West End Indiana Bancshares 10Q 2019 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2019

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 000-54578

West End Indiana Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Maryland		36-4713616
(State or other jurisdiction of in Company or organization)		(I.R.S. Employer Identification Number)

34 South 7^th Street, Richmond, Indiana		47374
(Address of Principal Executive Offices)		Zip Code

(765) 962-9587

(Registrant’s telephone number)

N/A

(Former name or former address, if changed since last report)

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 requirements for the past 90 days.

YESx 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YESx NO¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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. (Check one)

Large accelerated filer¨		Accelerated filer¨
Non-accelerated filer¨		Smaller reporting companyx
(Do not check if 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¨ NOx

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
None	None	None

As of May 15, 2019, there were 1,065,336 issued and outstanding shares of the Registrant’s Common Stock.

West End Indiana Bancshares, Inc.

Form 10-Q

Index

		Page
Part I. Financial Information

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets	1

	Condensed Consolidated Statements of Income	2

	Condensed Consolidated Statements of Comprehensive Income	3

	Condensed Consolidated Statements of Cash Flows	4

	Condensed Statements of Stockholders’ Equity	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35

Item 4.	Controls and Procedures	35

Part II. Other Information

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults upon Senior Securities	35

Item 4.	Mine Safety Disclosures	35

Item 5.	Other Information	35

Item 6.	Exhibits	36

	Signature Page	37

Part I. – Financial Information

Item 1.

Financial Statements

West End Indiana Bancshares, Inc.

Condensed Consolidated Balance Sheets

	March 31,			December 31,
	2019			2018

Assets
Cash and due from banks	$	1,713,837		$	1,551,865
Interest-bearing demand deposits		10,602,163			8,383,465
Cash and cash equivalents		12,316,000			9,935,330
Investment securities available for sale		19,257,202			19,796,452
Loans held for sale		-			132,517
Loans, net of allowance for loan losses of $2,940,082 and $3,039,697		242,552,604			244,955,065
Premises and equipment		8,785,569			8,897,904
Federal Home Loan Bank stock		2,435,700			2,435,700
Interest receivable		1,031,709			1,128,409
Bank-owned life insurance		6,120,738			7,136,110
Foreclosed real estate held for sale		-			16,000
Other assets		6,630,693			5,717,756

Total assets	$	299,130,215		$	300,151,243

Liabilities and Equity

Liabilities
Deposits	$	218,410,453		$	217,914,164
Federal Home Loan Bank advances		48,500,000			50,500,000
Interest payable		124,215			133,353
Other liabilities		1,426,303			1,442,833
Total liabilities		268,460,971			269,990,350

Commitments and Contingencies

Redeemable common stock held by Employee Stock Ownership Plan (ESOP)		904,179			1,028,282

Stockholders’ Equity
Common stock, $.01 par value per share: Issued and outstanding – 1,065,336 and 1,065,336		10,653			10,653
Additional paid in capital		6,275,796			6,251,261
Retained earnings		25,457,594			25,211,544
Unearned employee stock ownership plan (ESOP)		(714,510	)		(728,520	)
Accumulated other comprehensive loss		(360,289	)		(584,045	)

Total stockholders’ equity		30,669,244			30,160,893

Less maximum cash obligation related to ESOP shares		(904,179	)		(1,028,282	)

Total stockholders’ equity less maximum cash obligation related to ESOP shares		29,765,065			29,132,611

Total liabilities and stockholders’ equity	$	299,130,215		$	300,151,243

The accompanying notes are an integral part of these financial statements.

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements of Income

		Three Months Ended March 31,
		2019			2018
		(Unaudited)
Interest and Dividend Income
Loans receivable, including fees		$	3,523,478		$	3,454,656
Investment securities			112,739			102,671
Other			73,960			68,121
Total interest income			3,710,177			3,625,448

Interest Expense
Deposits			601,412			499,481
Federal Home Loan Bank advances			260,951			201,150
Total interest expense			862,363			700,631

Net Interest Income			2,847,814			2,924,817
Provision for loan losses			333,000			555,045
Net Interest After Provision for Loan Losses			2,514,814			2,369,772

Other Income
Service charges on deposit accounts			158,331			172,735
Loan servicing income, net			(8,568	)		80,681
Debit card income			96,075			94,062
Gain on sale of loans			55,440			111,778
Gain on cash surrender value and redemption of life insurance policies			141,274			43,402
Loss on sale of other assets			(24,274	)		(7,656	)
Other income			8,908			11,344
Total other income			427,186			506,346

Other Expense
Salaries and employee benefits			1,456,054			1,386,618
Net occupancy			191,001			208,459
Data processing fees			141,617			124,015
Professional fees			150,125			99,728
Director expenses			25,065			24,300
Advertising			60,024			55,778
ATM charges			42,616			41,608
Postage and courier			63,517			62,656
FDIC insurance premiums			31,000			39,000
Foreclosed real estate and repossession expense			84,582			46,317
Other expenses			300,277			320,584
Total other expenses	��		2,545,878			2,409,063

Income Before Income Tax			396,122			467,055
Income tax expense			80,598			119,526

Net Income		$	315,524		$	347,529
Earnings Per Share
Basic		$	0.32		$	0.35
Diluted			0.31			0.34
Dividends Per Share			0.07			0.06

The accompanying notes are an integral part of these financial statements.

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements

of Comprehensive Income

	Three Months Ended March 31,
	2019		2018
	(Unaudited)
Net income	$	315,524	$	347,529
Other comprehensive income(loss), net of tax
Unrealized holding gains (losses) arising during the period, net of tax expense (benefit) of $78,354 and $(81,228)		223,756		(229,568	)

Comprehensive income	$	539,280	$	117,961

The accompanying notes are an integral part of these financial statements.

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

	Three Months Ended
	March 31,
	2019			2018
	(Unaudited)
Operating Activities
Net income	$	315,524		$	347,529
Items not requiring (providing) cash
Provision for loan losses		333,000			555,045
Depreciation and amortization		115,935			124,236
Investment securities amortization, net		51,806			73,760
Loan originated for sale		(1,736,580	)		(2,592,065	)
Proceeds on loan sold		1,904,411			3,744,806
Gain on loans sold		(55,440	)		(111,778	)
Loss on other assets		24,274			7,656
ESOP shares earned		36,599			40,171
Stock based compensation		1,946			71,375
Gain on cash surrender value and redemption of life insurance policies		(141,274	)		(43,402	)
Net change in
Interest receivable		96,701			122,861
Interest payable		(9,138	)		22,891
Other adjustments		200,391			(161,509	)
Net cash provided by operating activities		1,138,155			2,201,576

Investing Activities
Purchases of securities available for sale		-			(4,126,227	)
Proceeds from maturities of securities available for sale		789,554			1,029,809
Net change in loans		1,828,873			(2,575,534	)
Purchase of premises and equipment		(3,600	)		(35,094	)
Proceeds from sale of foreclosed real estate and repossessions		200,873			138,423
Net cash provided by (used in) investing activities		2,815,700			(5,568,623	)

Financing Activities
Net change in demand deposits, money market, NOW, and savings accounts		88,935			(1,716,586	)
Net change in certificates of deposit		407,354			4,115,192
Repayment of FHLB advances		(21,000,000	)		(8,000,000	)
Proceeds from FHLB advances		19,000,000			15,000,000
Cash dividends		(69,474	)		(59,305	)
Net cash provided by (used in) financing activities		(1,573,185	)		9,339,301

Net Change in Cash and Cash Equivalents		2,380,670			5,972,254

Cash and Cash Equivalents, Beginning of Period		9,935,330			10,345,822

Cash and Cash Equivalents, End of Period	$	12,316,000		$	16,318,076

Additional Cash Flows Information
Interest paid	$	871,501		$	677,740
Real estate acquired in settlement of loans		338,674			187,840
Sales and financing of foreclosed real estate and repossessions		98,086			-

The accompanying notes are an integral part of these financial statements.

