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Finward Bancorp - Quarter Report: 2019 September (Form 10-Q)

nwin20190930_10q.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

(Mark One)

[X]

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

 

 

For the quarterly period ended September 30, 2019 or

 

[  ]

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

 

 

For the transition period from ______ to ______

 

 

Commission File Number: 0-26128

 

NorthWest Indiana Bancorp

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

N/A

N/A

N/A

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  

Yes [X]           No [  ]

 

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

Large accelerated filer [  ] Accelerated filer [X] Non-accelerated filer [  ]

Smaller Reporting Company [X] Emerging growth company [  ]

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

There were 3,451,797 shares of the registrant’s Common Stock, without par value, outstanding at October 28, 2019.

 

 

 

 

 

NorthWest Indiana Bancorp

 Index

 

   

Page 

Number

PART I. Financial Information    
     
Item 1. Unaudited Financial Statements and Notes   1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations    29
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk   43
     
Item 4. Controls and Procedures   43
     
PART II. Other Information   44
     
SIGNATURES   46
     
EXHIBITS    
10.1 NorthWest Indiana Bancorp Executive Change in Control Severance Plan     
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer    
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer    
32.1 Section 1350 Certifications    
101 XBRL Interactive Data File    

 

 

 

 

 

NorthWest Indiana Bancorp

Consolidated Balance Sheets

 

   

September 30,

         

(Dollars in thousands)

 

2019

   

December 31,

 
   

(unaudited)

   

2018

 

ASSETS

               
                 

Cash and non-interest bearing deposits in other financial institutions

  $ 26,839     $ 13,260  

Interest bearing deposits in other financial institutions

    42,953       3,116  

Federal funds sold

    2,150       763  
                 

Total cash and cash equivalents

    71,942       17,139  
                 

Certificates of deposit in other financial institutions

    2,170       2,024  
                 

Securities available-for-sale

    261,054       241,768  

Loans held-for-sale

    4,641       2,863  

Loans receivable

    904,273       764,400  

Less: allowance for loan losses

    (9,174 )     (7,962 )

Net loans receivable

    895,099       756,438  

Federal Home Loan Bank stock

    3,912       3,460  

Accrued interest receivable

    3,995       3,632  

Premises and equipment

    28,914       24,824  

Foreclosed real estate

    1,098       1,627  

Cash value of bank owned life insurance

    29,848       23,142  

Goodwill

    11,109       8,170  

Other assets

    16,687       11,071  
                 

Total assets

  $ 1,330,469     $ 1,096,158  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

Deposits:

               

Non-interest bearing

  $ 176,878     $ 127,277  

Interest bearing

    975,589       802,509  

Total

    1,152,467       929,786  

Repurchase agreements

    14,931       11,628  

Borrowed funds

    16,000       43,000  

Accrued expenses and other liabilities

    14,083       10,280  
                 

Total liabilities

    1,197,481       994,694  
                 

Stockholders' Equity:

               

Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding

    -       -  

Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: September 30, 2019 - 3,451,797 December 31, 2018 - 3,029,157

    -       -  

Additional paid-in capital

    29,589       11,927  

Accumulated other comprehensive income/(loss)

    4,418       (2,796 )

Retained earnings

    98,981       92,333  
                 

Total stockholders' equity

    132,988       101,464  
                 

Total liabilities and stockholders' equity

  $ 1,330,469     $ 1,096,158  

 

See accompanying notes to consolidated financial statements.

 

1

 

                      

 

NorthWest Indiana Bancorp

Consolidated Statements of Income

(unaudited)

 

 

 

Three Months Ended

   

Nine Months Ended

 

(Dollars in thousands)

 

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Interest income:

                               

Loans receivable

                               

Real estate loans

  $ 9,452     $ 7,189     $ 27,853     $ 19,240  

Commercial loans

    1,654       1,266       4,989       3,457  

Consumer loans

    229       97       521       106  

Total loan interest

    11,335       8,552       33,363       22,803  

Securities

    1,659       1,709       5,237       5,127  

Other interest earning assets

    326       74       611       134  
                                 

Total interest income

    13,320       10,335       39,211       28,064  
                                 

Interest expense:

