,908  $5,366  $223,323 
Home equity  192   3,736   40,165   37   323   657   373   45,483 
Commercial real estate  -   5,042   78,611   110,984   51,982   4,715   1,770   253,104 
Construction and land development  -   322   24,271   29,383   10,457   -   -   64,433 
Multifamily  -   569   19,255   23,417   3,844   149   -   47,234 
Farmland  -   -   -   -   240   -   -   240 
Commercial business  10,655   19,127   20,941   34,996   14,034   2,958   728   103,439 
Consumer  925   2,953   1,040   196   909   20   -   6,043 
Government  -   2,111   14,795   4,195   -   -   -   21,101 
Total $12,033  $92,136  $299,452  $213,612  $126,523  $12,407  $8,237  $764,400 
10

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:

 

1 – Minimal Risk

 

Borrower demonstrates exceptional credit fundamentals, including stable and predictable profit margins, strong liquidity and a conservative balance sheet with superior asset quality. Excellent cash flow coverage of existing and projected debt service. Historic and projected performance indicates borrower is able to meet obligations under almost any economic circumstances.

 

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 – Above average acceptable risk

 

Borrower generates sufficient cash flow to fund debt service and some working assets and/or capital expansion needs. Profitability and key balance sheet ratios are at or slightly above peers. Current trends are positive or stable. Earnings may be level or trending down slightly or be erratic; however, positive strengths are offsetting. Risk of default is reasonable but may warrant collateral protection.

 

4 – Acceptable risk

 

Borrower generates sufficient cash flow to fund debt service, but most working asset and all capital expansion needs are provided from external sources. Profitability ratios and key balance sheet ratios are usually close to peers but one or more ratios (e.g. leverage) may be higher than peer. Earnings may be trending down over the last three years. Borrower may be able to obtain similar financing from other banks with comparable or less favorable terms. Risk of default is acceptable but requires collateral protection.

 

5 – Marginally acceptable risk

 

Borrower may exhibit excessive growth, declining earnings, strained cash flow, increasing leverage and/or weakening market position that indicate above average risk. Limited additional debt capacity, modest coverage, and average or below average asset quality, margins and market share. Interim losses and/or adverse trends may occur, but not to the level that would affect the Bank’s position. The potential for default is higher than normal but considered marginally acceptable based on prospects for improving financial performance and the strength of the collateral.

 

6 – 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.

 

7 – 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.

 

8 – 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.

 

Performing loans are loans that are paying as agreed and are approximately less than ninety days past due on payments of interest and principal.

11

During the first threesix months of 2019, three home equity loans and one commercial business loan totaling $47$128 thousand waswere renewed as a troubled debt restructuring.restructurings. No troubled debt restructurings have subsequently defaulted during the periods presented. All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

 

The Bancorp's individually evaluated impaired loans are summarized below:

 

           For the three months ended 
  As of March 31, 2019  March 31, 2019 
(Dollars in thousands) Recorded 
Investment
  Unpaid Principal
Balance
  Related Allowance  Average Recorded
Investment
  Interest Income
Recognized
 
With no related allowance recorded:                    
Residential real estate $1,766  $3,900  $-  $1,578  $14 
Home equity  450   482   -   328   2 
Commercial real estate  1,675   2,276   -   1,650   19 
Construction and land development  -   -   -   -   - 
Multifamily  716   798   -   -   - 
Farmland  -   -   -   -   - 
Commercial business  1,536   1,685   -   1,668   21 
Consumer  -   -   -   -   - 
Government  -   -   -   -   - 
                     
With an allowance recorded:                    
Residential real estate  159   159   23   160   2 
Home equity  56   56   8   57   1 
Commercial real estate  481   481   202   481   - 
Construction and land development  -   -   -   -   - 
Multifamily  -   -   -   -   - 
Farmland  -   -   -   -   - 
Commercial business  32   32   32   48   - 
Consumer  -   -   -   -   - 
Government  -   -   -   -   - 
                     
Total:                    
Residential real estate $1,925  $4,059  $23  $1,738  $16 
Home equity $506  $538  $8  $385  $3 
Commercial real estate $2,156  $2,757  $202  $2,131  $19 
Construction & land development $-  $-  $-  $-  $- 
Multifamily $716  $798  $-  $-  $- 
Farmland $-  $-  $-  $-  $- 
Commercial business $1,568  $1,717  $32  $1,716  $21 
Consumer $-  $-  $-  $-  $- 
Government $-  $-  $-  $-  $- 

           For the six months ended 
  As of June 30, 2019  June 30, 2019 
(Dollars in thousands) Recorded
Investment
  Unpaid Principal
Balance
  Related Allowance  Average Recorded
Investment
  Interest Income
Recognized
 
With no related allowance recorded:                    
Residential real estate $2,284  $3,762  $-  $1,813  $31 
Home equity  375   398   -   344   3 
Commercial real estate  1,665   2,264   -   1,655   33 
Construction and land development  -   -   -   -   - 
Multifamily  701   783   -   472   3 
Farmland  -   -   -   -   - 
Commercial business  2,565   2,695   -   1,967   43 
Consumer  -   -   -   -   - 
Government  -   -   -   -   - 
                     
With an allowance recorded:                    
Residential real estate  157   157   22   159   2 
Home equity  64   64   11   59   1 
Commercial real estate  471   471   196   478   - 
Construction and land development  -   -   -   -   - 
Multifamily  -   -   -   -   - 
Farmland  -   -   -   -   - 
Commercial business  340   340   334   145   - 
Consumer  -   -   -   -   - 
Government  -   -   -   -   - 
                     
Total:                    
Residential real estate $2,441  $3,919  $22  $1,972  $33 
Home equity $439  $462  $11  $403  $4 
Commercial real estate $2,136  $2,735  $196  $2,133  $33 
Construction & land development $-  $-  $-  $-  $- 
Multifamily $701  $783  $-  $472  $3 
Farmland $-  $-  $-  $-  $- 
Commercial business $2,905  $3,035  $334  $2,112  $43 
Consumer $-  $-  $-  $-  $- 
Government $-  $-  $-  $-  $- 
12

       For the three months ended        For the six months ended 
 As of December 31, 2018 March 31, 2018  As of December 31, 2018 June 30, 2018 
(Dollars in thousands) Recorded
Investment
  Unpaid Principal
Balance
  Related Allowance  Average Recorded
Investment
  Interest Income
Recognized
  Recorded
Investment
  Unpaid Principal
Balance
  Related Allowance  Average Recorded
Investment
  Interest Income
Recognized
 
With no related allowance recorded:                                        
Residential real estate $1,389  $3,628  $-  $1,103  $6  $1,389  $3,628  $-  $1,108  $16 
Home equity  207   214   -   35   -   207   214   -   45   - 
Commercial real estate  1,624   2,222   -   252   -   1,624   2,222   -   561   - 
Construction & land development  -   -   -   134   -   -   -   -   89   - 
Multifamily  -   -   -   -   -   -   -   -   -   - 
Farmland  -   -   -   -   -   -   -   -   -   - 
Commercial business  1,799   2,038   -   184   1   1,799   2,038   -   257   - 
Consumer  -   -   -   -   -   -   -   -   -   - 
Government  -   -   -   -   -   -   -   -   -   - 
                                        
With an allowance recorded:                                        
Residential real estate  161   161   22   106   5   161   161   22   114   10 
Home equity  57   57   9   -   -   57   57   9   20   - 
Commercial real estate  481   481   210   186   4   481   481   210   160   16 
Construction & land development  -   -   -   -   -   -   -   -   -   - 
Multifamily  -   -   -   -   -   -   -   -   -   - 
Farmland  -   -   -   -   -   -   -   -   -   - 
Commercial business  64   64   5   275   -   64   64   5   186   8 
Consumer  -   -   -   -   -   -   -   -   -   - 
Government  -   -   -   -   -   -   -   -   -   - 
                                        
Total:                                        
Residential real estate $1,550  $3,789  $22  $1,209  $11  $1,550  $3,789  $22  $1,222  $26 
Home equity $264  $271  $9  $35  $-  $264  $271  $9  $65  $- 
Commercial real estate $2,105  $2,703  $210  $438  $4  $2,105  $2,703  $210  $721  $16 
Construction & land development $-  $-  $-  $134  $-  $-  $-  $-  $89  $- 
Multifamily $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
Farmland $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
Commercial business $1,863  $2,102  $5  $459  $1  $1,863  $2,102  $5  $443  $8 
Consumer $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
Government $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 

 

As a result of acquisition activity, 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 March 31,June 30, 2019, total purchased credit impaired loans with unpaid principal balances totaled $7.1$6.8 million with a recorded investment of $4.1$4.5 million. At December 31, 2018, purchased credit impaired loans with unpaid principal balances totaled $6.0 million with a recorded investment of $2.9 million.

13

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 Past Due and Accruing 
March 31, 2019                            
Residential real estate $2,384  $1,490  $4,132  $8,006  $294,912  $302,918  $379 
Home equity  141   98   427   666   49,050   49,716   - 
Commercial real estate  6,057   93   912   7,062   257,951   265,013   303 
Construction and land development  125   -   -   125   66,795   66,920   - 
Multifamily  33   270   145   448   48,868   49,316   145 
Farmland  -   -   -   -   236   236   - 
Commercial business  956   538   353   1,847   101,660   103,507   322 
Consumer  96   18   -   114   7,664   7,778   - 
Government  -   -   -   -   19,591   19,591   - 
Total $9,792  $2,507  $5,969  $18,268  $846,727  $864,995  $1,149 
                             
December 31, 2018                            
Residential real estate $3,659  $909  $4,362  $8,930  $214,393  $223,323  $122 
Home equity  143   5   304   452   45,031   45,483   50 
Commercial real estate  842   18   611   1,471   251,633   253,104   - 
Construction and land development  491   533   -   1,024   63,409   64,433   - 
Multifamily  -   149   -   149   47,085   47,234   - 
Farmland  -   -   -   -   240   240   - 
Commercial business  733   260   436   1,429   102,010   103,439   149 
Consumer  1   72   -   73   5,970   6,043   - 
Government  -   -   -   -   21,101   21,101   - 
Total $5,869  $1,946  $5,713  $13,528  $750,872  $764,400  $321 

(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 Past Due
and Accruing
 
June 30, 2019                            
Residential real estate $4,342  $1,597  $4,612  $10,551  $290,937  $301,488  $294 
Home equity  245   6   426   677   49,478   50,155   - 
Commercial real estate  753   174   1,146   2,073   273,881   275,954   220 
Construction and land development  248   -   -   248   71,407   71,655   - 
Multifamily  -   -   438   438   50,711   51,149   173 
Farmland  -   -   -   -   234   234   - 
Commercial business  372   331   1,320   2,023   110,053   112,076   238 
Consumer  181   34   -   215   12,064   12,279   - 
Government  -   -   -   -   19,284   19,284   - 
Total $6,141  $2,142  $7,942  $16,225  $878,049  $894,274  $925 
                             
December 31, 2018                            
Residential real estate $3,659  $909  $4,362  $8,930  $214,393  $223,323  $122 
Home equity  143   5   304   452   45,031   45,483   50 
Commercial real estate  842   18   611   1,471   251,633   253,104   - 
Construction and land development  491   533   -   1,024   63,409   64,433   - 
Multifamily  -   149   -   149   47,085   47,234   - 
Farmland  -   -   -   -   240   240   - 
Commercial business  733   260   436   1,429   102,010   103,439   149 
Consumer  1   72   -   73   5,970   6,043   - 
Government  -   -   -   -   21,101   21,101   - 
Total $5,869  $1,946  $5,713  $13,528  $750,872  $764,400  $321 

