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)

          

Indiana35-1927981

(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 AugustNovember 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.

 

 

1

 

 

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.

 

2

 

 

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.

 

3

 

 

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.

 

4

 

 

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.

 

5

 

NorthWest Indiana Bancorp

Notes to Consolidated Financial Statements

(unaudited)

 

 

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of NorthWest Indiana Bancorp (the “Bancorp” or “NWIN”), its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary) and Peoples Bank (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 JuneSeptember 30, 2020, and December 31, 2019, and the consolidated statements of income and comprehensive income for the three and sixnine months ended JuneSeptember 30, 2020, and 2019, and consolidated statements of cash flows and changes in stockholders’ equity for the sixnine months ended JuneSeptember 30, 2020, and 2019. The income reported for the sixnine month period ended JuneSeptember 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.

 

6


 
 

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 

 

7

 
 

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 JuneSeptember 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 sixnine 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 JuneSeptember 30, 2020 and December 31, 2019, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.

 

8

 

Securities with gross unrealized losses at JuneSeptember 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 

 

9

 

(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 

 

10

 

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 JuneSeptember 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 

 

11

 

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.

 

12

 

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 sixnine 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 JuneSeptember 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 fornecessary. During the sixthird months endedquarter, 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, Goodwilland 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 JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020. The fair market premium on the certificates of deposit has fully amortized as of JuneSeptember 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 sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020, stock based compensation expense of $202$309 thousand was recorded, compared to $154$232 thousand for the sixnine months ended JuneSeptember 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 sixnine 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 JuneSeptember 30, 2020, there were 0 outstanding incentive stock options.

 

18

There were 13,243 shares of restricted stock granted during the first sixnine months of 2020 compared to 7,407 shares granted during the first sixnine 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 sixnine months ended JuneSeptember 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, 2019December 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 JuneSeptember 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 sixnine months ended JuneSeptember 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 JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2020, as compared to December 31, 2019, and the results of operations for the quarter and sixnine months ending JuneSeptember 30, 2020, and JuneSeptember 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 JuneSeptember 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 JuneSeptember 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 sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 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 requiringencouraging 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 outbreakpandemic 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 JuneSeptember 30, 2020, the Bancorp approved 773782 applications totaling $91.5 million, with an average loan size of approximately $118,000.$117,000. These loans will help local business owners retain 10,74410,758 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 itsa loan customer’s repayment obligation if theirthe 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 JuneSeptember 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 JuneSeptember 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 1.601.57 and loan to value of 50%49%. The restaurant portfolio is comprised of 46% quick service and fast casual loan balances. As of JuneSeptember 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 1.461.40 and loan to value of 59%70%. The hotel portfolio is comprised of 89% flagged hotel loan balances. As of JuneSeptember 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 1.481.55 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 sixnine months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. As of JuneSeptember 30, 2020, the Bank approved 773782 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 10,74410,758 employees. We expect the majority of the PPP loans we have originated to qualify for and receivewill 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 untilexpired 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 sixnine 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 JuneSeptember 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 sixnine months ended JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2020 and 92.0% of total assets at December 31, 2019. The increase in total assets and interest earning assets for the sixnine 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 JuneSeptember 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 ofconnection with the significant declines ineffects 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 sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020, compared to $642 thousand$1.3 million for the sixnine months ended JuneSeptember 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 JuneSeptember 30, 2020, non-performing loans that remained accruing and more than 90 days past due include six commercial real estatetwo 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 equitycommercial 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 JuneSeptember 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 increasedecrease in the troubled debt restructure loans reflected in the table above for the sixnine months ending JuneSeptember 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, oneand 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. TwoOne 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 JuneSeptember 30, 2020, increase in watch loans. The purchased credit impaired loans, decreased at Junewhich 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 reductionincrease in impaired loan balances in accordance with required payment schedules and the payoff of two impaired loans.

31

 

At JuneSeptember 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 JuneSeptember 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 JuneSeptember 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 JuneSeptember 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 adjustedadjused for PPP loans that are fully guaranteed by the SBA.