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

For the Three Months Ended March 31, 2019 and 2018

																Maximum Cash
													Accumulated			Obligation
	Common Stock				Additional					Unearned			Other			Related to			Total
	Shares				Paid-In		Retained			ESOP			Comprehensive			ESOP			Stockholders
	Outstanding		Amount		Capital		Earnings			Shares			Loss			Shares			Equity
	(Unaudited)
Balances at January 1, 2019		1,065,336	$	10,653	$	6,251,261	$	25,211,544		$	(728,520	)	$	(584,045	)	$	(1,028,282	)	$	29,132,611
Net income		-		-		-		315,524			-			-			-			315,524
Other comprehensive loss		-		-		-		-			-			223,756			-			223,756
ESOP shares earned		-		-		22,589		-			14,010			-			-			36,599
Stock based compensation expense		-		-		1,946		-			-			-			-			1,946
Change in obligation related to ESOP shares		-		-		-		-			-			-			124,103			124,103
Cash dividends ($0.07) per share		-		-		-		(69,474	)		-			-			-			(69,474	)
Balances at March 31, 2019		1,065,336	$	10,653	$	6,275,796	$	25,457,594		$	(714,510	)	$	(360,289	)	$	(904,179	)	$	29,765,065

																Maximum Cash
													Accumulated			Obligation
	Common Stock				Additional					Unearned			Other			Related to			Total
	Shares				Paid-In		Retained			ESOP			Comprehensive			ESOP			Stockholders
	Outstanding		Amount		Capital		Earnings			Shares			Loss			Shares			Equity

Balances at January 1, 2018		1,066,858	$	10,668	$	6,062,163	$	24,029,397		$	(784,560	)	$	(288,301	)	$	(854,526	)	$	28,174,841
Net income		-		-		-		347,529			-			-			-			347,529
Other comprehensive loss		-		-		-		-			-			(229,568	)		-			(229,568	)
Reclassification in connection with ASU 2018-02		-		-		-		65,349			-			(65,349	)		-			-
ESOP shares earned		-		-		26,161		-			14,010			-			-			40,171
Stock based compensation expense		-		-		71,375		-			-			-			-			71,375
Change in obligation related to ESOP shares		-		-		-		-			-			-			(30,519	)		(30,519	)
Cash dividends ($0.06) per share		-		-		-		(59,305	)		-			-			-			(59,305	)
Balances at March 31, 2018		1,066,858	$	10,668	$	6,159,699	$	24,382,970		$	(770,550	)	$	(583,218	)	$	(885,045	)	$	28,314,524

The accompanying notes are an integral part of these financial statements.

West End Indiana Bancshares, Inc.

Form 10-Q

Notes to Condensed Consolidated Financial Statements

NOTE 1: Nature of Operations

West End Bank, S.B. (the “Bank”), a wholly owned subsidiary of West End Indiana Bancshares, Inc. (the “Company”), is an Indiana-chartered savings bank that was organized in 1894 and is headquartered in Richmond, Indiana.

The Bank provides financial services to individuals, families and businesses through its four banking offices located in the Indiana counties of Union and Wayne and limited service branches located in the elementary schools and high school in Richmond, Indiana at which the Bank offers more limited banking services and at which it provides banking seminars to students who assist in the branch operations. Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations, and to a lesser extent, borrowings, in one- to four- family residential real estate loans, indirect automobile loans, commercial and multi-family real estate loans, and to a lesser extent, second mortgages and equity lines of credit, construction loans and commercial business loans. We also purchase investment securities consisting of municipal bonds, and mortgage-backed securities.

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in the Annual Report on Form 10-K for the year ended December 31, 2018. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month period ended March 31, 2019, are not necessarily indicative of the results which may be expected for the entire year. The consolidated condensed balance sheet of the Company as of December 31, 2018 has been derived from the audited consolidated balance sheet of the Company as of that date.

Principals of Consolidation and Revenue from Contract with Customers

The consolidated financial statements include the accounts of West End Indiana Bancshares, Inc. and its wholly owned subsidiary, West End Bank, S.B. All significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue from Contracts with Customers

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

NOTE 2: Securities

The amortized cost and approximate fair values of securities are as follows:

	March 31, 2019
	(Unaudited)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value
	(In Thousands)
Available for sale
Municipal bonds	$	2,018	$	-	$	(104	)	$	1,914
Mortgage-backed securities - GSE residential		17,727		18		(402	)		17,343
Total available for sale	$	19,745	$	18	$	(506	)	$	19,257

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value
		(In Thousands)
Available for sale
Municipal bonds	$	2,018	$	-	$	(200	)	$	1,818
Mortgage-backed securities - GSE residential		18,569		-		(591	)		17,978
Total available for sale	$	20,587	$	-	$	(791	)	$	19,796

The amortized cost and fair value of securities available for sale at March 31, 2019 (unaudited) and December 31, 2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2019				December 31, 2018
	(Unaudited)
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In Thousands)
After ten years		2,018		1,914		2,018		1,818
Mortgage-backed securities - GSE residential		17,727		17,343		18,569		17,978
Totals	$	19,745	$	19,257	$	20,587	$	19,796

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $10,466,000 at March 31, 2019 (unaudited). Securities pledged at December 31, 2018 were $10,891,000.

There were no activities related to the sales of securities available for sale for the three months ended March 31, 2019 and 2018.

Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2019 (unaudited) and December 31, 2018 was $16,528,000 and $19,796,000 which is approximately 86% and 100% of the Company’s available-for-sale investment portfolio. These declines primarily resulted from changes in market interest rates.

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

Securities with unrealized losses at March 31, 2019 (unaudited) were as follows:

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(In Thousands)
Available-for-sale securities
Municipal bonds	$	-	$	-		$	1,914	$	(104	)	$	1,914	$	(104	)
Mortgage-backed securities - GSE residential		267		(3	)		14,347		(399	)		14,614		(402	)
	$	267	$	(3	)	$	16,261	$	(503	)	$	16,528	$	(506	)

Securities with unrealized losses at December 31, 2018 were as follows:

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Available-for-sale securities
Municipal bonds	$	-	$	-		$	1,818	$	(200	)	$	1,818	$	(200	)
Mortgage-backed securities - GSE residential		4,194		(36	)		13,784		(555	)		17,978		(591	)
	$	4,194	$	(36	)	$	15,602	$	(755	)	$	19,796	$	(791	)

Municipal Bonds

The unrealized losses on the Company’s investments in municipal bonds were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2019.