 

The Bancorp's loans on nonaccrual status are summarized below:

 

(Dollars in thousands)

(Dollars in thousands)     
 March 31, 2019 December 31, 2018  June 30, 2019 December 31, 2018 
Residential real estate $5,546  $5,135  $5,720  $5,135 
Home equity  537   270   543   270 
Commercial real estate  691   695   926   695 
Construction and land development  -   -   -   - 
Multifamily  270   -   265   - 
Farmland  -   -   -   - 
Commercial business  168   495   1,521   495 
Consumer  -   -   -   - 
Government  -   -   -   - 
Total $7,212  $6,595  $8,975  $6,595 

 

For the acquisitions of First Federal Savings & Loan (“First Federal”), Liberty Savings Bank (“Liberty Savings”), First Personal Bank (“First Personal”), and A.J. Smith Federal Savings Bank (“AJ Smith”), as part of the fair value of loans receivable, a net fair value discount was established for loans as summarized below:

 

(dollars in thousands) First Federal  Liberty Savings  First Personal  AJ Smith 
  Net fair value
discount
  Accretable period
in months
  Net fair value
discount
  Accretable period
in months
  Net fair value
discount
  Accretable period
in months
  Net fair value
discount
  Accretable period
in months
 
Residential real estate $1,062   59  $1,203   44  $948   56  $3,734   52 
Home equity  44   29   5   29   51   50   141   32 
Commercial real estate  -   -   -   -   208   56   8   9 
Construction and land development  -   -   -   -   1   30   -   - 
Multifamily  -   -   -   -   11   48   2   48 
Consumer  -   -   -   -   146   50   1   5 
Commercial business  -   -   -   -   348   24   -   - 
Purchased credit impaired loans  -   -   -   -   424   32   -   - 
Total $1,106      $1,208      $2,137      $3,886     

 

Accretable yield, or income recorded for the threesix months ended March 31,June 30, is as follows:

(dollars in thousands) First Federal  Liberty Savings  First Personal  AJ Smith  Total 
2018 $36  $68  $-  $-  $104 
2019  22   42   357   451  $872 

 

(dollars in thousands) First Federal  Liberty Savings  First Personal  AJ Smith  Total 
2018 $36  $68  $-  $-  $104 
2019  22   42   203   155  $422 
Total $58  $110  $203  $155  $526 

14

16

 

  

Accretable yield, or income expected to be recorded in the future is as follows:

 

(dollars in thousands) First Federal Liberty Savings First Personal AJ Smith Total  First Personal AJ Smith Total 
2019 $-  $-  $389  $695  $1,084  $281  $455  $736 
2020  -   -   491   895   1,386   538   879   1,417 
2021  -   -   290   888   1,178   345   871   1,216 
2022  -   -   278   888   1,166   334   871   1,205 
2023  -   -   61   365   426   75   359   434 
Total $-  $-  $1,509  $3,731  $5,240  $1,573  $3,435  $5,008 

 

Note 6 - Foreclosed Real Estate

 

Foreclosed real estate at period-end is summarized below:

 

 (Dollars in thousands)  (Dollars in thousands) 
 March 31, 2019 December 31, 2018  June 30, 2019 December 31, 2018 
Residential real estate $1,148  $1,132  $1,155  $1,132 
Commercial real estate  126   126   126   126 
Construction and land development  -   149   -   149 
Commercial business  220   220   220   220 
Total $1,494  $1,627  $1,501  $1,627 

 

Note 7 – Intangibles and Acquisition Related Accounting

 

The Bancorp established a goodwill balance totaling $10.7$11.1 million with the acquisitions of AJSB, First Personal, First Federal, and Liberty Savings. Goodwill of $2.6$2.9 million, $5.4 million, $2.0 million, and $804 thousand were established with the acquisition of AJSB, First Personal, First Federal, and Liberty Savings, respectively. 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 identified or recorded. Goodwill totaled $10.7$11.1 million and $8.2 million as of March 31,June 30, 2019 and December 31, 2018, respectively.

 

In addition to goodwill, a core deposit intangible of $93 thousand for the acquisition of First Federal was established and is being amortized over an initial period of 7.9 years on a straight line basis. A core deposit intangible of $471 thousand for the acquisition of Liberty Savings was established and is being amortized over an initial period of 8.2 years on a straight line basis. A core deposit intangible of $3.0 million for the acquisition of First Personal was established and is being amortized over an initial period of 6.4 years on a straight line basis. A core deposit intangible of $2.9 million for the acquisition of AJSB was established and is being amortized over an initial period of 6.5 years on a straight line basis. The table below summarizes the annual amortization:

 

(dollars in thousands) First Federal Liberty Savings First Personal AJ Smith Total  First Federal Liberty Savings First Personal AJ Smith Total 
Current period $3  $14  $119  $75  $211  $6 $29 $238 $187  $460 
Remainder 2019  9   44   356   336   745  6 29 237 224 496 
2020  12   58   475   449   994  12 58 475 449 994 
2021  12   58   475   449   994  12 58 475 449 994 
2022  1   58   475   449   983  1 58 475 449 983 
2023  -   38   475   449   962  - 38 475 449 962 
2024  -   -   470   449   919  - - 470 449 919 
2025  -   -   -   261   261   -  -  -  261  261 
Total $37  $270  $2,845  $2,917  $6,069  $37 $270 $2,845 $2,917 $6,069 

 

For the First Personal acquisition, as part of the fair value of certificates of deposit, a fair value premium was established of $133 thousand that is being amortized over 8 months on a straight line basis. Approximately $48$53 thousand of amortization was taken as income during the threesix months ended March 31,June 30, 2019. It is estimated that an additional $5 thousandThe premium has been fully amortized as of amortization will occur duringJune 30, 2019. For the AJSB acquisition, as part of the fair value of certificates of deposit, a fair value premium was established of $174 thousand that is being amortized over 14 months on a straight line basis. Approximately $25$64 thousand of amortization was taken as income during the threesix months ended March 31,June 30, 2019. It is estimated that an additional $114$76 thousand of amortization will occur during 2019 and an additional $34 thousand of amortization will occur during 2020.

 

Note 8 - Concentrations of Credit Risk

 

The primary lending area of the Bancorp encompasses Lake County in northwest Indiana and Cook County in northeast Illinois, where collectively 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 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.

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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 March 31,June 30, 2019 and 2018 are as follows:

 

 Three Months Ended  Three Months Ended Six Months Ended 
 March 31,  June 30, June 30, 
(Dollars in thousands, except per share data) 2019 2018  2019 2018 2019 2018 
Basic earnings per common share:                 
Net income available to common stockholders $2,222  $2,561 
Net income as reported $4,023  $2,511  $6,245  $5,072 
Weighted average common shares outstanding  3,343,183   2,867,413   3,451,961   2,868,250   3,397,872   2,867,834 
Basic earnings per common share $0.66  $0.89  $1.17  $0.88  $1.84  $1.77 
Diluted earnings per common share:                  -     
Net income available to common stockholders $2,222  $2,561 
Net income as reported $4,023  $2,511  $6,245  $5,072 
Weighted average common shares outstanding  3,343,183   2,867,413   3,451,961   2,868,250   3,397,872   2,867,834 
Weighted average common and dilutive        
potential common shares outstanding  3,343,183   2,867,413 
Weighted average common and dilutive potential common shares outstanding  3,451,961   2,868,250   3,397,872   2,867,834 
Diluted earnings per common share $0.66  $0.89  $1.17  $0.88  $1.84  $1.77 

 

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.

 

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 threesix months ended March 31,June 30, 2019, stock based compensation expense of $71$154 thousand was recorded, compared to $52$104 thousand for the threesix months ended March 31,June 30, 2018. It is anticipated that current outstanding unvested awards will result in additional compensation expense of approximately $639$556 thousand through 2022 with an additional $213$139 thousand in 2019, $251$246 thousand in 2020, $155$152 thousand in 2021, and $20$19 thousand in 2022.

 

There were no incentive stock options granted during the first threesix months of 2019 or 2018. 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. At March 31,June 30, 2019, there were no outstanding incentive stock options.

 

There were 7,407 shares of restricted stock granted during the first threesix months of 2019 compared to 4,433 shares granted during the first threesix months of 2018. 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 vest between three and 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 Plan described above for the year ended December 31, 2018 and threesix months ended March 31,June 30, 2019 follows:

 

Non-vested Shares Shares  Weighted
Average
Grant Date
Fair Value
 
Non-vested at January 1, 2018  30,690  $28.51 
Granted  4,433   43.50 
Vested  (7,700)  22.64 
Forfeited  -   - 
Non-vested at December 31, 2018  27,423  $32.58 
         
Non-vested at January 1, 2019  27,423  $32.58 
Granted  7,407   43.00 
Vested  (3,302)  27.26 
Forfeited  -   - 
Non-vested at March 31, 2019  31,528  $35.58 

Non-vested Shares Shares  Weighted
Average
Grant Date
Fair Value
 
Non-vested at January 1, 2018  30,690  $28.51 
Granted  4,433   43.50 
Vested  (7,700)  22.64 
Forfeited  -   - 
Non-vested at December 31, 2018  27,423  $32.58 
         
Non-vested at January 1, 2019  27,423  $32.58 
Granted  7,407   43.00 
Vested  (4,310)  28.37 
Forfeited  -   - 
Non-vested at June 30, 2019  30,520  $35.70 
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Note 11 – Change in Accounting Principles

 

In May 2014, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 and ASU 2015-14,Revenue from Contracts with Customers (Topic 606), superseding the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of 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. The ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new guidance was effective for the Bancorp's year ending December 31, 2018 and has been adopted as of January 1, 2018. The use of the modified retrospective approach has been used for implementing this standard. Interest income is outside of the scope of the new standard and was not impacted by the adoption of the standard. Management mapped noninterest income accounts to their associated income streams and applied the five step model to identify the contract, identify the performance obligations in the contract, determine the total transaction price, allocate the transaction price to each performance obligation, and ensure revenue is recognized when the performance obligation is satisfied. A review of the Bancorp’s noninterest income has not resulted in a change in revenue recognition since adoption.

 

In January 2016, FASB issued ASU No. 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU covers various changes to the accounting, measurement, and disclosures related to certain financial instruments, including requiring equity investments to be accounted for at fair value with changes recorded through earnings, the use of the exit price when measuring fair value, and disaggregation of financial assets and liabilities by category for disclosure purposes. The new guidance was effective for the Bancorp's year ending December 31, 2018 and was adopted on January 1, 2018. The adoption of this ASU has not had a material impact on the consolidated financial statements, as the Bancorp does not hold any equity securities with unrealized gains or losses. The new reporting requirements have been incorporated into the fair value of financial instruments table and disclosures.

 

In February 2016, FASB issued ASU No. 2016-02,Leases, which superseded the lease requirements in ASC 840. The ASU requires lessees to recognize a right-of-use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases are classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations. Prior to this ASU, leases were classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease-related expenses in the statements of operations and cash flows under the new guidance is generally consistent with the prior guidance. The new guidance is effective for the Bancorp's year ending December 31, 2019 and was adopted on January 1, 2019. The adoption of this ASU has not had a material impact on the consolidated financial statements, as the Bancorp does not engage in the leasing of property or in leasing of any significant furniture, fixtures, equipment, or software.

