UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

~~For the quarterly period ended June~~
For the quarterly period ended September 30, 2020 or

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

~~For the transition period from~~ to

For the transition period from ______ to ______

Commission File Number: 0-26128

NorthWest Indiana Bancorp

~~(Exact~~ (Exact name of registrant as specified in its charter)

Indiana	35-1927981
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
~~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 class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/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. Yes ☒ No ☐

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).

Yes ☒ 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 filer ☒ Non-accelerated filer ☐

Smaller Reporting Company ☒ Emerging 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 ☐ No ☒

There were 3,463,136 shares of the registrant’s Common Stock, without par value, outstanding at ~~August~~November 6, 2020.

NorthWest Indiana Bancorp

Index

		Page Number
		~~Number~~
PART I.	Financial Information

Item 1.	Unaudited Financial Statements and Notes	1

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

	Item 3. Quantitative and Qualitative Disclosures about Market Risk	41 43

	Item 4. Controls and Procedures	41 43

PART II.	Other Information	42 44

SIGNATURES	43 45

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

	June 30,						September 30,
(Dollars in thousands)	2020			December 31,			2020			December 31,
	(unaudited)			2019			(unaudited)			2019
ASSETS

Cash and non-interest bearing deposits in other financial institutions	$	23,989		$	20,964		$	15,374		$	20,964
Interest bearing deposits in other financial institutions		72,993			10,750			68,495			10,750
Federal funds sold		323			15,544			578			15,544

Total cash and cash equivalents		97,305			47,258			84,447			47,258

Certificates of deposit in other financial institutions		1,639			2,170			1,901			2,170

Securities available-for-sale		294,719			277,219			324,181			277,219
Loans held-for-sale		10,024			6,091			5,538			6,091
Loans receivable		981,902			906,869			975,940			906,869
Less: allowance for loan losses		(9,866	)		(8,999	)		(10,714	)		(8,999	)
Net loans receivable		972,036			897,870			965,226			897,870
Federal Home Loan Bank stock		3,918			3,912			3,918			3,912
Accrued interest receivable		4,284			4,029			4,714			4,029
Premises and equipment		28,905			29,407			29,599			29,407
Foreclosed real estate		634			1,083			501			1,083
Cash value of bank owned life insurance		30,374			30,017			30,551			30,017
Goodwill		11,109			11,109			11,109			11,109
Other assets		19,087			18,557			19,337			18,557

Total assets	$	1,474,034		$	1,328,722		$	1,481,022		$	1,328,722

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Non-interest bearing	$	262,001		$	172,094		$	258,170		$	172,094
Interest bearing		1,015,633			982,276			1,022,486			982,276
Total		1,277,634			1,154,370			1,280,656			1,154,370
Repurchase agreements		17,159			11,499			19,145			11,499
Borrowed funds		12,000			14,000			12,000			14,000
Accrued expenses and other liabilities		22,060			14,750			20,280			14,750

Total liabilities		1,328,853			1,194,619			1,332,081			1,194,619

Stockholders' Equity:
Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding		-			-			0			0
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: June 30, 2020 - 3,463,136 December 31, 2019 - 3,451,797		-
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: September 30, 2020 - 3,463,136 December 31, 2019 - 3,451,797								0			-
Additional paid-in capital		29,774			29,657			29,881			29,657
Accumulated other comprehensive income/(loss)		9,114			4,261
Accumulated other comprehensive income								8,938			4,261
Retained earnings		106,293			100,185			110,122			100,185

Total stockholders' equity		145,181			134,103			148,941			134,103

Total liabilities and stockholders' equity	$	1,474,034		$	1,328,722		$	1,481,022		$	1,328,722

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Income

(unaudited)

	Three Months Ended				Six Months Ended				Quarter Ended				Nine Months Ended
(Dollars in thousands)	June 30,				June 30,				September 30,				September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Interest income:
Loans receivable
Real estate loans	$	9,305	$	9,653	$	18,662	$	18,401	$	8,560	$	9,452	$	27,222	$	27,853
Commercial loans		1,834		1,651		3,319		3,335		2,427		1,654		5,746		4,989
Consumer loans		158		181		345		292		276		229		621		521
Total loan interest		11,297		11,485		22,326		22,028		11,263		11,335		33,589		33,363
Securities		1,564		1,777		3,269		3,578		1,534		1,659		4,803		5,237
Other interest earning assets		44		143		179		285		39		326		218		611

Total interest income		12,905		13,405		25,774		25,891		12,836		13,320		38,610		39,211

Interest expense:
Deposits		1,380		2,011		3,444		3,683		1,050		2,353		4,494		6,036
Repurchase agreements		17		66		57		115		15		64		72		179
Borrowed funds		93		128		187		294		83		108		270		402

Total interest expense		1,490		2,205		3,688		4,092		1,148		2,525		4,836		6,617

Net interest income		11,415		11,200		22,086		21,799		11,688		10,795		33,774		32,594
Provision for loan losses		508		511		1,022		828		849		494		1,871		1,322

Net interest income after provision for loan losses		10,907		10,689		21,064		20,971		10,839		10,301		31,903		31,272

Noninterest income:
Gain on sale of loans held-for-sale, net	$	2,464	$	400	$	3,617	$	642	$	2,420	$	681	$	6,037	$	1,323
Fees and service charges		1,151		1,243		2,200		2,405		1,473		1,203		3,673		3,608
Wealth management operations										537		447		1,605		1,426
Gain on sale of securities, net		667		301		1,177		652		197		102		1,374		754
Wealth management operations		514		479		1,068		979
Increase in cash value of bank owned life insurance		188		179		357		342		177		177		534		519
Gain on sale of foreclosed real estate, net		43		13		103		40		24		43		127		83
Benefit from bank owned life insurance										0		205		0		205
Other		19		54		70		178		27		39		97		217
Total noninterest income	$	5,046	$	2,669	$	8,592	$	5,238	$	4,855	$	2,897	$	13,447	$	8,135

Noninterest expense:
Compensation and benefits	$	5,371	$	4,600	$	10,588	$	9,401	$	5,263	$	4,932	$	15,851	$	14,333
Occupancy and equipment		1,295		1,169		2,704		2,291		1,150		1,231		3,854		3,522
Data processing		532		351		1,088		1,947		583		627		1,671		2,407
Federal deposit insurance premiums										216		18		571		286
Marketing		180		176		388		613		176		170		564		783
Federal deposit insurance premiums		159		177		355		268
Other		2,227		1,951		4,640		4,193		2,393		2,291		7,033		6,651
Total noninterest expense	$	9,764	$	8,424	$	19,763	$	18,713	$	9,781	$	9,269	$	29,544	$	27,982

Income before income tax expenses		6,189		4,934		9,893		7,496		5,913		3,929		15,806		11,425
Income tax expenses		1,126		911		1,638		1,251		1,010		351		2,648		1,602
Net income	$	5,063	$	4,023	$	8,255	$	6,245	$	4,903	$	3,578	$	13,158	$	9,823

Earnings per common share:
Basic	$	1.46	$	1.17	$	2.39	$	1.84	$	1.42	$	1.04	$	3.80	$	2.88
Diluted	$	1.46	$	1.17	$	2.39	$	1.84	$	1.42	$	1.04	$	3.80	$	2.88

Dividends declared per common share	$	0.31	$	0.31	$	0.62	$	0.61	$	0.31	$	0.31	$	0.93	$	0.92

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Comprehensive Income

(unaudited)

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
(Dollars in thousands)	June 30,						June 30,						September 30,						September 30,
	2020			2019			2020			2019			2020			2019			2020			2019

Net income	$	5,063		$	4,023		$	8,255		$	6,245		$	4,903		$	3,578		$	13,158		$	9,823

Net change in net unrealized gains on securities available-for-sale:
Unrealized gains arising during the period		1,207			3,584			7,319			7,766
Net change in net unrealized gain (loss) on securities available-for-sale:
Unrealized gain (loss) arising during the period														(25	)		2,112			7,294			9,878
Less: reclassification adjustment for gains included in net income		(667	)		(301	)		(1,177	)		(652	)		(197	)		(102	)		(1,374	)		(754	)
Net securities gain during the period		540			3,283			6,142			7,114
Net securities gain (loss) during the period														(222	)		2,010			5,920			9,124
Tax effect		(112	)		(690	)		(1,289	)		(1,488	)		46			(422	)		(1,243	)		(1,910	)
Net of tax amount		428			2,593			4,853			5,626			(176	)		1,588			4,677			7,214

Other comprehensive income, net of tax		428			2,593			4,853			5,626
Other comprehensive income (loss), net of tax														(176	)		1,588			4,677			7,214

Comprehensive income, net of tax	$	5,491		$	6,616		$	13,108		$	11,871		$	4,727		$	5,166		$	17,835		$	17,037

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

															Three Months Ended
						Accumulated													Accumulated
			Additional			Other											Additional		Other
	Common		Paid-in			Comprehensive			Retained			Total			Common		Paid-in		Comprehensive			Retained			Total
(Dollars in thousands, except per share data)	Stock		Capital			(Loss)/Income			Earnings			Equity			Stock		Capital		(Loss)/Income			Earnings			Equity

Balance at January 1, 2019	$	-	$	11,927		$	(2,796	)	$	92,333		$	101,464
Balance at June 30, 2019															$	0	$	29,510	$	2,830		$	96,472		$	128,812

Comprehensive income:
Net income		-		-			-			2,222			2,222			0		0		0			3,578			3,578
Net unrealized gain on securities available-for-sale, net of reclassification and tax effects		-		-			3,033			-			3,033
Net unrealized gain on securities available-for- sale, net of reclassification and tax effects																0		0		1,588			0			1,588
Comprehensive income													5,255													5,166
Stock-based compensation expense		-		71			-			-			71			0		79		0			0			79
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	)
Cash dividends, $0.31 per share																0		0		0			(1,069	)		(1,069	)

Balance at March 31, 2019	$	-	$	29,490		$	237		$	93,520		$	123,247
Balance at September 30, 2019															$	0	$	29,589	$	4,418		$	98,981		$	132,988

Balance at June 30, 2020															$	0	$	29,774	$	9,114		$	106,293		$	145,181

Comprehensive income:
Net income		-		-			-			4,023			4,023			0		0		0			4,903			4,903
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

Balance at January 1, 2020	$	-	$	29,657		$	4,261		$	100,185		$	134,103

Comprehensive income:
Net income		-		-			-			3,192			3,192
Net unrealized gain on securities available-for-sale, net of reclassification and tax effects		-		-			4,425			-			4,425
Comprehensive income													7,617
Net surrender value of 1,904 restricted stock awards				(85	)								(85	)
Stock-based compensation expense		-		94			-			-			94
Cash dividends, $0.31 per share		-		-			-			(1,074	)		(1,074	)

Balance at March 31, 2020	$	-	$	29,666		$	8,686		$	102,303		$	140,655

Comprehensive income:
Net income		-		-			-			5,063			5,063
Net unrealized gain on securities available-for-sale, net of reclassification and tax effects		-		-			428			-			428
Net unrealized loss on securities available-for- sale, net of reclassification and tax effects																0		0		(176	)		0			(176	)
Comprehensive income													5,491													4,727
Stock-based compensation expense		-		108			-			-			108			0		107		0			0			107
Cash dividends, $0.31 per share		-		-			-			(1,073	)		(1,073	)
Cash dividends, $0.31 per share																0		0		0			(1,074	)		(1,074	)

Balance at June 30, 2020	$	-	$	29,774		$	9,114		$	106,293		$	145,181
Balance at September 30, 2020															$	0	$	29,881	$	8,938		$	110,122		$	148,941

	Nine Months Ended
						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, 2019	$	0	$	11,927		$	(2,796	)	$	92,333		$	101,464

Comprehensive income:
Net income		0		0			0			9,823			9,823
Net unrealized gain on securities available-for- sale, net of reclassification and tax effects		0		0			7,214			0			7,214
Comprehensive income													17,037
Net surrender value of 1,245 restricted stock awards		0		(63	)		0			0			(63	)
Stock-based compensation expense		0		233			0			0			233
Issuance of 416,478 shares at $42.00 per share, for acquisition of AJS Bancorp, Inc		0		17,492			0			0			17,492
Cash dividends, $0.92 per share		0		0			0			(3,175	)		(3,175	)

Balance at September 30, 2019	$	0	$	29,589		$	4,418		$	98,981		$	132,988


Balance at January 1, 2020	$	0	$	29,657		$	4,261		$	100,185		$	134,103

Comprehensive income:
Net income		0		0			0			13,158			13,158
Net unrealized gain on securities available-for- sale, net of reclassification and tax effects		0		0			4,677			0			4,677
Comprehensive income													17,835
Net surrender value of 1,904 restricted stock awards		0		(85	)		0			0			(85	)
Stock-based compensation expense		0		309			0			0			309
Cash dividends, $0.93 per share		0		0			0			(3,221	)		(3,221	)

Balance at September 30, 2020	$	0	$	29,881		$	8,938		$	110,122		$	148,941

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Cash Flows

(unaudited)

	Six Months Ended						Nine Months Ended
(Dollars in thousands)	June 30,						September 30,
	2020			2019			2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8,255		$	6,245		$	13,158		$	9,823
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Origination of loans for sale		(114,170	)		(29,585	)		(171,151	)		(54,555	)
Sale of loans originated for sale		113,362			29,252			177,556			54,123
Depreciation and amortization, net of accretion		2,186			1,516			3,178			2,382
Amortization of mortgage servicing rights		32			33			63			48
Stock based compensation expense		202			154			309			233
Net surrender value of restricted stock awards		(85	)		(63	)		(85	)		(63	)
Gain on sale of securities, net		(1,177	)		(652	)		(1,374	)		(754	)
Gain on sale of loans held-for-sale, net		(3,617	)		(642	)		(6,037	)		(1,323	)
Gain on interest rate lock derivative		298			-			(308	)		0
Gain on sale of foreclosed real estate, net		(103	)		(40	)		(127	)		(83	)
Gain on sale of premises and equipment, net								0			(126	)
Benefit from bank owned life insurance								0			(205	)
Provision for loan losses		1,022			828			1,871			1,322
Net change in:
Interest receivable		(255	)		(499	)		(685	)		(363	)
Other assets		(1,657	)		(3,567	)		(1,593	)		(1,546	)
Accrued expenses and other liabilities		7,303			2,661			5,526			1,957
Total adjustments		3,341			(604	)		7,143			1,047
Net cash - operating activities		11,596			5,641			20,301			10,870

CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from maturities and (purchases) of certificates of deposits in other financial institutions		531			54
Net proceeds from maturities and (purchases) of certificates of deposits in other financial institutions..								269			(146	)
Proceeds from maturities and pay downs of securities available-for-sale		31,409			11,747			49,311			20,627
Proceeds from sales of securities available-for-sale		35,098			30,281			39,242			35,859
Purchase of securities available-for-sale		(77,506	)		(48,347	)		(129,503	)		(63,377	)
Loan participations purchased								(8,267	)		0
Net change in loans receivable		(75,211	)		(42,336	)		(60,982	)		(52,399	)
Purchase of Federal Home Loan Bank Stock		(6	)		59
(Purchase)/redemption of Federal Home Loan Bank Stock								(6	)		59
Purchase of premises and equipment, net		(866	)		(962	)		(2,088	)		(2,116	)
Proceeds from sale of foreclosed real estate, net		575			514			731			960
Proceeds on sale of premises and equipment, net								0			228
Cash and cash equivalents from acquisition activity, net		-			52,560			0			52,560
Change in cash value of bank owned life insurance		(357	)		(343	)		(534	)		(66	)
Net cash - investing activities		(86,333	)		3,227			(111,827	)		(7,811	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		123,264			53,109			126,286			78,455
Repayment of FHLB advances		(2,000	)		(25,000	)		(2,000	)		(27,000	)
Change in other borrowed funds		5,660			9,000			7,646			3,303
Dividends paid		(2,140	)		(1,944	)		(3,217	)		(3,014	)
Net cash - financing activities		124,784			35,165			128,715			51,744
Net change in cash and cash equivalents		50,047			44,033			37,189			54,803
Cash and cash equivalents at beginning of period		47,258			17,139			47,258			17,139
Cash and cash equivalents at end of period	$	97,305		$	61,172		$	84,447		$	71,942

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	3,802		$	4,112		$	4,953		$	6,608
Income taxes		-			650			500			1,485
Acquisition activity:
Fair value of assets acquired, including cash and cash equivalents	$	-		$	172,925		$	0		$	172,925
Value of goodwill and other intangible assets		-			5,856			0			5,856
Fair value of liabilities assumed		-			145,546			0			145,546
Cash paid for acquisition		-			15,743			0			15,743
Issuance of common stock for acquisition		-			17,492			0			17,492
Noncash activities:
Transfers from loans to foreclosed real estate	$	23		$	193		$	23		$	262

See accompanying notes to consolidated financial statements.

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 (the “Bank”), and the Bank’s wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC, NWIN Funding, Incorporated, and Columbia Development Company, LLC. Peoples Bank (formerly known as “Peoples Bank SB”) was an Indiana-chartered stock savings bank until its conversion to an Indiana-chartered commercial bank effective May 22, 2020. 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 ~~June~~September 30, 2020, and December 31, 2019, and the consolidated statements of income and comprehensive income for the three and ~~six~~nine months ended ~~June~~September 30, 2020, and 2019, and consolidated statements of cash flows and changes in stockholders’ equity for the ~~six~~nine months ended ~~June~~September 30, 2020, and 2019. The income reported for the ~~six~~nine month period ended ~~June~~September 30, 2020, 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.

In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Bancorp’s customers operate and could impair their ability to fulfill their financial obligations to the Bancorp. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Bancorp operates.

Currently, the Bancorp does not expect COVID-19 to affect its ability to account for the assets on its balance sheet in a timely manner; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Bancorp does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

The Bancorp is working with customers directly affected by COVID-19 in a discliplined manner. The Bancorp is prepared to offer short-term assistance in accordance with regulatory guidelines for those customers specifically facing financial hardships due to the pandemic. As a result of the current economic environment caused by the COVID-19 virus, the Bancorp is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Bancorp could experience further increases in its required allowance for loan loss and record additional provision for loan loss expense. It is possible that the Bancorp’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

In addition, COVID-19 could cause a further and sustained decline in the Bancorp’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill and intangible asset impairment tests and result in an impairment charge being recorded for that period. In the event that the Bancorp concludes that all or a portion of its goodwill or intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. Details on goodwill impairment testing can be found in Note 7, Intangibles and Acquisition Related Accounting.

Note 3 - Acquisition Activity

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 (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, 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 0 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 $15.7 million. Based upon the closing price of NWIN’s common stock on January 23, 2019, the transaction had an implied valuation of approximately $33.2 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. Acquisition costs incurred in 2019 related to the AJSB Merger were 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.