Mortgage-backed Securities – GSE Residential

The unrealized losses on the Company’s investment in mortgage-backed securities were caused by interest rate increases. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not, more likely than not, the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2019.

NOTE 3: Loans and Allowance

The Company’s loan and allowance policies are as follows:

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except residential and consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical charge-off experience by segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years.Management believes the three year historical loss experience methodology is appropriate in the current economic environment. Other adjustments (qualitative/environmental considerations) for each segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due based on the loan’s current payment status and the borrower’s financial condition including available sources of cash flows. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for non-homogenous type loans such as commercial, non-owner residential and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Company utilizes the discounted cash flows to determine the level of impairment, the Company includes the entire change in the present value of cash flows as bad debt expense.

The fair values of collateral dependent impaired loans are based on independent appraisals of the collateral. In general, the Company acquires an updated appraisal upon identification of impairment and annually thereafter for commercial, commercial real estate and multi-family loans. If the most recent appraisal is over a year old, and a new appraisal is not performed, due to lack of comparable values or other reasons, the existing appraisal is utilized and discounted 25% - 35% based on the age of the appraisal, condition of the subject property, and overall economic conditions. After determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses. The potential for outdated appraisal values is considered in our determination of the allowance for loan losses through our analysis of various trends and conditions including the local economy, trends in charge-offs and delinquencies, etc. and the related qualitative adjustments assigned by the Company.

Segments of loans with similar risk characteristics are collectively evaluated for impairment based on the segment’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

Categories of loans include:

	(Unaudited)
	March 31,		December 31,
	2019		2018
	(In Thousands)
Commercial	$	12,784	$	12,825
Real estate loans
Residential		63,422		63,787
Commercial and multi-family		59,534		59,725
Construction		3,612		3,092
Second mortgages and equity lines of credit		6,827		6,971
Consumer loans
Indirect		81,386		83,399
Other		18,025		18,295
		245,590		248,094
Less
Net deferred loan fees, premiums and discounts		97		99
Allowance for loan losses		2,940		3,040
Total loans	$	242,553	$	244,955

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial and Multi-Family Real Estate

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and multi-family real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.

Commercial and multi-family real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial and multi-family real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Construction

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Residential, Second mortgages and equity lines of credit and Consumer

With respect to residential loans that are secured by 1-4 family residences, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Second mortgages and equity lines of credit loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

The following presents by portfolio segment, the activity in the allowance for loan losses for the three months ended March 31, 2019 (unaudited) and 2018 (unaudited).

				(Unaudited)
				Real Estate
	Commercial			Residential			Commercial and Multi-Family			Construction		Seconds and Equity Line			Consumer			Total
	(In Thousands)
Three Months Ended March 31, 2019:
Balance, beginning of year	$	408		$	164		$	942		$	4	$	12		$	1,510		$	3,040
Provision for losses		(124	)		(2	)		(23	)		1		—			481			333
Recoveries on loans		9			1			—			—		—			21			31
Loans charged off		—			—			—			—		—			(464	)		(464	)
Balance, end of period	$	293		$	163		$	919		$	5	$	12		$	1,548		$	2,940

Three Months Ended March 31, 2018:
Balance, beginning of year	$	303		$	191		$	886		$	2	$	10		$	1,353		$	2,745
Provision for losses		253			19			(10	)		1		(1	)		293			555
Recoveries on loans		—			15			—			—		—			32			47
Loans charged off		—			(27	)		(1	)		—		—			(347	)		(375	)
Balance, end of period	$	556		$	198		$	875		$	3	$	9		$	1,331		$	2,972

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2019 (unaudited) and December 31, 2018:

			March 31, 2019
			Real Estate
	Commercial		Residential		Commercial and Multi- Family		Construction		Seconds and Equity Line		Consumer		Total

	(In Thousands)
Allowance:
Balance, end of period	$	293	$	163	$	919	$	5	$	12	$	1,548	$	2,940
Individually evaluated for impairment		201		-		680		-		-		-		881
Collectivity evaluated for impairment		92		163		239		5		12		1,548		2,059
Loans:
Ending balance	$	12,784	$	63,422	$	59,534	$	3,612	$	6,827	$	99,411	$	245,590
Individually evaluated for impairment		759		-		1,345		-		-		86		2,190
Collectivity evaluated for impairment		12,025		63,422		58,189		3,612		6,827		99,325		243,400

			December 31, 2018
			Real Estate
	Commercial		Residential		Commercial and Multi- Family		Construction		Seconds and Equity Line		Consumer		Total

	(In Thousands)
Allowance:
Balance, end of year	$	408	$	164	$	942	$	4	$	12	$	1,510	$	3,040
Individually evaluated for impairment		317		-		700		-		-		-		1,017
Collectivity evaluated for impairment		91		164		242		4		12		1,510		2,023
Loans:
Ending balance	$	12,825	$	63,787	$	59,725	$	3,092	$	6,971	$	101,694	$	248,094
Individually evaluated for impairment		787		-		1,355		-		-		-		2,142
Collectivity evaluated for impairment		12,038		63,787		58,370		3,092		6,971		101,694		245,952

The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of March 31, 2019 (unaudited) and December 31, 2018:

			March 31, 2019
			Real Estate
	Commercial		Residential		Commercial and Multi-Family		Construction		Seconds and Equity Line		Consumer		Total

	(In Thousands)
Pass	$	11,912	$	63,051	$	53,617	$	3,612	$	6,827	$	99,325	$	238,344
Watch		113		––		2,599		—		—		86		2,798
Special Mention		––		371		1,973		—		––		—		2,344
Substandard		759		––		1,345		—		—		––		2,104
Doubtful		––		—		—		—		—		—		––
Loss		—		—		—		—		––		—		––
Total	$	12,784	$	63,422	$	59,534	$	3,612	$	6,827	$	99,411	$	245,590

			December 31, 2018
			Real Estate
	Commercial		Residential		Commercial and Multi-Family		Construction		Seconds and Equity Line		Consumer		Total

	(In Thousands)
Pass	$	11,916	$	63,415	$	53,778	$	3,092	$	6,971	$	101,694	$	240,866
Watch		122		––		2,608		—		—		—		2,730
Special Mention		––		372		1,984		—		––		—		2,356
Substandard		787		––		1,355		—		—		––		2,142
Doubtful		––		—		—		—		—		—		––
Loss		—		—		—		—		––		—		––
Total	$	12,825	$	63,787	$	59,725	$	3,092	$	6,971	$	101,694	$	248,094

The Company generally categorizes all classes of loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Generally, smaller dollar consumer loans are excluded from this grading process and are reflected in the Pass category. The delinquency trends of these consumer loans are monitored on homogeneous basis and the related delinquent amounts are reflected in the aging analysis table below. The Company uses the following definitions for risk ratings:

The Pass asset quality rating encompasses assets that have generally performed as expected. With the exception of some smaller consumer and residential loans, these assets generally do not have delinquency. Loans assigned this rating include loans to borrowers possessing solid credit quality with acceptable risk. Borrowers in these grades are differentiated from higher grades on the basis of size (capital and/or revenue), leverage, asset quality, stability of the industry or specific market area and quality/coverage of collateral. These borrowers generally have a history of consistent earnings and reasonable leverage.