 

Note 12 - Upcoming Accounting Standards

 

In June 2016, FASB issued ASU No. 2016-13,Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU includes increased disclosures and various changes to the accounting and measurement of financial assets including the Bancorp’s loans and available-for-sale and held-to-maturity debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. The new credit loss guidance will be effective for the Bancorp's year ending December 31, 2020. However, in July 2019, the FASB proposed changes to the effective date of this ASU for smaller reporting companies, such as the Bancorp, and other non-SEC reporting entities. The proposal would delay the effective date of this ASU to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Bancorp is a smaller reporting company, the proposed delay would be applicable to the Bancorp if it is approved by the FASB. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Early adoption for all institutions is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is in the process of evaluating the impact adoption of this update will have on the Bancorp’s consolidated financial statements. This process of evaluation has engaged multiple areas of the Bancorp’s management in discussing loss estimation methods and the application of these methods to specific segments of the loans receivable portfolio. Management has been actively monitoring developments and evaluating the use of different methods allowed. Due to continuing development of understanding of application, additional time is required to understand how this ASU will affect the Bancorp’s financial statements. Management plans on running parallel calculations during the year and finalizing a method or methods of adoption in time for the effective date.

17


 

In January 2017, the FASB issued ASU 2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This Standard simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU No. 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU No. 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. Finally, this ASU amends the Overview and Background sections of the Accounting Standards Codification as part of the FASB’s initiative to unify and improve such sections across Topics and Subtopics. The new guidance will be effective for the Company’s year ending December 31, 2020.

 

In March 2017, the FASB issued ASU 2017-08,Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This Standard amends the amortization period for certain purchased callable debt securities held at a premium. In particular, the amendments in this ASU require the premium to be amortized to the earliest call date. The amendments do not, however, require an accounting change for securities held at a discount; instead, the discount continues to be amortized to maturity. The amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. In fact, in most cases, market participants price securities to the call date that produces the worst yield when the coupon is above current market rates (i.e., the security is trading at a premium), and price securities to maturity when the coupon is below market rates (i.e., the security is trading at a discount), in anticipation that the borrower will act in its economic best interest. The new guidance will be effective for the Company’s year ending December 31, 2020. Management will recognize amortization expense as dictated by the amount of premiums and the differences between maturity and call dates at the time of adoption.

 

Note 13 - 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.

18

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 GAAP. 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 pooled trust preferred securities. The analysis is performed annually during December 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 GAAP. 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 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. Based on current market conditions and a review of the trustee reports, management performed an analysis of the pooled trust preferred securities and no additional impairment was taken at December 31, 2018. A specialist will be used to review all pooled trust preferred securities again at December 31, 2019.

 

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:

 

 Collateralized debt obligations  (Dollars in thousands) 
(Dollars in thousands) other-than-temporary impairment 
 Collateralized 
 debt obligations 
 other-than-temporary 
 impairment 
Ending balance, December 31, 2018 $235  $235 
Additions not previously recognized  -   - 
Ending balance, March 31, 2019 $235 
Ending balance, June, 2019 $235 

 

At March 31,June 30, 2019, trust preferred securities with a cost basis of $3.5 million continue to be in “payment in kind” status. These trust preferred securities classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For these trust preferred 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 GAAP, 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 on a consistent basis.

 

19

21

 

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

There were no transfers to or from Levels 1 and 2 during the threesix months ended March 31,June 30, 2019. Assets measured at fair value on a recurring basis are summarized below:

 

   Fair Value Measurements at March 31, 2019 Using    Fair Value Measurements at June 30, 2019 Using 
(Dollars in thousands) Estimated
Fair
Value
 Quoted Prices in 
Active Markets 
for Identical
Assets
(Level 1)
 Significant Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
  Estimated
Fair
Value
 Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 Significant Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
 
Available-for-sale debt securities:                                
Money market fund $4,254  $4,254  $-  $-  $5,598  $5,598  $-  $- 
U.S. treasury securities  594   -   594   -   599   -   599   - 
U.S. government sponsored entities  14,953   -   14,953   -   13,082   -   13,082   - 
Collateralized mortgage obligations and residential mortgage-backed securities  142,606   -   142,606   -   145,174   -   145,174   - 
Municipal securities  86,845   -   86,845   -   92,242   -   92,242   - 
Collateralized debt obligations  2,079   -   -   2,079   2,047   -   -   2,047 
Total securities available-for-sale $251,331  $4,254  $244,998  $2,079  $258,742  $5,598  $251,097  $2,047 
                
   Fair Value Measurements at December 31, 2018 Using 
(Dollars in thousands) Estimated
Fair
Value
 Quoted Prices in 
Active Markets 
for Identical
Assets
(Level 1)
 Significant Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
 
Available-for-sale debt securities:                
Money market fund $2,480  $2,480  $-  $- 
U.S. treasury securities  -   -   -   - 
U.S. government sponsored entities  7,894   -   7,894   - 
Collateralized mortgage obligations and residential mortgage-backed securities  135,281   -   135,281   - 
Municipal securities  94,064   -   94,064   - 
Collateralized debt obligations  2,049   -   -   2,049 
Total securities available-for-sale $241,768  $2,480  $237,239  $2,049 

     Fair Value Measurements at December 31, 2018 Using 
(Dollars in thousands) Estimated
Fair
Value
  Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
Available-for-sale debt securities:                
Money market fund $2,480  $2,480  $-  $- 
U.S. treasury securities  -   -   -   - 
U.S. government sponsored entities  7,894   -   7,894   - 
Collateralized mortgage obligations and residential mortgage-backed securities  135,281   -   135,281   - 
Municipal securities  94,064   -   94,064   - 
Collateralized debt obligations.  2,049   -   -   2,049 
Total securities available-for-sale $241,768  $2,480  $237,239  $2,049 

 

A roll forward of available-for-sale securities, which require significant adjustment based on unobservable data, are presented in the following table:

 

(Dollars in thousands) Estimated Fair Value
Measurements Using
Significant Unobservable
Inputs (Level 3)
  Estimated Fair Value
Measurements Using
Significant Unobservable
Inputs (Level 3)
 
 Available-for-
sale securities
  Available-for-
sale securities
 
Beginning balance, January 1, 2018 $3,439  $3,439 
Principal payments  (51)  (51)
Total unrealized gains, included in other comprehensive income  (36)  (36)
Transfers in and/or (out) of Level 3  (1,303)  (1,303)
Ending balance, December 31, 2018 $2,049  $2,049 
        
Beginning balance, January 1, 2019 $2,049  $2,049 
Principal payments  (12)  (26)
Total unrealized gains, included in other comprehensive income  42   24 
Sale out of Level 3  -   - 
Ending balance, March 31, 2019 $2,079 
Ending balance, June 30, 2019 $2,047 

 

Assets measured at fair value on a non-recurring basis are summarized below:

 

   (Dollars in thousands)    (Dollars in thousands) 
   Fair Value Measurements at March 31, 2019 Using    Fair Value Measurements at June 30, 2019 Using 
(Dollars in thousands) Estimated
Fair
Value
 Quoted Prices in 
Active Markets 
for Identical
Assets
(Level 1)
 Significant Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
  Estimated
Fair
Value
 Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 Significant Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
 
Impaired loans $6,606  $-  $-  $6,606  $8,059  $-  $-  $8,059 
Foreclosed real estate  1,494   -   -   1,494   1,501   -   -   1,501 
                
   (Dollars in thousands) 
   Fair Value Measurements at December 31, 2018 Using 
(Dollars in thousands) Estimated
Fair
Value
 Quoted Prices in 
Active Markets 
for Identical
Assets
(Level 1)
 Significant Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
 
Impaired loans $5,536  $-  $-  $5,536 
Foreclosed real estate  1,627   -   -   1,627 

 

     (Dollars in thousands) 
     Fair Value Measurements at December 31, 2018 Using 
(Dollars in thousands) Estimated
Fair
Value
  Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
Impaired loans $5,536  $-  $-  $5,536 
Foreclosed real estate  1,627   -   -   1,627 

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 in impaired loans was approximately $6.9$8.6 million and the related specific reserves totaled approximately $265$563 thousand, resulting in a fair value of impaired loans totaling approximately $6.6$8.1 million, at March 31,June 30, 2019. The recorded investment of impaired loans was approximately $5.8 million and the related specific reserves totaled approximately $246 thousand, resulting in a fair value of impaired loans totaling approximately $5.5 million, at December 31, 2018. 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.

 

20

The following table shows carrying values and related estimated fair values of financial instruments as of the dates indicated. Estimated fair values are further categorized by the inputs used to measure fair value. Items that are not financial instruments are not included.

 

  March 31, 2019  Estimated Fair Value Measurements at March 31, 2019 Using 
(Dollars in thousands) Carrying
Value
  Estimated
Fair Value
  Quoted Prices in
 Active Markets for
Identical Assets
(Level 1)
  Significant
Other Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
Financial assets:                    
Cash and cash equivalents $60,764  $60,764  $60,764  $-  $- 
Certificates of deposit in other financial institutions  2,215   2,181   -   2,181   - 
Securities available-for-sale  251,331   251,331   4,254   244,998   2,079 
Loans held-for-sale  2,966   3,023   3,023   -   - 
Loans receivable, net  856,759   853,675   -   -   853,675 
Federal Home Loan Bank stock  3,971   3,971   -   3,971   - 
Accrued interest receivable  4,062   4,062   -   4,062   - 
                     
Financial liabilities:                    
Non-interest bearing deposits  177,317   177,317   177,317   -   - 
Interest bearing deposits  924,336   922,383   617,684   304,699   - 
Repurchase agreements  12,691   12,689   10,927   1,762   - 
Borrowed funds  20,000   19,989   -   19,989   - 
Accrued interest payable  166   166   -   166   - 

  June 30, 2019  Estimated Fair Value Measurements at June 30, 2019 Using 
(Dollars in thousands) Carrying
Value
  Estimated
Fair Value
  Quoted Prices in
 Active Markets for
Identical Assets
(Level 1)
  Significant
Other Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
Financial assets:                    
Cash and cash equivalents $61,172  $61,172  $61,172  $-  $- 
Certificates of deposit in other financial institutions  1,970   1,940   -   1,940   - 
Securities available-for-sale  258,742   258,742   5,598   251,097   2,047 
Loans held-for-sale  3,835   3,920   3,920   -   - 
Loans receivable, net  885,530   891,109   -   -   891,109 
Federal Home Loan Bank stock  3,912   3,912   -   3,912   - 
Accrued interest receivable  4,131   4,131   -   4,131   - 
                     
Financial liabilities:                    
Non-interest bearing deposits  178,394   178,394   178,394   -   - 
Interest bearing deposits  948,727   947,957   631,162   316,795   - 
Repurchase agreements  20,628   20,628   18,863   1,765   - 
Borrowed funds  18,000   18,081   -   18,081   - 
Accrued interest payable  166   166   -   166   - 

 

 December 31, 2018 Estimated Fair Value Measurements at December 31, 2018 Using  December 31, 2018 Estimated Fair Value Measurements at December 31, 2018 Using 
(Dollars in thousands) Carrying
Value
 Estimated
Fair Value
 Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 Significant
Other Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
  Carrying
Value
 Estimated
Fair Value
 Quoted Prices in
 Active Markets for
Identical Assets
(Level 1)
 Significant
Other Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
 