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 the valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, the final purchase price for the AJSB acquisition is allocated as follows:

ASSETS					*LIABILITIES*
Cash and due from banks	$	68,303	$	68,303	Deposits
Investment securities, available for sale		3,432		3,432	Non-interest bearing	$	24,502
					NOW accounts		10,712
Commercial		712		712	Savings and money market		68,875
Residential mortgage		85,635		85,635	Certificates of deposits		40,137
Multifamily		1,442		1,442	Total Deposits		144,226
Consumer		57		57
Total Loans		87,846		87,846
					Interest payable		50
Premises and equipment, net		3,542		3,542	Other liabilities		1,270
FHLB stock		512		512
Goodwill		2,939		2,939
Core deposit intangible		2,917		2,917
Interest receivable		351		351
Other assets		8,939		8,939
Total assets purchased	$	178,781	$	178,781
Common shares issued		17,492		17,492
Cash paid		15,743		15,743
Total purchase price	$	33,235	$	33,235	Total liabilities assumed	$	145,546

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

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
	Basis		Gains		Losses			Value		Basis		Gains		Losses			Value
June 30, 2020
September 30, 2020
Money market fund	$	21,457	$	-	$	-		$	21,457	$	26,789	$	0	$	0		$	26,789
U.S. government sponsored entities											4,998		0		(9	)		4,989
Collateralized mortgage obligations and residential mortgage-backed securities		129,789		4,284		-			134,073		125,122		3,864		(23	)		128,963
Municipal securities		129,754		8,622		(2	)		138,374		153,780		9,075		(294	)		162,561
Collateralized debt obligations		2,191		-		(1,376	)		815		2,186		0		(1,307	)		879
Total securities available-for-sale	$	283,191	$	12,906	$	(1,378	)	$	294,719	$	312,875	$	12,939	$	(1,633	)	$	324,181

	(Dollars in thousands)									(Dollars in thousands)
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Cost		Unrealized		Unrealized			Fair		Cost		Unrealized		Unrealized			Fair
	Basis		Gains		Losses			Value		Basis		Gains		Losses			Value
December 31, 2019
Money market fund	$	9,670	$	-	$	-		$	9,670	$	9,670	$	0	$	0		$	9,670
U.S. government sponsored entities		12,994		64		-			13,058		12,994		64		0			13,058
Collateralized mortgage obligations and residential mortgage-backed securities		149,339		1,745		(96	)		150,988		149,339		1,745		(96	)		150,988
Municipal securities		97,628		4,844		(45	)		102,427		97,628		4,844		(45	)		102,427
Collateralized debt obligations		2,202		-		(1,126	)		1,076		2,202		0		(1,126	)		1,076
Total securities available-for-sale	$	271,833	$	6,653	$	(1,267	)	$	277,219	$	271,833	$	6,653	$	(1,267	)	$	277,219

The estimated fair value of available-for-sale debt securities at ~~June~~September 30, 2020, 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
June 30, 2020	Value		Yield (%)
September 30, 2020					Value		Yield (%)
Due in one year or less	$	21,457		0.11	$	26,789		0.04
Due from one to five years		3,134		4.79		2,980		3.94
Due from five to ten years		9,857		4.00		18,305		2.76
Due over ten years		126,198		3.55		147,144		3.37
Collateralized mortgage obligations and residential mortgage-backed securities		134,073		2.31		128,963		2.11
Total	$	294,719		2.76	$	324,181		2.56

Sales of available-for-sale securities were as follows for the ~~six~~nine months ended:

	(Dollars in thousands)						(Dollars in thousands)
	June 30,			June 30,			September 30,			September 30,
	2020			2019			2020			2019

Proceeds	$	35,098		$	30,281		$	39,242		$	35,859
Gross gains		1,237			733			1,433			838
Gross losses		(60	)		(81	)		(59	)		(84	)

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, 2019	$	4,261	$	4,261
Current period change		4,853		4,677
Ending balance, June 30, 2020	$	9,114
Ending balance, September 30, 2020			$	8,938

Securities with carrying values of approximately ~~$116.8~~$117.8 million and $65.5 million were pledged as of ~~June~~September 30, 2020 and December 31, 2019, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.

Securities with gross unrealized losses at ~~June~~September 30, 2020, and December 31, 2019 not recognized in income are as follows:

	(Dollars in thousands)															(Dollars in thousands)
	Less than 12 months					12 months or longer					Total					Less than 12 months					12 months or longer					Total
	Estimated					Estimated					Estimated					Estimated					Estimated					Estimated
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
June 30, 2020
Money market fund
Collateralized mortgage obligations and residential mortgage-backed securities		-		-			-		-			-		-			6,096		(23	)		0		0			6,096		(23	)
U.S. government sponsored entities																	4,989		(9	)		0		0			4,989		(9	)
Municipal securities		1,088		(2	)		-		-			1,088		(2	)		17,338		(294	)		0		0			17,338		(294	)
Collateralized debt obligations		-		-			815		(1,376	)		815		(1,376	)		0		0			879		(1,307	)		879		(1,307	)
Total temporarily impaired	$	1,088	$	(2	)	$	815	$	(1,376	)	$	1,903	$	(1,378	)	$	28,423	$	(326	)	$	879	$	(1,307	)	$	29,302	$	(1,633	)
Number of securities				2					2					4					32					2					34

(Dollars in thousands)

Less than 12 months

12 months or longer

Total

Estimated

Estimated

Estimated

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

December 31, 2019

U.S. government sponsored entities
$ - $ - $ - $ - $ - $ -
Collateralized mortgage obligations and residential mortgage-backed securities
8,859 (31 ) 15,065 (65 ) 23,924 (96 )
Municipal securities
4,367 (45 ) - - 4,367 (45 )
Collateralized debt obligations
- - 1,076 (1,126 ) 1,076 (1,126 )
Total temporarily impaired
$ 13,226 $ (76 ) $ 16,141 $ (1,191 ) $ 29,367 $ (1,267 )
Number of securities
11 17 28

	(Dollars in thousands)
	Less than 12 months					12 months or longer					Total
	Estimated					Estimated					Estimated
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
December 31, 2019
U.S. government sponsored entities	$	0	$	0		$	0	$	0		$	0	$	0
Collateralized mortgage obligations and residential mortgage-backed securities		8,859		(31	)		15,065		(65	)		23,924		(96	)
Municipal securities		4,367		(45	)		0		0			4,367		(45	)
Collateralized debt obligations		0		0			1,076		(1,126	)		1,076		(1,126	)
Total temporarily impaired	$	13,226	$	(76	)	$	16,141	$	(1,191	)	$	29,367	$	(1,267	)
Number of securities				11					17					28

Unrealized losses on securities have not been recognized into income because the securities are of high credit quality or have undisrupted cash flows. Management has the intent and ability to hold those securities for the foreseeable future, and the decline in fair value is largely due to changes in interest rates and volatility in securities markets. The fair values are expected to recover as the securities approach maturity.

Note 5 - Loans Receivable

~~Loans receivable are summarized below:~~

Loans receivable are summarized below:

(Dollars in thousands)
	June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Loans secured by real estate:
Residential real estate	$	284,703	$	299,569		$	284,381	$	299,569
Home equity		46,254		49,118			42,127		49,118
Commercial real estate		286,122		283,108			285,701		283,108
Construction and land development		92,982		87,710			89,176		87,710
Multifamily		56,070		51,286			50,701		51,286
Farmland		221		227			218		227
Total loans secured by real estate		766,352		771,018			752,304		771,018
Commercial business		181,984		103,222			184,406		103,222
Consumer		522		627			467		627
Manufactured homes		17,806		13,285			21,991		13,285
Government		13,729		15,804			13,205		15,804
Subtotal		980,393		903,956			972,373		903,956
Less:
Net deferred loan origination fees		1,411		2,934			3,441		2,934
Undisbursed loan funds		98		(21	)		126		(21	)
Loans receivable	$	981,902	$	906,869		$	975,940	$	906,869

(Dollars in thousands)	Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance			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, 2020:
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended September 30, 2020:													The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended September 30, 2020:

Allowance for loan losses:
Residential real estate	$	1,828	$	(2	)	$	4	$	(122	)	$	1,708		$	1,708	$	0		$	5	$	170		$	1,883
Home equity		246		-			-		(15	)		231			231		0			0		(19	)		212
Commercial real estate		3,693		(80	)		-		99			3,712			3,712		0			0		675			4,387
Construction and land development		1,223		(17	)		-		(5	)		1,201			1,201		0			0		(29	)		1,172
Multifamily		562		-			-		47			609			609		0			0		(59	)		550
Farmland		-		-			-		-			-			0		0			0		0			0
Commercial business		1,901		(78	)		16		536			2,375			2,375		0			0		113			2,488
Consumer		42		(1	)		5		(16	)		30			30		(9	)		3		(2	)		22
Manufactured homes		-		-			-		-			-			0		0			0		0			0
Government		16		-			-		(16	)		-			0		0			0		0			0
Total	$	9,511	$	(178	)	$	25	$	508		$	9,866		$	9,866	$	(9	)	$	8	$	849		$	10,714

~~The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the~~ ~~three~~ ~~months ended~~ ~~June 30, 2019:~~

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended September 30, 2019:

Allowance for loan losses:
Residential real estate	$	1,660	$	(62	)	$	5	$	149		$	1,752
Home equity		202		0			2		23			227
Commercial real estate		3,529		0			0		178			3,707
Construction and land development		806		0			0		188			994
Multifamily		453		0			0		51			504
Farmland		0		0			0		0			0
Commercial business		1,517		(9	)		8		405			1,921
Consumer		51		(13	)		5		7			50
Manufactured homes		505		0			0		(505	)		0
Government		21		0			0		(2	)		19
Total	$	8,744	$	(84	)	$	20	$	494		$	9,174

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the nine months ended September 30, 2020:													The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the nine months ended September 30, 2020:

Allowance for loan losses:
Residential real estate	$	1,680	$	(18	)	$	4	$	(6	)	$	1,660		$	1,812	$	(2	)	$	15	$	58		$	1,883
Home equity		194		-			2		6			202			223		0			0		(11	)		212
Commercial real estate		3,485		-			-		44			3,529			3,773		(80	)		0		694			4,387
Construction and land development		777		-			-		29			806			1,098		(17	)		0		91			1,172
Multifamily		434		-			-		19			453			529		0			0		21			550
Farmland		-		-			-		-			-			0		0			0		0			0
Commercial business		1,391		-			10		116			1,517			1,504		(78	)		17		1,045			2,488
Consumer		254		(7	)		6		303			556			43		(22	)		11		(10	)		22
Manufactured homes		-		-			-		-			-			0		0			0		0			0
Government		21		-			-		-			21			17		0			0		(17	)		0
Total	$	8,236	$	(25	)	$	22	$	511		$	8,744		$	8,999	$	(199	)	$	43	$	1,871		$	10,714

~~The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the~~ ~~six~~ ~~months ended~~ ~~June 30, 2020:~~

Allowance for loan losses:

Residential real estate
$ 1,812 $ (2 ) $ 10 $ (112 ) $ 1,708
Home equity
223 - - 8 231
Commercial real estate
3,773 (80 ) - 19 3,712
Construction and land development
1,098 (17 ) - 120 1,201
Multifamily
529 - - 80 609
Farmland
- - - - -
Commercial business
1,504 (78 ) 17 932 2,375
Consumer
43 (13 ) 8 (8 ) 30
Manufactured homes
- - - - -
Government
17 - - (17 ) -
Total
$ 8,999 $ (190 ) $ 35 $ 1,022 $ 9,866

~~The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the~~ ~~six~~ ~~months ended~~ ~~June 30, 2019:~~

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the nine months ended September 30, 2019:													The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the nine months ended September 30, 2019:

Allowance for loan losses:
Residential real estate	$	1,715	$	(66	)	$	18	$	(7	)	$	1,660		$	1,715	$	(128	)	$	23	$	142		$	1,752
Home equity		202		-			2		(2	)		202			202		0			4		21			227
Commercial real estate		3,335		-			-		194			3,529			3,335		0			0		372			3,707
Construction and land development		756		-			-		50			806			756		0			0		238			994
Multifamily		472		-			-		(19	)		453			472		0			0		32			504
Farmland		-		-			-		-			-			0		0			0		0			0
Commercial business		1,362		-			16		139			1,517			1,362		(9	)		24		544			1,921
Consumer		82		(25	)		9		490			556			41		(38	)		14		33			50
Manufactured homes		-		-			-		-			-			41		0			0		(41	)		0
Government		38		-			-		(17	)		21			38		0			0		(19	)		19
Total	$	7,962	$	(91	)	$	45	$	828		$	8,744		$	7,962	$	(175	)	$	65	$	1,322		$	9,174

A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased. This reserve is available for use for manufactured home loan nonperformance and costs associated with nonperformance. If the segment performs in line with expectation, the deferred cost reserve is paid as an origination cost to the third party originator of the loan. The unamortized balance of the deferred cost reserve totaled ~~$2.7~~$3.3 million and $1.9 million as of ~~June~~September 30, 2020 and December 31, 2019, respectively, and is included in net deferred loan origination costs.

~~The Bancorp's impairment analysis is summarized below:~~

Ending Balances

(Dollars in thousands)

Individually
evaluated for
impairment
reserves

Collectively
evaluated for
impairment
reserves

Loan receivables

Individually
evaluated for
impairment

Purchased credit
impaired
individually
evaluated for
impairment

Collectively
evaluated for
impairment

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at June 30, 2020:

Residential real estate
$ 130 $ 1,578 $ 284,563 $ 794 $ 1,470 $ 282,299
Home equity
- 231 46,312 230 142 45,940
Commercial real estate
15 3,697 286,122 1,110 152 284,860
Construction and land development
- 1,201 92,982 - - 92,982
Multifamily
- 609 56,070 112 656 55,302
Farmland
- - 221 - - 221
Commercial business
337 2,038 178,863 1,103 1,154 176,606
Consumer
- 30 522 - - 522
Manufactured homes
- - 22,518 - - 22,518
Government
- - 13,729 - - 13,729
Total
$ 482 $ 9,384 $ 981,902 $ 3,349 $ 3,574 $ 974,979

The Bancorp's impairment analysis is summarized below:

~~The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at~~ ~~December 31, 2019:~~

	Ending Balances

(Dollars in thousands)	Individually evaluated for impairment reserves		Collectively evaluated for impairment reserves		Loan receivables		Individually evaluated for impairment		Purchased credit impaired individually evaluated for impairment		Collectively evaluated for impairment

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at September 30, 2020:

Residential real estate	$	186	$	1,697	$	284,293	$	781		1,422	$	282,090
		1		211		42,183		222		139		41,822
Commercial real estate		683		3,704		285,701		6,242		152		279,307
Construction and land development		0		1,172		89,176		0		0		89,176
Multifamily		0		550		50,701		102		646		49,953
Farmland		0		0		218		0		0		218
Commercial business		460		2,028		182,182		1,451		1,158		179,573
Consumer		0		22		467		0		0		467
Manufactured homes		0		0		27,814		0		0		27,814
Government		0		0		13,205		0		0		13,205
Total	$	1,330	$	9,384	$	975,940	$	8,798	$	3,517	$	963,625

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2019:													The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2019:

Residential real estate	$	10	$	1,802	$	299,333	$	642	$	1,581	$	297,110		$	10	$	1,802	$	299,333	$	642	$	1,581	$	297,110
Home equity		4		219		49,181		221		216		48,744			4		219		49,181		221		216		48,744
Commercial real estate		-		3,773		283,108		1,078		487		281,543			0		3,773		283,108		1,078		487		281,543
Construction and land development		-		1,098		87,710		-		-		87,710			0		1,098		87,710		0		0		87,710
Multifamily		-		529		51,286		129		673		50,484			0		529		51,286		129		673		50,484
Farmland		-		-		227		-		-		227			0		0		227		0		0		227
Commercial business		152		1,352		103,088		1,041		1,150		100,897			152		1,352		103,088		1,041		1,150		100,897
Consumer		-		43		627		-		-		627			0		43		627		0		0		627
Manufactured homes		-		-		16,505		-		-		16,505			0		0		16,505		0		0		16,505
Government		-		17		15,804		-		-		15,804			0		17		15,804		0		0		15,804
Total	$	166	$	8,833	$	906,869	$	3,111	$	4,107	$	899,651		$	166	$	8,833	$	906,869	$	3,111	$	4,107	$	899,651

~~The Bancorp's credit quality indicators are summarized below at~~ ~~June~~
The Bancorp's credit quality indicators are summarized below at September 30, 2020 and December 31, 2019:

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category																Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
	June 30, 2020																September 30, 2020
(Dollars in thousands)	2		3		4		5		6		7		8				2		3		4		5		6		7		8

Loan Segment	Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Total		Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	660	$	113,209	$	101,700	$	13,550	$	47,117	$	3,164	$	5,163	$	284,563	$	952	$	115,720	$	100,115	$	13,601	$	44,660	$	2,555	$	6,690	$	284,293
Home equity		120		6,371		37,894		121		743		565		498		46,312		76		5,636		34,538		115		713		563		542		42,183
Commercial real estate		-		2,123		71,620		146,373		56,102		6,731		3,173		286,122		0		1,780		70,624		143,743		54,799		6,486		8,269		285,701
Construction and land development		-		1,087		28,609		50,274		13,012		-		-		92,982		0		2,238		26,639		45,236		15,063		0		0		89,176
Multifamily		-		757		17,409		31,844		5,018		501		541		56,070		0		723		13,364		29,548		4,971		1,567		528		50,701
Farmland		-		-		-		-		221		-		-		221		0		0		0		0		218		0		0		218
Commercial business		5,256		99,733		16,920		36,300		17,723		1,851		1,080		178,863		5,674		101,847		17,848		33,675		19,994		1,718		1,426		182,182
Consumer		55		-		467		-		-		-		-		522		63		1		403		0		0		0		0		467
Manufactured homes		4,712		2,146		14,663		180		817		-		-		22,518		5,822		1,998		19,041		178		775		0		0		27,814
Government		-		1,775		10,294		1,660		-		-		-		13,729		0		1,658		9,887		1,660		0		0		0		13,205
Total	$	10,803	$	227,201	$	299,576	$	280,302	$	140,753	$	12,812	$	10,455	$	981,902	$	12,587	$	231,601	$	292,459	$	267,756	$	141,193	$	12,889	$	17,455	$	975,940

	December 31, 2019																December 31, 2019
(Dollars in thousands)	2		3		4		5		6		7		8				2		3		4		5		6		7		8

Loan Segment	Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Total		Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	827	$	119,138	$	104,153	$	13,463	$	53,058	$	4,203	$	4,491	$	299,333	$	827	$	119,138	$	104,153	$	13,463	$	53,058	$	4,203	$	4,491	$	299,333
Home equity		100		6,536		40,027		264		934		813		507		49,181		100		6,536		40,027		264		934		813		507		49,181
Commercial real estate		-		2,030		82,158		135,058		56,917		5,380		1,565		283,108		0		2,030		82,158		135,058		56,917		5,380		1,565		283,108
Construction and land development		-		719		26,900		45,751		14,340		-		-		87,710		0		719		26,900		45,751		14,340		0		0		87,710
Multifamily		-		903		18,107		26,800		4,674		-		802		51,286		0		903		18,107		26,800		4,674		0		802		51,286
Farmland		-		-		-		-		227		-		-		227		0		0		0		0		227		0		0		227
Commercial business		8,312		13,158		19,638		39,016		20,009		2,228		727		103,088		8,312		13,158		19,638		39,016		20,009		2,228		727		103,088
Consumer		90		-		537		-		-		-		-		627		90		0		537		0		0		0		0		627
Manufactured homes		3,221		2,413		9,825		184		862		-		-		16,505		3,221		2,413		9,825		184		862		0		0		16,505
Government		-		1,889		11,505		2,410		-		-		-		15,804		0		1,889		11,505		2,410		0		0		0		15,804
Total	$	12,550	$	146,786	$	312,850	$	262,946	$	151,021	$	12,624	$	8,092	$	906,869	$	12,550	$	146,786	$	312,850	$	262,946	$	151,021	$	12,624	$	8,092	$	906,869

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.

During the first ~~six~~nine months of 2020, one commercial real estate loan totaling ~~$148~~$145 thousand, one residential loan totaling ~~$52~~$51 thousand and 1 home equity loan totaling ~~$24~~$23 thousand were renewed as a troubled debt restructuring. One commercial business trouble debt restructuring loan totaling ~~$294~~$287 thousand has 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.