The Watch asset quality rating encompasses assets that have been brought to the attention of management and may, if not corrected, warrant a more serious quality rating by management. These assets are usually in the first phase of a deficiency situation and may possess similar criteria as Special Mention assets. This grade includes “pass grade” loans to borrowers which require special monitoring because of deteriorating financial results, declining credit ratings, decreasing cash flow, increasing leverage, marginal collateral coverage or industry stress that has resulted or may result in a changing overall risk profile.

The Special Mention asset quality rating encompasses assets that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. This grade is intended to include loans to borrowers whose credit quality has clearly deteriorated and where risk of further decline is possible unless active measures are taken to correct the situation. Weaknesses are considered potential at this state and are not yet fully defined.

The Substandard asset quality rating encompasses assets that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; assets having a well-defined weakness(es) based upon objective evidence; assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected; or the possibility that liquidation will not be timely. Loans categorized in this grade possess a well-defined credit weakness and the likelihood of repayment from the primary source is uncertain. Significant financial deterioration has occurred and very close attention is warranted to ensure the full repayment without loss. Collateral coverage may be marginal and the accrual of interest has been suspended.

The Doubtful asset quality rating encompasses assets that have all of the weaknesses of those classified as Substandard. In addition, these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

The Loss asset quality rating encompasses assets that are considered uncollectible and of such little value that their continuance as assets of the bank is not warranted. A loss classification does not mean that an asset has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be realized in the future.

The Company evaluates the loan grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during 2019.

The following table presents the Bank’s loan portfolio aging analysis as of March 31, 2019 (unaudited) and December 31, 2018:

			March 31, 2019
			Real Estate
	Commercial		Residential		Commercial and Multi- Family		Construction		Seconds and Equity Line		Consumer		Total

	(In Thousands)
30-59 days past due	$	46	$	15	$	-	$	-	$	43	$	1,246	$	1,350
60-89 days past due		35		23		-		-		43		733		834
Greater than 90 days past due		-		619		387		-		-		847		1,853
Total past due		81		657		387		-		86		2,826		4,037
Current		12,703		62,765		59,147		3,612		6,741		96,585		241,553
Total loans	$	12,784	$	63,422	$	59,534	$	3,612	$	6,827	$	99,411	$	245,590

Nonaccrual loans	$	-	$	511	$	-	$	-	$	-	$	-	$	511
Past due 90 days and accruing		-		108		387		-		-		847		1,342
Total	$	-	$	619	$	387	$	-	$	-	$	847	$	1,853

			December 31, 2018
			Real Estate
	Commercial		Residential		Commercial and Multi- Family		Construction		Seconds and Equity Line		Consumer		Total

	(In Thousands)
30-59 days past due	$	17	$	110	$	387	$	-	$	3	$	1,140	$	1,657
60-89 days past due		-		181		-		-		-		495		676
Greater than 90 days		-		529		-		-		2		952		1,483
Total past due		17		820		387		-		5		2,587		3,816
Current		12,808		62,967		59,338		3,092		6,966		99,107		244,278
Total loans	$	12,825	$	63,787	$	59,725	$	3,092	$	6,971	$	101,694	$	248,094

Nonaccrual loans	$	-	$	507	$	-	$	-	$	-	$	11	$	518
Past due 90 days and accruing		-		22		-		-		2		941		965
Total	$	-	$	529	$	-	$	-	$	2	$	952	$	1,483

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

The following table presents impaired loans and specific valuation allowance based on class level at March 31, 2019 (unaudited) and for the year ended December 31, 2018:

			March 31, 2019
			Real Estate
	Commercial		Residential		Commercial and Multi-Family		Construction		Seconds and Equity Line		Consumer		Total
	(In Thousands)
Impaired loans without a specific allowance:
Recorded investment	$	44	$	-	$	414	$	-	$	86	$	-	$	544
Unpaid principal balance		44		-		414		-		86		-		544
Impaired loans with a specific allowance:
Recorded investment		715		-		931		-		-		-		1,646
Unpaid principal balance		715		-		931		-		-		-		1,646
Specific allowance		201		-		680		-		-		-		881
Total impaired loans:
Recorded investment		759		-		1,345		-		86		-		2,190
Unpaid principal balance		759		-		1,345		-		86		-		2,190
Specific allowance		201		-		680		-		-		-		881

			December 31, 2018
			Real Estate
	Commercial		Residential		Commercial and Multi-Family		Construction		Seconds and Equity Line		Consumer		Total
	(In Thousands)
Impaired loans without a specific allowance:
Recorded investment	$	49	$	-	$	417	$	-	$	-	$	-	$	466
Unpaid principal balance		49		-		417		-		-		-		466
Impaired loans with a specific allowance:
Recorded investment		738		-		938		-		-		-		1,676
Unpaid principal balance		738		-		938		-		-		-		1,676
Specific allowance		317		-		700		-		-		-		1,017
Total impaired loans:
Recorded investment		787		-		1,355		-		-		-		2,142
Unpaid principal balance		787		-		1,355		-		-		-		2,142
Specific allowance		317		-		700		-		-		-		1,017

The following presents by portfolio segment, information related to the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2019 (unaudited) and 2018 (unaudited):

			(Unaudited)
			Real Estate
	Commercial		Residential		Commercial and Multi-Family		Construction		Seconds and Equity Line		Consumer		Total
	(In Thousands)
Three Months Ended March 31, 2019:
Total impaired loan:
Average recorded investment	$	773	$	—	$	1,350	$	––	$	––	$	43	$	2,166
Interest income recognized		12		—		20		––		––		––		32
Interest income recognized on a cash basis		—		—		––		––		––		––		––

(Unaudited)

Real Estate

Commercial

Residential

Commercial
and
Multi-Family

Construction

Seconds
and
Equity Line

Consumer

Total

(In Thousands)

Three Months Ended March 31, 2018:

Total impaired loan:

Average recorded investment

812

—

1,601

––

2,413

Interest income recognized

—

––

Interest income recognized on a cash basis

—

––

Troubled Debt Restructurings

In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In restructuring the loan, the Company attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified, whether through a new agreement replacing the old or via changes to an existing loan agreement, are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred. A troubled debt restructuring occurs when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Company do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Company may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.