Financial assets:                                        
Cash and cash equivalents $17,139  $17,139  $17,139  $-  $-  $17,139  $17,139  $17,139  $-  $- 
Certificates of deposit in other financial institutions  2,024   2,001   -   2,001   -   2,024   2,001   -   2,001   - 
Securities available-for-sale  241,768   241,768   2,480   237,239   2,049   241,768   241,768   2,480   237,239   2,049 
Loans held-for-sale  2,863   2,910   2,910   -   -   2,863   2,910   2,910   -   - 
Loans receivable, net  756,438   747,553   -   -   747,553   756,438   747,553   -   -   747,553 
Federal Home Loan Bank stock  3,460   3,460   -   3,460   -   3,460   3,460   -   3,460   - 
Accrued interest receivable  3,632   3,632   -   3,632   -   3,632   3,632   -   3,632   - 
                                        
Financial liabilities:                                        
Non-interest bearing deposits  127,277   127,277   127,277   -   -   127,277   127,277   127,277   -   - 
Interest bearing deposits  802,509   800,349   543,617   256,732   -   802,509   800,349   543,617   256,732   - 
Repurchase agreements  11,628   11,626   9,867   1,759   -   11,628   11,626   9,867   1,759   - 
Borrowed funds  43,000   42,888   -   42,888   -   43,000   42,888   -   42,888   - 
Accrued interest payable  186   186   -   186   -   186   186   -   186   - 

 

The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended March 31,June 30, 2019 and December 31, 2018:

 

Cash and cash equivalent carrying amounts approximate fair value. Certificates of deposits in other financial institutions carrying amounts approximate fair value (Level 2). 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 the exit price notion which is the exchange price that would be received to transfer the loans at the most advantageous market price in an orderly transaction between market participants on the measurement date (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 values of accrued interest receivable and payable approximate 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 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.

21

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Summary

 

NorthWest Indiana Bancorp (the “Bancorp”) is a financial holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank SB (“the Bank”), an Indiana savings bank, and NWIN Risk Management, Inc., a captive insurance company, are wholly-owned subsidiaries of the Bancorp. The Bancorp has no other business activity other than being a holding company for the Bank and NWIN Risk Management, Inc. The following management’s discussion and analysis presents information concerning our financial condition as of March 31,June 30, 2019, as compared to December 31, 2018, and the results of operations for the quarter and six months ending March 31,June 30, 2019, and March 31,June 30, 2018. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

At March 31,June 30, 2019, the Bancorp had total assets of $1.3 billion, total loans receivable of $865.0$894.3 million and total deposits of $1.1 billion. Stockholders' equity totaled $123.2$128.8 million or 9.72%9.84% of total assets, with a book value per share of $35.70.$42.52. Net income for the quarter ended March 31,June 30, 2019, was $2.2$4.0 million, or $0.66$1.17 earnings per common share for both basic and diluted calculations. For the quarter ended March 31,June 30, 2019, the return on average assets (ROA) was 0.72%1.27%, while the return on average stockholders’ equity (ROE) was 7.59%12.77%. Net income for the six months ended June 30, 2019, was $6.2 million, or $1.84 earnings per common share for both basic and diluted calculations. For the six months ended June 30, 2019, the ROA was 1.00%, while the ROE was 10.25%.

 

Recent Developments

 

Acquisition of AJSB.On January 24, 2019, the Bancorp completed its acquisition of AJSB, pursuant to an Agreement and Plan of Merger dated July 30, 2018 (the “AJSB Merger Agreement”) between the Bancorp and AJSB. Pursuant to the terms of the AJSB Merger Agreement, AJSB merged with and into the Bancorp, with the Bancorp as the surviving corporation (the “AJSB Merger”). Simultaneous with the AJSB Merger, A.J. Smith Federal Savings Bank, a federally chartered savings bank and wholly-owned subsidiary of AJSB, merged with and into the Bank, with the Bank as the surviving institution.

 

In connection with the AJSB Merger, each AJSB stockholder holding 100 or more shares of AJSB common stock received fixed consideration of (i) 0.2030 shares of the Bancorp common stock, and (ii) $7.20 per share in cash for each outstanding share of AJSB common stock. Stockholders holding less than 100 shares of AJSB common stock received $16.00 in cash and no stock consideration for each outstanding share of AJSB common stock. Any fractional shares of Bancorp common stock that an AJSB stockholder would have otherwise received in the AJSB Merger were cashed out in the amount of such fraction multiplied by $43.01.

 

The Bancorp issued 416,478 shares of Bancorp common stock to the former AJSB stockholders, and paid cash consideration of approximately $15.4$15.7 million. Based upon the closing price of NWIN’s common stock on January 23, 2019, the transaction had an implied valuation of approximately $32.9 million, which includes unallocated shares held by the AJSB Employee Stock Ownership Plan (“ESOP”), some of which were cancelled in connection with the closing to satisfy the ESOP’s outstanding loan balance. As of March 31,June 30, 2019, acquisition costs related to the AJSB Merger equaled approximately $2.1 million. The acquisition further expanded the Bank’s banking center network in Cook County, Illinois, expanding the Bank’s full-service retail banking network to 22 banking centers.

24

 

Acquisition of First Personal.On July 26, 2018, the Bancorp completed its previously announced acquisition of First Personal, pursuant to an Agreement and Plan of Merger dated February 20, 2018 (the “First Personal Merger Agreement”) between the Bancorp and First Personal. Pursuant to the terms of the First Personal Merger Agreement, First Personal merged with and into the Bancorp, with the Bancorp as the surviving corporation (the “First Personal Merger”). Simultaneous with the First Personal Merger, First Personal Bank, an Illinois state chartered commercial bank and wholly-owned subsidiary of First Personal, merged with and into Peoples Bank SB, with Peoples Bank as the surviving institution. The acquisition represented the Bank’s first expansion into the South Suburban Chicagoland market, and expanded the Bank’s full-service retail banking network to 19 banking centers.

22

 

In connection with the First Personal Merger, each First Personal stockholder holding 100 or more shares of First Personal common stock received fixed consideration of (i) 0.1246 shares of Bancorp common stock, and (ii) $6.67 per share in cash for each outstanding share of First Personal common stock. Stockholders holding less than 100 shares of First Personal common stock received $12.12 in cash and no stock consideration for each outstanding share of First Personal common stock. Any fractional shares of Bancorp common stock that a First Personal stockholder would have otherwise received in the First Personal Merger were cashed out in the amount of such fraction multiplied by $42.95.

 

The Bancorp issued a total of 161,875 shares of Bancorp common stock to the former First Personal stockholders, and paid cash consideration of approximately $8.7 million. Based upon the closing price of Bancorp’s common stock on July 25, 2018, the transaction had an implied valuation of approximately $15.6 million.

 

Financial Condition

 

During the threesix months ended March 31,June 30, 2019, total assets increased by $172.2$213.2 million (15.7%(19.4%), with interest-earning assets increasing by $137.9$180.8 million (13.5%(17.8%). At March 31,June 30, 2019, interest-earning assets totaled $1.2 billion compared to $1.0 billion at December 31, 2018. Earning assets represented 91.2%91.6% of total assets at March 31,June 30, 2019 and 92.9% of total assets at December 31, 2018. The increase in total assets and interest earning assets for the threesix months was primarily the result of the completion of the acquisition of AJSB as well as internally generated growth.

 

Net loans receivable totaled $856.8$885.5 million at March 31,June 30, 2019, compared to $756.4 million at December 31, 2018. 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:

 

  March 31,       
  2019  December 31, 
(Dollars in thousands) (unaudited)  2018 
  Balance  % Loans  Balance  % Loans 
             
Residential real estate $302,918   35.0%  223,323   29.2%
Home equity  49,716   5.7%  45,483   6.0%
Commercial real estate  265,013   30.6%  253,104   33.1%
Construction and land development  66,920   7.7%  64,433   8.4%
Multifamily  49,316   5.7%  47,234   6.2%
Farmland  236   0.0%  240   0.0%
Consumer  7,778   0.9%  6,043   0.8%
Commercial business  103,507   12.0%  103,439   13.5%
Government  19,591   2.4%  21,101   2.8%
Loans receivable $864,995   100.0% $764,400   100.0%
                 
Adjustable rate loans / loans receivable $454,844   52.6% $348,559   45.6%

  June 30,       
  2019  December 31, 
(Dollars in thousands) (unaudited)  2018 
  Balance  % Loans  Balance  % Loans 
             
Residential real estate $301,488   33.7%  223,323   29.2%
Home equity  50,155   5.6%  45,483   6.0%
Commercial real estate  275,954   30.9%  253,104   33.1%
Construction and land development  71,655   8.0%  64,433   8.4%
Multifamily.  51,149   5.7%  47,234   6.2%
Farmland  234   0.0%  240   0.0%
Consumer  12,279   1.4%  6,043   0.8%
Commercial business  112,076   12.5%  103,439   13.5%
Government  19,284   2.2%  21,101   2.8%
Loans receivable $894,274   100.0% $764,400   100.0%
                 
Adjustable rate loans / loans receivable $490,694   54.9% $348,559   45.6%

 

 March 31,    June 30,   
 2019 December 31,  2019 December 31, 
 (unaudited) 2018  (unaudited) 2018 
          
Loans receivable to total assets  68.2%  69.7%  68.3%  69.7%
Loans receivable to earning assets  74.8%  75.1%  74.6%  75.1%
Loans receivable to total deposits  78.5%  82.2%  79.3%  82.2%

 

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 threesix months ended March 31,June 30, 2019, the Bancorp originated $9.8$29.6 million in new fixed rate mortgage loans for sale, compared to $8.3$24.3 million during the threesix months ended March 31,June 30, 2018. Net gains realized from the mortgage loan sales totaled $242$642 thousand for the threesix months ended March 31,June 30, 2019, compared to $211$570 thousand for the threesix months ended March 31,June 30, 2018. At March 31,June 30, 2019, the Bancorp had $3.0$3.8 million in loans that were classified as held for sale, compared to $2.9 million at December 31, 2018.

23

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. At March 31,June 30, 2019, all non-performing loans are also accounted for on a non-accrual basis, except for four residential real estate loans totaling $379 thousand, two commercial business totaling $322 thousand, three commercial real estate loans totaling $303 thousand, and one multifamily loan totaling $145 thousand that remained accruing and more than 90 days past due.due include four residential real estate loans totaling $294 thousand, one commercial business totaling $238 thousand, three commercial real estate loans totaling $220 thousand, and two multifamily loans totaling $173 thousand. The Bancorp will at times leave notes accruing, despite being over 90 days past due, for short periods of time when management has reason to believe payments are in process of being paid.received.

 

The Bancorp's nonperforming loans are summarized below:
(Dollars in thousands)          
Loan Segment March 31, 2019 December 31,
2018
  (unaudited)
June 30, 2019
 December 31,
2018
 
Residential real estate $5,925  $5,257  $6,014 $5,257 
Home equity  537   320  543 320 
Commercial real estate  994   695  1,146 695 
Construction and land development  -   -  - - 
Multifamily  415   -  438 - 
Farmland  -   -  - - 
Commercial business  490   644  1,759 644 
Consumer  -   -  - - 
Government  -   -   -  - 
Total $8,361  $6,916  $9,900 $6,916 
Nonperforming loans to total loans  0.97%  0.90% 1.11% 0.90%
Nonperforming loans to total assets  0.66%  0.63% 0.76% 0.63%

 

Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. No loans were internally classified as doubtful or loss at March 31,June 30, 2019 or December 31, 2018.