13

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

For the six months ended

For the nine months ended

As of June 30, 2020

June 30, 2020

As of September 30, 2020

September 30, 2020

(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
$ 2,077 $ 3,459 $ - $ 2,107 $ 49 $ 1,923 $ 3,260 $ - $ 2,061 $ 81
Home equity
372 392 - 384 9 360 372 - 378 13
Commercial real estate
1,096 1,682 - 1,379 47 1,214 1,797 - 1,338 65
Construction and land development
- - - - - 0 0 - 0 0
Multifamily
768 850 - 784 14 748 830 - 775 23
Farmland
- - - - - 0 0 - 0 0
Commercial business
1,463 1,517 - 1,588 40 1,693 1,728 - 1,614 61
Consumer
- - - - - 0 0 - 0 0
Manufactured homes
- - - - - 0 0 - 0 0
Government
- - - - - 0 0 - 0 0

With an allowance recorded:

Residential real estate
$ 187 $ 187 $ 130 $ 107 $ 1 $ 280 $ 324 $ 186 $ 151 $ 4
Home equity
- - - 5 - 1 9 1 4 0
Commercial real estate
166 166 15 67 1 5,180 5,180 683 1,346 0
Construction and land development
- - - - - 0 0 0 0 0
Multifamily
- - - - - 0 0 0 0 0
Farmland
- - - - - 0 0 0 0 0
Commercial business
794 794 337 676 19 916 916 460 736 19
Consumer
- - - - - 0 0 0 0 0
Manufactured homes
- - - - - 0 0 0 0 0
Government
- - - - - 0 0 0 0 0

Total:

Residential real estate
$ 2,264 $ 3,646 $ 130 $ 2,214 $ 50 $ 2,203 $ 3,584 $ 186 $ 2,212 $ 85
Home equity
$ 372 $ 392 $ - $ 389 $ 9 $ 361 $ 381 $ 1 $ 382 $ 13
Commercial real estate
$ 1,262 $ 1,848 $ 15 $ 1,446 $ 48 $ 6,394 $ 6,977 $ 683 $ 2,684 $ 65
Construction & land development
$ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0
Multifamily
$ 768 $ 850 $ - $ 784 $ 14 $ 748 $ 830 $ 0 $ 775 $ 23
Farmland
$ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0
Commercial business
$ 2,257 $ 2,311 $ 337 $ 2,264 $ 59 $ 2,609 $ 2,644 $ 460 $ 2,350 $ 80
Consumer
$ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0
Manufactured homes
$ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0
Government
$ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0

14

For the six months ended

For the nine months ended

As of December 31, 2019

June 30, 2019

As of December 31, 2019

September 30, 2019

(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
$ 2,140 $ 3,555 $ - $ 1,813 $ 31 $ 2,140 $ 3,555 $ - $ 1,915 $ 55
Home equity
429 451 - 344 3 429 451 - 368 6
Commercial real estate
1,547 2,141 - 1,655 33 1,547 2,141 - 1,586 41
Construction & land development
- - - - - 0 0 - 0 0
Multifamily
802 884 - 472 3 802 884 - 525 12
Farmland
- - - - - 0 0 - 0 0
Commercial business
1,814 1,906 - 1,967 43 1,814 1,906 - 1,933 63
Consumer
- - - - - 0 0 - 0 0
Manufactured homes
- - - - - 0 0 - 0 0
Government
- - - - - 0 0 - 0 0

With an allowance recorded:

Residential real estate
$ 83 $ 83 $ 10 $ 159 $ 2 $ 83 $ 83 $ 10 $ 158 $ 3
Home equity
8 8 4 59 1 8 8 4 60 1
Commercial real estate
18 18 - 478 - 18 18 0 473 0
Construction & land development
- - - - - 0 0 0 0 0
Multifamily
- - - - - 0 0 0 0 0
Farmland
- - - - - 0 0 0 0 0
Commercial business
377 377 152 145 - 377 377 152 547 3
Consumer
- - - - - 0 0 0 0 0
Manufactured homes
- - - - - 0 0 0 0 0
Government
- - - - - 0 0 0 0 0

Total:

Residential real estate
$ 2,223 $ 3,638 $ 10 $ 1,972 $ 33 $ 2,223 $ 3,638 $ 10 $ 2,073 $ 58
Home equity
$ 437 $ 459 $ 4 $ 403 $ 4 $ 437 $ 459 $ 4 $ 428 $ 7
Commercial real estate
$ 1,565 $ 2,159 $ - $ 2,133 $ 33 $ 1,565 $ 2,159 $ 0 $ 2,059 $ 41
Construction & land development
$ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0
Multifamily
$ 802 $ 884 $ - $ 472 $ 3 $ 802 $ 884 $ 0 $ 525 $ 12
Farmland
$ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0
Commercial business
$ 2,191 $ 2,283 $ 152 $ 2,112 $ 43 $ 2,191 $ 2,283 $ 152 $ 2,480 $ 66
Consumer
$ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0
Manufactured homes
$ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0
Government
$ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0

15

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

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, 2020

September 30, 2020

Residential real estate
$ 4,741 $ 1,055 $ 3,524 $ 9,320 $ 275,243 $ 284,563 $ 343 $ 2,697 $ 2,028 $ 3,284 $ 8,009 $ 276,284 $ 284,293 $ 0
Home equity
266 207 389 862 45,450 46,312 49 163 0 408 571 41,612 42,183 0
Commercial real estate
1,693 1,344 1,447 4,484 281,638 286,122 1,194 9,837 1,532 248 11,617 274,084 285,701 0
Construction and land development
672 - - 672 92,310 92,982 - 478 0 345 823 88,353 89,176 345
Multifamily
- 274 170 444 55,626 56,070 - 102 269 166 537 50,164 50,701 0
Farmland
- - - - 221 221 - 0 0 0 0 218 218 0
Commercial business
426 150 847 1,423 177,440 178,863 318 1,342 215 759 2,316 179,866 182,182 234
Consumer
9 - - 9 513 522 - 0 0 0 0 467 467 0
Manufactured homes
308 293 - 601 21,917 22,518 - 423 168 0 591 27,223 27,814 0
Government
- - - - 13,729 13,729 - 0 0 0 0 13,205 13,205 0
Total
$ 8,115 $ 3,323 $ 6,377 $ 17,815 $ 964,087 $ 981,902 $ 1,904 $ 15,042 $ 4,212 $ 5,210 $ 24,464 $ 951,476 $ 975,940 $ 579

December 31, 2019

Residential real estate
$ 3,486 $ 1,332 $ 3,724 $ 8,542 $ 290,791 $ 299,333 $ 452 $ 3,486 $ 1,332 $ 3,724 $ 8,542 $ 290,791 $ 299,333 $ 452
Home equity
90 24 388 502 48,679 49,181 19 90 24 388 502 48,679 49,181 19
Commercial real estate
1,461 170 719 2,350 280,758 283,108 61 1,461 170 719 2,350 280,758 283,108 61
Construction and land development
143 289 - 432 87,278 87,710 - 143 289 0 432 87,278 87,710 0
Multifamily
140 - 160 300 50,986 51,286 - 140 0 160 300 50,986 51,286 0
Farmland
- - - - 227 227 - 0 0 0 0 227 227 0
Commercial business
926 583 870 2,379 100,709 103,088 288 926 583 870 2,379 100,709 103,088 288
Consumer
- - - - 627 627 - 0 0 0 0 627 627 0
Manufactured homes
63 36 46 145 16,360 16,505 46 63 36 46 145 16,360 16,505 46
Government
- - - - 15,804 15,804 - 0 0 0 0 15,804 15,804 0
Total
$ 6,309 $ 2,434 $ 5,907 $ 14,650 $ 892,219 $ 906,869 $ 866 $ 6,309 $ 2,434 $ 5,907 $ 14,650 $ 892,219 $ 906,869 $ 866

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

(Dollars in thousands)

September 30,
2020

December 31,
2019

Residential real estate
$ 6,650 $ 4,374
Home equity
509 473
Commercial real estate
5,411 658
Construction and land development
0 0
Multifamily
528 420
Farmland
0 0
Commercial business
1,383 582
Consumer
0 0
Manufactured homes
0 0
Government
0 0
Total
$ 14,481 $ 6,507
~~(Dollars in thousands)~~

June 30,
2020

December 31,
2019

Residential real estate
$ 5,135 $ 4,374
Home equity
464 473
Commercial real estate
253 658
Construction and land development
- -
Multifamily
541 420
Farmland
- -
Commercial business
1,015 582
Consumer
- -
Manufactured homes
- -
Government
- -
Total
$ 7,408 $ 6,507

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 ~~June~~September 30, 2020, total purchased credit impaired loans with unpaid principal balances totaled ~~$5.7~~$5.6 million with a recorded investment of ~~$3.6~~$3.5 million. At December 31, 2019, purchased credit impaired loans with unpaid principal balances totaled $6.3 million with a recorded investment of $4.1 million.

~~Accretable interest taken from the purchase credit impaired portfolio, or income recorded for the~~ ~~six~~ ~~months ended~~ ~~June~~
Accretable interest taken from the purchase credit impaired portfolio, or income recorded for the nine months ended September 30, is as follows:

(dollars in thousands)

First Personal

First Personal

2019
$ 90 $ 118
2020
57 78

Accretable interest taken from the purchase credit impaired portfolio, or income expected to be recorded in the future is as follows:

(dollars in thousands)

First Personal

First Personal

2020
43 21
2021
21 21
Total
$ 64 $ 42

16

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

AJSB

First Federal

Libery Savings

First Personal

AJSB

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

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 $ 1,062 59 $ 1,203 44 $ 948 56 $ 3,734 52
Home equity
44 29 5 29 51 50 141 32 44 29 5 29 51 50 141 32
Commercial real estate
- - - - 208 56 8 9 0 - 0 - 208 56 8 9
Construction and land development
- - - - 1 30 - - 0 - 0 - 1 30 0 -
Multifamily
- - - - 11 48 2 48 0 - 0 - 11 48 2 48
Consumer
- - - - 146 50 1 5 0 - 0 - 146 50 1 5
Commercial business
- - - - 348 24 - - 0 - 0 - 348 24 0 -
Purchased credit impaired loans
- - - - 424 32 - - 0 - 0 - 424 32 0 -
Total
$ 1,106 $ 1,208 $ 2,137 $ 3,886 $ 1,106 $ 1,208 $ 2,137 $ 3,886

~~Accretable yield, or income recorded for the~~ ~~six~~ ~~months ended~~ ~~June~~
Accretable yield, or income recorded for the nine months ended September 30, is as follows:

(dollars in thousands)

First Federal

Liberty Savings

First Personal

AJSB

Total

First Federal

Libery Savings

First Personal

AJSB

Total

2019
$ 22 $ 42 $ 357 $ 451 $ 872 $ 22 $ 42 $ 402 $ 843 $ 1,245
2020
- - 285 691 $ 975 0 0 416 936 1,352

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

(dollars in thousands)

First Personal

AJSB

Total

2020
$ 162 $ 347 $ 509
2021
311 694 1,005
2022
300 694 994
2023
68 287 355
Total
$ 841 $ 2,022 $ 2,863
Accretable yield, or income expected to be recorded in the future is as follows:

(dollars in thousands)

First Personal

AJ Smith

Total

2020
$ 73 $ 167 $ 240
2021 292 667 959
2022
282 667 949
2023
63 275 338
Total
$ 710 $ 1,776 $ 2,486

Note 6 - Foreclosed Real Estate
Foreclosed real estate at period-end is summarized below:

(Dollars in thousands)

June 30, 2020

December 31, 2019

Residential real estate
$ 524 $ 957
Commercial real estate
110 126
Total
$ 634 $ 1,083

(Dollars in thousands)

September 30, 2020

December 31, 2019

Residential real estate
$ 375 $ 957
Commercial real estate
126 126
Total
$ 501 $ 1,083

Note 7 – Intangibles and Acquisition Related Accounting
The Bancorp established a goodwill balance totaling $11.1 million with the acquisitions of AJSB, First Personal, First Federal, and Liberty Savings. Goodwill of $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, or when circumstances or events are deemed significant enough to test 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. As a result of the COVID-19 outbreak, and its broad effects on the economy, the Bancorp deemed it necessary to perform an interim impairment test of goodwill as of June 30, 2020. As part of the impairment test, the Bancorp enlisted a third party expert to perform a quantitative goodwill valuation analysis. The analysis showed the implied fair value of goodwill was higher than its carrying value and no impairment was ~~necessary for~~necessary. During the ~~six~~third ~~months ended~~quarter, the Bancorp performed an internal analysis, noting 0 impairment was necessary. The Bancorp will perform their annual impairment test as of ~~June 30, 2020.~~December 31, 2020, ~~Goodwill~~and depending on current market conditions, the Bancorp will consider the use of a third party expert to perform another quantitative goodwill valuation analysis.Goodwill totaled $11.1 million as of ~~June~~September 30, 2020, and December 31, 2019.

17

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:

~~Amortization recorded for the~~ ~~six~~ ~~months ended~~ ~~June~~
Amortization recorded for the nine months ended September 30, 2020 is as follows:

(dollars in thousands)

First Federal

Liberty Savings

First Personal

AJSB

Total

First Federal

Liberty Savings

First Personal

AJSB

Total

Current period
$ 6 $ 29 $ 238 $ 224 $ 497 $ 9 $ 43 $ 356 $ 337 $ 745

Amortization to be recorded in future periods, is as follows:

(dollars in thousands)

First Federal

Liberty Savings

First Personal

AJSB

Total

First Federal

Liberty Savings

First Personal

AJSB

Total

Remainder 2020
6 29 238 224 497 3 15 119 112 249
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 0 38 475 449 962
2024
- - 470 449 919 0 0 470 449 919
2025
- - - 261 261 0 0 0 261 261
2026
- - - - 0 0 0 0
Total
$ 19 $ 183 $ 2,133 $ 2,281 $ 4,616 $ 16 $ 169 $ 2,014 $ 2,169 $ 4,368

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 $34 thousand of amortization was taken as income during the ~~six~~nine months ended ~~June~~September 30, 2020. The fair market premium on the certificates of deposit has fully amortized as of ~~June~~September 30, 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 DuPage, 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.

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~~nine months ended ~~June~~September 30, 2020, and 2019 are as follows:

Three Months Ended

Six Months Ended

Three Months Ended

Nine Months Ended

(Dollars in thousands, except per share data)

June 30,

June 30,

September 30,

September 30,

2020

2019

2020

2019

2020

2019

2020

2019

Basic earnings per common share:

Net income as reported
$ 5,063 $ 4,023 $ 8,255 $ 6,245 $ 4,903 $ 3,578 $ 13,158 $ 9,823
Weighted average common shares outstanding
3,463,136 3,451,961 3,460,820 3,397,872
Weighted average common shares outstanding..
3,463,136 3,451,797 3,461,598 3,416,045
Basic earnings per common share
$ 1.46 $ 1.17 $ 2.39 $ 1.84 $ 1.42 $ 1.04 $ 3.80 $ 2.88
Diluted earnings per common share:
- -
Net income as reported
$ 5,063 $ 4,023 $ 8,255 $ 6,245 $ 4,903 $ 3,578 $ 13,158 $ 9,823
Weighted average common shares outstanding
3,463,136 3,451,961 3,460,820 3,397,872
Weighted average common shares outstanding..
3,463,136 3,451,797 3,461,598 3,416,045
Weighted average common and dilutive potential common shares outstanding
3,463,136 3,451,961 3,460,820 3,397,872 3,463,136 3,451,797 3,461,598 3,416,045
Diluted earnings per common share
$ 1.46 $ 1.17 $ 2.39 $ 1.84 $ 1.42 $ 1.04 $ 3.80 $ 2.88

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 ~~six~~nine months ended ~~June~~September 30, 2020, stock based compensation expense of ~~$202~~$309 thousand was recorded, compared to ~~$154~~$232 thousand for the ~~six~~nine months ended ~~June~~September 30, 2019. It is anticipated that current outstanding unvested awards will result in additional compensation expense of approximately ~~$794~~$687 thousand through 2023 with an additional ~~$215~~$107 thousand in 2020, $339 thousand in 2021, $209 thousand in 2022, and ~~$31~~$32 thousand in 2023.

18

There were 0 incentive stock options granted during the first ~~six~~nine months of 2020 or 2019. 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 ~~June~~September 30, 2020, there were 0 outstanding incentive stock options.

18

There were 13,243 shares of restricted stock granted during the first ~~six~~nine months of 2020 compared to 7,407 shares granted during the first ~~six~~nine months of 2019. 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, 2019, and ~~six~~nine months ended ~~June~~September 30, 2020, follows:

Non-vested Shares

Shares

Weighted
Average
Grant Date
Fair Value

Shares

Weighted
Average
Grant
Date
Fair Value

Non-vested at January 1, 2019
27,423 $ 32.58 27,423 $ 32.58
Granted
7,407 43.00 7,407 43.00
Vested
(4,625 ) 29.37 (4,625 ) 29.37
Forfeited
- - 0 0
Non-vested at December 31, 2019
30,205 $ 35.63 30,205 $ 35.63

Non-vested at January 1, 2020.
30,205 $ 35.63
Non-vested at January 1, 2020
30,205 $ 35.63
Granted
13,243 44.30 13,243 44.30
Vested
(6,400 ) 27.50 (6,400 ) 27.50
Forfeited
- - 0 0
Non-vested at June 30, 2020
37,048 $ 40.13
Non-vested at September 30, 2020
37,048 $ 40.13

Note 11 – Change in Accounting Principles

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 is effective for the Company’s year ending December 31, 2020, and was adopted on January 1, 2020. The adoption of this ASU has not had a material impact on the consolidated financial statements, and the Bancorp has not recorded goodwill impairment to date as part of their acquisition activity.

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 was effective for the Company’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, management has recognized amortization expense as dictated by the amount of premiums and the differences between maturity and call dates at the time of adoption.

19

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. In October 2019, the FASB voted and approved proposed changes to the effective date of this ASU for smaller reporting companies, such as the Bancorp, and other non-SEC reporting entities. The approval changed the effective date of the ASU to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. The new credit loss guidance will be effective for the Bancorp's year ending December 31, 2023. 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.

Note 13 – Derivative Financial Instruments

The Bancorp has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Bancorp to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Bancorp enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Bancorp agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Bancorp agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Bancorp’s results of operations.

The Bancorp enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (i.e., interest rate lock commitment). The interest rate lock commitments are considered derivatives and are recorded on the accompanying consolidated balance sheets at fair value in accordance with FASB ASC 815, Derivatives and Hedging.

20
The following table shows the amounts of non-hedging derivative financial instruments:

June 30, 2020

September 30, 2020
September 30, 2020

Notational or

Asset derivatives

Liability derivatives

Notational or

Asset derivatives

Liability derivatives

(Dollars in thousands)

contractual amount

Statement of Financial Condition classification

Fair value

Statement of Financial Condition classification

Fair value

contractual amount

Statement of Financial Condition classification

Fair value

Statement of Financial Condition classification

Fair value

Interest rate swap contracts
$ 38,866
Other assets
$ 3,778
Other liabilties
$ 3,778 $ 61,909
Other assets
$ 4,062
Other liabilties
$ 4,062
Interest rate lock commitments
35,904
Other assets
485 N/A - 27,507
Other assets
495 N/A 0
Total
$ 74,770 $ 4,263 $ 3,778 $ 89,416 $ 4,557 $ 4,062

December 31, 2019 December 31, 2019
December 31, 2019

Notational or

Asset derivatives

Liability derivatives

Notational or

Asset derivatives

Liability derivatives

(Dollars in thousands)

contractual amount

Statement of Financial Condition classification

Fair value

Statement of Financial Condition classification

Fair value

contractual amount

Statement of Financial Condition classification

Fair value

Statement of Financial Condition classification

Fair value

Interest rate swap contracts
$ 29,466
Other assets
$ 1,358
Other liabilties
$ 1,358 $ 29,466
Other assets
$ 1,358
Other liabilties
$ 1,358
Interest rate lock commitments
12,822
Other assets
186 N/A - 12,822
Other assets
186 N/A 0
Total
$ 42,288 $ 1,544 $ 1,358 $ 42,288 $ 1,544 $ 1,358

20

   The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments:

Six Months Ended

Nine Months Ended

June 30,

September 30,

(Dollars in thousands)
Statement of Income Classification

2020

2019

Statement of Income Classification

2020

2019

Interest rate swap contracts
Other income
$ 231 $ 338
Other income
$ 512 $ 338
Interest rate lock commitments
Gain on sale of loans held-for-sale, net
298 -
Gain on sale of loans held-for-sale, net
309 0
Total
$ 529 $ 338
Total
$ 821 $ 338

   The following table shows the offsetting of financial assets and derivative assets:

Gross Amounts not Offset in the

Gross Amounts not Offset in the

Statement of Financial Condition

Statement of Financial Condition

(Dollars in thousands)

Gross Amounts of
Recognized Assets

Gross Amounts Offset in the
Statement of Financial Condition

Net Amounts of Liabilities Presented
in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Received

Net Amount

Gross Amounts of
Recognized Assets

Gross Amounts Offset in the Statement of Financial Condition

Net Amounts of Assets Presented in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Received

Net Amount

June 30, 2020

September 30, 2020

Interest rate swap contracts
$ 3,778 $ - $ 3,778 $ - $ - $ 3,778 $ 4,062 $ 0 $ 4,062 $ 0 $ 0 $ 4,062
Interest rate lock commitments
485 - 485 - - 485 495 0 495 0 0 495
Total
$ 4,263 $ - $ 4,263 $ - $ - $ 4,263 $ 4,557 $ 0 $ 4,557 $ 0 $ 0 $ 4,557

Gross Amounts not Offset in the

Gross Amounts not Offset in the

Statement of Financial Condition

Statement of Financial Condition

(Dollars in thousands)

Gross Amounts of
Recognized Liabilities

Gross Amounts Offset in the
Statement of Financial Condition

Net Amounts of Liabilities Presented
in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Received

Net Amount

Gross Amounts of
Recognized Liabilities

Gross Amounts Offset in the Statement of Financial Condition

Net Amounts of Liabilities Presented in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Received

Net Amount

December 31, 2019

Interest rate swap contracts
$ 1,358 $ - $ 1,358 $ - $ - $ 1,358 $ 1,358 $ 0 $ 1,358 $ 0 $ 0 $ 1,358
Interest rate lock commitments
186 - 186 - - 186 186 0 186 0 0 186
Total
$ 1,544 $ - $ 1,544 $ - $ - $ 1,544 $ 1,544 $ 0 $ 1,544 $ 0 $ 0 $ 1,544

   The following table shows the offsetting of financial liabilities and derivative liabilities:

Gross Amounts not Offset in the

Gross Amounts not Offset in the

Statement of Financial Condition

Statement of Financial Condition

(Dollars in thousands)

Gross Amounts of
Recognized Liabilities

Gross Amounts Offset in the
Statement of Financial Condition

Net Amounts of Liabilities Presented
in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Pledged

Net Amount

Gross Amounts of
Recognized Liabilities

Gross Amounts Offset in the Statement of Financial Condition

Net Amounts of Liabilities Presented in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Pledged

Net Amount

March 31, 2020

September 30, 2020

Interest rate swap contracts
$ 3,778 $ - $ 3,778 $ - $ 3,660 $ 118 $ 4,062 $ 0 $ 4,062 $ 0 $ 3,930 $ 132
Total
$ 3,778 $ - $ 3,778 $ - $ 3,660 $ 118 $ 4,062 $ 0 $ 4,062 $ 0 $ 3,930 $ 132

Gross Amounts not Offset in the

Gross Amounts not Offset in the

Statement of Financial Condition

Statement of Financial Condition

(Dollars in thousands)

Gross Amounts of
Recognized Liabilities

Gross Amounts Offset in the
Statement of Financial Condition

Net Amounts of Liabilities Presented
in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Pledged

Net Amount

Gross Amounts of
Recognized Liabilities

Gross Amounts Offset in the Statement of Financial Condition

Net Amounts of Liabilities Presented in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Pledged

Net Amount

December 31, 2019

Interest rate swap contracts
$ 1,358 $ - $ 1,358 $ - $ 2,290 $ (932 ) $ 1,358 $ 0 $ 1,358 $ 0 $ 2,290 $ (932 )
Total
$ 1,358 $ - $ 1,358 $ - $ 2,290 $ (932 ) $ 1,358 $ 0 $ 1,358 $ 0 $ 2,290 $ (932 )

21

Note 14 - Fair Value
The Fair Value Measurements Topic establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Topic describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgments and assumptions used in pricing could result in different estimates of value. In certain cases where market data is not readily available because of a lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy.