Nonaccrual loans, including TDRs that have not met the six month minimum performance criterion, are reported in this report as non-performing loans. For all loan classes, it is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. A loan is generally classified as nonaccrual when the Company believes that receipt of principal and interest is questionable under the terms of the loan agreement. Most generally, this is at 90 or more days past due. If the restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. Loans that are considered TDR are classified as performing, unless they are on nonaccrual status or greater than 90 days past due, as of the end of the most recent quarter.

With regard to determination of the amount of the allowance for credit losses, all accruing restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously above.

During the three months ended March 31, 2019 we had one new consumer loan classified as a TDR totaling $86,000. The pre-modification balance and post-modification balance were both $86,000. The consumer loan term, and monthly payment amount were reduced to conform with a ballooned payment schedule that suits the debtor.

During the three months ended March 31, 2018 (unaudited), there were no new restructurings classified as TDRs.

No loans restructured during the last twelve months defaulted during the three months ended March 31, 2019 and 2018.

At March 31, 2019 and December 31, 2018, there were $517,000 and $230,000 respectively of residential real estate loans in process of foreclosure.

NOTE 4: Disclosures About Fair Value of Assets and Liabilities

ASC Topic 820,Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

The standard describes three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

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 for substantially the full term of the assets or liabilities.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Recurring Measurements

The following is a description of the valuation methodologies and inputs used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions. Additionally, matrix pricing is used for certain investment securities and is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Level 2 securities include municipal bonds and mortgage-backed securities. At March 31, 2019 (unaudited) and December 31, 2018, all mortgage-backed securities are residential government sponsored enterprises. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Mortgage-Servicing Rights

Mortgage-servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of actual and expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. Due to the nature of the valuation inputs, mortgage-servicing rights are classified within Level 3 of the hierarchy. Significant changes in any of the inputs could significantly impact the fair value measurement.

Fair value determinations for Level 3 measurements are the responsibility of the Finance Department. The Finance Department contracts with a pricing specialist to generate fair value estimates on a quarterly basis. The Finance Department challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States. Using the data from the quarterly valuation, the Finance Department adjusts to fair value on a monthly basis

The following tables present the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2019 (unaudited) and December 31, 2018:

			(Unaudited) March 31, 2019
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Available-for-sale securities:
Municipal bonds	$	1,914	$	—	$	1,914	$	—
Mortgage-backed securities - GSE residential		17,343		—		17,343		—
Mortgage-servicing rights		771		—		—		771

			December 31, 2018
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Available-for-sale securities:
Municipal bonds	$	1,818	$	—	$	1,818	$	—
Mortgage-backed securities - GSE residential		17,978		—		17,978		—
Mortgage-servicing rights		801		—		—		801

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs:

	(Unaudited) Mortgage-Servicing Rights
	Month’s Ended March 31,
	2019			2018
	(In Thousands)
Balances, beginning of period	$	801		$	731
Total unrealized gains (losses) included in net income		(20	)		58
Additions (rights recorded on sale of loans)		20			39
Settlements (payments)		(30	)		(23	)
Balances, end of period	$	771		$	805

Total unrealized gains and losses included in net income reflected in the table above are included in other income.

Nonrecurring Measurements

The following is a description of the valuation methodologies used for instruments measured at fair value on a nonrecurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

The following tables present the fair value measurements of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall:

			March 31, 2019
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands) (unaudited)
Impaired loans	$	764	$	—	$	—	$	764

			December 31, 2018
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Impaired loans	$	661	$	—	$	—	$	661

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

Fair Value at
March 31, 2019

Valuation
Technique

Unobservable
Inputs

Range (Weighted Average)

(In Thousands) (unaudited)

Impaired loans

764

Comparative sales based on independent appraisals

Marketability Discount

50.0%

Mortgage-servicing rights

771

Discounted Cash Flow

Discount rate
Conditional prepayment rate
Expected loan servicing years

5.9% -6.6% (6.4%)

9.1% - 11.7% (9.7%)

1.4 – 4.7 (4.2)

Fair Value at
December 31, 2018

Valuation
Technique

Unobservable
Inputs

Range (Weighted Average)

(In Thousands)

Impaired loans

661

Comparative sales based on independent appraisals

Marketability Discount

57.0%

Mortgage-servicing rights

801

Discounted Cash Flow

Discount rate
Conditional prepayment rate
Expected loan servicing years

6.0% -6.8% (6.6%)

8.6% - 11.4% (9.2%)

1.5 – 4.8 (4.4)

Sensitivity of Significant Unobservable Inputs

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in unobservable inputs on the fair value measurement.

Mortgage –Servicing Rights

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage-servicing rights are discount rates, conditional prepayment rates and expected loan servicing years. Significant increases or decreases in any of those inputs in isolation would result in a significant change in the fair value measurement.

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

Cash and Cash Equivalents, Federal Home Loan Bank Stock, Interest Receivable and Interest Payable

The carrying amount approximates fair value.

Loans Held for Sale

Loans held for sale are based on current market prices.

Loans

Loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The carrying amount of accrued interest approximates its fair value.

Deposits

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank Advances

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market. If a quoted market price is not available, an expected present value technique is used to estimate fair value.

The following table presents estimated fair values of the Company’s financial instruments at March 31, 2019 (unaudited) and December 31, 2018.

	March 31, 2019
			Fair Value
	Carrying Amount		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	$	12,316	$	12,316	$	––	$	—
Loans, net		242,553		—		––		239,507
Federal Home Loan Bank stock		2,436		—		2,436		—
Interest receivable		1,032		—		1,032		—
Financial liabilities
Deposits		218,410		111,716		106,925		—
Federal Home Loan Bank advances		48,500		—		48,147		—
Interest payable		124		—		124		—

	December 31, 2018
			Fair Value
	Carrying Amount		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	$	9,935	$	9,935	$	––	$	—
Loans held for sale		133		––		133		—
Loans, net		244,955		—		––		241,786
Federal Home Loan Bank stock		2,436		—		2,436		—
Interest receivable		1,128		—		1,128		—
Financial liabilities
Deposits		217,914		111,627		106,413		—
Federal Home Loan Bank advances		50,500		—		50,400		—
Interest payable		133		—		133		—

NOTE 5: Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, a lessee is required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods therein. Adoption of the ASU did not a have a significant effect on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326). The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. While the Company expects that the implementation of this ASU will increase the balance of the allowance for loan losses, it is continuing to evaluate the potential impact on the Company’s results of operations and financial position. The Company has established a workgroup to review and produce different methodologies to best estimate future loan losses.

In March 2017, the FASB has issued ASU No. 2017-08,Receivables – Nonrefundable Fees and Other Costs(Subtopic 310-20):Premium Amortization on Purchased Callable Debt Securitieswhich shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments in this ASU require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustment should be reflected, as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. The adoption of this ASU did not have a significant effect on the Company's consolidated financial statements.