                               

Deposits

    2,353       1,018       6,036       2,531  

Repurchase agreements

    64       47       179       124  

Borrowed funds

    108       254       402       682  
                                 

Total interest expense

    2,525       1,319       6,617       3,337  
                                 

Net interest income

    10,795       9,016       32,594       24,727  

Provision for loan losses

    494       312       1,322       950  
                                 

Net interest income after provision for loan losses

    10,301       8,704       31,272       23,777  
                                 

Noninterest income:

                               

Fees and service charges

  $ 1,203     $ 991     $ 3,608     $ 2,830  

Wealth management operations

    447       414       1,426       1,253  

Gain on sale of loans held-for-sale, net

    681       451       1,323       1,021  

Gain on sale of securities, net

    102       151       754       1,155  

Increase in cash value of bank owned life insurance

    177       130       519       358  

Benefit from bank owned life insurance

    205       -       205       -  

Gain on sale of foreclosed real estate, net

    43       54       83       154  

Other

    39       32       217       104  

Total noninterest income

  $ 2,897     $ 2,223     $ 8,135     $ 6,875  
                                 

Noninterest expense:

                               

Compensation and benefits

  $ 4,932     $ 4,669     $ 14,333     $ 12,045  

Occupancy and equipment

    1,231       829       3,522       2,524  

Data processing

    806       1,012       2,753       2,076  

Marketing

    170       223       783       523  

Federal deposit insurance premiums

    18       91       286       250  

Other

    2,112       2,233       6,305       5,512  

Total noninterest expense

  $ 9,269     $ 9,057     $ 27,982     $ 22,930  
                                 

Income before income tax expenses

    3,929       1,870       11,425       7,722  

Income tax expenses

    351       245       1,602       1,025  

Net income

  $ 3,578     $ 1,625     $ 9,823     $ 6,697  
                                 

Earnings per common share:

                               

Basic

  $ 1.04     $ 0.54     $ 2.88     $ 2.29  

Diluted

  $ 1.04     $ 0.54     $ 2.88     $ 2.29  
                                 

Dividends declared per common share

  $ 0.31     $ 0.30     $ 0.92     $ 0.89  

 

See accompanying notes to consolidated financial statements.

 

2

 

 

 

NorthWest Indiana Bancorp

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 

(Dollars in thousands)

 

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net income

  $ 3,578     $ 1,625     $ 9,823     $ 6,697  
                                 

Net change in net unrealized gains and losses on securities available-for-sale:

                               

Unrealized gains/(losses) arising during the period

    2,112       (2,071 )     9,878       (7,301 )

Less: reclassification adjustment for gains included in net income

    (102 )     (151 )     (754 )     (1,155 )

Net securities gain/(loss) during the period

    2,010       (2,222 )     9,124       (8,456 )

Tax effect

    (422 )     467       (1,910 )     1,780  

Net of tax amount

    1,588       (1,755 )     7,214       (6,676 )
                                 

Comprehensive income/(loss), net of tax

  $ 5,166     $ (130 )   $ 17,037     $ 21  

 

See accompanying notes to consolidated financial statements.

 

3

 

 

 

NorthWest Indiana Bancorp

Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

 

   

Three Months Ended

 
                   

Accumulated

                 
           

Additional

   

Other

                 
   

Common

   

Paid-in

   

Comprehensive

   

Retained

   

Total

 

(Dollars in thousands, except per share data)

 

Stock

   

Capital

   

(Loss)/Income

   

Earnings

   

Equity

 
                                         
                                         

Balance at June 30, 2018

  $ -     $ 4,925     $ (4,237 )   $ 89,889     $ 90,577  
                                         

Comprehensive income:

                                       

Net income

    -       -       -       1,625       1,625  

Net unrealized loss on securities available-for- sale, net of reclassification and tax effects

    -       -       (1,755 )     -       (1,755 )

Comprehensive income

                                    (130 )

Net surrender value of 629 restricted stock awards

            (27 )                     (27 )

Stock-based compensation expense

    -       50       -       -       50  

Issuance of 161,875 shares at $42.80 per share, for acquisition of First Personal Financial Corporation