At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with 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 semi-annually during June and 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 semi-annual other-than-temporary impairment analysis, management utilizes current reports issued by the trustee, which contain principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled trust preferred security. In addition, a detailed review of the performing collateral was performed. Based on current market conditions and a review of the trustee reports, management performed an analysis of the pooled trust preferred securities and 0 additional impairment was taken at June 30, 2020. A specialist will be used to review all pooled trust preferred securities again at December 31, 2020.

The table below shows the credit loss roll forward on a year-to-date basis for the Bancorp’s pooled trust preferred securities that have been classified with other-than-temporary impairment:

(Dollars in Thousands)

(Dollars in Thousands)

Collateralized

Collateralized

debt obligations

debt obligations

other-than-temporary

other-than-temporary

(Dollars in thousands)

impairment

impairment

Ending balance, December 31, 2019
$ 173 $ 173
Additions not previously recognized
- 0
Ending balance, June 30, 2020
$ 173
Ending balance, September 30, 2020
$ 173

At ~~June~~September 30, 2020, ~~30,2020,~~trust preferred securities with a cost basis of $2.2 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.

22

Assets and Liabilities Measured at Fair Value on a Recurring Basis
There were no transfers to or from Levels 1 and 2 during the ~~six~~nine months ended ~~June~~September 30, 2020. Assets measured at fair value on a recurring basis are summarized below:

Fair Value Measurements at June 30, 2020, Using

Fair Value Measurements at September 30, 2020, 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
$ 21,457 $ 21,457 $ - $ - $ 26,789 $ 26,789 $ 0 $ 0
residential mortgage-backed securities
134,073 - 134,073 -
U.S. government sponsored entities
4,989 4,989
Collateralized mortgage obligations and residential mortgage-backed securities
128,963 0 128,963 0
Municipal securities
138,374 - 138,374 - 162,561 0 162,561 0
Collateralized debt obligations
815 - - 815 879 0 0 879
Total securities available-for-sale
$ 294,719 $ 21,457 $ 272,447 $ 815 $ 324,181 $ 26,789 $ 296,513 $ 879

Fair Value Measurements at December 31, 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)

Available-for-sale debt securities:

Money market fund
$ 9,670 $ 9,670 $ - $ -
U.S. government sponsored entities
13,058 - 13,058 -
Collateralized mortgage obligations and residential mortgage-backed securities
150,988 - 150,988 -
Municipal securities
102,427 - 102,427 -
Collateralized debt obligations
1,076 - - 1,076
Total securities available-for-sale
$ 277,219 $ 9,670 $ 266,473 $ 1,076

Fair Value Measurements at December 31, 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)

Available-for-sale debt securities:

Money market fund
$ 9,670 $ 9,670 $ 0 $ 0
U.S. government sponsored entities
13,058 0 13,058 0
Collateralized mortgage obligations and residential mortgage-backed securities
150,988 0 150,988 0
Municipal securities
102,427 0 102,427 0
Collateralized debt obligations
1,076 0 0 1,076
Total securities available-for-sale
$ 277,219 $ 9,670 $ 266,473 $ 1,076

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, 2019
$ 2,049 $ 2,049
Principal payments
(38 ) (38 )
Total unrealized gains, included in other comprehensive income
52 52
Transfers in and/or (out) of Level 3
(987 ) (987 )
Ending balance, December 31, 2019
$ 1,076 $ 1,076

Beginning balance, January 1, 2020
$ 1,076 $ 1,076
Principal payments
(11 ) (16 )
Total unrealized losses, included in other comprehensive income
(250 )
Total unrealized losses, included in other comprehensive income..
(181 )
Sale out of Level 3
- 0
Ending balance, June 30, 2020
$ 815
Ending balance, September 30, 2020
$ 879

23
Assets measured at fair value on a non-recurring basis are summarized below:

(Dollars in thousands)

(Dollars in thousands)

Fair Value Measurements at June 30, 2020, Using

Fair Value Measurements at September 30, 2020, 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
$ 6,441 $ - $ - $ 6,441 $ 10,985 $ 0 $ 0 $ 10,985
Foreclosed real estate
634 - - 634 501 0 0 501

(Dollars in thousands)

(Dollars in thousands)

Fair Value Measurements at December 31, 2019, Using

Fair Value Measurements at December 31, 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
$ 7,052 $ - $ - $ 7,052 $ 7,052 $ 0 $ 0 $ 7,052
Foreclosed real estate
1,083 - - 1,083 1,083 0 0 1,083

23

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~~$12.3 million and the related specific reserves totaled approximately ~~$482 thousand,~~$1.3 million, resulting in a fair value of impaired loans totaling approximately ~~$6.4~~$11.0 million, at ~~June~~September 30, 2020. The recorded investment of impaired loans was approximately $7.2 million and the related specific reserves totaled approximately $166 thousand, resulting in a fair value of impaired loans totaling approximately $7.1 million, at December 31, ~~2020.~~2019. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. The fair value of foreclosed real estate is similarly determined by using the results of recent real estate appraisals. The numerical range of unobservable inputs for these valuation assumptions is not meaningful to this presentation.

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

June 30, 2020

Estimated Fair Value Measurements at June 30, 2020 Using

September 30, 2020

Estimated Fair Value Measurements at September 30, 2020 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
$ 97,305 $ 97,305 $ 97,305 $ - $ - $ 84,447 $ 84,447 $ 84,447 $ 0 $ 0
Certificates of deposit in other financial institutions
1,639 1,614 - 1,614 - 1,901 1,872 0 1,872 0
Securities available-for-sale
294,719 294,719 21,457 272,447 815 324,181 324,181 4,989 318,313 879
Loans held-for-sale
10,024 10,311 10,311 - - 5,538 5,721 5,721 0 0
Loans receivable, net
972,036 989,824 - - 989,824 965,226 986,847 0 0 986,847
Federal Home Loan Bank stock
3,918 3,918 - 3,918 - 3,918 3,918 0 3,918 0
Interest rate swap agreements
3,778 3,778 - 3,778 - 4,062 4,062 0 4,062 0
Accrued interest receivable
4,284 4,284 - 4,284 - 4,714 4,714 0 4,714 0

Financial liabilities:

Non-interest bearing deposits
262,001 262,001 262,001 - - 258,170 258,170 258,170 0 0
Interest bearing deposits
1,015,633 1,016,961 720,953 296,008 - 1,022,486 1,023,402 737,047 286,355 0
Repurchase agreements
17,159 17,166 15,425 1,741 - 19,145 19,149 17,411 1,738 0
Borrowed funds
12,000 12,140 - 12,140 - 12,000 12,072 0 12,072 0
Interest rate swap agreements
3,778 3,778 - 3,778 - 4,062 4,062 0 4,062 0
Accrued interest payable
65 65 - 65 - 62 62 0 62 0

December 31, 2019

Estimated Fair Value Measurements at December 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
$ 47,258 $ 47,258 $ 47,258 $ - $ -
Certificates of deposit in other financial institutions
2,170 2,137 - 2,137 -
Securities available-for-sale
277,219 277,219 9,670 266,473 1,076
Loans held-for-sale
6,091 6,204 6,204 - -
Loans receivable, net
897,870 917,174 - - 917,174
Federal Home Loan Bank stock
3,912 3,912 - 3,912 -
Interest rate swap agreements
1,358 1,358 - 1,358 -
Accrued interest receivable
4,029 4,029 - 4,029 -

Financial liabilities:

Non-interest bearing deposits
172,094 172,094 172,094 - -
Interest bearing deposits
982,276 982,241 654,573 327,668 -
Repurchase agreements
11,499 11,499 9,721 1,778 -
Borrowed funds
14,000 14,108 - 14,108 -
Interest rate swap agreements
1,358 1,358 - 1,358 -
Accrued interest payable
179 179 - 179 -
24

December 31, 2019

Estimated Fair Value Measurements at December 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
$ 47,258 $ 47,258 $ 47,258 $ 0 $ 0
Certificates of deposit in other financial institutions
2,170 2,137 0 2,137 0
Securities available-for-sale
277,219 277,219 9,670 266,473 1,076
Loans held-for-sale
6,091 6,204 6,204 0 0
Loans receivable, net
897,870 917,174 0 0 917,174
Federal Home Loan Bank stock
3,912 3,912 0 3,912 0
Interest rate swap agreements
1,358 1,358 0 1,358 0
Accrued interest receivable
4,029 4,029 0 4,029 0

Financial liabilities:

Non-interest bearing deposits
172,094 172,094 172,094 0 0
Interest bearing deposits
982,276 982,241 654,573 327,668 0
Repurchase agreements
11,499 11,499 9,721 1,778 0
Borrowed funds
14,000 14,108 0 14,108 0
Interest rate swap agreements
1,358 1,358 0 1,358 0
Accrued interest payable
179 179 0 179 0

The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended ~~June~~September 30, 2020 and December 31, 2019:

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. Interest rate swap agreements, both assets and liabilities, are valued by a third-party pricing agent using an income approach (Level 2). 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.

24

   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.

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 (“the Bank”), an Indiana commercial bank, and NWIN Risk Management, Inc., a captive insurance company, are wholly-owned subsidiaries of the Bancorp. The Bank (which was formerly known as Peoples Bank SB) converted from an Indiana-chartered stock savings bank to an Indiana-chartered commercial bank effective May 22, 2020. 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 ~~June~~September 30, 2020, as compared to December 31, 2019, and the results of operations for the quarter and ~~six~~nine months ending ~~June~~September 30, 2020, and ~~June~~September 30, 2019. 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, 2019.

25
At ~~June~~September 30, 2020, the Bancorp had total assets of $1.5 billion, total loans receivable of ~~$981.9~~$975.9 million and total deposits of $1.3 billion. Stockholders' equity totaled ~~$145.2~~$148.9 million or ~~9.85%~~10.1% of total assets, with a book value per share of ~~$41.92.~~$43.01. Net income for the quarter ended ~~June 30,2020,~~September 30, 2020, was ~~$5.1~~$4.9 million, or ~~$1.46~~$1.42 earnings per common share for both basic and diluted calculations. For the quarter ended ~~June~~September 30, 2020, the return on average assets (ROA) was ~~1.42%~~1.33%, while the return on average stockholders’ equity (ROE) was ~~14.32%~~13.42%. Net income for the ~~six~~nine months ended ~~June~~September 30, 2020, was ~~$8.3~~$13.2 million, or ~~$2.39~~$3.80 earnings per common share for both basic and diluted calculations. For the ~~six~~nine months ended ~~June~~September 30, 2020, the ROA was ~~1.20%~~1.25%, while the ROE was ~~11.90%~~12.43%.

Recent Developments

COVID-19

In December 2019, COVID-19 was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments ordered non-essential businesses to close and residents to shelter in place at home. While many of these measures have been lifted or eased since the beginning of the pandemic and economic growth is beginning to recover, the pandemic resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak,the stock markets have experienced high levels of volatility at times and, in particular, many bank stocks have declined in value. In response to the COVID-19 outbreak, the Federal Reserve Board has reduced the benchmark federal funds rate to a target range of 0% to 0.25%, and the yields on 10- and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are ~~requiring~~encouraging lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality, restaurant, and retail industries.

25

In addition, the spread of COVID-19 has caused us to modify our business practices, including remote employee work locations, restrictions on employee travel, mask and social distancing guidelines for our employees, and the cancellation or postponement of physical participation in meetings, events, and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19 or will otherwise be satisfactory to government authorities and regulators.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 ~~outbreak~~pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be fully reopened in our market areas.

As a result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a significant effect on our business, financial condition, liquidity, and results of operations:

●
Demand for our products and services may decline, making it difficult to grow assets and income.

●
If the economies in the Bank’s market areas are unable to fully reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased provisions for loan losses, charge-offs, and reduced income.

●
Collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase.
26

●
The Bank’s allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income.

●
The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to the Bank.

●
As a result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread, and correspondingly reducing our net income.

●
A material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend.

●
Our wealth management revenues may decline with continuing market volatility.

●
We rely on third party vendors for certain critical services, and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on the Bank.

●
FDIC premiums may increase if the agency experiences additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with the Bancorp and the Bank for many years. The Bancorp has put in place measures such as remote work to protect the health and safety of our employees. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. However, the Bancorp has an appropriate emergency succession plan in place, which is reviewed and approved annually by the Bancorp’s Board of Directors.

26

Any one or a combination of the factors identified above may remain prevalent for a significant period of time and could negatively impact our business, financial condition, and results of operations and prospects even after the COVID-19 outbreak has subsided.

The extent to which the COVID-19 outbreak impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can fully resume. Even after the COVID-19 outbreak has subsided, we may continue to experience significant impacts to our business as a result of the virus’s regional, national, and global economic impact, including the availability of credit, adverse impacts on our liquidity, and any recession that has occurred or may occur in the future.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. That being said, we believe the Bancorp and the Bank are well prepared for the economic and social consequences of the COVID-19 global pandemic.

Impacts of COVID-19

The COVID-19 pandemic began to impact the Bancorp’s operations during March 2020, and as of the date of this report, continues to influence operating decisions. In response to the pandemic, the Bancorp’s management implemented the following policy actions:

●
Participating in the U.S. Small Business Administration’s Paycheck Protection Program ~~(PPP)~~, a program initiated to help small businesses maintain their workforce during the pandemic. As of ~~June~~September 30, 2020, the Bancorp approved ~~773~~782 applications totaling $91.5 million, with an average loan size of approximately ~~$118,000.~~$117,000. These loans will help local business owners retain ~~10,744~~10,758 employees based on the borrower’s ~~application.~~applications. The Bancorp’s SBA lender fee is averaging approximately 3.80% for this program, and fees will be earned over the life of the associated loan. .
27

●
Prudently helping borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. Consistent with regulatory guidance, the Bancorp will consider ~~and has been~~ deferring or modifying ~~its~~a loan customer’s repayment obligation if ~~their~~the customer’s cash flow has been negatively impacted by the pandemic. The Bancorp’s management anticipates that additional borrower deferral and modification requests will continue during the remainder of ~~2020.~~2020 Loans modified to interest only payment or full payment deferral as part of the effects of COVID-19 as of ~~June~~September 30, 2020, are as follows:

(Dollars in thousands)

(Unaudited)

As of June 30, 2020

Mortgage loans

Commercial Loans

Number
of Loans

Recorded
Investment

Number
of Loans

Recorded
Investment

Interest only payment
90 $ 10,975 95 $ 42,259
Full payment deferral
8 653 41 27,220
Total $
98 $ 11,628 136 $ 69,479

27

(Dollars in thousands)

(Unaudited)

As of September 30, 2020

Mortgage loans

Commercial Loans

Number of Loans

Recorded Investment

Number of Loans

Recorded Investment

Interest only payment
38 $ 4,399 5 $ 2,021
Full payment deferral
3 260 3 6,330
Total $
41 $ 4,659 8 $ 8,351
●
As the Bancorp continues to monitor the borrowers that are in and outside of deferral status, some loan relationships may be deemed non-performing. As of September 30, 2020, a single large commercial real estate loan relationship, which operates a hotel, with a carrying balance of $5.3 million, came out of deferral and was deemed non-performing because of the COVID-19 pandemic stresses. Through management’s review of the loan relationship, a specific reserve within the allowance for loan losses was allocated as of September 30, 2020. No other COVID-19 impacted loans that have come out of deferral have been deemed non-performing at this time. As of September 30, 2020, a total of 169 loans have come out of COVID-19 related deferral status and continue to be performing with carrying balances of $68.8 million.

●
Commercial real estate loans are one of the Bancorp’s primary loan concentrations. Key loan data for commercial real estate loans secured by restaurants, hotels, and retail non-owner occupied properties indicate a strong weighted average loan-to-value and debt service coverage. As of ~~June~~September 30, 2020, commercial real estate loans secured by restaurants totaled $22.1 million and represented 5%8% of the commercial real estate ~~construction and land development, and multifamily loan~~ portfolio, ~~of which is comprised of 47% quick service and fast casual loans balances,~~ and had a weighted average debt coverage ratio of ~~1.60~~1.57 and loan to value of ~~50%~~49%. The restaurant portfolio is comprised of 46% quick service and fast casual loan balances. As of ~~June~~September 30, 2020, commercial real estate loans secured by hotels totaled $23.8 million and represented 5%8% of the commercial real estate ~~construction and land development, and multifamily loan~~ portfolio, ~~of which is comprised of 88% flagged hotel loan balances,~~ and had a weighted average debt coverage ratio of ~~1.46~~1.40 and loan to value of ~~59%~~70%. The hotel portfolio is comprised of 89% flagged hotel loan balances. As of ~~June~~September 30, 2020, commercial real estate loans secured by retail non-owner occupied properties totaled $59.5 million and represented ~~13%~~21% of the commercial real estate ~~construction and land development, and multifamily loan~~ portfolio and had a weighted average debt coverage of ~~1.48~~1.55 and loan to value of ~~51%~~54%.

●
Maintaining a strong liquidity position to support funding demand. The Bancorp has sufficient on balance sheet liquidity and contingent liquidity sources to meet funding demand.

●
Implementing remote working policies for the Bancorp’s workforce. 142 employees or 50% of the workforce have been provided remote work capabilities to support social distancing measures.

●
Keeping the Bancorp’s 22 banking centers open during the pandemic. To ensure banking processes run efficiently, drive-ups are open and fully functional, and a wide range of digital banking options are available. All banking centers lobbies are also available to serve customers, however we are requesting that they make appointments via the Bank’s website to help us adhere to social distancing guidelines.

28

U.S. Small Business Administration Paycheck Protection Program

The Bank has participated in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), which was initiated on April 3, 2020 in order to help small businesses maintain their workforce during the COVID-19 pandemic. The Bank began accepting applications from qualified business customers immediately upon the initiation of the PPP. Under the PPP, borrowers who use the funds for payroll and certain other expenses are eligible to have the loan balances forgiven by the SBA. Applications for forgiveness can be submitted to the Bank beginning eight weeks after loan disbursement. The PPP loans carry a fixed interest rate of 1.0% and a term of two years (for loans made before June 5, 2020) or five years (for loans made on or after June 5, 2020), if not forgiven, in whole or in part, and are 100% guaranteed by the SBA. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the Bank or the date that is ~~six~~nine months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. As of ~~June~~September 30, 2020, the Bank approved ~~773~~782 applications totaling $91.5 million in loan requests, with an average loan size of approximately ~~$118,000.~~$117,000. The Bank began closing and funding PPP loans late during the week of April 6, 2020. These loans are expected to help local business owners retain ~~10,744~~10,758 employees. We expect the majority of the PPP loans we have originated to qualify for and ~~receive~~will have applied for forgiveness from the SBA by December 31, 2020. This expectation is subject to change due to borrower behavior, changing SBA requirements and processes related to loan forgiveness, and other relevant factors. The Bank is a certified SBA lender and was one of the first local banks to fund loans under the PPP. The PPP ~~has been extended until~~expired on August 8, ~~2020, and may be extended again. The Bank may have additional PPP loan originations in the third quarter of 2020, but not likely at the pace experienced in the second quarter of~~ 2020.