In February of 2018, the FASB issued ASU No. 2018-02,Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. In addition, under the ASU, an entity will be required to provide certain disclosures regarding stranded tax effects. Entities electing the reclassification are required to apply the guidance either at the beginning of the period of adoption or retrospectively for all periods impacted. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company had approximately $65,000 of stranded tax effects included in accumulated other comprehensive income. The Company adopted this ASU in the first quarter of 2018.

NOTE 6: Earnings per Share

The Company has granted stock compensation awards with non-forfeitable dividend rights, which are considered participating securities. Accordingly, earnings per share (EPS) is computed using the two-class method as required by ASC 260-10-45. Basic EPS is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted EPS includes the dilutive effect of additional potential common shares from stock compensation awards, but excludes awards considered participating securities. ESOP shares are not considered outstanding for EPS until they are earned. The following table presents the computation of basic and diluted EPS for the periods indicated (in thousands, except for share and per share data):

	(Unaudited)
	Three Months Ended March 31,
	2019			2018
	(In Thousands)
Net Income		316			347
Allocated to participating securities		-			(4	)
Net income allocated to common stockholders	$	316		$	343

Weighted average common shares outstanding, gross		1,065,336			1,066,858
Less: Average unearned ESOP shares and participating securities		(72,369	)		(89,181	)
Weighted average common shares outstanding, net		992,967			977,677
Effect of diluted based awards		34,279			41,613
Weighted average shares and common stock equivalents		1,027,246			1,019,290

Income per common share:
Basic	$	0.32		$	0.35
Diluted	$	0.31		$	0.34

Options excluded from the calculation due to their anti-dilutive effect on earnings per share		-			-

NOTE 7: Share Based Compensation

In May 2013, the Company’s stockholders approved the West End Indiana Bancshares, Inc. 2013 Equity Incentive Plan (“Plan”) which provides for awards of stock options and restricted stock to key officers and outside directors. The cost of the Plan is based on the fair value of the awards on the grant date. The fair value of restricted stock awards is based on the closing price of the Company’s stock on the grant date. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate, and option term. These assumptions are based on management’s judgments regarding future events, are subjective in nature, and contain uncertainties inherent in an estimate. The cost of the awards are being recognized on a straight-line basis over the five-year vesting period during which participants are required to provide services in exchange for the awards.

Until such time as awards of stock are granted and vest or options are exercised, shares of the Company’s common stock under the Plan shall be authorized but unissued shares. The maximum number of shares authorized under the plan is 196,140. Total share-based compensation expense for the three months ended March 31, 2019 and 2018 (unaudited) was $2,000 and $71,000 respectively.

Stock Options

The tables below represents the stock option activity for the periods shown (unaudited):

	Options		Weighted average exercise price		Remaining contractual life (years)
Options outstanding at January 1, 2019		127,250	$	19.00
Granted		-		-
Exercised		-		-
Forfeited		-		-
Expired		-		-
Options outstanding at March 31, 2019		127,250	$	19.00		4.4
Exercisable options outstanding at March 31, 2019		122,350	$	18.91		4.2

	Options		Weighted average exercise price		Remaining contractual life (years)
Options outstanding at January 1, 2018		128,150	$	19.00
Granted		-		-
Exercised		-		-
Forfeited		-		-
Expired		-		-
Options outstanding at March 31, 2018		128,150	$	19.00		5.4
Exercisable options outstanding at March 31, 2018		95,490	$	18.88		5.2

As of March 31, 2019 (unaudited) and December 31, 2018, the Company had $13,000 and $15,000 of unrecognized compensation expense related to stock options. Exercisable options vesting in the three months ended March 31, 2019 and March 31, 2018 (unaudited) were 2,700 and 2,700 respectively. The cost of stock options will be amortized in monthly installments over the five-year vesting period. Stock option expense for the three months ended March 31, 2019 and 2018 (unaudited) was $2,000 and $19,000, respectively. The total intrinsic value of options as of March 31, 2019 and 2018 (unaudited) were $1,050,000 and $1,256,000, respectively. The total intrinsic value of exercisable options as of March 31, 2019 and March 31, 2018 (unaudited) was $1,021,000 and $947,000, respectively. There were no options exercised during the three months ended March 31, 2019 or 2018 (unaudited).

Restricted Stock Awards

Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of the grant. Unvested restricted stock awards may not be disposed of or transferred during the vesting period. Restricted stock awards carry with them the right to receive dividends. There was no restricted stock activity during the three months ended March 31, 2019 (unaudited).

As of March 31, 2019 (unaudited) and December 31, 2018, the Company had $0 and $0 of unrecognized compensation expense related to restricted stock awards. The cost of the restricted stock awards are amortized in monthly installments over the five-year vesting period. Restricted stock expense for the three months ended March 31, 2019 and 2018 (unaudited) was $0 and $52,000, respectively.

NOTE 8: Employee Stock Ownership Plan

As part of the conversion, the Company established an Employee Stock Ownership Plan (ESOP) covering substantially all employees. The ESOP acquired 112,080 shares of Company common stock at $10 per share in the conversion with funds provided by a loan from the Company. Accordingly, $1,121,000 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity. Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Dividends on unallocated shares are used to repay the loan and are treated as compensation expense. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors, are made to the ESOP.

ESOP expense for the three months ended March 31, 2019 and 2018 (unaudited) was $37,000 and $40,000, respectively.

	March 31,		December 31,
	2019		2018
	(Unaudited)
Allocated shares		35,159		35,159
Unreleased shares		72,852		72,852
Total ESOP shares		108,011		108,011

Fair value of unreleased shares at March 31, 2019, and December 31, 2018 (in thousands)	$	1,985	$	1,909

At March 31, 2019 (unaudited) and December 31, 2018 the fair value of the 35,159 and 35,159 allocated shares held by the ESOP was $958,000 and $921,000, respectively, based on the quoted per share price of $27.25 and $26.20 at March 31, 2019 (unaudited) and December 31, 2018 respectively.

In the event the ESOP is unable to satisfy the obligation to repurchase the shares held by each beneficiary upon the beneficiary’s termination or retirement, the Company is obligated to purchase such shares at their fair market value based on the most recent valuation report any time within 60 days of the distribution date. If this right is not exercised, an additional 60-day exercise period is available in the year following the year in which the distribution is made and begins after a new valuation of the stock has been determined and communicated to the participant or beneficiary. The allocated shares held by the ESOP and the outstanding shares held by former employee’s subject to the repurchase option totaled 35,458 at both March 31, 2019 (unaudited) and December 31, 2018. At March 31, 2019, the 35,458 shares had a fair value of $904,000 ($25.50 per share based on the most recent valuation report) and have been classified as mezzanine capital. At December 31, 2018, the 35,458 shares had a fair value of $1,028,000 ($29.00 per share) based on the most recent valuation report) and have been classified as mezzanine capital.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Management’s discussion and analysis of the financial condition and results of operations at March 31, 2019 and for the three months ended March 31, 2019 and 2018 is intended to assist in understanding the financial condition and results of operations of the Company on a consolidated basis. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

statements regarding the asset quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

general economic conditions, either nationally or in our market areas, that are worse than expected;

competition among depository and other financial institutions;

our success in continuing to emphasize consumer lending, including indirect automobile lending;

our ability to improve our asset quality even as we increase our non-residential lending;

our success in maintaining our commercial and multi-family real estate and our non-owner occupied one- to four-family residential real estate and commercial business lending;

changes in the interest rate environment that reduce our margins or reduce the fair value of our financial instruments;

adverse changes in the securities markets;

changes in laws or government regulations or policies affecting financial institutions, including changes in deposit insurance premiums, regulatory fees and capital requirements, which increase our compliance costs;

our ability to enter new markets successfully and capitalize on growth opportunities;

changes in consumer spending, borrowing and savings habits;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

changes in our organization, compensation and benefit plans;

loan delinquencies and changes in the underlying cash flows of our borrowers;

changes in our financial condition or results of operations that reduce capital available to pay dividends; and

changes in the financial condition or future prospects of issuers of securities that we own.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in West End Indiana Bancshares, Inc.’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 29, 2019.