 

The JuneSeptember 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 JuneSeptember 30, 2020, foreclosed real estate totaled $634$501 thousand, which was comprised of fourteentwelve 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 sixnine months ended JuneSeptember 30, 2020. At the end of JuneSeptember 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 JuneSeptember 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 JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020, cash and cash equivalents increased by $50.0$37.2 million compared to a $44.0$54.8 million increase for the sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020, compared to cash provided of $6.0$10.9 million for the sixnine month period ended JuneSeptember 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 providedoutflows of $2.9$7.8 million for the sixnine months ended JuneSeptember 30, 2019. Cash outflows from investing activities for the current sixnine 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 cashCash 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 sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020, and $1.9$3.0 million for the sixnine months ended JuneSeptember 30, 2019.

 

At JuneSeptember 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 JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020, stockholders' equity increased by $11.1$14.8 million (8.3%(11.1%). During the sixnine months ended JuneSeptember 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 sixnine 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 sixnine months ended JuneSeptember 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 JuneSeptember 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 JuneSeptember 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 secondthird quarter dividend of $0.31 per share. The Bancorp’s secondthird quarter dividend was paid to shareholders on July 3,October 2, 2020.

 

Results of Operations - Comparison of the Quarter Ended JuneSeptember 30, 2020 to the Quarter Ended JuneSeptember 30, 2019

For the quarter ended JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2019. The ROE was 14.32%13.42% for the quarter ended JuneSeptember 30, 2020, compared to 12.77%11.05% for the quarter ended JuneSeptember 30, 2019.

 

Net interest income for the quarter ended JuneSeptember 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 JuneSeptember 30, 2019. The weighted-average yield on interest-earning assets was 3.93%3.75% for the quarter ended JuneSeptember 30, 2020, compared to 4.65%4.40% for the quarter ended JuneSeptember 30, 2019. The weighted-average cost of funds for the quarter ended JuneSeptember 30, 2020 was 0.47%0.35% compared to 0.78%0.86% for the quarter ended JuneSeptember 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 JuneSeptember 30, 2019. The net interest margin on earning assets was 3.48%3.41% for the quarter ended JuneSeptember 30, 2020 and 3.89%3.56% for the quarter ended JuneSeptember 30, 2019. On a tax equivalent basis, the Bancorp’s net interest margin was 3.60%3.53% for the quarter ended JuneSeptember 30, 2020, compared to 3.96%3.63% for the quarter ended JuneSeptember 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 JuneSeptember 30, 2020, compared to the quarter ended JuneSeptember 30, 2019. The decrease in interest income for federal funds sold was primarily the result of lower average balances for the quarter ended JuneSeptember 30, 2020, compared to the quarter ended JuneSeptember 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 JuneSeptember 30, 2020, compared to the quarter ended JuneSeptember 30, 2019. The decrease in interest income for securities available-for-sale was primarily the result of lower average rates for the quarter ended JuneSeptember 30, 2020, compared to the quarter ended JuneSeptember 30, 2019. The decrease in interest income for loans receivable was the result of lower weighted average rates received during quarter ended JuneSeptember 30, 2020, compared to the quarter ended JuneSeptember 30, 2019. The decrease in Federal Home Loan Bank stock was the result of lower weighted average rates received during quarter ended JuneSeptember 30, 2020, compared to quarter ended JuneSeptember 30, 2019. The decrease in the interest expense of total deposits was the result of lower weighted average rates for the quarter ended JuneSeptember 30, 2020, compared to the quarter ended JuneSeptember 30, 2019. The decrease in the interest expense for repurchase agreements was the result of lower weighted average rates for the quarter ended JuneSeptember 30, 2020, compared to the quarter ended JuneSeptember 30, 2019. The decrease in the interest expense for borrowed funds was the result of lower weighted average ratesbalances for the quarter ended JuneSeptember 30, 2020, compared to the quarter ended JuneSeptember 30, 2019.

 

The following table shows the change in noninterest income for the quarter ending JuneSeptember 30, 2020, and JuneSeptember 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 decreaseincrease in fees and service charges is primarily the result of changes in customer usageincreased lending fees earned as part of bank services duringopportunities resulting from the pandemic. The increase in gains on the sale of securities is a result of current market conditionseconomic 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 decreaseincrease in other noninterest incomegains on the sale of securities is primarily thea result of one-time legal gainscurrent 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 JuneSeptember 30, 2020, and JuneSeptember 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 equipmentfederal 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 investmentone-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 JuneSeptember 30, 2020, compared to 60.7%67.7% for the quarter ended JuneSeptember 30, 2019. The decreasedmore 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 JuneSeptember 30, 2020, totaled $1.1$1.0 million, compared to income tax expense of $911$351 thousand for the quarter ended JuneSeptember 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 JuneSeptember 30, 2020, compared to 18.5%8.9% for the quarter ended JuneSeptember 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 SixNine Months Ended JuneSeptember 30, 2020 to the SixNine Months Ended JuneSeptember 30, 2019