 

The Bancorp's substandard loans are summarized below:     The Bancorp's substandard loans are summarized below:   
         
(Dollars in thousands)          
Loan Segment March 31, 2019 December 31,
2018
  (unaudited)
June 30, 2019
 December 31,
2018
 
Residential real estate $5,494  $5,366  $5,975  $5,366 
Home equity  558   373   564   373 
Commercial real estate  1,829   1,770   2,049   1,770 
Construction and land development  -   -   -   - 
Multifamily  683   -   701   - 
Farmland  -   -   -   - 
Commercial business  430   728   1,764   728 
Consumer  -   -   -   - 
Government  -   -   -   - 
Total $8,994  $8,237  $11,053  $8,237 

 

In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of special mention loans. Special mention loans represent loans management is closely monitoring due to one or more factors that may cause the loan to become classified as substandard.

The Bancorp's special mention loans are summarized below: 
    
(Dollars in thousands)      
Loan Segment March 31, 2019  December 31,
2018
 
Residential real estate $4,466  $3,908 
Home equity  866   657 
Commercial real estate  4,556   4,715 
Construction and land development  -   - 
Multifamily  178   149 
Farmland  -   - 
Commercial business  2,839   2,958 
Consumer  -   20 
Government  -   - 
Total $12,905  $12,407 

24

The Bancorp's special mention loans are summarized below:   
    
(Dollars in thousands)      
Loan Segment (unaudited)
June 30, 2019
  December 31,
2018
 
Residential real estate $3,900  $3,908 
Home equity  744   657 
Commercial real estate  4,253   4,715 
Construction and land development  -   - 
Multifamily  140   149 
Farmland  -   - 
Commercial business  2,423   2,958 
Consumer  -   20 
Government  -   - 
Total $11,460  $12,407 

 

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. 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.

 

The Bancorp's impaired loans, including purchased credit impaired loans, are summarized below:
(Dollars in thousands)          
Loan Segment March 31, 2019 December 31,
2018
  (unaudited)
June 30, 2019
 December 31,
2018
 
Residential real estate $1,925  $1,550  $2,441  $1,550 
Home equity  506   264   439   264 
Commercial real estate  2,156   2,105   2,136   2,105 
Construction and land development  -   -   -   - 
Multifamily  716   -   701   - 
Farmland  -   -   -   - 
Commercial business  1,568   1,863   2,905   1,863 
Consumer  -   -   -   - 
Government  -   -   -   - 
Total $6,871  $5,782  $8,622  $5,782 

 

At times, the Bancorp will modify the terms of a loan to forego a portion of interest or principal or reduce the interest rate on the loan to a rate materially less than market rates, or materially extend the maturity date of a loan as part of a troubled debt restructuring. 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.

The Bancorp's troubled debt restructured loans are summarized below:
(Dollars in thousands)          
Loan Segment March 31, 2019 December 31,
2018
  (unaudited)
June 30, 2019
 December 31,
2018
 
Residential real estate $589  $598  $348  $598 
Home equity  -   -   104   - 
Commercial real estate  1,050   1,074   1,037   1,074 
Construction and land development  -   -   -   - 
Multifamily  -   -   -   - 
Farmland  -   -   -   - 
Commercial business  384   359   360   359 
Consumer  -   -   -   - 
Government  -   -   -   - 
Total $2,023  $2,031  $1,849  $2,031 

 

The decrease in the troubled debt restructure loans reflected in the table above for the threesix months ending March 31,June 30, 2019 was the result of scheduled payments totaling $55$88 thousand and the removal of the TDR status for two residential and four home equity loans totaling $222 thousand due to positive payment performance, which was offset by the addition of one commercial business loan and three home equity loans totaling $47$128 thousand that waswere renewed with cash flow difficulties. This restructuringThese restructurings along with two commercial business loans to one customer and the AJSB purchased credit impaired loans all contributed to the increase in impaired loans.

 

The increase in the nonperforming, substandard, special mention, and impaired loans reflected in the tables above for the threesix months ending March 31,June 30, 2019, are the result of the completion of the AJSB acquisition as well as two commercial business loans to one commercial real estate loancustomer which waswere not related to the acquisition. The reduction in the watch loans for the six months ending June 30, 2019, are the result of the movement of various loans out of watch, which was offset by the AJSB acquisition. AJSB loans totaling $1.1$1.0 million and two commercial business loans to one customer totaling $1.2 million contributed to the March 31,June 30, 2019 increase in nonperforming loans. AJSB loans totaling $1.6$1.5 million and two commercial business loans to one customer totaling $1.2 million contributed to the March 31,June 30, 2019 increase in substandard loans which was offset by payments and theloans. The movement of various loans out of substandard. One commercial real estate loanwatch totaling $283 thousand and AJSB loans totaling $1.1$3.0 million contributed to the March 31,June 30, 2019 increasedecrease in watch loans, which was offset by payments and the movement of variousAJSB loans out of watch.totaling $1.0 million. AJSB purchased credit impaired loans totaling $1.8$1.6 million and two commercial business loans to one customer totaling $1.2 million contributed to the March 31,June 30, 2019 increase in impaired loans.

 

25

At March 31,June 30, 2019, 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 affect future operations, liquidity or capital resources.

 

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.


The Bancorp's provision for loan losses for the six months ended are summarized below:
 
(Dollars in thousands)      
       
Loan Segment (unaudited)
June 30, 2019
  (unaudited)
June 30, 2018
 
Residential real estate $(7) $61 
Home equity  (2)  41 
Commercial real estate  194   162 
Construction and land development  50   (7)
Multifamily  (19)  (15)
Farmland  -   4 
Commercial business  139   378 
Consumer  490   18 
Government  (17)  (4)
Total $828  $638 

 

The Bancorp's provision for loan losses for the three months ended are summarized below:
       
(Dollars in thousands)      
       
Loan Segment March 31, 2019  March 31, 2018 
Residential real estate $(1) $(7)
Home equity  (8)  12 
Commercial real estate  150   (10)
Construction and land development  21   43 
Multifamily  (38)  (7)
Farmland  -   4 
Commercial business  23   295 
Consumer  187   8 
Government  (17)  3 
Total $317  $341 

The Bancorp's charge-off and recovery information is summarized below:The Bancorp's charge-off and recovery information is summarized below:   The Bancorp's charge-off and recovery information is summarized below:   
       
(Dollars in thousands)    (unaudited) 
 As of March 31, 2019  As of June 30, 2019 
Loan Segment Charge-off Recoveries Net Charge-offs  Charge-off Recoveries Net Charge-offs 
Residential real estate $(48) $14  $(34) $(66) $18  $(48)
Home equity  -   -   -   -   2   2 
Commercial real estate  -   -   -   -   -   - 
Construction and land development  -   -   -   -   -   - 
Multifamily  -   -   -   -   -   - 
Farmland  -   -   -   -   -   - 
Commercial business  -   6   6   -   16   16 
Consumer  (18)  3   (15)  (25)  9   (16)
Government  -   -   -   -   -   - 
Total $(66) $23  $(43) $(91) $45  $(46)

 

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 considered risks associated with the local economy, changes in loan balances and mix, and asset quality.

 

In addition, management considers additional reserves that are not part of the ALL that have been established from acquisition activity. 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 March 31,June 30, 2019, total purchased credit impaired loans reserves totaled $3.0$2.3 million compared to $3.1 million at DecmberDecember 31, 2018. Additionally, the Bancorp has acquired loans where there was not evidence of credit quality deterioration since origination and has marked these loans to their fair values. As part of the fair value of loans receivable, a net fair value discount was established for loans acquired of $5.2$4.8 million at March 31,June 30, 2019, compared to $1.8 million at December 31, 2018. Details on these fair value marks and the additional reserves created can be found in Note 5, Loans Receivable.

26

The Bancorp's allowance to total loans and non-performing loans aresummarized below:
The Bancorp's allowance to total loans and non-performing loans are summarized below:The Bancorp's allowance to total loans and non-performing loans are summarized below:
     
(Dollars in thousands)          
 March 31, 2019 December 31,
2018
  (unaudited)
June 30, 2019
 December 31,
2018
 
          
Allowance for loan losses $8,236  $7,962  $8,744  $7,962 
Total loans $864,995  $764,400  $894,274  $764,400 
Non-performing loans $8,361  $6,916  $9,900  $6,916 
ALL-to-total loans  0.95%  1.04%  0.98%  1.04%
ALL-to-non-performing loans (coverage ratio)  98.5%  115.1%  88.3%  115.1%

 

The March 31,June 30, 2019 balance in the ALL account is considered adequate by management after evaluation of the loan portfolio, past experience, current economic and market conditions, and additional reserves from acquisition accounting.accounting as described in the immediately preceding paragraph. 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 March 31,June 30, 2019, foreclosed real estate totaled $1.5 million, which was comprised of twenty-four properties, compared to $1.6 million and twenty-four properties at December 31, 2018. Net gains from the sale of foreclosed real estate totaled $27$40 thousand for the threesix months ended March 31,June 30, 2019. At the end of MarchJune 2019, all of the Bancorp’s foreclosed real estate is located within its primary market area, which has been expanded into the Cook County, Illinois and Chicagoland metropolitan area with the acquisition of First Personal and AJSB.

 

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 $251.3$258.7 million at March 31,June 30, 2019, compared to $241.8 million at December 31, 2018, an increase of $9.5$17.0 million (4.0%(7.0%). The increase in the securities portfolio during the year is a result of market value adjustments and the AJSB acquisition. At March 31,June 30, 2019, the securities portfolio represented 21.7%21.6% of interest-earning assets and 19.8% of total assets compared to 23.7% of interest-earning assets and 22.1% of total assets at December 31, 2018.

 

The Bancorp’s end-of-period investment portfolio and other short-term investments and stock balances were as follows:

 

 March 31,      June 30,     
 2019 December 31,  2019 December 31, 
(Dollars in thousands) (unaudited) 2018  (unaudited) 2018 
 Balance % Securities Balance % Securities  Balance % Securities Balance % Securities 
                  
Money market fund $4,254   1.7% $2,480   1.0% $5,598   2.2% $2,480   1.0%
U.S. treasury securities  594   0.2%  -   0.0%  599   0.2%  -   0.0%
U.S. government sponsored entities  14,953   5.9%  7,894   3.3%  13,082   5.1%  7,894   3.3%
Collateralized mortgage obligations and residential mortgage-backed securities  142,606   56.7%  135,281   56.0%  145,174   56.1%  135,281   56.0%
Municipal securities  86,845   34.6%  94,064   38.9%  92,242   35.7%  94,064   38.9%
Collateralized debt obligations  2,079   0.9%  2,049   0.8%  2,047   0.7%  2,049   0.8%
Total securities available-for-sale $251,331   100.0% $241,768   100.0% $258,742   100.0% $241,768   100.0%

 

 March 31,        June 30,       
 2019 December 31, YTD  2019 December 31, YTD 
(Dollars in thousands) (unaudited) 2018 Change  (unaudited) 2018 Change 
 Balance Balance $ %  Balance Balance $ % 
                  
Interest bearing deposits in other financial institutions $15,255  $3,116  $12,139   389.6% $27,739  $3,116  $24,623   790.2%
Fed funds sold  15,518   763   14,755   1933.8%  8,720   763   7,957   1042.9%
Certificates of deposit in other financial institutions  2,215   2,024   191   9.4%  1,970   2,024   (54)  -2.7%
Federal Home Loan Bank stock  3,971   3,460   511   14.8%  3,912   3,460   452   13.1%

 

The net increase in interest bearing deposits in other financial institutions and fed funds sold is primarily the result of the AJSB acquisition and timing of liquidity needs. The increase in Federal Home Loan Bank stock corresponds to stock ownership requirements based the AJSB acquisition.