Comparison of Financial Condition at March 31, 2019 and December 31, 2018

Total assets decreased $1.0 million, or 0.3%, to $299.1 million at March 31, 2019 from $300.2 million at December 31, 2018. The decrease was due to decreases in net loans, investment securities available for sale, bank-owned life insurance, offset by an increase in cash and cash equivalents and other assets.

Total cash and cash equivalents increased $2.4 million, or 24.0%, to $12.3 million at March 31, 2019. The increase in total cash and cash equivalents reflected normal fluctuation from operations.

Securities classified as available for sale decreased $539,000, or 2.7%, to $19.3 million at March 31, 2019 from $19.8 million at December 31, 2018. At March 31, 2019, securities classified as available for sale consisted of mortgage-backed securities and municipal obligations.

Net loans decreased $2.4 million, or 1.0%, to $242.6 million at March 31, 2019 from $245.0 million at December 31, 2018, due primarily to a decrease in consumer loans of $2.3 million. Total non-performing loans increased $370,000 to $1.9 million at March 31, 2019 from $1.5 million at December 31, 2018.

Deposits increased $496,000, or 0.2%, to $218.4 million at March 31, 2019 from $217.9 million at December 31, 2018. The increase was due to increases in core deposits, including savings, interest-bearing and noninterest-bearing checking, and money market deposit accounts increasing $89,000 to $111.7 million at March 31, 2019 from 111.6 million at December 31, 2018. Certificates and other time deposits increased $407,000 to $106.7 million at March 31, 2019 from $106.3 million at December 31, 2018.

Federal Home Loan Bank advances decreased $2.0 million to $48.5 million at March 31, 2019 from $50.5 million at December 31, 2018.

Total stockholders’ equity increased $508,000, or 1.7%, to $30.7 million at March 31, 2019 from $30.2 million at December 31, 2018. The increase was primarily a result of year to date net income of $316,000, accumulated other comprehensive income of $224,000, and ESOP shares earnings of $37,000, and stock-based compensation expense of $2,000, offset in part by decreases to dividends of $69,000.

Comparison of Operating Results for the Three Months Ended March 31, 2019 and 2018

General.We recorded net income of $316,000 for the quarter ended March 31, 2019 compared to net income of $348,000 for the quarter ended March 31, 2018. The decrease in net income resulted primarily from an increase in total other expense of $137,000, a decrease in net interest income of $77,000 and a decrease in total other income of $79,000, offset by a decrease to the provision for loan losses of $222,000 and a decrease to the provision for income taxes of $39,000.

Interest Income.Interest income increased $85,000, or 2.3%, to $3.7 million for the quarter ended March 31, 2019 from $3.6 million for the quarter ended March 31, 2018. The average balance of total interest-earning assets decreased $3.8 million, or 1.4%, to $273.5 million for the quarter ended March 31, 2019 from $277.4 million for the quarter ended March 31, 2018. The average rate earned on these assets increased to 5.5% for the period ended March 31, 2019 from 5.3% for the period ended March 31, 2018.

Interest income on loans increased $69,000, or 2.0%, to $3.5 million for the 2019 quarter from $3.4 million for 2018 quarter, as the average balance of net loans decreased $89,000 or 0.04%, to $243.6 million for the quarter ended March 31, 2019 from $243.7 million for the quarter ended March 31, 2018. Additionally, the average yield on our loan portfolio increased twelve basis points to 5.87% for the quarter ended March 31, 2019 from 5.75% for the quarter ended March 31, 2018.

Interest income on investment securities increased $10,000 to $113,000 for the quarter ended March 31, 2019 from $103,000 for the quarter ended on March 31, 2018. The average balance of our securities available for sale decreased $1.6 million, or 7.9%, to $19.2 million for the quarter ended March 31, 2019. The average yield on the securities portfolio increased 38 basis points, to 2.38% for the three months ended March 31, 2019 from 2.00% for the three months ended March 31, 2018.

Interest Expense.Interest expense increased $162,000, or 23.1%, to $862,000 for the quarter ended March 31, 2019 from $700,000 for the quarter ended March 31, 2018. The total average balance of interest-bearing liabilities decreased $6.8 million to $241.4 million for the quarter ended March 31, 2019 from $248.2 million for the quarter ended March 31, 2018, the cost of funding increased to 1.45% for the 2019 quarter from 1.14% for the 2018 quarter.

The average rate paid on deposits increased 27 basis points to 1.27% for the quarter ended March 31, 2019 from 1.00% for the quarter ended March 31, 2018. The average balance of interest-bearing deposits decreased $11.3 million, or 5.6%, to $191.3 million for the quarter ended March 31, 2019 from $202.7 million for the quarter ended March 31, 2018. The decrease in the average balance of deposits was comprised of decreases in money market accounts of $10.9 million, interest-bearing checking accounts of $1.9 million and certificates of deposits of $1.8 million, offset by an increase in savings accounts of $3.3 million. Interest expense increased due to the rising rate environment. The weighted average rate paid on checking, money market and savings combined increased eleven basis points. The rate paid on certificate of deposits increased 36 basis points to 1.93% for the 2019 period from 1.57% for the 2018 period.

Interest expense on borrowed funds, consisting entirely of Federal Home Loan Bank advances, increased $60,000, or 29.7%, to $261,000 for the quarter ended March 31, 2019 from $201,000 for the quarter ended March 31, 2018 reflecting an increase of 32 basis points in the rate to 2.11% for the quarter ended March 31, 2019 from 1.79% for the quarter ended March 31, 2018. The increase was due to the increased average balance of advances $4.5 million from the prior quarter and the rising rate environment.

Net Interest Income.Net interest income decreased slightly to $2.8 million for the quarter ended March 31, 2019. Our net interest rate spread decreased to 4.05% from 4.16%, and our net interest margin decreased to 4.16% for the quarter ended March 31, 2019 from 4.22% for the quarter ended March 31, 2018 as the cost of deposits repriced faster than loans.

The following table summarize average balances and yields, costs of interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2019 and 2018.