    -       6,928       -       -       6,928  

Cash dividends, $0.30 per share

    -       -       -       (911 )     (911 )
                                         

Balance at September 30, 2018

  $ -     $ 11,876     $ (5,992 )   $ 90,603     $ 96,487  
                                         

Balance at June 30, 2019

  $ -     $ 29,510     $ 2,830     $ 96,472     $ 128,812  
                                         

Comprehensive income:

                                       

Net income

    -       -       -       3,578       3,578  

Net unrealized gain on securities available-for- sale, net of reclassification and tax effects

    -       -       1,588       -       1,588  

Comprehensive income

                                    5,166  

Stock-based compensation expense

    -       79       -       -       79  

Cash dividends, $0.31 per share

    -       -       -       (1,069 )     (1,069 )
                                         

Balance at September 30, 2019

  $ -     $ 29,589     $ 4,418     $ 98,981     $ 132,988  

 

4

 

 

   

Nine Months Ended

 
                   

Accumulated

                 
           

Additional

   

Other

                 
   

Common

   

Paid-in

   

Comprehensive

   

Retained

   

Total

 

(Dollars in thousands, except per share data)

 

Stock

   

Capital

   

(Loss)/Income

   

Earnings

   

Equity

 
                                         
                                         

Balance at January 1, 2018

  $ -     $ 4,867     $ 684     $ 86,509     $ 92,060  
                                         

Comprehensive income:

                                       

Net income

    -       -       -       6,697       6,697  

Net unrealized gain on securities available-for- sale, net of reclassification and tax effects

    -       -       (6,676 )     -       (6,676 )

Comprehensive income

                                    21  

Net surrender value of 1,658 restricted stock awards

    -       (72 )     -       -       (72 )

Stock-based compensation expense

    -       153       -       -       153  

Issuance of 161,875 shares at $42.80 per share, for acquisition of First Personal Financial Corporation

            6,928                       6,928  

Cash dividends, $0.89 per share

    -       -       -       (2,603 )     (2,603 )
                                         

Balance at September 30, 2019

  $ -     $ 11,876     $ (5,992 )   $ 90,603     $ 96,487  
                                         
                                         

Balance at January 1, 2019

  $ -     $ 11,927     $ (2,796 )   $ 92,333     $ 101,464  
                                         

Comprehensive income:

                                       

Net income

    -       -       -       9,823       9,823  

Net unrealized gain on securities available-for- sale, net of reclassification and tax effects

    -       -       7,214       -       7,214  

Comprehensive income

                                    17,037  

Net surrender value of 1,245 restricted stock awards

    -       (63 )     -       -       (63 )

Stock-based compensation expense

    -       233       -       -       233  

Issuance of 416,478 shares at $42.00 per share, for acquisition of AJS Bancorp, Inc

    -       17,492       -       -       17,492  

Cash dividends, $0.92 per share

    -       -       -       (3,175 )     (3,175 )
                                         

Balance at September 30, 2019

  $ -     $ 29,589     $ 4,418     $ 98,981     $ 132,988  

 

See accompanying notes to consolidated financial statements.

 

5

 

 

 

NorthWest Indiana Bancorp

Consolidated Statements of Cash Flows

(unaudited)

 

   

Nine Months Ended

 

(Dollars in thousands)

 

September 30,

 
   

2019

   

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 9,823     $ 6,697  

Adjustments to reconcile net income to net cash provided by/(used in) operating activities:

               

Origination of loans for sale

    (54,555 )     (41,823 )

Sale of loans originated for sale

    54,123       39,953  

Depreciation and amortization, net of accretion

    2,382       1,902  

Amortization of mortgage servicing rights

    48       48  

Stock based compensation expense

    233       154  

Net surrender value of restricted stock awards

    (63 )     (72 )

Gain on sale of securities, net

    (754 )     (1,155 )

Gain on sale of loans held-for-sale, net

    (1,323 )     (1,021 )

Gain on sale of premises and equipment, net

    (126 )     -  

Gain on sale of foreclosed real estate, net

    (83 )     (154 )

Benefit from bank owned life insurance

    (205 )     -  

Provision for loan losses

    1,322       950  

Net change in:

               