27

 

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:

 

  March 31,          
  2019  December 31,  YTD    
(Dollars in thousands) (unaudited)  2018  Change    
  Balance  Balance  $  % 
             
Checking $387,682  $341,677  $46,005   13.5%
Savings  218,760   160,490   58,270   36.3%
Money market  188,559   168,727   19,832   11.8%
Certificates of deposit  306,652   258,892   47,760   18.4%
Total deposits $1,101,653  $929,786  $171,867   18.5%

  June 30,          
  2019  December 31,  YTD 
(Dollars in thousands) (unaudited)  2018  Change 
  Balance  Balance  $  % 
             
Checking $409,458  $341,677  $67,781   19.8%
Savings  214,107   160,490   53,617   33.4%
Money market  185,991   168,727   17,264   10.2%
Certificates of deposit  317,565   258,892   58,673   22.7%
Total deposits $1,127,121  $929,786  $197,335   21.2%

 

The overall increase in total deposits is primarily a result of the acquisition of AJSB, along with internally generated growth. This increase also reflects the cyclical nature and timing of municipality deposits.


The Bancorp’s borrowed funds are primarily used to fund asset growth not supported by deposit generation. The Bancorp’s end-of-period borrowing balances were as follows:

 

  March 31,          
  2019  December 31,  YTD 
(Dollars in thousands) (unaudited)  2018  Change 
  Balance  Balance  $  % 
             
Repurchase agreements $12,691  $11,628  $1,063   9.1%
Borrowed funds  20,000   43,000   (23,000)  -53.5%
Total borrowed funds $32,691  $54,628  $(21,937)  -40.2%

  June 30,          
  2019  December 31,  YTD 
(Dollars in thousands) (unaudited)  2018  Change 
  Balance  Balance  $  % 
             
Repurchase agreements $20,628  $11,628  $9,000   77.4%
Borrowed funds  18,000   43,000   (25,000)  -58.1%
Total borrowed funds $38,628  $54,628  $(16,000)  -29.3%

 

Repurchase agreements increased as part of normal account fluctuations within that product line. Borrowed funds decreased as FHLB advances were paid down and matured during the quarter.

 

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 threesix months ended March 31,June 30, 2019, cash and cash equivalents increased by $43.7$44.0 million compared to a $9.4$8.8 million increase for the threesix months ended March 31,June 30, 2018. The primary sources of cash and cash equivalents were the acquisition of AJSB, growth of deposits, and proceeds from sales of loans originated for sale.securities. The primary uses of cash and cash equivalents were loan originations, the purchase of securities, loan originations, and the repayment of FHLB advances. Cash provided by operating activities totaled $1.4$5.6 million for the threesix months ended March 31,June 30, 2019, compared to cash provided of $3.0$5.7 million for the threesix month period ended March 31,June 30, 2018. Cash provided from operating activities was primarily a result of net income, and sale of loans originated for sale, offset by the saleorigination of loans originated for sale and change in accrued expenses and other liabilities.sale. Cash provided from investing activities totaled $37.4$3.2 million for the current period, compared to cash outflows of $6.7$26.0 million for the threesix months ended March 31,June 30, 2018. Cash provided from investing activities for the current threesix months were primarily related to the cash and cash equivalents from acquisition activity, offset against purchases of securities available-for-sale and origination of loans receivable.and cash paid for acquisition. Net cash provided from financing activities totaled $4.8$35.2 million during the current period compared to net cash provided of $13.1$29.0 million for the threesix months ended March 31,June 30, 2018. The net cash inflows from financing activities were primarily a result of net change in deposits offset against repayment of FHLB advances. On a cash basis, the Bancorp paid dividends on common stock of $909 thousand$1.9 million for the threesix months ended March 31,June 30, 2019 and $831 thousand$1.7 million for the threesix months ended March 31,June 30, 2018.

 

28

At March 31,June 30, 2019, outstanding commitments to fund loans totaled $191.4$199.0 million. Approximately 54.1%54.5% 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 $10.1$10.9 million at March 31,June 30, 2019. 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 threesix months ended March 31,June 30, 2019, stockholders' equity increased by $21.8$27.3 million (21.5%(27.0%). During the threesix months ended March 31,June 30, 2019, stockholders’ equity was primarily increased by net income of $2.2$6.2 million, increased unrealized gains on available securities of $3.0$5.6 million, and the issuance of 416,478 shares for $17.5 million as part of the acquisition of AJSB. Decreasing stockholders’ equity was the declaration of $1.0$2.1 million in cash dividends. 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 under the program during the first threesix months of 2019 or 2018. During 2019, 3,3024,310 restricted stock shares vested under the Incentive Plan outlined in Note 10 of the financial statements, of which 8431,058 of these shares were withheld in the form of a net surrender to cover the withholding tax obligations of the vesting employees. The repurchase of these surrendered shares is considered outside of the scope of the formal stock repurchase program.


The Bancorp is subject to risk-based capital guidelines adopted by the Board of Governors of the Federal Reserve System (the “FRB”), and the Bank is subject to risk-based capital guidelines adopted by the FDIC. As applied to the Bancorp and the Bank, the FRB and FDIC capital requirements are substantially the same. These regulations divide capital into 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 capital regulations provide for a minimum leverage ratio (Tier 1 capital to adjusted average assets) of 4%.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the FRB to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries. However, under the FRB’s “Small Bank Holding Company” exemption from consolidated bank holding company capital requirements, bank holding companies and savings and loan holding companies with less than $3 billion in consolidated assets, such as the Bancorp, are exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases.

 

During the threesix months ended March 31,June 30, 2019, the Bancorp’s and Bank’s regulatory capital ratios continued to be negatively impacted by regulatory requirements regarding collateralized debt obligations. The regulatory requirements state that for collateralized debt obligations that have been downgraded below investment grade by the rating agencies, increased risk based asset weightings are required. The Bancorp currently holds pooled trust preferred securities with a cost basis of $3.5 million. These investments currently have ratings that are below investment grade. As a result, approximately $17.5$16.5 million of risk-based assets are generated by the trust preferred securities in the Bancorp’s and Bank’s total risk based capital calculation.

 

29

The following table shows that, at March 31,June 30, 2019, and December 31, 2018, the Bancorp’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.

 

(Dollars in millions)         Minimum Required To Be          Minimum Required To Be 
     Minimum Required For Well Capitalized Under Prompt      Minimum Required For Well Capitalized Under Prompt 
 Actual Capital Adequacy Purposes Corrective Action Regulations  Actual Capital Adequacy Purposes Corrective Action Regulations 
At March 31, 2019 Amount Ratio Amount Ratio Amount Ratio 
At June 30, 2019 Amount Ratio Amount Ratio Amount Ratio 
Common equity tier 1 capital to risk-weighted assets $103.2   11.6% $39.9   4.5%  N/A   N/A  $106.2   11.5% $41.4   4.5%  N/A   N/A 
Tier 1 capital to risk-weighted assets $103.2   11.6% $53.2   6.0%  N/A   N/A  $106.2   11.5% $55.2   6.0%  N/A   N/A 
Total capital to risk-weighted assets $111.4   12.6% $71.0   8.0%  N/A   N/A  $115.0   12.5% $73.7   8.0%  N/A   N/A 
Tier 1 capital to adjusted average assets $103.2   8.5% $48.4   4.0%  N/A   N/A  $106.2   8.5% $50.0   4.0%  N/A   N/A 

 

(Dollars in millions)             Minimum Required To Be 
        Minimum Required For  Well Capitalized Under Prompt 
  Actual  Capital Adequacy Purposes  Corrective Action Regulations 
At December 31, 2018 Amount  Ratio  Amount  Ratio  Amount  Ratio 
Common equity tier 1 capital to risk-weighted assets $92.8   11.6% $26.1   4.5%  N/A   N/A 
Tier 1 capital to risk-weighted assets $92.8   11.6% $42.2   6.0%  N/A   N/A 
Total capital to risk-weighted assets $100.8   12.6% $64.2   8.0%  N/A   N/A 
Tier 1 capital to adjusted average assets $92.8   8.6% $43.2   4.0%  N/A   N/A 

 

In addition, the following table shows that, at March 31,June 30, 2019, and December 31, 2018, the Bank’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.

(Dollars in millions)         Minimum Required To Be          Minimum Required To Be 
     Minimum Required For Well Capitalized Under Prompt      Minimum Required For Well Capitalized Under Prompt 
 Actual Capital Adequacy Purposes Corrective Action Regulations  Actual Capital Adequacy Purposes Corrective Action Regulations 
At March 31, 2019 Amount Ratio Amount Ratio Amount Ratio 
At June 30, 2019 Amount Ratio Amount Ratio Amount Ratio 
Common equity tier 1 capital to risk-weighted assets $100.3   11.3% $39.9   4.5% $57.7   6.5% $103.2   11.2% $41.5   4.5% $59.9   6.5%
Tier 1 capital to risk-weighted assets $100.3   11.3% $53.3   6.0% $71.0   8.0% $103.2   11.2% $55.3   6.0% $73.7   8.0%
Total capital to risk-weighted assets $108.5   12.2% $71.0   8.0% $88.8   10.0% $111.9   12.2% $73.7   8.0% $92.1   10.0%
Tier 1 capital to adjusted average assets $100.3   8.3% $48.3   4.0% $60.4   5.0% $103.2   8.3% $49.7   4.0% $62.1   5.0%

 

(Dollars in millions)             Minimum Required To Be 
        Minimum Required For  Well Capitalized Under Prompt 
  Actual  Capital Adequacy Purposes  Corrective Action Regulations 
At December 31, 2018 Amount  Ratio  Amount  Ratio  Amount  Ratio 
Common equity tier 1 capital to risk-weighted assets $89.9   11.2% $36.2   4.5% $52.2   6.5%
Tier 1 capital to risk-weighted assets $89.9   11.2% $48.2   6.0% $64.3   8.0%
Total capital to risk-weighted assets $97.9   12.2% $64.3   8.0% $80.3   10.0%
Tier 1 capital to adjusted average assets $89.9   8.4% $42.9   4.0% $53.6   5.0%

 

The Bancorp’s ability to pay dividends to its shareholders is primarily dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. The aggregate amount of dividends that may be declared by the Bank in 2019, without the need for qualifying for an exemption or prior DFI approval, is $1.5 million plus 2019 net profits. Moreover, the FDIC and the FRB may prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. On February 22,May 31, 2019, the Board of Directors of the Bancorp declared a firstsecond quarter dividend of $0.30$0.31 per share. The Bancorp’s firstsecond quarter dividend was paid to shareholders on AprilJuly 5, 2019.