SBA Loan Subsidy Program

Pursuant to the CARES Act, Section 1112, Congress has determined that all existing borrowers under the SBA Section 7(a) program are adversely affected by COVID-19, and are therefore entitled to a subsidy in the form of relief payments. Specifically, the CARES Act provides that the SBA will pay the principal and interest on any existing and current SBA 7(a) loan for a period of ~~six~~nine months. These principal and interest payments will be made by the SBA directly to the SBA 7(a) lender and will begin with the next payment due. The Bancorp is a qualified SBA Section 7(a) lender, and is participating in the Section 1112 program. As of ~~June~~September 30, 2020, the Bancorp had 4950 loans eligible for the program, with an aggregate principal amount of ~~$6.7~~$9.4 million. Payments under the program will not constitute new loans for the Bancorp, but simply payments of principal and interest on loans that already exist in the Bancorp’s SBA 7(a) loan portfolio and are current on borrower payments. The Bancorp received its first tranche of payments under the program on April 30, 2020, and expects to receive subsequent payments from the SBA by the 25th of each month thereafter until the expiration of the six-month program period.

28

Financial Condition
During the ~~six~~nine months ended ~~June~~September 30, 2020, total assets increased by ~~$145.3~~$152.3 million ~~(10.9%~~(11.5%), with interest-earning assets increasing by ~~$143.0~~$158.0 million ~~(11.7%~~(12.9%). At ~~June~~September 30, 2020, interest-earning assets totaled $1.4 billion compared to $1.2 billion at December 31, 2019. Earning assets represented ~~92.6%~~93.2% of total assets at ~~June~~September 30, 2020 and 92.0% of total assets at December 31, 2019. The increase in total assets and interest earning assets for the ~~six~~nine months was primarily the result of the Bancorp’s participation in the ~~PPP.~~PPP, and increased cash balances related to strong core deposit growth.

Net loans receivable totaled ~~$981.9~~$975.9 million at ~~June~~September 30, 2020, compared to $906.9 million at December 31, 2019. 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 continues to review its loan pipelines and credit product specifications in ~~anticipation of~~connection with the ~~significant declines in~~effects on economic activity and employment stemming from the COVID-19 global pandemic. As a result of this review, management believes the Bancorp’s loan portfolio and current pipelines are well-positioned to withstand the current effects of the pandemic and address the needs of the Bancorp’s customers

29
The Bancorp’s end-of-period loan balances were as follows:

June 30,

September 30,

2020

December 31,

2020

December 31,

(Dollars in thousands)

(unaudited)

2019

(unaudited)

2019

Balance

% Loans

Balance

% Loans

Balance

% Loans

Balance

% Loans

Residential real estate
$ 284,563 29.0 % $ 299,333 33.0 % $ 284,293 29.1 % $ 299,333 33.0 %
Home equity
46,312 4.7 % 49,181 5.4 % 42,183 4.3 % 49,181 5.4 %
Commercial real estate
286,122 29.1 % 283,108 31.2 % 285,701 29.3 % 283,108 31.2 %
Construction and land development
92,982 9.5 % 87,710 9.7 % 89,176 9.1 % 87,710 9.7 %
Multifamily
56,070 5.7 % 51,286 5.7 % 50,701 5.2 % 51,286 5.7 %
Farmland
221 0.0 % 227 0.0 % 218 0.0 % 227 0.0 %
Consumer
522 0.1 % 627 0.1 % 467 0.0 % 627 0.1 %
Commercial business
178,863 18.2 % 103,088 11.4 % 182,182 18.7 % 103,088 11.4 %
Manufactured homes
22,518 2.3 % 16,505 1.8 % 27,814 2.8 % 16,505 1.8 %
Government
13,729 1.4 % 15,804 1.7 % 13,205 1.5 % 15,804 1.7 %
Loans receivable
$ 981,902 100.0 % $ 906,869 100.0 % $ 975,940 100.0 % $ 906,869 100.0 %

Adjustable rate loans / loans receivable
$ 496,505 50.6 % $ 504,941 55.7 % $ 489,037 50.1 % $ 504,941 55.7 %

June 30,

September 30,

2020

December 31,
��
2020

December 31,

(unaudited)

2019

(unaudited)

2019

Loans receivable to total assets
66.6 % 68.3 % 65.9 % 68.3 %
Loans receivable to earning assets
71.9 % 74.2 % 70.7 % 74.2 %
Loans receivable to total deposits
76.9 % 78.6 % 76.2 % 78.6 %

The Bancorp is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the ~~six~~nine months ended ~~June~~September 30, 2020, the Bancorp originated ~~$114.2~~$171.2 million in new fixed rate mortgage loans for sale, compared to ~~$29.6~~$54.6 million during the ~~six~~nine months ended ~~June~~September 30, 2019. The increase in originations of these fixed rate mortgage loans was due to the low interest rate environment and new purchase, and customer preferences to refinance existing mortgages to lower rates. Net gains realized from the mortgage loan sales totaled ~~$3.6~~$6.0 million for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$642 thousand~~$1.3 million for the ~~six~~nine months ended ~~June~~September 30, 2019. At ~~June 30,2020,~~September 30, 2020, the Bancorp had ~~$10.0~~$5.5 million in loans that were classified as held for sale, compared to $6.1 million at December 31, 2019.

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 ~~June~~September 30, 2020, non-performing loans that remained accruing and more than 90 days past due include ~~six commercial real estate~~two construction and land development loans totaling ~~$1.2 million, five residential real estate loans totaling $343 thousand, two commercial business totaling $318~~$345 thousand and one ~~home equity~~commercial busness loan totaling ~~$49~~$234 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 received.

The Bancorp's nonperforming loans are summarized below:
(Dollars in thousands)

Loan Segment

September 30,
2020

December 31,
2019

Residential real estate
$ 6,650 $ 4,826
Home equity
509 492
Commercial real estate
5,411 719
Construction and land development
345 -
Multifamily
528 420
Farmland
- -
Commercial business
1,617 870
Consumer
- -
Manufactured homes
- 46
Government
- -
Total
$ 15,060 $ 7,373
Nonperforming loans to total loans
1.54 % 0.81 %
Nonperforming loans to total assets
1.02 % 0.55 %
2930

The Bancorp's nonperforming loans are summarized below:

(Dollars in thousands)

Loan Segment

June 30, 2020
(unaudited)

December 31,
2019

Residential real estate
$ 5,478 $ 4,826
Home equity
513 492
Commercial real estate
1,447 719
Construction and land development
- -
Multifamily
541 420
Farmland
- -
Commercial business
1,333 870
Consumer
- -
Manufactured homes
- 46
Government
- -
Total
$ 9,312 $ 7,373
Nonperforming loans to total loans
0.95 % 0.81 %
Nonperforming loans to total assets
0.63 % 0.56 %

Substandard loans include potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. No loans were internally classified as doubtful or loss at ~~June~~September 30, 2020 or December 31, 2019.

The Bancorp's substandard loans are summarized below:
(Dollars in thousands)

Loan Segment

June 30, 2020
(unaudited)

December 31,
2019

Residential real estate
$ 5,163 $ 4,491
Home equity
498 507
Commercial real estate
3,173 1,565
Construction and land development
- -
Multifamily
541 802
Farmland
- -
Commercial business
1,080 727
Consumer
- -
Manufactured homes
- -
Government
- -
Total
$ 10,455 $ 8,092
The Bancorp's substandard loans are summarized below:
(Dollars in thousands)

Loan Segment

September 30,
2020

December 31,
2019

Residential real estate
$ 6,690 $ 4,491
Home equity
542 507
Commercial real estate
8,269 1,565
Construction and land development
- -
Multifamily
528 802
Farmland
- -
Commercial business
1,426 727
Consumer
- -
Manufactured homes
- -
Government
- -
Total
$ 17,455 $ 8,092

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

June 30, 2020
(unaudited)

December 31,
2019

Residential real estate
$ 3,164 $ 4,203
Home equity
565 813
Commercial real estate
6,731 5,380
Construction and land development
- -
Multifamily
501 -
Farmland
- -
Commercial business
1,851 2,228
Consumer
- -
Manufactured homes
- -
Government
- -
Total
$ 12,812 $ 12,624
The Bancorp's special mention loans are summarized below:
(Dollars in thousands)

Loan Segment

September 30,
2020

December 31,
2019

Residential real estate
$ 2,555 $ 4,203
Home equity
563 813
Commercial real estate
6,486 5,380
Construction and land development
- -
Multifamily
1,567 -
Farmland
- -
Commercial business
1,718 2,228
Consumer
- -
Manufactured homes
- -
Government
- -
Total
$ 12,889 $ 12,624

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.
30

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

June 30, 2020
(unaudited)

December 31,
2019

Residential real estate
$ 2,264 $ 2,223
Home equity
372 437
Commercial real estate
1,262 1,565
Construction and land development
- -
Multifamily
768 802
Farmland
- -
Commercial business
2,257 2,191
Consumer
- -
Manufactured homes
- -
Government
- -
Total
$ 6,923 $ 7,218
31
The Bancorp's impaired loans, including purchased credit impaired loans, are summarized below:
(Dollars in thousands)

Loan Segment

September 30,
2020

December 31,
2019

Residential real estate
$ 2,203 $ 2,223
Home equity
361 437
Commercial real estate
6,394 1,565
Construction and land development
- -
Multifamily
748 802
Farmland
- -
Commercial business
2,609 2,191
Consumer
- -
Manufactured homes
- -
Government
- -
Total
$ 12,315 $ 7,218

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

June 30, 2020
(unaudited)

December 31,
2019

Residential real estate
$ 520 $ 480
Home equity
192 176
Commercial real estate
928 823
Construction and land development
- -
Multifamily
- -
Farmland
- -
Commercial business
518 622
Consumer
- -
Manufactured homes
- -
Government
- -
Total
$ 2,158 $ 2,101
The Bancorp's troubled debt restructured loans are summarized below:
(Dollars in thousands)

Loan Segment

September 30,
2020

December 31,
2019

Residential real estate
$ 513 $ 480
Home equity
189 176
Commercial real estate
902 822
Construction and land development
- -
Multifamily
- -
Farmland
- -
Commercial business
486 622
Consumer
- -
Manufactured homes
- -
Government
- -
Total
$ 2,090 $ 2,100

The ~~increase~~decrease in the troubled debt restructure loans reflected in the table above for the ~~six~~nine months ending ~~June~~September 30, 2020, was the result of one commercial business loan totaling $44 thousand which was charged off and payment reductions for various commercial business loans totaling $92 thousand. Offsetting the overall decline in troubled debt restructure loans was one commercial real estate loan totaling ~~$148~~$145 thousand, one residential ~~real estate~~ loan totaling ~~$52~~$51 thousand and one home equity loan totaling ~~$24~~$23 thousand which were renewed as a new troubled debt ~~restructuring loans during 2020.~~restructurings. The new troubled debt restructuring loans along with one commercial real estate customer with loans totaling $5.3 million, see above in Impacts of COVID-19 section for further disclosure on this loan, one commercial business relationship with loans totaling ~~$428~~$394 thousand, ~~one~~and three commercial business customers with loans totaling $384 thousand contributed to the increase in impaired loans.
One commercial real estate customer with loans totaling ~~$151 thousand~~$5.3 million, see above in Impacts of COVID-19 section for further disclosure on this loan, and residential real estate loans totaling $2.7 million contributed to the September 30, 2020, increase in nonperforming loans. One commercial real estate customer with loans totaling $5.3 million, residential real estate loans totaling $2.6 million and one commercial real estate customer with loans totaling ~~$148 thousand offset the overall decline in impaired loans.~~
~~Five loans to one commercial real estate relationship totaling $1.1~~$1.3 million ~~two loans to one commercial business relationship totaling $445 thousand and nine loans to one commercial business relationship totaling $428 thousand~~ contributed to the June 30, 2020, increase in nonperforming loans. Three loans to one commercial real estate customer totaling $1.3 million, one loan to a commercial real estate customer totaling $837 thousand, two loans to one commercial business relationship totaling $445 thousand and nine loans to one commercial business relationship totaling $428 thousand contributed to the JuneSeptember 30, 2020, increase in substandard loans. ~~Two~~One commercial real estate relationship with loans tototaling $4.1 million and one commercial real estate customer with loans totaling ~~$5.3~~$1.1 million contributed to the ~~June~~September 30, 2020, increase in watch ~~loans. The purchased credit impaired~~ loans, ~~decreased at June~~which was offset by the movement of one commercial real estate customer with loans totaling $5.3 million to substandard. One commercial real estate customer with loans totaling $5.3 million, one commercial business relationship with loans totaling $394 thousand, and three commercial business customers with loans totaling $384 thousand contributed to the September 30, 2020, ~~to $3,416 thousand ledger balance from $4,041 thousand ledger balance at December 31, 2019, due primarily to the overall reduction~~increase in impaired ~~loan balances in accordance with required payment schedules and the payoff of two impaired~~ loans.
31

At ~~June~~September 30, 2020, management is of the opinion that there are no loans, except certain of those discussed above or as part of credit risk impacts of COVID-19, 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.
32

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)

(unaudited)

Loan Segment

June 30, 2020

June 30, 2019

Residential real estate
$ (112 ) $ (7 )
Home equity
8 (2 )
Commercial real estate
19 194
Construction and land development
120 50
Multifamily
80 (19 )
Farmland
- -
Commercial business
932 139
Consumer
(8 ) 490
Manufactured homes
- -
Government
(17 ) (17 )
Total
$ 1,022 $ 828
The Bancorp's provision for loan losses for the nine months ended are summarized below:

The Bancorp's charge-off and recovery information is summarized below:

(Dollars in thousands)

(unaudited)

As of June 30, 2020

Loan Segment

Charge-off

Recoveries

Net Charge-offs

September 30,
2020

September 30,
2019

Residential real estate
$ (2 ) $ 10 $ 8 $ 58 $ 142
Home equity
- - - (11 ) 21
Commercial real estate
(80 ) - (80 ) 694 372
Construction and land development
(17 ) - (17 ) 91 238
Multifamily
- - - 21 32
Farmland
- - - - -
Commercial business
(78 ) 17 (61 ) 1,045 544
Consumer
(13 ) 8 (5 ) (10 ) 33
Manufactured homes
- - - (41 )
Government
- - - (17 ) (19 )
Total
$ (190 ) $ 35 $ (155 ) $ 1,871 $ 1,322
The Bancorp's charge-off and recovery information is summarized below:
(Dollars in thousands)

(unaudited)

As of September 30, 2020

Loan Segment

Charge-off

Recoveries

Net Charge-offs

Residential real estate
$ (2 ) $ 15 $ 13
Home equity
- - -
Commercial real estate
(80 ) - (80 )
Construction and land development
(17 ) - (17 )
Multifamily
- - -
Farmland
- - -
Commercial business
(78 ) 17 (61 )
Consumer
(22 ) 11 (11 )
Manufactured homes
- -
Government
- - -
Total
$ (199 ) $ 43 $ (156 )

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.

32

In addition, management considers 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 ~~June~~September 30, 2020, total purchased credit impaired loans reserves totaled $2.1 million compared to $2.2 million at December 31, 2019. 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 ~~$2.9~~$2.5 million at ~~June~~September 30, 2020, compared to $3.8 million at December 31, 2019. Details on these fair value marks and the additional reserves created can be found in Note 5, Loans Receivable.

The Bancorp's allowance to total loans and non-performing loans are summarized below:

(Dollars in thousands)

(unaudited)

June 30, 2020

June 30, 2019

Allowance for loan losses
$ 9,866 $ 8,744
Total loans
$ 981,902 $ 906,869
Non-performing loans
$ 9,312 $ 7,373
ALL-to-total loans
1.00 % 0.96 %
ALL-to-non-performing loans (coverage ratio)
105.9 % 118.6 %
33
The Bancorp's allowance to total loans and non-performing loans are summarized below:
(Dollars in thousands)

September 30,
2020

December 31,
2019

Allowance for loan losses
$ 10,714 $ 8,999
Total loans
$ 975,940 $ 906,869
Non-performing loans
$ 15,060 $ 7,373
ALL-to-total loans
1.10 % 0.99 %
ALL-to-non-performing loans (coverage ratio)
71.1 % 122.1 %

The non-GAAP ALL-to-total loans and coverage ratio when adjusted with purchased fair value marks and additional reserves discussed in Note 5, Loans Receivable, reconciled to the most directly comparable GAAP measure, are presented as follows:

($ in thousands)

(Unaudited)

(Unaudited)

For the three months ended March 31, 2020

GAAP

Additional
reserves not
part of the ALL

Non-GAAP

For the nine months ended September 30, 2020

GAAP

Additional
reserves not
part of the ALL

Non-GAAP

Allowance for loan losses (ALL)
$ 9,866 $ 4,986 $ 14,852 $ 10,714 $ 4,587 $ 15,301
Total loans
$ 981,902 $ 981,902 $ 975,940 $ 975,940
ALL to total loans
1.00 % 1.51 % 1.10 % 1.57 %

($ in thousands)

(Unaudited)

(Unaudited)

For the three months ended March 31, 2020

GAAP

Additional
reserves not
part of the ALL

Non-GAAP

For the nine months ended September 30, 2020

GAAP

Additional
reserves not
part of the ALL

Non-GAAP

Allowance for loan losses (ALL)
$ 9,866 $ 4,986 $ 14,852 $ 10,714 $ 4,587 $ 15,301
Non-performing loans
$ 9,312 $ 9,312 $ 15,060 $ 15,060
ALL to nonperfroming loans (coverage ratio)
105.95 % 159.49 % 71.14 % 101.60 %

The non-GAAP ALL-to-total loans ratio when adjusted for PPP loans, which are fully guaranteed by the SBA, outstanding at ~~June~~September 30, 2020, reconciled to the most directly comparable GAAP measure, is presented as follows:

($ in thousands)

(Unaudited)

For the three months ended March 31, 2020

GAAP

PPP loans
which are
SBA guaranteed

Non-GAAP

Allowance for loan losses (ALL)
$ 9,866 $ 14,852
Total loans
$ 981,902 $
91,335
$ 890,567
ALL to total loans
1.00 % 1.11 %
($ in thousands)

(Unaudited)

For the nine months ended September 30, 2020

GAAP

Additional
reserves not
part of the ALL

Non-GAAP

Allowance for loan losses (ALL)
$ 10,714 $ 10,714
Total loans
$ 975,940 $ 91,453 $ 884,487
ALL to total loans
1.10 % 1.21 %

The Bancorp has included the above non-GAAP measures to help investors evaluate the allowance for loan loss once adjusted for purchased fair value marks and additional reserves, and also ~~adjusted~~adjused for PPP loans that are fully guaranteed by the SBA.

The ~~June~~September 30, 2020, 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 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 ~~June~~September 30, 2020, foreclosed real estate totaled ~~$634~~$501 thousand, which was comprised of ~~fourteen~~twelve properties, compared to $1.1 million and seventeen properties at December 31, 2019. Net gains from the sale of foreclosed real estate totaled ~~$103~~$127 thousand for the ~~six~~nine months ended ~~June~~September 30, 2020. At the end of ~~June~~September 2020, all of the Bancorp’s foreclosed real estate is located within its primary market area.

3334

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 ~~$294.7~~$324.2 million at ~~June~~September 30, 2020, compared to $277.2 million at December 31, 2019, an increase of ~~$17.5~~$47.0 million ~~(6.3%~~(16.9%). The increase in the securities portfolio during the year is a result of investment in the security portfolio and market value adjustments. At ~~June~~September 30, 2020, the securities portfolio represented ~~21.6%~~23.5% of interest-earning assets and ~~20.0%~~21.9% of total assets compared to 22.7% of interest-earning assets and 20.9% of total assets at December 31, 2019.