 

For the sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2019, an increase of $2.0$3.3 million (32.2%(34.0%). For the sixnine months ended, the ROA was 1.20%1.25%, compared to 1.00%1.03% for the sixnine months ended JuneSeptember 30, 2019. The ROE was 11.90%12.43% for the sixnine months ended JuneSeptember 30, 2020, compared to 10.25%10.54% for the sixnine months ended JuneSeptember 30, 2019.

 

Net interest income for the sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2019. The weighted-average yield on interest-earning assets was 4.07%3.96% for the sixnine months ended JuneSeptember 30, 2020, compared to 4.53%4.49% for the sixnine months ended JuneSeptember 30, 2019. The weighted-average cost of funds for the sixnine months ended JuneSeptember 30, 2020, was 0.60%0.52% compared to 0.74%0.78% for the sixnine months ended JuneSeptember 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 sixnine months, which is a decrease from the spread of 3.79%3.71% as of JuneSeptember 30, 2019. The net interest margin on earning assets was 3.49%3.46% for the sixnine months ended JuneSeptember 30, 2020, and 3.81%3.73% for the sixnine months ended JuneSeptember 30, 2019. On a tax equivalent basis, the Bancorp’s net interest margin was 3.61%3.58% for the sixnine months ended JuneSeptember 30, 2020, compared to 3.88%3.80% for the sixnine months ended JuneSeptember 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 yieldsinterest income for interest bearing deposits in other financial institutions was the result of lower weighted average rates for the sixnine months ended JuneSeptember 30, 2020, compared to the sixnine months ended JuneSeptember 30, 2019. The increasedecrease in yieldsinterest income for federal funds sold was primarily the result of higherlower weighted average ratesbalances for the sixnine months ended JuneSeptember 30, 2020, compared to the sixnine months ended JuneSeptember 30, 2019. The decrease in yieldsinterest income for certificates of deposits in other financial institutions was primarily the result of lower average balance and lower weighted average rates for the sixnine months ended JuneSeptember 30, 2020, compared to the sixnine months ended JuneSeptember 30, 2019. The decrease in yieldsinterest income for securities available-for-sale was the result of lower weighted average rates for the sixnine months ended JuneSeptember 30, 2020, compared to the sixnine months ended JuneSeptember 30, 2019. The increase in yieldsinterest income for loans receivable was the result of higher average balances during the sixnine months ended JuneSeptember 30, 2020, compared to the sixnine months ended JuneSeptember 30, 2019. The decrease in the costinterest expense of total deposits was the result of lower weighted average rates for the sixnine months ended JuneSeptember 30, 2020, compared to the sixnine months ended JuneSeptember 30, 2019. The decrease in the costinterest expense of repurchase agreements was the result of lower weighted average rates for the sixnine months ended JuneSeptember 30, 2020, compared to the sixnine months ended JuneSeptember 30, 2019. The decrease in the costinterest expense of borrowed funds was the result of lower average balances and lower wighted average rates for the sixnine months ended JuneSeptember 30, 2020, compared to the sixnine months ended JuneSeptember 30, 2019.

 

The following table shows the change in noninterest income for the sixnine months ending JuneSeptember 30, 2020, and JuneSeptember 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 decreaseincrease in fees and service charges is primarily the result of changes in customer usageincreased lending fees earned as part of bank services duringopportunities resulting from the pandemic. The increase in gains on the sale of securities is a result of current market conditionseconomic 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 JuneSeptember 30, 2020, and JuneSeptember 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-monthsnine months ended JuneSeptember 30, 2020, compared to 69.2%68.7% for the six-monthsnine months ended JuneSeptember 30, 2019. The increasedmore 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 sixnine months ended JuneSeptember 30, 2020 totaled $1.6$2.6 million, compared to income tax expense of $1.3$1.6 million for the sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020, compared to 16.7%14.0% for the sixnine months ended JuneSeptember 30, 2019. The Bancorp’s lowerhigher current period effective tax rate is a result of an increasea 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 JuneSeptember 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 sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 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.

104Cover 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