 

Results of Operations - Comparison of the Quarter Ended March 31,June 30, 2019 to the Quarter Ended March 31,June 30, 2018

 

For the quarter ended March 31,June 30, 2019, the Bancorp reported net income of $2.2$4.0 million, compared to net income of $2.6$2.5 million for the quarter ended March 31,June 30, 2018, a decreasean increase of $337 thousand (13.2%$1.5 million (60.2%). For the quarter, the ROA was 0.72%1.27%, compared to 1.10%1.07% for the quarter ended March 31,June 30, 2018. The ROE was 7.59%12.77% for the quarter ended March 31,June 30, 2019, compared to 11.20%11.04% for the quarter ended March 31,June 30, 2018.

30

 

Net interest income for the quarter ended March 31,June 30, 2019 was $10.6$11.2 million, an increase of $2.8$3.3 million (35.3%(42.2%), compared to $7.8$7.9 million for the quarter ended March 31,June 30, 2018. The weighted-average yield on interest-earning assets was 4.40%4.65% for the quarter ended March 31,June 30, 2019, compared to 3.99%4.05% for the quarter ended March 31,June 30, 2018. The weighted-average cost of funds for the quarter ended March 31,June 30, 2019 was 0.70%0.78% compared to 0.43%0.53% for the quarter ended March 31,June 30, 2018. The impact of the 4.40%4.65% return on interest earning assets and the 0.70%0.78% cost of funds resulted in an interest rate spread of 3.70%3.87% for the current quarter, an increase from the 3.56%3.52% spread for the quarter ended March 31,June 30, 2018. The net interest margin on earning assets was 3.74%3.89% for the quarter ended March 31,June 30, 2019 and 3.58%3.56% for the quarter ended March 31,June 30, 2018. On a tax equivalent basis, the Bancorp’s net interest margin was 3.81%3.96% for the quarter ended March 31,June 30, 2019, compared to 3.80%3.78% for the quarter ended March 31,June 30, 2018. Comparing the net interest margin on a tax equivalent basis more accurately compares the returns on tax-exempt loans and securities to those on taxable interest-earning assets.

 

Information relating to the average consolidated balance sheet and the yield on average earning assets and cost of average liabilities for the periods indicated are in the following table. Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities drives the disclosed rates. Average balances are derived from daily balances.

Quarter-to-Date                          
(Dollars in thousands) Average Balances, Interest, and Rates  Average Balances, Interest, and Rates 
(unaudited) March 31, 2019 March 31, 2018  June 30, 2019 June 30, 2018 
 Average
Balance
 Interest Rate (%) Average
Balance
 Interest Rate (%)  Average
Balance
 Interest Rate (%) Average
Balance
 Interest Rate (%) 
ASSETS                          
Interest bearing deposits in other financial institutions $39,838  $85   0.85  $2,396  $10   1.67  $13,985  $92   2.63  $6,865  $32   1.86 
Federal funds sold  5,478   41   2.99   467   1   0.86   3,818   36   3.77   1,585   4   1.01 
Certificates of deposit in other financial institutions  2,201   17   3.09   1,636   6   1.47   2,118   15   2.83   1,526   7   1.83 
Securities available-for-sale  246,525   1,758   2.85   241,081   1,671   2.77   253,421   1,732   2.73   238,669   1,665   2.79 
Loans receivable  836,958   10,543   5.04   626,894   6,994   4.46   874,652   11,485   5.25   636,333   7,257   4.56 
Federal Home Loan Bank stock  3,840   43   4.48   3,000   51   6.80   3,931   45   4.58   3,010   31   4.12 
Total interest earning assets  1,134,840  $12,487   4.40   875,474  $8,733   3.99   1,151,925  $13,405   4.65   887,988  $8,996   4.05 
Cash and non-interest bearing deposits in other financial institutions  17,612           13,360           29,756           9,839         
Allowance for loan losses  (8,065)          (7,468)          (8,357)          (7,234)        
Other noninterest bearing assets  86,365           53,643           91,808           53,755         
Total assets $1,230,752          $935,009          $1,265,132          $944,348         
                                                
LIABILITIES AND STOCKHOLDERS' EQUITY                                                
Total deposits $1,038,380  $1,672   0.64  $782,382  $675   0.35  $1,097,283  $2,011   0.73  $786,207  $838   0.43 
Repurchase agreements  10,540   49   1.86   11,162   32   1.15   13,638   66   1.94   13,330   45   1.35 
Borrowed funds  27,579   166   2.41   40,764   191   1.87   15,341   128   3.34   44,510   237   2.13 
Total interest bearing liabilities  1,076,499  $1,887   0.70   834,308  $898   0.43   1,126,262  $2,205   0.78   844,047  $1,120   0.53 
Other noninterest bearing liabilities  37,088           9,288           12,864           9,335         
Total liabilities  1,113,587           843,596           1,139,126           853,382         
Total stockholders' equity  117,165           91,413           126,006           90,966         
Total liabilities and stockholders' equity $1,230,752          $935,009          $1,265,132          $944,348         

 

The increase in interest income for interest bearing deposits in other financial institutions was the result of higher average balances for the quarter ended March 31,June 30, 2019, compared to the quarter ended March 31,June 30, 2018. The increase in interest income for federal funds sold was primarily the result of higher average balances and rates received in short term rates for the quarter ended March 31,June 30, 2019, compared to the quarter ended March 31,June 30, 2018. The increase in interest income for certificates of deposit in other financial institutions was the result of higher average balances and higher average rates received in short term rates for the quarter ended March 31,June 30, 2019, compared to the quarter ended March 31,June 30, 2018. The increase in interest income for securities available-for-sale was primarily the result of higher average balances and average rates received in rates for the quarter ended March 31,June 30, 2019, compared to the quarter ended March 31,June 30 2018. The increase in interest income for loans receivable was the result of higher average balances, and higher weighted average rates, forand the recognition of one-time gains from excess reserves associated with purchase credit impaired loans from the former acquisitions of First Federal Savings & Loan and Liberty Savings Bank during the quarter ended March 31,June 30, 2019, compared to the quarter ended March 31,June 30, 2018. The increase in the interest expense of total deposits and borrowed funds was the result of higher average balances and higher weighted average rates for the quarter ended March 31,June 30, 2019, compared to the quarter ended March 31,June 30, 2018. The increase in the interest expense for repurchase agreements was the result of higher weighted average rates for the quarter ended March 31,June 30, 2019, compared to the quarter ended March 31,June 30, 2018. The decrease in the interest expense for borrowed funds was the result of lower average balances for the quarter ended June 30, 2019, compared to the quarter ended June 30, 2018.

31

 

The following table shows the change in noninterest income for the quarter ending March 31,June 30, 2019, and March 31,June 30, 2018.

 

 Three Months Ended      Three Months Ended     
(Dollars in thousands) March 31, Three Months Ended  June 30, Three Months Ended 
 2019 2018 $ Change % Change  2019 2018 $ Change % Change 
Noninterest income:                                
Fees and service charges $1,162  $892  $270   30.3% $1,243  $947  $296  31.3%
Wealth management operations  500   415   85   20.5%  479   424   55  13.0%
Gain on sale of securities, net  352   758   (406)  -53.6%  301   246   55  22.4%
Gain on sale of loans held-for-sale, net  242   211   31   14.7%  400   359   41  11.4%
Increase in cash value of bank owned life insurance  163   108   55   50.9%  179   120   59  49.2%
Gain on sale of foreclosed real estate, net  27   32   (5)  -15.6%  13   68   (55)  -80.9%
Other  124   33   91   275.8%  54   39   15  38.5%
Total noninterest income $2,570  $2,449  $121   4.9% $2,669  $2,203  $466   21.2%

The increase in fees and service charges is the result of the Bancorp’s continued focus on maintaining competitive fees within its market place, as well the acquisition of First Personal and AJSB. The increase in wealth management income is related to book value changes in assets under management and the timing of one time fees. The increase in gains on sale of loans is a result of overall increase in loan origination volume. Current market conditions provided opportunities to maintain securities cash flows, while recognizing gains from the sales of securities.

The following table shows the change in noninterest expense for the quarter ending June 30, 2019, and June 30, 2018.

  Three Months Ended       
(Dollars in thousands) June 30,  Three Months Ended 
  2019  2018  $ Change  % Change 
Noninterest expense:                
Compensation and benefits $4,600  $3,516  $1,084   30.8%
Occupancy and equipment  1,169   842   327   38.8%
Data processing  351   703   (352)  -50.1%
Marketing  176   166   10   6.0%
Federal deposit insurance premiums  177   75   102   136.0%
Other  1,951   1,604   347   21.6%
Total noninterest expense $8,424  $6,906  $1,518   22.0%

The increase in compensation and benefits is primarily the result of increased compensation due to the acquisition of AJSB and First Personal. Additionally, increases to compensation and benefits can be attributed to management’s continued focus on talent management and retention. The increase in occupancy and equipment is primarily related to the First Personal and AJSB acquisitions and related assets brought over. The decrease in data processing expense is primarily related to timing of the First Personal and AJSB acquisitions. The increase in other operating expenses is related to generally higher third party costs. The Bancorp’s efficiency ratio was 60.7% for the quarter ended June 30, 2019, compared to 68.5% for the quarter ended June 30, 2018. The decreased ratio is related primarily to the increase in interest income. The efficiency ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period. The acquisition of AJSB and First Personal acquisitions are discussed in Note 3 of the financial statements.

Income tax expenses for the quarter ended June 30, 2019, totaled $911 thousand, compared to income tax expense of $365 thousand for the quarter ended June 30, 2018, an increase of $546 thousand (149.6%). The combined effective federal and state tax rates for the Bancorp was 18.5% for the quarter ended June 30, 2019, compared to 12.7% for the quarter ended June 30, 2018. The Bancorp’s higher current period effective tax rate is a result of a larger increase to earnings relative to increased tax preferred income.

Results of Operations - Comparison of the Six Months Ended June 30, 2019 to the Six Months Ended June 30, 2018

For the six months ended June 30, 2019, the Bancorp reported net income of $6.2 million, compared to net income of $5.1 million for the six months ended June 30, 2018, an increase of $1.2 million (23.1%). For the six months ended, the ROA was 1.00%, compared to 1.08% for the six months ended June 30, 2018. The ROE was 10.25% for the six months ended June 30, 2019, compared to 11.12% for the six months ended June 30, 2018.

Net interest income for the six months ended June 30, 2019, was $21.8 million, an increase of $6.1 million (38.7%), compared to $15.7 million for the six months ended June 30, 2018. The weighted-average yield on interest-earning assets was 4.53% for the six months ended June 30, 2019, compared to 4.02% for the six months ended June 30, 2018. The weighted-average cost of funds for the six months ended June 30, 2019, was 0.74% compared to 0.48% for the six months ended June 30, 2018. The impact of the 4.53% return on interest earning assets and the 0.74% cost of funds resulted in an interest rate spread of 3.79% for the current six months, which is an increase from the spread of 3.54% as of June 30, 2018. The net interest margin on earning assets was 3.81% for the six months ended June 30, 2019, and 3.56% for the six months ended June 30, 2018. On a tax equivalent basis, the Bancorp’s net interest margin was 3.88% for the six months ended June 30, 2019, compared to 3.75% for the six months ended June 30, 2018. Comparing the net interest margin on a tax equivalent basis more accurately compares the returns on tax-exempt loans and securities to those on taxable interest-earning assets.

Information relating to the average consolidated balance sheet and the yield on average earning assets and cost of average liabilities for the periods indicated are in the following table. Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities drives the disclosed rates. Average balances are derived from daily balances.