	Three months ended March 31,
	2019							2018
	Average Balance		Interest and Dividends		Yield/Cost			Average Balance		Interest and Dividends		Yield/Cost
Assets:
Interest-earning assets:
Loans	$	243,590	$	3,523		5.87	%	$	243,679	$	3,454		5.75	%
Investment Securities		19,225		113		2.38	%		20,863		103		2.00	%
Other interest-earning assets		10,731		74		2.80	%		12,838		68		2.15	%
		273,546		3,710		5.50	%		277,380		3,625		5.30	%
Noninterest-earning assets		24,447							24,261
Total assets	$	297,993						$	301,641

Liabilities and stockholders' equity
Interest-bearing liabilities:
Now accounts	$	30,604		13		0.17	%	$	32,542		16		0.20	%
Money market accounts		29,417		49		0.68	%		40,279		49		0.49	%
Savings accounts		24,639		31		0.51	%		21,388		14		0.27	%
Certificates of deposit		106,686		508		1.93	%		108,455		420		1.57	%
Total interest-bearing deposits		191,346		601		1.27	%		202,664		499		1.00	%
FHLB advances		50,078		261		2.11	%		45,533		201		1.79	%
Total interest-bearing liabilities		241,424		862		1.45	%		248,197		700		1.14	%
Noninterest-bearing deposits		24,452							22,889
Other noninterest-bearing liabilities		1,540							1,502
Total liabilities		267,416							272,588
Total stockholders' equity		30,577							29,053
Total liabilities and stockholders' equity	$	297,993						$	301,641
Net interest income			$	2,848						$	2,925
Interest rate spread						4.05	%						4.16	%
Net interest margin (annualized)						4.16	%						4.22	%
Average interest-earning assets to average interest-bearing liabilities						113.31	%						111.76	%

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies — Allowance for Loan Losses,” in our annual report on Form 10-K filed on March 29, 2019, we recorded a provision for loan losses of $333,000 for the quarter ended March 31, 2019, a decrease of $222,000 from $555,000 allocated for the quarter ended March 31, 2018. The allowance for loan losses decreased $100,000 to $2.9 million at March 31, 2019 from $3.0 million at March 31, 2018. The allowance for loan losses to total loans remained consistent at 1.2% at March 31, 2019 and 2018. Non-performing loans including nonaccrual loans and accruing loans past due 90 of more days increased to $1.9 million, at March 31, 2019 from $809,000 at March 31, 2018. While non-performing loans increased, the change consisted primarily of one-to-four family mortgages which hold a lower risk weight in the analysis for loan losses. Managements analysis of the quantitative and qualitative factors in calculating our reserve indicated a reduction to the reserve was justified, as in the second half of 2018 management tightened up lending on our consumer loans to help minimize risk in the largest portion of the portfolio. The allowance for loan losses as a percentage of non-performing loans including nonaccrual loans and accruing loans past due 90 of more days was 158.66% at March 31, 2019 compared to 367.37% at March 31, 2018. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at March 31, 2019 and 2018.

Noninterest Income.Noninterest income decreased $79,000, or 15.6%, to $427,000 for the quarter ended March 31, 2019, from $506,000 for the quarter ended March 31, 2018. In the 2019 quarter, we recorded decreases in loan servicing income of $89,000, gain on sale of loans of $56,000, increased loss on sale of other assets of $17,000, and service charges on deposit accounts of $14,000, offset by an increase in gain on cash surrender value and redemption of life insurance policies of $98,000. The increase to gain on cash surrender value and redemption of life insurance policies was related to the redemption of a life insurance claim.

Noninterest Expense. Noninterest expense increased $137,000, or 5.7%, to $2.5 million at March 31, 2019, from $2.4 million for the quarter ended March 31, 2018. The increase was due to increases in salaries and employee benefits of $69,000, professional fees of $50,000, foreclosed real estate and repossession expenses of $38,000 and data processing fees of $18,000, offset by decreases in other expenses of $20,000, and net occupancy expense of $17,000. Salaries and employee benefits increased due to normal cost of living and merit increases, and other employee benefit programs.

Income Tax Expense.We recorded income tax expense of $81,000 for the quarter ended March 31, 2019 compared to a tax expense of $120,000 for the 2018 period, reflecting pre-tax income of $396,000 during the 2019 quarter versus a pre-tax income of $467,000 for the quarter ended March 31, 2018. Our effective tax rate was 20.3% for the quarter ended March 31, 2019 compared to 25.6% for the quarter ended March 31, 2018, reflecting the decrease in pretax income and the reduced corporate federal income tax rate.

Liquidity and Capital Resources.Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from sale of loans, proceeds from maturities and calls of securities, and Federal Home Loan Bank advances. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $1.1 million and $2.2 million for the three months ended March 31, 2019 and 2018, respectively. Net cash provided (used) by investing activities, which consists primarily of principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs on mortgage-backed securities, was $2.8 million and ($5.6 million) for the three months ended March 31, 2019 and 2018, respectively. Net cash provided (used) by financing activities, consisting primarily of the activity in deposit accounts and Federal Home Loan Bank advances, was ($1.6 million) and $9.3 million for the three months ended March 31, 2019 and 2018, respectively.

At March 31, 2019, we exceeded all of our regulatory capital requirements with a Tier 1 (core) capital level of $30.1 million, or 10.1% of adjusted total assets, which is above the required level of $11.9 million, or 4%; and total risk-based capital of $33.0 million, or 14.0% of risk-weighted assets, which is above the required level of $18.8 million, or 8%. Accordingly, West End Bank, S.B. was categorized as well capitalized at March 31, 2019. Management is not aware of any conditions or events since the most recent notification that would change our category. Basel III regulatory capital requirements were effective for the quarter ending March 31, 2019. There were no significant impacts on capital ratios.

At March 31, 2019, we had outstanding commitments to originate loans of $15.6 million and stand-by letters of credit of $45,000. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2019 totaled $71.3 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable, as the Registrant is a smaller reporting company.

Item 4.

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2019. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2019, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

We are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Bank’s or the Registrant’s financial condition or results of operations.

Item 1A.

Risk Factors

Not applicable, as the Registrant is a smaller reporting company.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

There were no sales of unregistered securities during the period covered by this Report.

(b)

Not applicable.

(c)

There were no issuer repurchases of securities during the period covered by this Report.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document.

101.SCH	XBRL Schema Document.

101.CAL	XBRL Calculation Linkbase Document.

101.DEF	XBRL Definition Linkbase Document.

101.LAB	XBRL Label Linkbase Document.

101.PRE	XBRL Presentation Linkbase Document

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.

	WEST END INDIANA BANCSHARES, INC.

Date: May 15, 2019	/s/ Timothy R. Frame
	Timothy R. Frame
	President/Chief Executive Officer


Date: May 15, 2019	/s/ Shelley D. Miller
	Shelley D. Miller
	Executive Vice President and Chief Financial Officer

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West End Indiana Bancshares (WEIN) 10-Q2019 Q1 Quarterly report

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