Interest receivable

    (363 )     (298 )

Other assets

    (1,546 )     (345 )

Accrued expenses and other liabilities

    2,322       (2,544 )

Total adjustments

    1,412       (4,405 )

Net cash - operating activities

    11,235       2,292  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Proceeds from maturities of certificates of deposits in other financial institutions

    (146 )     1,150  

Proceeds from maturities and pay downs of securities available-for-sale

    20,627       17,747  

Proceeds from sales of securities available-for-sale

    35,859       29,049  

Purchase of securities available-for-sale

    (63,377 )     (48,464 )

Net change in loans receivable

    (52,399 )     (28,385 )

Purchase of Federal Home Loan Bank Stock

    59       (17 )

Purchase of premises and equipment, net

    (2,116 )     (624 )

Proceeds on sale of premises and equipment, net

    228       -  

Proceeds from sale of foreclosed real estate, net

    960       1,273  

Cash and cash equivalents from acquisition activity, net

    52,195       18,261  

Change in cash value of bank owned life insurance

    (66 )     (358 )

Net cash - investing activities

    (8,176 )     (10,368 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Net change in deposits

    78,455       (15,180 )

Proceeds from FHLB advances

    -       62,000  

Repayment of FHLB advances

    (27,000 )     (44,000 )

Change in other borrowed funds

    3,303       10,718  

Dividends paid

    (3,014 )     (2,523 )

Net cash - financing activities

    51,744       11,015  

Net change in cash and cash equivalents

    54,803       2,939  

Cash and cash equivalents at beginning of period

    17,139       11,025  

Cash and cash equivalents at end of period

  $ 71,942     $ 13,964  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

               

Cash paid during the period for:

               

Interest

  $ 6,608     $ 3,258  

Income taxes

    1,485       1,080  

Acquisition activity:

               

Fair value of assets acquired, including cash and cash equivalents

  $ 172,560     $ 137,449  

Value of goodwill and other intangible assets

    5,856       8,481  

Fair value of liabilities assumed

    145,546       130,313  

Cash paid for acquisition

    15,743       8,689  

Issuance of common stock for acquisition

    17,492       6,928  

Noncash activities:

               

Transfers from loans to foreclosed real estate

  $ 262     $ 253  

 

See accompanying notes to consolidated financial statements.

 

6

 

 

NorthWest Indiana Bancorp

 

Notes to Consolidated Financial Statements

(unaudited)

 

 

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of NorthWest Indiana Bancorp (the “Bancorp” or “NWIN”), its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary) and Peoples Bank SB (the “Bank”), and the Bank’s wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC, NWIN Funding, Incorporated, Columbia Development Company, LLC, and Alliance NMTC Investment Fund, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are primarily dependent upon the earnings of the Bank. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by U.S. generally accepted accounting principles for complete presentation of consolidated financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of the Bancorp as of September 30, 2019 and December 31, 2018, and the consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2019 and 2018, and consolidated statements of cash flows and changes in stockholders’ equity for the nine months ended September 30, 2019 and 2018. The income reported for the nine month period ended September 30, 2019 is not necessarily indicative of the results to be expected for the full year.

 

 

Note 2 - Use of Estimates

Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of foreclosed real estate, loan servicing rights, investment securities, deferred tax assets, goodwill, and the status of contingencies are particularly susceptible to material change in the near term.

 

 

Note 3 - Acquisition Activity

On July 26, 2018, the Bancorp completed its acquisition of First Personal Financial Corp., a Delaware corporation (“First Personal”), pursuant to an Agreement and Plan of Merger dated February 20, 2018 between the Bancorp and First Personal (the “First Personal Merger Agreement”). Pursuant to the terms of the First Personal Merger Agreement, First Personal merged with and into the Bancorp, with the Bancorp as the surviving corporation. Simultaneous with the First Personal Merger, First Personal Bank, an Illinois state chartered commercial bank and wholly-owned subsidiary of First Personal, merged with and into the Bank, with the Bank as the surviving institution.