Year-to-Date                  
(Dollars in thousands) Average Balances, Interest, and Rates 
  June 30, 2019  June 30, 2018 
  Average
Balance
  Interest  Rate (%)  Average
Balance
  Interest  Rate (%) 
ASSETS                        
Interest bearing deposits in other financial institutions $26,840  $176   1.31  $4,915  $42   1.71 
Federal funds sold  4,644   77   3.32   1,029   5   0.97 
Certificates of deposit in other financial institutions  2,194   32   2.92   1,581   13   1.64 
Securities available-for-sale  250,016   3,489   2.79   239,868   3,336   2.78 
Loans receivable  855,908   22,028   5.15   631,640   14,251   4.51 
Federal Home Loan Bank stock  3,886   89   4.58   3,005   82   5.46 
Total interest earning assets  1,143,488  $25,891   4.53   882,038  $17,729   4.02 
Cash and non-interest bearing deposits in other financial institutions  23,628           10,351         
Allowance for loan losses  (8,213)          (7,350)        
Other noninterest bearing assets  88,967           53,699         
Total assets $1,247,870          $938,738         
                         
LIABILITIES AND STOCKHOLDERS' EQUITY                        
Total deposits $1,067,976  $3,683   0.69  $783,066  $1,513   0.39 
Repurchase agreements  12,098   115   1.90   12,252   77   1.26 
Borrowed funds  21,426   294   2.74   42,919   428   1.99 
Total interest bearing liabilities  1,101,500  $4,092   0.74   838,237  $2,018   0.48 
Other noninterest bearing liabilities  24,528           9,267         
Total liabilities  1,126,028           847,504         
Total stockholders' equity  121,842           91,234         
Total liabilities and stockholders' equity $1,247,870          $938,738         

The increase in yields for interest bearing deposits in other financial institutions was the result of higher average balance for the six months ended June 30, 2019, compared to the six months ended June 30, 2018. The increase in yields for certificates of deposits in other financial institutions was primarily the result of higher average balance and higher rates for the six months ended June 30, 2019, compared to the six months ended June 30, 2018. The increase in yields for securities available-for-sale was the result of higher average balances and higher weighted average rates for the six months ended June 30, 2019, compared to the six months ended June 30, 2018. The increase in yields for loans receivable was the result of higher average balances, higher weighted average rates, and the recognition of one-time gains from excess reserves associated with purchase credit impaired loans from the former acquisitions of First Federal Savings & Loan and Liberty Savings Bank during the six months ended June 30, 2019, compared to the six months ended June 30, 2018. The increase in the cost of total deposits was the result of higher average balances and higher weighted average rates for the six months ended June 30, 2019, compared to the six months ended June 30, 2018. The decrease in the cost of borrowed was the result of lower average balances for the six months ended June 30, 2019, compared to the six months ended June 30, 2018. The increase in the cost of repurchase agreements was the result of higher weighted average rates for the six months ended June 30, 2019, compared to the six months ended June 30, 2018.

The following table shows the change in noninterest income for the six months ending June 30, 2019, and June 30, 2018.

  Six Months Ended    
(Dollars in thousands) June 30,  Six Months Ended 
  2019  2018  $ Change  % Change 
Noninterest income:            
Fees and service charges $2,405  $1,839  $566  30.8%
Wealth management operations  979   839   140  16.7%
Gain on sale of securities, net  652   1,004   (352)  -35.1%
Gain on sale of loans held-for-sale, net  642   570   72  12.6%
Increase in cash value of bank owned life insurance  342   228   114  50.0%
Gain on sale of foreclosed real estate, net  40   100   (60)  -60.0%
Other  178   72   106  147.2%
Total noninterest income $5,238  $4,652  $586   12.6%

 

The increase in fees and service charges is the result of the Bancorp’s continued focus on maintaining competitive fees within its market place, as well the acquisition of First Personal and AJSB. The increase in gains on salewealth management income is related to book value changes in assets under management and the timing of loans is a result of overall increase in loan origination volume.one time fees. The decrease in gains on sale of securities is a result of current market conditions and maintaining current securities cash flows. The increase in gain on sale of loans held for sale is the result of continued efforts on loan growth and normal course of business sales. The increase in cash value of bank owned life insurance is related to the increased bank owned life insurance balances from the AJSB and First Personal acquisitions. The increase in other noninterest income is primarily driven by gains made on the sale of fixed assets.


The following table shows the change in noninterest expense for the quartersix ending March 31,June 30, 2019, and March 31,June 30, 2018.

 

 Three Months Ended      Six Months Ended     
(Dollars in thousands) March 31, Three Months Ended  June 30, Six Months Ended 
 2019 2018 $ Change % Change  2019 2018 $ Change % Change 
Noninterest expense:                                
Compensation and benefits $4,676  $3,860  $816   21.1% $9,401  $7,376  $2,025   27.5%
Occupancy and equipment  1,123   853   270   31.7%  2,291   1,695   596   35.2%
Data processing  703   361   342   94.7%  1,947   1,064   883   83.0%
Marketing  263   134   129   96.3%  613   300   313   104.3%
Federal deposit insurance premiums  91   84   7   8.3%  268   159   109   68.6%
Other  3,435   1,675   1,760   105.1%  4,193   3,279   914   27.9%
Total noninterest expense $10,291  $6,967  $3,324   47.7% $18,713  $13,873  $4,840   34.9%

 

The increase in compensation and benefits is primarily the result of increased compensation due to the acquisition of AJSB and First Personal. AdditionalAdditionally, increases to compensation and benefits can be attributed to management’s continued focus on talent management and retention. The increase in occupancy and equipment is primarily related to the First Personal and AJSB acquisitions and related assets brought over. The increase in data processing expense is primarily the result of data conversion expenses related to the acquisition of AJSB as well as increased utilization of systems. The increase in marketing expenses is primarily related to the acquisition of AJSB as well as regular advertising initiatives. The increase in other operating expenses is primarily related to the increasetiming of approximately $1.5 million that resulted from the acquisition of AJSB, as well as generally higher third party costs.costs for First Personal and AJ Smith. The Bancorp’s efficiency ratio was 78.1%69.2% for the quartersix-months ended March 31,June 30, 2019, compared to 67.8%68.1% for the quartersix-months ended March 31,June 30, 2018. The increased ratio is related primarily to the increase in noninterest expense. The efficiency ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period. The acquisition of AJSB and First Personal acquisitions are discussed in Note 3 of the financial statements.

 

Income tax expenses for the quartersix months ended March 31,June 30, 2019 totaled $340 thousand,$1.3 million, compared to income tax expense of $415$780 thousand for the quartersix months ended March 31,June 30, 2018, a decreasean increase of $75$471 thousand (18.1%(60.4%). The combined effective federal and state tax rates for the Bancorp was 16.7% for the six months ended June 30, 2019, compared to 13.3% for the quarter ended March 31, 2019, comparedJune 30, 2018. The Bancorp’s higher current period effective tax rate is a result of a larger increase to 13.9% for the quarter ended March 31, 2018.earnings relative to increased tax preferred income.

 

Critical Accounting Policies

 

Critical accounting policies are those accounting policies that management believes are most important to the portrayal of the Bancorp’s financial condition and that require management’s most difficult, subjective or complex judgments. The Bancorp’s critical accounting policies from December 31, 2018, remain unchanged.

 

Forward-Looking Statements

 

Statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are also intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. The Bancorp cautions readers that forward-looking statements, including without limitation those relating to the Bancorp’s future business prospects, merger and acquisition activities, interest income and expense, net income, liquidity, and capital needs are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this report, including those identified in the Bancorp’s 2018 Form 10-K.

32

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.


Item 4. Controls and Procedures

 

(a)Evaluation of Disclosure Controls and Procedures.

 

The Bancorp maintains disclosure controls and procedures (as defined in Sections 13a – 15(e) and 15d – 15(e)) of regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the "Exchange Act" is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bancorp's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The Bancorp's Chief Executive Officer and Chief Financial Officer evaluate the effectiveness of the Bancorp's disclosure controls and procedures as of the end of each quarter. Based on that evaluation as of March 31,June 30, 2019, the Bancorp’s Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective as of that datein ensuring that information required to be disclosed by the Bancorp under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

(b)       Changes in Internal Control Over Financial Reporting.

(b)Changes in Internal Control Over Financial Reporting.

 

There was no change in the Bancorp's internal control over financial reportingidentified in connection with the Bancorp’s evaluation of controls that occurred during the threesix months ended March 31,June 30, 2019, that has materially affected, or is reasonably likely to materially affect, the Bancorp's internal control over financial reporting.

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PART II - Other Information

 

Item 1.Legal Proceedings

 

The Bancorp and its subsidiaries, from time to time, are involved in legal proceedings in the ordinary course of business against its debtors and are defendants in legal actions arising from normal business activities. Management, after consultation with legal counsel believes that the ultimate liabilities, if any, resulting from these actions will not have a material adverse effect on the financial position of the Bank or on the consolidated financial position of the Bancorp.

 

Item 1A.Risk Factors

 

Not Applicable.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

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 threesix months ended March 31,June 30, 2019 under the stock repurchase program.

 

PeriodTotal Number
of Shares Purchased
  Average Price
Paid per Share
 Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
  Maximum Number of
Purchased as Part of
Shares That May Yet
Total NumberAverage PricePublicly Announced
Be Purchased Under
Periodof Shares PurchasedPaid per SharePlans or Programs
the Program(1)
 

January 1, 2019 – January 31, 2019

  -  N/A  -   48,828 

February 1, 2019 – February 28, 2019

  -  N/A  -   48,828 

March 1, 2019 – March 31, 2019

  -   N/A-48,828
April 1, 2019 – April 30, 2019- N/A-48,828
May 1, 2019 – May 31, 2019- N/A-48,828
June 1, 2019 – June 30, 2019-N/A  -   48,828 

 

(1)The stock repurchase program was announced on April 24, 2014, whereby the Bancorp is authorized to repurchase up to 50,000 shares of the Bancorp’s common stock outstanding. There is no express expiration date for this program.

 

Item 3.Defaults Upon Senior Securities

 

There are no matters reportable under this item.

 

Item 4.Mine Safety Disclosures

 

Not Applicable

 

Item 5.Other Information

 

None

 

Item 6.Exhibits

 

Exhibit  
Number Description
2.1Agreement and Plan of Merger by and among NorthWest Indiana Bancorp and AJS Bancorp, Inc. dated July 30, 2018 (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed with the SEC on July 31, 2018).
10.1First Amendment to Employment Agreement dated July 27, 2018 by and among NorthWest Indiana Bancorp, Peoples Bank SB, and Benjamin J. Bochnowski (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the SEC on July 30, 2018).
10.2Voting Agreement dated July 30, 2018 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on July 31, 2018).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certifications.
101 The following materials from the Bancorp’s Form 10-Q for the quarterly period ended March 31,June 30, 2019, formatted in an XBRL Interactive Data File: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Changes in Stockholders’ Equity; (iv) Consolidated Statement of Comprehensive Income; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements, with detailed tagging of notes and financial statement schedules.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

NORTHWEST INDIANA BANCORP

Date: April 23,August 8, 2019/s/ Benjamin J. Bochnowski
 Benjamin J. Bochnowski
 President and Chief Executive Officer
  
Date: April 23,August 8, 2019/s/ Robert T. Lowry
 Robert T. Lowry
 Executive Vice President, Chief Financial
 Officer and Treasurer

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