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

June 30,

September 30,

2020

December 31,

2020

December 31,

(Dollars in thousands)

(unaudited)

2019

(unaudited)

2019

Balance

% Securities

Balance

% Securities

Balance

% Securities

Balance

% Securities

Money market fund
$ 21,457 7.3 % $ 9,670 3.5 % $ 26,789 8.3 % $ 9,670 3.5 %
U.S. government sponsored entities
- 0.0 % 13,058 4.7 % 4,989 1.5 % 13,058 4.7 %
Collateralized mortgage obligations and residential mortgage-backed securities
134,073 45.5 % 150,988 54.5 % 128,963 39.8 % 150,988 54.5 %
Municipal securities
138,374 47.0 % 102,427 36.9 % 162,561 50.1 % 102,427 36.9 %
Collateralized debt obligations
815 0.2 % 1,076 0.4 % 879 0.3 % 1,076 0.4 %
Total securities available-for-sale
$ 294,719 100.0 % $ 277,219 100.0 % $ 324,181 100.0 % $ 277,219 100.0 %

June 30,

September 30,

2020

December 31,

YTD

2020

December 31,

YTD

(Dollars in thousands)

(unaudited)

2019

Change

(unaudited)

2019

Change

Balance

Balance
$
%

Balance

Balance
$
%

Interest bearing deposits in other financial institutions
$ 72,993 $ 10,750 $ 62,243 579.0 % $ 68,495 $ 10,750 $ 57,745 537.2 %
Fed funds sold
323 15,544 (15,221 ) -97.9 % 578 15,544 (14,966 ) -96.3 %
Certificates of deposit in other financial institutions
1,639 2,170 (531 ) -24.5 % 1,901 2,170 (269 ) -12.4 %
Federal Home Loan Bank stock
3,918 3,912 6 0.2 % 3,918 3,912 6 0.2 %

The net increase in interest bearing deposits in other financial institutions, fed funds sold, and certificates of deposit in other financial institutions is primarily the result of the Bancorp’s participation in the PPP and customer’s current preference toward security and liquidity of assets.

Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes. The Bancorp offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships.

The Bancorp’s end-of-period deposit portfolio balances were as follows:

June 30,

September 30,

2020

December 31,

YTD

2020

December 31,

YTD

(Dollars in thousands)

(unaudited)

2019

Change

(unaudited)

2019

Change

Balance

Balance
$
%

Balance

Balance

$

%

Checking
$ 511,798 $ 392,324 $ 119,474 30.5 % $ 516,904 $ 392,324 $ 124,580 31.8 %
Savings
235,254 209,945 25,309 12.1 % 240,215 209,945 30,270 14.4 %
Money market
235,902 224,398 11,504 5.1 % 238,098 224,398 13,700 6.1 %
Certificates of deposit
294,680 327,703 (33,023 ) -10.1 % 285,439 327,703 (42,264 ) -12.9 %
Total deposits
$ 1,277,634 $ 1,154,370 $ 123,264 10.7 % $ 1,280,656 $ 1,154,370 $ 126,286 10.9 %

The overall increase in total deposits is primarily the result of management’s sales efforts, deposits gained through the participation in the PPP, along with customer loyalty to the Bancorp and preferences for the security the deposit products offer.

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

June 30,

September 30,

2020

December 31,

YTD

2020

December 31,

YTD

(Dollars in thousands)

(unaudited)

2019

Change

(unaudited)

2019

Change

Balance

Balance

$

%

Balance

Balance

$

%

Repurchase agreements
$ 17,159 $ 11,499 $ 5,660 49.2 % $ 19,145 $ 11,499 $ 7,646 66.5 %
Borrowed funds
12,000 14,000 (2,000 ) -14.3 % 12,000 14,000 (2,000 ) -14.3 %
Total borrowed funds
$ 29,159 $ 25,499 $ 3,660 14.4 % $ 31,145 $ 25,499 $ 5,646 22.1 %

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.

3435

Liquidity and Capital Resources
For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, and pay dividends and operating expenses. Because profit and liquidity are often conflicting objectives, management attempts to maximize the Bank’s net interest margin by making adequate, but not excessive, liquidity provisions. Furthermore, funds are managed so that future profits will not be significantly impacted as funding costs increase.

Changes in the liquidity position result from operating, investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. The primary investing activities include loan originations, loan repayments, investments in interest bearing balances in other financial institutions, and the purchase, sale, and maturity of investment securities. Financing activities focus almost entirely on the generation of customer deposits. In addition, the Bancorp utilizes borrowings (i.e., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds.

During the ~~six~~nine months ended ~~June~~September 30, 2020, cash and cash equivalents increased by ~~$50.0~~$37.2 million compared to a ~~$44.0~~$54.8 million increase for the ~~six~~nine months ended ~~June~~September 30, 2019. The primary sources of cash and cash equivalents were the ~~growth of deposits,~~ proceeds from the sale of loans originated for sale, growth of deposits, proceeds and paydown of securities, and proceeds from sales of securities. The primary uses of cash and cash equivalents were origination of loans for sale, purchase of securities, other loan originations, and purchase of ~~securities, and the repayment of FHLB advances.~~loan participations. Cash provided by operating activities totaled ~~$11.7~~$20.3 million for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to cash provided of ~~$6.0~~$10.9 million for the ~~six~~nine month period ended ~~June~~September 30, 2019. Cash provided from operating activities was primarily a result of net income, change in accrued expenses and liabilities, ~~and~~ sale of loans originated for sale, and depreciation and amortization, net of accretion, offset by the origination of loans for ~~sale.~~sale and gain on sale of loans held-for-sale. Cash outflows from investing activities totaled ~~$86.4~~$111.8 million for the current period, compared to cash ~~provided~~outflows of ~~$2.9~~$7.8 million for the ~~six~~nine months ended ~~June~~September 30, 2019. Cash outflows from investing activities for the current ~~six~~nine months were primarily related to the purchase of securities available-for-sale, ~~and~~ origination of loans, and purchase of loan participations, offset against the proceeds from the maturity, paydown, and sale of available-for-sale securities. ~~Net cash~~Cash provided from financing activities totaled ~~$124.8~~$128.7 million during the current period compared to net cash provided of ~~$35.2~~$51.7 million for the ~~six~~nine months ended ~~June~~September 30, 2019. The ~~net~~ cash inflows from financing activities were primarily a result of net change in deposits and change in other borrowed funds, offset against repayment of FHLB advances and payment of quarterly dividends. On a cash basis, the Bancorp paid dividends on common stock of ~~$2.1~~$3.2 million for the ~~six~~nine months ended ~~June~~September 30, 2020, and ~~$1.9~~$3.0 million for the ~~six~~nine months ended ~~June~~September 30, 2019.

At ~~June~~September 30, 2020, outstanding commitments to fund loans totaled ~~$213.7~~$229.3 million. Approximately 56.8% 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 ~~$11.4~~$10.9 million at ~~June~~September 30, 2020. Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity.

Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the ~~six~~nine months ended ~~June~~September 30, 2020, stockholders' equity increased by ~~$11.1~~$14.8 million ~~(8.3%~~(11.1%). During the ~~six~~nine months ended ~~June~~September 30, 2020, stockholders’ equity was primarily increased by net income of ~~$8.3~~$13.2 million and increased unrealized gains on available securities of ~~$4.9~~$4.7 million. Decreasing stockholders’ equity was the declaration of ~~$2.1~~$3.2 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 ~~six~~nine months of 2020 or 2019. During 2020, 6,400 restricted stock shares vested under the Incentive Plan outlined in Note 10 of the financial statements, of which 1,904 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.
36

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%.

35

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions by the institution and certain discretionary bonus payments to management if an institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased each year until the buffer requirement became fully effective on January 1, 2019.

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 ~~six~~nine months ended ~~June~~September 30, 2020, 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 $2.2 million. These investments currently have ratings that are below investment grade. As a result, approximately ~~$10.5~~$10.4 million of risk-based assets are generated by the trust preferred securities in the Bancorp’s and Bank’s total risk based capital calculation.

The following table shows that, at ~~June~~September 30, 2020, and December 31, 2019, 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 June 30, 2020

Amount

Ratio

Amount

Ratio

Amount

Ratio

At September 30, 2020

Amount

Ratio

Amount

Ratio

Amount

Ratio

Common equity tier 1 capital to risk-weighted assets
$118.2 12.5% $42.4 4.5% N/A N/A $ 122.6 12.8 % $ 43.3 4.5 % N/A N/A
Tier 1 capital to risk-weighted assets
$118.2 12.5% $56.6 6.0% N/A N/A $ 122.6 12.8 % $ 57.7 6.0 % N/A N/A
Total capital to risk-weighted assets
$128.1 13.6% $75.4 8.0% N/A N/A $ 133.3 13.9 % $ 76.9 8.0 % N/A N/A
Tier 1 capital to adjusted average assets
$118.2 8.3% $57.4 4.0% N/A N/A $ 122.6 8.3 % $ 59.5 4.0 % N/A N/A

(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 December 31, 2019

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Common equity tier 1 capital to risk-weighted assets
$110.8 11.8% $42.4 4.5% N/A N/A $ 110.8 11.8 % $ 42.4 4.5 % N/A N/A
Tier 1 capital to risk-weighted assets
$110.8 11.8% $56.5 6.0% N/A N/A $ 110.8 11.8 % $ 56.5 6.0 % N/A N/A
Total capital to risk-weighted assets
$119.8 12.7% $75.3 8.0% N/A N/A $ 119.8 12.7 % $ 75.3 8.0 % N/A N/A
Tier 1 capital to adjusted average assets
$110.8 8.5% $52.3 4.0% N/A N/A $ 110.8 8.5 % $ 52.3 4.0 % N/A N/A

3637

In addition, the following table shows that, at ~~June~~September 30, 2020, and December 31, 2019, 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 June 30, 2020

Amount

Ratio

Amount

Ratio

Amount

Ratio

At September 30, 2020

Amount

Ratio

Amount

Ratio

Amount

Ratio

Common equity tier 1 capital to risk-weighted assets
$115.9 12.3% $42.4 4.5% $61.3 6.5% $ 120.9 12.6 % $ 43.3 4.5 % $ 62.5 6.5 %
Tier 1 capital to risk-weighted assets
$115.9 12.3% $56.6 6.0% $75.4 8.0% $ 120.9 12.6 % $ 57.7 6.0 % $ 76.9 8.0 %
Total capital to risk-weighted assets
$125.7 13.3% $75.4 8.0% $94.3 10.0% $ 131.6 13.7 % $ 76.9 8.0 % $ 96.2 10.0 %
Tier 1 capital to adjusted average assets
$115.9 8.2% $57.3 4.0% $71.6 5.0% $ 120.9 8.2 % $ 59.4 4.0 % $ 74.2 5.0 %

(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 December 31, 2019

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Common equity tier 1 capital to risk-weighted assets
$108.9 11.6% $42.4 4.5% $61.2 6.5% $ 108.9 11.6 % $ 42.4 4.5 % $ 61.2 6.5 %
Tier 1 capital to risk-weighted assets
$108.9 11.6% $56.5 6.0% $75.3 8.0% $ 108.9 11.6 % $ 56.5 6.0 % $ 75.3 8.0 %
Total capital to risk-weighted assets
$117.9 12.5% $75.3 8.0% $94.1 10.0% $ 117.9 12.5 % $ 75.3 8.0 % $ 94.1 10.0 %
Tier 1 capital to adjusted average assets
$108.9 8.3% $52.3 4.0% $65.3 5.0% $ 108.9 8.3 % $ 52.3 4.0 % $ 65.3 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 2020, without the need for qualifying for an exemption or prior DFI approval, is its 2020 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 ~~May 15,~~August 28, 2020, the Board of Directors of the Bancorp declared a ~~second~~third quarter dividend of $0.31 per share. The Bancorp’s ~~second~~third quarter dividend was paid to shareholders on ~~July 3,~~October 2, 2020.

Results of Operations - Comparison of the Quarter Ended ~~June~~September 30, 2020 to the Quarter Ended ~~June~~September 30, 2019
For the quarter ended ~~June~~September 30, 2020, the Bancorp reported net income of ~~$5.1~~$4.9 million, compared to net income of ~~$4.0~~$3.6 million for the quarter ended ~~June~~September 30, 2019, an increase of ~~$1.0~~$1.3 million ~~(25.9%~~(37.0%). For the quarter, the ROA was ~~1.42%~~1.33%, compared to ~~1.27%~~1.08% for the quarter ended ~~June~~September 30, 2019. The ROE was ~~14.32%~~13.42% for the quarter ended ~~June~~September 30, 2020, compared to ~~12.77%~~11.05% for the quarter ended ~~June~~September 30, 2019.

Net interest income for the quarter ended ~~June~~September 30, 2020 was ~~$11.4~~$11.7 million, an increase of ~~$215~~$893 thousand ~~(1.9%~~(8.3%), compared to ~~$11.2~~$10.8 million for the quarter ended ~~June~~September 30, 2019. The weighted-average yield on interest-earning assets was ~~3.93%~~3.75% for the quarter ended ~~June~~September 30, 2020, compared to ~~4.65%~~4.40% for the quarter ended ~~June~~September 30, 2019. The weighted-average cost of funds for the quarter ended ~~June~~September 30, 2020 was ~~0.47%~~0.35% compared to ~~0.78%~~0.86% for the quarter ended ~~June~~September 30, 2019. The impact of the ~~3.93%~~3.75% return on interest earning assets and the ~~0.47%~~0.35% cost of funds resulted in an interest rate spread of ~~3.46%~~3.40% for the current quarter, ana decrease from the ~~3.87%~~3.54% spread for the quarter ended ~~June~~September 30, 2019. The net interest margin on earning assets was ~~3.48%~~3.41% for the quarter ended ~~June~~September 30, 2020 and ~~3.89%~~3.56% for the quarter ended ~~June~~September 30, 2019. On a tax equivalent basis, the Bancorp’s net interest margin was ~~3.60%~~3.53% for the quarter ended ~~June~~September 30, 2020, compared to ~~3.96%~~3.63% for the quarter ended ~~June~~September 30, 2019. 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.

3738

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)

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

Average
Balance

Interest

Rate (%)

Average
Balance

Interest

Rate (%)

Average
Balance

Interest

Rate (%)

Average
Balance

Interest

Rate (%)

ASSETS

Interest bearing deposits in other financial institutions
$ 39,325 $ 15 0.15 $ 13,985 $ 92 2.63 $ 72,920 $ 22 0.12 $ 45,686 $ 262 2.29
Federal funds sold
1,738 18 4.14 3,818 36 3.77 719 7 3.89 5,141 46 3.58
Certificates of deposit in other financial institutions
1,734 11 2.54 2,118 15 2.83 1,877 10 2.13 2,076 18 3.47
Securities available-for-sale
288,330 1,532 2.13 253,421 1,732 2.73 315,090 1,506 1.91 258,851 1,612 2.49
Loans receivable
977,866 11,297 4.62 874,652 11,485 5.25 975,794 11,263 4.62 896,096 11,335 5.06
Federal Home Loan Bank stock
3,918 32 3.27 3,931 45 4.58 3,918 28 2.86 3,912 47 4.81
Total interest earning assets
1,312,911 $ 12,905 3.93 1,151,925 $ 13,405 4.65 1,370,318 $ 12,836 3.75 1,211,762 $ 13,320 4.40
Cash and non-interest bearing deposits in other financial institutions
17,713 29,756 15,814 23,183
Allowance for loan losses
(9,553 ) (8,357 ) (9,917 ) (8,887 )
Other noninterest bearing assets
102,964 91,808 98,879 93,937
Total assets
$ 1,424,035 $ 1,265,132 $ 1,475,094 $ 1,319,995
��
LIABILITIES AND STOCKHOLDERS' EQUITY

Total deposits
$ 1,237,241 $ 1,380 0.45 $ 1,097,283 $ 2,011 0.73 $ 1,282,698 $ 1,050 0.33 $ 1,146,053 $ 2,353 0.82
Repurchase agreements
13,671 17 0.50 13,638 66 1.94 16,246 15 0.37 13,696 64 1.87
Borrowed funds
13,981 93 2.66 15,341 128 3.34 12,000 83 2.77 17,000 108 2.54
Total interest bearing liabilities
1,264,893 $ 1,490 0.47 1,126,262 $ 2,205 0.78 1,310,944 $ 1,148 0.35 1,176,749 $ 2,525 0.86
Other noninterest bearing liabilities
17,741 12,864 18,034 13,781
Total liabilities
1,282,634 1,139,126 1,328,978 1,190,530
Total stockholders' equity
141,401 126,006 146,116 129,465
Total liabilities and stockholders' equity
$ 1,424,035 $ 1,265,132 $ 1,475,094 $ 1,319,995

The decrease in interest income for interest bearing deposits in other financial institutions was the result of lower weighted average rates for the quarter ended ~~June~~September 30, 2020, compared to the quarter ended ~~June~~September 30, 2019. The decrease in interest income for federal funds sold was ~~primarily~~ the result of lower average balances for the quarter ended ~~June~~September 30, 2020, compared to the quarter ended ~~June~~September 30, 2019. The decrease in interest income for certificates of deposit in other financial institutions was the result of lower average balances and lower average rates received for the quarter ended ~~June~~September 30, 2020, compared to the quarter ended ~~June~~September 30, 2019. The decrease in interest income for securities available-for-sale was primarily the result of lower average rates for the quarter ended ~~June~~September 30, 2020, compared to the quarter ended ~~June~~September 30, 2019. The decrease in interest income for loans receivable was the result of lower weighted average rates received during quarter ended ~~June~~September 30, 2020, compared to the quarter ended ~~June~~September 30, 2019. The decrease in Federal Home Loan Bank stock was the result of lower weighted average rates received during quarter ended ~~June~~September 30, 2020, compared to quarter ended ~~June~~September 30, 2019. The decrease in the interest expense of total deposits was the result of lower weighted average rates for the quarter ended ~~June~~September 30, 2020, compared to the quarter ended ~~June~~September 30, 2019. The decrease in the interest expense for repurchase agreements was the result of lower weighted average rates for the quarter ended ~~June~~September 30, 2020, compared to the quarter ended ~~June~~September 30, 2019. The decrease in the interest expense for borrowed funds was the result of lower weighted average ~~rates~~balances for the quarter ended ~~June~~September 30, 2020, compared to the quarter ended ~~June~~September 30, 2019.

The following table shows the change in noninterest income for the quarter ending ~~June~~September 30, 2020, and ~~June~~September 30, 2019.

Three Months Ended

Quarter Ended

(Dollars in thousands)

June 30,
Three Months Ended
September 30,

Quarter Ended

2020

2019

$ Change

% Change

2020

2019

$ Change

% Change

Noninterest income:

Gain on sale of loans held-for-sale, net
$ 2,464 $ 400 $ 2,064 516.0 % $ 2,420 $ 681 $ 1,739 255.4 %
Fees and service charges
1,151 1,243 (92 ) -7.4 % 1,473 1,203 270 22.4 %
Wealth management operations
537 447 90 20.1 %
Gain on sale of securities, net
667 301 366 121.6 % 197 102 95 93.1 %
Wealth management operations
514 479 35 7.3 %
Increase in cash value of bank owned life insurance
188 179 9 5.0 % 177 177 0 0.0 %
Gain on sale of foreclosed real estate, net
43 13 30 230.8 % 24 43 (19 ) -44.2 %
Benefit from bank owned life insurance
- 205 (205 ) -100.0 %
Other
19 54 (35 ) -64.8 % 27 39 (12 ) -30.8 %
Total noninterest income
$ 5,046 $ 2,669 $ 2,377 89.1 % $ 4,855 $ 2,897 $ 1,958 67.6 %

The increase in gain on sale of loans is the result of the current economic and rate environment, which we anticipate will return to more normal levels as the current low rate environment persists or rates return to higher levels. The ~~decrease~~increase in fees and service charges is primarily the result of ~~changes in customer usage~~increased lending fees earned as part of ~~bank services during~~opportunities resulting from the ~~pandemic. The increase in gains on the sale of securities is a result of~~ current ~~market conditions~~economic and ~~actively managing the portfolio.~~rate environment. The increase in wealth management income is the result of the Bancorp’s continued focus on expanding its wealth management line of business. The ~~decrease~~increase in ~~other noninterest income~~gains on the sale of securities is ~~primarily the~~a result of ~~one-time legal gains~~current market conditions and actively managing the portfolio. In the third quarter of 2019, a death benefit from bank owned life insurance was recorded, no similar events have occurred in ~~the prior year.~~2020.

3839

The following table shows the change in noninterest expense for the quarter ending ~~June~~September 30, 2020, and ~~June~~September 30, 2019.

Quarter Ended

(Dollars in thousands) Three Months Ended Three Months Ended
September 30,

Quarter Ended

2020 2019 $ Change % Change
2020

2019

$ Change

% Change

Noninterest expense:

Compensation and benefits
$ 5,371 $ 4,600 $ 771 16.8 % $ 5,263 $ 4,932 $ 331 6.7 %
Occupancy and equipment
1,295 1,169 126 10.8 % 1,150 1,231 (81 ) -6.6 %
Data processing
532 351 181 51.6 % 583 627 (44 ) -7.0 %
Federal deposit insurance premiums
216 18 198 1100.0 %
Marketing
180 176 4 2.3 % 176 170 6 3.5 %
Federal deposit insurance premiums
159 177 (18 ) -10.2 %
Other
2,227 1,951 276 14.1 % 2,393 2,291 102 4.5 %
Total noninterest expense
$ 9,764 $ 8,424 $ 1,340 15.9 % $ 9,781 $ 9,269 $ 512 5.5 %

~~Compensation~~
The increase in compensation and benefits is primarily the result of management’s continued focus on talent management and retention. The increase in ~~occupancy and equipment~~federal deposit insurance premiums is ~~primarily related to facilities improvement efforts aimed at enhancing technology and to accommodate recent growth. The increase in data processing is primarily~~ the result of ~~increased system utilization and investment~~one-time credits received in the ~~customer experience.~~third quarter of 2019. The increase in other operating expenses is primarily the result of investments in strategic initiatives. The Bancorp’s efficiency ratio was ~~59.3%~~59.1% for the quarter ended ~~June~~September 30, 2020, compared to ~~60.7%~~67.7% for the quarter ended ~~June~~September 30, 2019. The ~~decreased~~more favorable ratio for the current period is ~~related~~ primarily attributable to the increase in noninterest income and net 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.

Income tax expenses for the quarter ended ~~June~~September 30, 2020, totaled ~~$1.1~~$1.0 million, compared to income tax expense of ~~$911~~$351 thousand for the quarter ended ~~June~~September 30, 2019, an increase of ~~$215~~$659 thousand ~~(23.6%~~(187.7%). The combined effective federal and state tax rates for the Bancorp was ~~18.2%~~17.1% for the quarter ended ~~June~~September 30, 2020, compared to ~~18.5%~~8.9% for the quarter ended ~~June~~September 30, 2019. The increase in the effective tax rate for the quarter ended Sepetmber 30, 2020, is the result of lower tax preferred income relative to the increase to earnings and lower tax benefits resulting from a new market tax credit.

Results of Operations - Comparison of the ~~Six~~Nine Months Ended ~~June~~September 30, 2020 to the ~~Six~~Nine Months Ended ~~June~~September 30, 2019

For the ~~six~~nine months ended ~~June~~September 30, 2020, the Bancorp reported net income of ~~$8.3~~$13.2 million, compared to net income of ~~$6.2~~$9.8 million for the ~~six~~nine months ended ~~June~~September 30, 2019, an increase of ~~$2.0~~$3.3 million ~~(32.2%~~(34.0%). For the ~~six~~nine months ended, the ROA was ~~1.20%~~1.25%, compared to ~~1.00%~~1.03% for the ~~six~~nine months ended ~~June~~September 30, 2019. The ROE was ~~11.90%~~12.43% for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~10.25%~~10.54% for the ~~six~~nine months ended ~~June~~September 30, 2019.

Net interest income for the ~~six~~nine months ended ~~June~~September 30, 2020, was ~~$22.1~~$33.8 million, an increase of ~~$287 thousand (1.3%~~$1.2 million (3.6%), compared to ~~$21.8~~$32.6 million for the ~~six~~nine months ended ~~June~~September 30, 2019. The weighted-average yield on interest-earning assets was ~~4.07%~~3.96% for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~4.53%~~4.49% for the ~~six~~nine months ended ~~June~~September 30, 2019. The weighted-average cost of funds for the ~~six~~nine months ended ~~June~~September 30, 2020, was ~~0.60%~~0.52% compared to ~~0.74%~~0.78% for the ~~six~~nine months ended ~~June~~September 30, 2019. The impact of the ~~4.07%~~3.96% return on interest earning assets and the ~~0.60%~~0.52% cost of funds resulted in an interest rate spread of ~~3.47%~~3.44% for the current ~~six~~nine months, which is a decrease from the spread of ~~3.79%~~3.71% as of ~~June~~September 30, 2019. The net interest margin on earning assets was ~~3.49%~~3.46% for the ~~six~~nine months ended ~~June~~September 30, 2020, and ~~3.81%~~3.73% for the ~~six~~nine months ended ~~June~~September 30, 2019. On a tax equivalent basis, the Bancorp’s net interest margin was ~~3.61%~~3.58% for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~3.88%~~3.80% for the ~~six~~nine months ended ~~June~~September 30, 2019. 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.

3940

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, 2020

June 30, 2019

Year-to-Date

(Dollars in thousands)

Average Balances, Interest, and Rates

(unaudited)

September 30, 2020

September 30, 2019

Average
Balance

Interest

Rate (%)

Average
Balance

Interest

Rate (%)

Average
Balance

Interest

Rate (%)

Average
Balance

Interest

Rate (%)

ASSETS

Interest bearing deposits in other financial institutions
$ 26,406 $ 69 0.52 $ 26,840 $ 176 1.31 $ 42,025 $ 91 0.29 $ 33,191 $ 438 1.76
Federal funds sold
3,726 85 4.56 4,644 77 3.32 2,716 92 4.52 4,811 123 3.41
Certificates of deposit in other financial institutions
1,851 25 2.70 2,194 32 2.92 1,859 35 2.51 2,149 50 3.10
Securities available-for-sale
284,955 3,202 2.25 250,016 3,489 2.79 295,073 4,708 2.13 253,004 5,101 2.69
Loans receivable
945,189 22,326 4.72 855,908 22,028 5.15 954,985 33,589 4.69 867,941 33,363 5.13
Federal Home Loan Bank stock
3,915 67 3.42 3,886 89 4.58 3,916 95 3.23 3,894 136 4.66
Total interest earning assets
1,266,042 $ 25,774 4.07 1,143,488 $ 25,891 4.53 1,300,574 $ 38,610 3.96 1,164,990 $ 39,211 4.49
Cash and non-interest bearing deposits in other financial institutions
18,397 23,628 17,530 23,496
Allowance for loan losses
(9,302 ) (8,213 ) (9,508 ) (8,449 )
Other noninterest bearing assets
98,409 88,967 98,611 92,595
Total assets
$ 1,373,546 $ 1,247,870 $ 1,407,207 $ 1,272,632

LIABILITIES AND STOCKHOLDERS' EQUITY

Total deposits
$ 1,192,482 $ 3,444 0.58 $ 1,067,976 $ 3,683 0.69 $ 1,222,497 $ 4,494 0.49 $ 1,094,631 $ 6,036 0.74
Repurchase agreements
12,803 57 0.89 12,098 115 1.90 13,959 72 0.69 12,636 179 1.89
Borrowed funds
14,087 187 2.65 21,426 294 2.74 13,386 270 2.69 19,935 402 2.69
Total interest bearing liabilities
1,219,372 $ 3,688 0.60 1,101,500 $ 4,092 0.74 1,249,842 $ 4,836 0.52 1,127,202 $ 6,617 0.78
Other noninterest bearing liabilities
15,380 24,528 16,270 21,179
Total liabilities
1,234,752 1,126,028 1,266,112 1,148,381
Total stockholders' equity
138,794 121,842 141,095 124,251
Total liabilities and stockholders' equity
$ 1,373,546 $ 1,247,870 $ 1,407,207 $ 1,272,632

The decrease in ~~yields~~interest income for interest bearing deposits in other financial institutions was the result of lower weighted average rates for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019. The ~~increase~~decrease in ~~yields~~interest income for federal funds sold was primarily the result of ~~higher~~lower weighted average ~~rates~~balances for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019. The decrease in ~~yields~~interest income for certificates of deposits in other financial institutions was primarily the result of lower average balance and lower weighted average rates for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019. The decrease in ~~yields~~interest income for securities available-for-sale was the result of lower weighted average rates for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019. The increase in ~~yields~~interest income for loans receivable was the result of higher average balances during the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019. The decrease in the ~~cost~~interest expense of total deposits was the result of lower weighted average rates for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019. The decrease in the ~~cost~~interest expense of repurchase agreements was the result of lower weighted average rates for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019. The decrease in the ~~cost~~interest expense of borrowed funds was the result of lower average balances ~~and lower wighted average rates~~ for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019.

The following table shows the change in noninterest income for the ~~six~~nine months ending ~~June~~September 30, 2020, and ~~June~~September 30, 2019.

Six Months Ended

Nine Months Ended

(Dollars in thousands)

June 30,
Six Months Ended
September 30,

Nine Months Ended

2020

2019

$ Change

% Change

2020

2019

$ Change

% Change

Noninterest income:

Gain on sale of loans held-for-sale, net
$ 3,617 $ 642 $ 2,975 463.4 % $ 6,037 $ 1,323 $ 4,714 356.3 %
Fees and service charges
2,200 2,405 (205 ) -8.5 % 3,673 3,608 65 1.8 %
Wealth management operations
1,605 1,426 179 12.6 %
Gain on sale of securities, net
1,177 652 525 80.5 % 1,374 754 620 82.2 %
Wealth management operations
1,068 979 89 9.1 %
Increase in cash value of bank owned life insurance
357 342 15 4.4 % 534 519 15 2.9 %
Gain on sale of foreclosed real estate, net
103 40 63 157.5 % 127 83 44 53.0 %
Benefit from bank owned life insurance
- 205 (205 ) 0.0 %
Other
70 178 (108 ) -60.7 % 97 217 (120 ) -55.3 %
Total noninterest income
$ 8,592 $ 5,238 $ 3,354 64.0 % $ 13,447 $ 8,135 $ 5,312 65.3 %
41

The increase in gain on sale of loans is the result of the current economic and rate environment, which we anticipate will return to more normal levels as the current low rate environment persists or rates return to higher levels. The ~~decrease~~increase in fees and service charges is primarily the result of ~~changes in customer usage~~increased lending fees earned as part of ~~bank services during~~opportunities resulting from the ~~pandemic. The increase in gains on the sale of securities is a result of~~ current ~~market conditions~~economic and ~~actively managing the portfolio.~~rate environment. The increase in wealth management income is the result of the Bancorp’s continued focus on expanding its wealth management line of business. The increase in gains on the sale of securities is a result of current market conditions and actively managing the portfolio. In the prior year, a death benefit from bank owned life insurance was recorded, no events have occurred in the first nine months of 2020. The decrease in other noninterest income is the result of a one-time fixed asset sale for a gain in the prior year.

40

The following table shows the change in noninterest expense for the six ending ~~June~~September 30, 2020, and ~~June~~September 30, 2019.

Six Months Ended

Nine Months Ended

(Dollars in thousands)

June 30,

Six Months Ended

September 30,

Nine Months Ended

2020

2019

$ Change

% Change

Noninterest expense:

Compensation and benefits
$ 10,588 $ 9,401 $ 1,187 12.6 % $ 15,851 $ 14,333 $ 1,518 10.6 %
Occupancy and equipment
2,704 2,291 413 18.0 % 3,854 3,522 332 9.4 %
Data processing
1,088 1,947 (859 ) -44.1 % 1,671 2,407 (736 ) -30.6 %
Federal deposit insurance premiums
571 286 285 99.7 %
Marketing
388 613 (225 ) -36.7 % 564 783 (219 ) -28.0 %
Federal deposit insurance premiums
355 268 87 32.5 %
Other
4,640 4,193 447 10.7 % 7,033 6,651 382 5.7 %
Total noninterest expense
$ 19,763 $ 18,713 $ 1,050 5.6 % $ 29,544 $ 27,982 $ 1,562 5.6 %

~~Compensation~~
The increase in compensation and benefits is primarily the result of management’s continued focus on talent management and retention. The increase in occupancy and equipment is primarily related to facilities improvement efforts aimed at enhancing technology and to accommodate recent growth. The decrease in data processing expense is primarily the result of prior year data conversion expenses incurred in the first quarter of 2019 related to the acquisition of AJSB. The decrease in federal deposit insurance premiums is the result of one-time credits received during 2019. The decrease in marketing is a result of the timing of the Bancorp’s marketing initiatives. The increase in other operating expenses is primarily the result of investments in strategic initiatives. The Bancorp’s efficiency ratio was ~~64.4%~~62.6% for the ~~six-months~~nine months ended ~~June~~September 30, 2020, compared to ~~69.2%~~68.7% for the ~~six-months~~nine months ended ~~June~~September 30, 2019. The ~~increased~~more favorable ratio for the current period is ~~related~~ primarily attributable to the increase in noninterest income and net 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.

Income tax expenses for the ~~six~~nine months ended ~~June~~September 30, 2020 totaled ~~$1.6~~$2.6 million, compared to income tax expense of ~~$1.3~~$1.6 million for the ~~six~~nine months ended ~~June~~September 30, 2019, an increase of ~~$387 thousand (30.9%~~$1.0 million (65.3%). The combined effective federal and state tax rates for the Bancorp was ~~16.6%~~16.8% for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~16.7%~~14.0% for the ~~six~~nine months ended ~~June~~September 30, 2019. The Bancorp’s ~~lower~~higher current period effective tax rate is a result of ~~an increase~~a decrease in tax preferred income in relation to the increase of 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, 2019, 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 2019 Form 10-K.

42
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.

Item 4. Controls and Procedures
(a)
~~(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"~~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 ~~June~~September 30, 2020, the Bancorp’s Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective as of that date in ensuring that information required to be disclosed by the Bancorp under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and ~~forms~~.forms.

(b)
~~(b)~~ Changes in Internal Control Over Financial Reporting.
There was no change in the Bancorp's internal control over financial reporting identified in connection with the Bancorp’s evaluation of controls that occurred during the ~~six~~nine months ended ~~June~~September 30, 2020, that has materially affected, or is reasonably likely to materially affect, the Bancorp's internal control over financial reporting.

4143

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 ~~six~~nine months ended ~~June~~September 30, 2020 under the stock repurchase program.

Period
Total Number
of Shares Purchased

Average Price
Paid per Share

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

Maximum Number of
Shares That May Yet
Be Purchased Under
the Program(1)
January 1, 2020 – January 31, 2020
-

N/A

-

48,828
February 1, 2020 – February 28, 2020
-

N/A

-

48,828
March 1, 2020 – March 31, 2020
-

N/A

-

48,828
April 1, 2020 – April 30, 2020
-

N/A

-

48,828
May 1, 2020 – May 31, 2020
-

N/A

-

48,828
June 1, 2020 – June 30, 2020
-

N/A

-

48,828
July 1, 2020 – July 31, 2020
-
N/A
-
48,828
August 1, 2020 – August 31, 2020
-
N/A
-
48,828
September 1, 2020 – September 30, 2020
-
N/A
-
48,828

-

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
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 , formatted in an Inline 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.
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

4244

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: August 7, 2020~~
~~/s/ Benjamin J. Bochnowski~~
~~Benjamin J. Bochnowski~~
~~President and Chief Executive Officer~~

Date: ~~August 7,~~November 6, 2020
/s/ Benjamin J. Bochnowski
Benjamin J. Bochnowski
President and Chief Executive Officer
Date: November 6, 2020
/s/ Robert T. Lowry

Robert T. Lowry
Executive Vice President, Chief Financial
Officer and Treasurer

4345

							For the six months ended										For the nine months ended
	As of June 30, 2020						June 30, 2020				As of September 30, 2020						September 30, 2020
(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	$	2,077	$	3,459	$	-	$	2,107	$	49	$	1,923	$	3,260	$	-	$	2,061	$	81
Home equity		372		392		-		384		9		360		372		-		378		13
Commercial real estate		1,096		1,682		-		1,379		47		1,214		1,797		-		1,338		65
Construction and land development		-		-		-		-		-		0		0		-		0		0
Multifamily		768		850		-		784		14		748		830		-		775		23
Farmland		-		-		-		-		-		0		0		-		0		0
Commercial business		1,463		1,517		-		1,588		40		1,693		1,728		-		1,614		61
Consumer		-		-		-		-		-		0		0		-		0		0
Manufactured homes		-		-		-		-		-		0		0		-		0		0
Government		-		-		-		-		-		0		0		-		0		0

With an allowance recorded:
Residential real estate	$	187	$	187	$	130	$	107	$	1	$	280	$	324	$	186	$	151	$	4
Home equity		-		-		-		5		-		1		9		1		4		0
Commercial real estate		166		166		15		67		1		5,180		5,180		683		1,346		0
Construction and land development		-		-		-		-		-		0		0		0		0		0
Multifamily		-		-		-		-		-		0		0		0		0		0
Farmland		-		-		-		-		-		0		0		0		0		0
Commercial business		794		794		337		676		19		916		916		460		736		19
Consumer		-		-		-		-		-		0		0		0		0		0
Manufactured homes		-		-		-		-		-		0		0		0		0		0
Government		-		-		-		-		-		0		0		0		0		0

Total:
Residential real estate	$	2,264	$	3,646	$	130	$	2,214	$	50	$	2,203	$	3,584	$	186	$	2,212	$	85
Home equity	$	372	$	392	$	-	$	389	$	9	$	361	$	381	$	1	$	382	$	13
Commercial real estate	$	1,262	$	1,848	$	15	$	1,446	$	48	$	6,394	$	6,977	$	683	$	2,684	$	65
Construction & land development	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0
Multifamily	$	768	$	850	$	-	$	784	$	14	$	748	$	830	$	0	$	775	$	23
Farmland	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0
Commercial business	$	2,257	$	2,311	$	337	$	2,264	$	59	$	2,609	$	2,644	$	460	$	2,350	$	80
Consumer	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0
Manufactured homes	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0
Government	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0

							For the six months ended										For the nine months ended
	As of December 31, 2019						June 30, 2019				As of December 31, 2019						September 30, 2019
(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	$	2,140	$	3,555	$	-	$	1,813	$	31	$	2,140	$	3,555	$	-	$	1,915	$	55
Home equity		429		451		-		344		3		429		451		-		368		6
Commercial real estate		1,547		2,141		-		1,655		33		1,547		2,141		-		1,586		41
Construction & land development		-		-		-		-		-		0		0		-		0		0
Multifamily		802		884		-		472		3		802		884		-		525		12
Farmland		-		-		-		-		-		0		0		-		0		0
Commercial business		1,814		1,906		-		1,967		43		1,814		1,906		-		1,933		63
Consumer		-		-		-		-		-		0		0		-		0		0
Manufactured homes		-		-		-		-		-		0		0		-		0		0
Government		-		-		-		-		-		0		0		-		0		0

With an allowance recorded:
Residential real estate	$	83	$	83	$	10	$	159	$	2	$	83	$	83	$	10	$	158	$	3
Home equity		8		8		4		59		1		8		8		4		60		1
Commercial real estate		18		18		-		478		-		18		18		0		473		0
Construction & land development		-		-		-		-		-		0		0		0		0		0
Multifamily		-		-		-		-		-		0		0		0		0		0
Farmland		-		-		-		-		-		0		0		0		0		0
Commercial business		377		377		152		145		-		377		377		152		547		3
Consumer		-		-		-		-		-		0		0		0		0		0
Manufactured homes		-		-		-		-		-		0		0		0		0		0
Government		-		-		-		-		-		0		0		0		0		0

Total:
Residential real estate	$	2,223	$	3,638	$	10	$	1,972	$	33	$	2,223	$	3,638	$	10	$	2,073	$	58
Home equity	$	437	$	459	$	4	$	403	$	4	$	437	$	459	$	4	$	428	$	7
Commercial real estate	$	1,565	$	2,159	$	-	$	2,133	$	33	$	1,565	$	2,159	$	0	$	2,059	$	41
Construction & land development	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0
Multifamily	$	802	$	884	$	-	$	472	$	3	$	802	$	884	$	0	$	525	$	12
Farmland	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0
Commercial business	$	2,191	$	2,283	$	152	$	2,112	$	43	$	2,191	$	2,283	$	152	$	2,480	$	66
Consumer	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0
Manufactured homes	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0
Government	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0

(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		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, 2020
September 30, 2020
Residential real estate	$	4,741	$	1,055	$	3,524	$	9,320	$	275,243	$	284,563	$	343	$	2,697	$	2,028	$	3,284	$	8,009	$	276,284	$	284,293	$	0
Home equity		266		207		389		862		45,450		46,312		49		163		0		408		571		41,612		42,183		0
Commercial real estate		1,693		1,344		1,447		4,484		281,638		286,122		1,194		9,837		1,532		248		11,617		274,084		285,701		0
Construction and land development		672		-		-		672		92,310		92,982		-		478		0		345		823		88,353		89,176		345
Multifamily		-		274		170		444		55,626		56,070		-		102		269		166		537		50,164		50,701		0
Farmland		-		-		-		-		221		221		-		0		0		0		0		218		218		0
Commercial business		426		150		847		1,423		177,440		178,863		318		1,342		215		759		2,316		179,866		182,182		234
Consumer		9		-		-		9		513		522		-		0		0		0		0		467		467		0
Manufactured homes		308		293		-		601		21,917		22,518		-		423		168		0		591		27,223		27,814		0
Government		-		-		-		-		13,729		13,729		-		0		0		0		0		13,205		13,205		0
Total	$	8,115	$	3,323	$	6,377	$	17,815	$	964,087	$	981,902	$	1,904	$	15,042	$	4,212	$	5,210	$	24,464	$	951,476	$	975,940	$	579

December 31, 2019
Residential real estate	$	3,486	$	1,332	$	3,724	$	8,542	$	290,791	$	299,333	$	452	$	3,486	$	1,332	$	3,724	$	8,542	$	290,791	$	299,333	$	452
Home equity		90		24		388		502		48,679		49,181		19		90		24		388		502		48,679		49,181		19
Commercial real estate		1,461		170		719		2,350		280,758		283,108		61		1,461		170		719		2,350		280,758		283,108		61
Construction and land development		143		289		-		432		87,278		87,710		-		143		289		0		432		87,278		87,710		0
Multifamily		140		-		160		300		50,986		51,286		-		140		0		160		300		50,986		51,286		0
Farmland		-		-		-		-		227		227		-		0		0		0		0		227		227		0
Commercial business		926		583		870		2,379		100,709		103,088		288		926		583		870		2,379		100,709		103,088		288
Consumer		-		-		-		-		627		627		-		0		0		0		0		627		627		0
Manufactured homes		63		36		46		145		16,360		16,505		46		63		36		46		145		16,360		16,505		46
Government		-		-		-		-		15,804		15,804		-		0		0		0		0		15,804		15,804		0
Total	$	6,309	$	2,434	$	5,907	$	14,650	$	892,219	$	906,869	$	866	$	6,309	$	2,434	$	5,907	$	14,650	$	892,219	$	906,869	$	866

(Dollars in thousands)
	September 30, 2020		December 31, 2019
Residential real estate	$	6,650	$	4,374
Home equity		509		473
Commercial real estate		5,411		658
Construction and land development		0		0
Multifamily		528		420
Farmland		0		0
Commercial business		1,383		582
Consumer		0		0
Manufactured homes		0		0
Government		0		0
Total	$	14,481	$	6,507

	June 30, 2020		December 31, 2019
Residential real estate	$	5,135	$	4,374
Home equity		464		473
Commercial real estate		253		658
Construction and land development		-		-
Multifamily		541		420
Farmland		-		-
Commercial business		1,015		582
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	7,408	$	6,507

(dollars in thousands)	First Personal		First Personal
2019	$	90	$	118
2020		57		78

(dollars in thousands)	First Federal				Liberty Savings				First Personal				AJSB				First Federal				Libery Savings				First Personal				AJSB
	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		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	$	1,062		59	$	1,203		44	$	948		56	$	3,734		52
Home equity		44		29		5		29		51		50		141		32		44		29		5		29		51		50		141		32
Commercial real estate		-		-		-		-		208		56		8		9		0		-		0		-		208		56		8		9
Construction and land development		-		-		-		-		1		30		-		-		0		-		0		-		1		30		0		-
Multifamily		-		-		-		-		11		48		2		48		0		-		0		-		11		48		2		48
Consumer		-		-		-		-		146		50		1		5		0		-		0		-		146		50		1		5
Commercial business		-		-		-		-		348		24		-		-		0		-		0		-		348		24		0		-
Purchased credit impaired loans		-		-		-		-		424		32		-		-		0		-		0		-		424		32		0		-
Total	$	1,106			$	1,208			$	2,137			$	3,886			$	1,106			$	1,208			$	2,137			$	3,886

(dollars in thousands)	First Personal		AJ Smith		Total
2020	$	73	$	167	$	240
2021		292		667		959
2022		282		667		949
2023		63		275		338
Total	$	710	$	1,776	$	2,486

	(Dollars in thousands)
	June 30, 2020		December 31, 2019
Residential real estate	$	524	$	957
Commercial real estate		110		126
Total	$	634	$	1,083

Non-vested Shares	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Non-vested at January 1, 2019		27,423		$	32.58		27,423		$	32.58
Granted		7,407			43.00		7,407			43.00
Vested		(4,625	)		29.37		(4,625	)		29.37
Forfeited		-			-		0			0
Non-vested at December 31, 2019		30,205		$	35.63		30,205		$	35.63

Non-vested at January 1, 2020.		30,205		$	35.63
Non-vested at January 1, 2020							30,205		$	35.63
Granted		13,243			44.30		13,243			44.30
Vested		(6,400	)		27.50		(6,400	)		27.50
Forfeited		-			-		0			0
Non-vested at June 30, 2020		37,048		$	40.13
Non-vested at September 30, 2020							37,048		$	40.13

							Gross Amounts not Offset in the												Gross Amounts not Offset in the
							Statement of Financial Condition												Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount		Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
June 30, 2020
September 30, 2020
Interest rate swap contracts	$	3,778	$	-	$	3,778	$	-	$	-	$	3,778	$	4,062	$	0	$	4,062	$	0	$	0	$	4,062
Interest rate lock commitments		485		-		485		-		-		485		495		0		495		0		0		495
Total	$	4,263	$	-	$	4,263	$	-	$	-	$	4,263	$	4,557	$	0	$	4,557	$	0	$	0	$	4,557

	(Dollars in Thousands)		(Dollars in Thousands)
	Collateralized		Collateralized
	debt obligations		debt obligations
	other-than-temporary		other-than-temporary
(Dollars in thousands)	impairment		impairment
Ending balance, December 31, 2019	$	173	$	173
Additions not previously recognized		-		0
Ending balance, June 30, 2020	$	173
Ending balance, September 30, 2020			$	173

			Fair Value Measurements at June 30, 2020, Using									Fair Value Measurements at September 30, 2020, 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	$	21,457	$	21,457	$	-	$	-		$	26,789	$	26,789	$	0	$	0
residential mortgage-backed securities		134,073		-		134,073		-
U.S. government sponsored entities											4,989				4,989
Collateralized mortgage obligations and residential mortgage-backed securities											128,963		0		128,963		0
Municipal securities		138,374		-		138,374		-			162,561		0		162,561		0
Collateralized debt obligations		815		-		-		815			879		0		0		879
Total securities available-for-sale	$	294,719	$	21,457	$	272,447	$	815		$	324,181	$	26,789	$	296,513	$	879

			Fair Value Measurements at December 31, 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)
Available-for-sale debt securities:
Money market fund	$	9,670	$	9,670	$	-	$	-
U.S. government sponsored entities		13,058		-		13,058		-
Collateralized mortgage obligations and residential mortgage-backed securities		150,988		-		150,988		-
Municipal securities		102,427		-		102,427		-
Collateralized debt obligations		1,076		-		-		1,076
Total securities available-for-sale	$	277,219	$	9,670	$	266,473	$	1,076

(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, 2019	$	2,049		$	2,049
Principal payments		(38	)		(38	)
Total unrealized gains, included in other comprehensive income		52			52
Transfers in and/or (out) of Level 3		(987	)		(987	)
Ending balance, December 31, 2019	$	1,076		$	1,076

Beginning balance, January 1, 2020	$	1,076		$	1,076
Principal payments		(11	)		(16	)
Total unrealized losses, included in other comprehensive income		(250	)
Total unrealized losses, included in other comprehensive income..					(181	)
Sale out of Level 3		-			0
Ending balance, June 30, 2020	$	815
Ending balance, September 30, 2020				$	879

	June 30, 2020				Estimated Fair Value Measurements at June 30, 2020 Using						September 30, 2020				Estimated Fair Value Measurements at September 30, 2020 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	$	97,305	$	97,305	$	97,305	$	-	$	-	$	84,447	$	84,447	$	84,447	$	0	$	0
Certificates of deposit in other financial institutions		1,639		1,614		-		1,614		-		1,901		1,872		0		1,872		0
Securities available-for-sale		294,719		294,719		21,457		272,447		815		324,181		324,181		4,989		318,313		879
Loans held-for-sale		10,024		10,311		10,311		-		-		5,538		5,721		5,721		0		0
Loans receivable, net		972,036		989,824		-		-		989,824		965,226		986,847		0		0		986,847
Federal Home Loan Bank stock		3,918		3,918		-		3,918		-		3,918		3,918		0		3,918		0
Interest rate swap agreements		3,778		3,778		-		3,778		-		4,062		4,062		0		4,062		0
Accrued interest receivable		4,284		4,284		-		4,284		-		4,714		4,714		0		4,714		0

Financial liabilities:
Non-interest bearing deposits		262,001		262,001		262,001		-		-		258,170		258,170		258,170		0		0
Interest bearing deposits		1,015,633		1,016,961		720,953		296,008		-		1,022,486		1,023,402		737,047		286,355		0
Repurchase agreements		17,159		17,166		15,425		1,741		-		19,145		19,149		17,411		1,738		0
Borrowed funds		12,000		12,140		-		12,140		-		12,000		12,072		0		12,072		0
Interest rate swap agreements		3,778		3,778		-		3,778		-		4,062		4,062		0		4,062		0
Accrued interest payable		65		65		-		65		-		62		62		0		62		0

	December 31, 2019				Estimated Fair Value Measurements at December 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	$	47,258	$	47,258	$	47,258	$	-	$	-
Certificates of deposit in other financial institutions		2,170		2,137		-		2,137		-
Securities available-for-sale		277,219		277,219		9,670		266,473		1,076
Loans held-for-sale		6,091		6,204		6,204		-		-
Loans receivable, net		897,870		917,174		-		-		917,174
Federal Home Loan Bank stock		3,912		3,912		-		3,912		-
Interest rate swap agreements		1,358		1,358		-		1,358		-
Accrued interest receivable		4,029		4,029		-		4,029		-

Financial liabilities:
Non-interest bearing deposits		172,094		172,094		172,094		-		-
Interest bearing deposits		982,276		982,241		654,573		327,668		-
Repurchase agreements		11,499		11,499		9,721		1,778		-
Borrowed funds		14,000		14,108		-		14,108		-
Interest rate swap agreements		1,358		1,358		-		1,358		-
Accrued interest payable		179		179		-		179		-

The Bancorp's nonperforming loans are summarized below:

(Dollars in thousands)
Loan Segment	June 30, 2020 (unaudited)			December 31, 2019
Residential real estate	$	5,478		$	4,826
Home equity		513			492
Commercial real estate		1,447			719
Construction and land development		-			-
Multifamily		541			420
Farmland		-			-
Commercial business		1,333			870
Consumer		-			-
Manufactured homes		-			46
Government		-			-
Total	$	9,312		$	7,373
Nonperforming loans to total loans		0.95	%		0.81	%
Nonperforming loans to total assets		0.63	%		0.56	%

The Bancorp's substandard loans are summarized below:
(Dollars in thousands)
Loan Segment	June 30, 2020 (unaudited)		December 31, 2019
Residential real estate	$	5,163	$	4,491
Home equity		498		507
Commercial real estate		3,173		1,565
Construction and land development		-		-
Multifamily		541		802
Farmland		-		-
Commercial business		1,080		727
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	10,455	$	8,092

The Bancorp's special mention loans are summarized below:
(Dollars in thousands)
Loan Segment	June 30, 2020 (unaudited)		December 31, 2019
Residential real estate	$	3,164	$	4,203
Home equity		565		813
Commercial real estate		6,731		5,380
Construction and land development		-		-
Multifamily		501		-
Farmland		-		-
Commercial business		1,851		2,228
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	12,812	$	12,624

The Bancorp's impaired loans, including purchased credit impaired loans, are summarized below:
(Dollars in thousands)
Loan Segment	June 30, 2020 (unaudited)		December 31, 2019
Residential real estate	$	2,264	$	2,223
Home equity		372		437
Commercial real estate		1,262		1,565
Construction and land development		-		-
Multifamily		768		802
Farmland		-		-
Commercial business		2,257		2,191
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	6,923	$	7,218

The Bancorp's troubled debt restructured loans are summarized below:
(Dollars in thousands)
Loan Segment	June 30, 2020 (unaudited)		December 31, 2019
Residential real estate	$	520	$	480
Home equity		192		176
Commercial real estate		928		823
Construction and land development		-		-
Multifamily		-		-
Farmland		-		-
Commercial business		518		622
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	2,158	$	2,101

The Bancorp's provision for loan losses for the six months ended are summarized below:
(Dollars in thousands)
(unaudited)

Loan Segment	June 30, 2020			June 30, 2019
Residential real estate	$	(112	)	$	(7	)
Home equity		8			(2	)
Commercial real estate		19			194
Construction and land development		120			50
Multifamily		80			(19	)
Farmland		-			-
Commercial business		932			139
Consumer		(8	)		490
Manufactured homes		-			-
Government		(17	)		(17	)
Total	$	1,022		$	828

The Bancorp's charge-off and recovery information is summarized below:
(Dollars in thousands)	(unaudited)
	As of June 30, 2020
Loan Segment	Charge-off			Recoveries		Net Charge-offs			September 30, 2020			September 30, 2019
Residential real estate	$	(2	)	$	10	$	8		$	58		$	142
Home equity		-			-		-			(11	)		21
Commercial real estate		(80	)		-		(80	)		694			372
Construction and land development		(17	)		-		(17	)		91			238
Multifamily		-			-		-			21			32
Farmland		-			-		-			-			-
Commercial business		(78	)		17		(61	)		1,045			544
Consumer		(13	)		8		(5	)		(10	)		33
Manufactured homes		-			-					-			(41	)
Government		-			-		-			(17	)		(19	)
Total	$	(190	)	$	35	$	(155	)	$	1,871		$	1,322

The Bancorp's allowance to total loans and non-performing loans are summarized below:
(Dollars in thousands)
(unaudited)
	June 30, 2020			June 30, 2019

Allowance for loan losses	$	9,866		$	8,744
Total loans	$	981,902		$	906,869
Non-performing loans	$	9,312		$	7,373
ALL-to-total loans		1.00	%		0.96	%
ALL-to-non-performing loans (coverage ratio)		105.9	%		118.6	%

($ in thousands)	(Unaudited)								(Unaudited)
For the three months ended March 31, 2020	GAAP			Additional reserves not part of the ALL		Non-GAAP
For the nine months ended September 30, 2020									GAAP			Additional reserves not part of the ALL		Non-GAAP
Allowance for loan losses (ALL)	$	9,866		$	4,986	$	14,852		$	10,714		$	4,587	$	15,301
Total loans	$	981,902				$	981,902		$	975,940				$	975,940
ALL to total loans		1.00	%				1.51	%		1.10	%				1.57	%

(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 June 30, 2020	Amount	Ratio	Amount	Ratio	Amount	Ratio
At September 30, 2020							Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$118.2	12.5%	$42.4	4.5%	N/A	N/A	$	122.6		12.8	%	$	43.3		4.5	%		N/A		N/A
Tier 1 capital to risk-weighted assets	$118.2	12.5%	$56.6	6.0%	N/A	N/A	$	122.6		12.8	%	$	57.7		6.0	%		N/A		N/A
Total capital to risk-weighted assets	$128.1	13.6%	$75.4	8.0%	N/A	N/A	$	133.3		13.9	%	$	76.9		8.0	%		N/A		N/A
Tier 1 capital to adjusted average assets	$118.2	8.3%	$57.4	4.0%	N/A	N/A	$	122.6		8.3	%	$	59.5		4.0	%		N/A		N/A

Quarter-to-Date
(Dollars in thousands)	Average Balances, Interest, and Rates															Average Balances, Interest, and Rates
(unaudited)	June 30, 2020								June 30, 2019							September 30, 2020							September 30, 2019
	Average Balance			Interest		Rate (%)			Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
ASSETS
Interest bearing deposits in other financial institutions	$	39,325		$	15		0.15		$	13,985		$	92		2.63	$	72,920		$	22		0.12	$	45,686		$	262		2.29
Federal funds sold		1,738			18		4.14			3,818			36		3.77		719			7		3.89		5,141			46		3.58
Certificates of deposit in other financial institutions		1,734			11		2.54			2,118			15		2.83		1,877			10		2.13		2,076			18		3.47
Securities available-for-sale		288,330			1,532		2.13			253,421			1,732		2.73		315,090			1,506		1.91		258,851			1,612		2.49
Loans receivable		977,866			11,297		4.62			874,652			11,485		5.25		975,794			11,263		4.62		896,096			11,335		5.06
Federal Home Loan Bank stock		3,918			32		3.27			3,931			45		4.58		3,918			28		2.86		3,912			47		4.81
Total interest earning assets		1,312,911		$	12,905		3.93			1,151,925		$	13,405		4.65		1,370,318		$	12,836		3.75		1,211,762		$	13,320		4.40
Cash and non-interest bearing deposits in other financial institutions		17,713								29,756							15,814							23,183
Allowance for loan losses		(9,553	)							(8,357	)						(9,917	)						(8,887	)
Other noninterest bearing assets		102,964								91,808							98,879							93,937
Total assets	$	1,424,035							$	1,265,132						$	1,475,094						$	1,319,995
								��
LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits	$	1,237,241		$	1,380		0.45		$	1,097,283		$	2,011		0.73	$	1,282,698		$	1,050		0.33	$	1,146,053		$	2,353		0.82
Repurchase agreements		13,671			17		0.50			13,638			66		1.94		16,246			15		0.37		13,696			64		1.87
Borrowed funds		13,981			93		2.66			15,341			128		3.34		12,000			83		2.77		17,000			108		2.54
Total interest bearing liabilities		1,264,893		$	1,490		0.47			1,126,262		$	2,205		0.78		1,310,944		$	1,148		0.35		1,176,749		$	2,525		0.86
Other noninterest bearing liabilities		17,741								12,864							18,034							13,781
Total liabilities		1,282,634								1,139,126							1,328,978							1,190,530
Total stockholders' equity		141,401								126,006							146,116							129,465
Total liabilities and stockholders' equity	$	1,424,035							$	1,265,132						$	1,475,094						$	1,319,995

Year-to-Date (Dollars in thousands)	Average Balances, Interest, and Rates
	June 30, 2020							June 30, 2019
Year-to-Date
(Dollars in thousands)															Average Balances, Interest, and Rates
(unaudited)															September 30, 2020							September 30, 2019
	Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
ASSETS
Interest bearing deposits in other financial institutions	$	26,406		$	69		0.52	$	26,840		$	176		1.31	$	42,025		$	91		0.29	$	33,191		$	438		1.76
Federal funds sold		3,726			85		4.56		4,644			77		3.32		2,716			92		4.52		4,811			123		3.41
Certificates of deposit in other financial institutions		1,851			25		2.70		2,194			32		2.92		1,859			35		2.51		2,149			50		3.10
Securities available-for-sale		284,955			3,202		2.25		250,016			3,489		2.79		295,073			4,708		2.13		253,004			5,101		2.69
Loans receivable		945,189			22,326		4.72		855,908			22,028		5.15		954,985			33,589		4.69		867,941			33,363		5.13
Federal Home Loan Bank stock		3,915			67		3.42		3,886			89		4.58		3,916			95		3.23		3,894			136		4.66
Total interest earning assets		1,266,042		$	25,774		4.07		1,143,488		$	25,891		4.53		1,300,574		$	38,610		3.96		1,164,990		$	39,211		4.49
Cash and non-interest bearing deposits in other financial institutions		18,397							23,628							17,530							23,496
Allowance for loan losses		(9,302	)						(8,213	)						(9,508	)						(8,449	)
Other noninterest bearing assets		98,409							88,967							98,611							92,595
Total assets	$	1,373,546						$	1,247,870						$	1,407,207						$	1,272,632

LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits	$	1,192,482		$	3,444		0.58	$	1,067,976		$	3,683		0.69	$	1,222,497		$	4,494		0.49	$	1,094,631		$	6,036		0.74
Repurchase agreements		12,803			57		0.89		12,098			115		1.90		13,959			72		0.69		12,636			179		1.89
Borrowed funds		14,087			187		2.65		21,426			294		2.74		13,386			270		2.69		19,935			402		2.69
Total interest bearing liabilities		1,219,372		$	3,688		0.60		1,101,500		$	4,092		0.74		1,249,842		$	4,836		0.52		1,127,202		$	6,617		0.78
Other noninterest bearing liabilities		15,380							24,528							16,270							21,179
Total liabilities		1,234,752							1,126,028							1,266,112							1,148,381
Total stockholders' equity		138,794							121,842							141,095							124,251
Total liabilities and stockholders' equity	$	1,373,546						$	1,247,870						$	1,407,207						$	1,272,632

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Program(1)
January 1, 2020 – January 31, 2020	-	N/A	-	48,828
February 1, 2020 – February 28, 2020	-	N/A	-	48,828
March 1, 2020 – March 31, 2020	-	N/A	-	48,828
April 1, 2020 – April 30, 2020	-	N/A	-	48,828
May 1, 2020 – May 31, 2020	-	N/A	-	48,828
June 1, 2020 – June 30, 2020	-	N/A	-	48,828
July 1, 2020 – July 31, 2020	-	N/A	-	48,828
August 1, 2020 – August 31, 2020	-	N/A	-	48,828
September 1, 2020 – September 30, 2020	-	N/A	-	48,828
	-	N/A	-	48,828