 

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

 

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

 

7

 

 

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

 

ASSETS

       

Cash and due from banks

  $ 30,178  

Investment securities, available for sale

    2  
         

Commercial

    53,026  

Residential mortgage

    32,542  

Consumer

    9,004  

Total Loans

    94,572  
         

Premises and equipment, net

    5,799  

FHLB stock

    219  

Goodwill

    5,437  

Core deposit intangible

    3,044  

Interest receivable

    274  

Other assets

    6,405  

Total assets purchased

  $ 145,930  

Common shares issued

    6,928  

Cash paid

    8,689  

Total purchase price

  $ 15,617  
         

LIABILITIES

       

Deposits

       

Non-interest bearing

  $ 14,517  

NOW accounts

    22,177  

Savings and money market

    41,852  

Certificates of deposits

    46,355  

Total Deposits

    124,901  
         

Borrowings

    4,124  

Interest payable

    32  

Other liabilities

    1,256  
         

Total liabilities assumed

  $ 130,313  

 

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

 

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

 

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

 

The Bancorp issued 416,478 shares of Bancorp common stock to the former AJSB stockholders, and paid cash consideration of approximately $15.7 million. Based upon the closing price of NWIN’s common stock on January 23, 2019, the transaction had an implied valuation of approximately $33.2 million, which includes unallocated shares held by the AJSB Employee Stock Ownership Plan (“ESOP”), some of which were cancelled in connection with the closing to satisfy the ESOP’s outstanding loan balance. As of September 30, 2019, acquisition costs related to the AJSB Merger were approximately $2.1 million. The acquisition further expanded the Bank’s banking center network in Cook County, Illinois, expanding the Bank’s full-service retail banking network to 22 banking centers.

 

8

 

 

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

 

ASSETS

       

Cash and due from banks

  $ 68,303  

Investment securities, available for sale

    3,432  
         

Commercial

    712  

Residential mortgage

    85,635  

Multifamily

    1,442  

Consumer

    57  

Total Loans

    87,846  
         

Premises and equipment, net

    3,542  

FHLB stock

    512  

Goodwill

    2,939  

Core deposit intangible

    2,917  

Interest receivable

    351  

Other assets

    8,939  

Total assets purchased

  $ 178,781  

Common shares issued

    17,492  

Cash paid

    15,743  

Total purchase price

  $ 33,235  
         

LIABILITIES

       

Deposits

       

Non-interest bearing

  $ 24,502  

NOW accounts

    10,712  

Savings and money market

    68,875  

Certificates of deposits

    40,137  

Total Deposits

    144,226  
         

Interest payable

    50  

Other liabilities

    1,270  
         

Total liabilities assumed

  $ 145,546  

 

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

 

9

 

 

 

Note 4 - Securities

The estimated fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

 

   

(Dollars in thousands)

 
           

Gross

   

Gross

   

Estimated

 
   

Cost

   

Unrealized

   

Unrealized

   

Fair

 
   

Basis

   

Gains

   

Losses

   

Value

 

September 30, 2019

                               

Money market fund

  $ 5,771     $ -     $ -     $ 5,771  

U.S. government sponsored entities

    14,420       96       (3 )     14,513  

Collateralized mortgage obligations and residential mortgage-backed securities

    138,832       1,894       (105 )     140,621  

Municipal securities

    92,999       5,119       (39 )     98,079  

Collateralized debt obligations

    3,448       -       (1,378 )     2,070  

Total securities available-for-sale

  $ 255,470     $ 7,109     $ (1,525 )   $ 261,054  

 

   

(Dollars in thousands)

 
           

Gross

   

Gross

   

Estimated

 
   

Cost

   

Unrealized

   

Unrealized

   

Fair

 
   

Basis

   

Gains

   

Losses

   

Value

 

December 31, 2018

                               

Money market fund

  $ 2,480     $ -     $ -     $ 2,480  

U.S. government sponsored entities

    7,997       28       (131 )     7,894  

Collateralized mortgage obligations and residential mortgage-backed securities

    137,834       135       (2,688 )     135,281  

Municipal securities

    93,516       1,072       (524 )     94,064  

Collateralized debt obligations

    3,481       -       (1,432 )     2,049  

Total securities available-for-sale

  $ 245,308     $ 1,235     $ (4,775 )   $ 241,768  

 

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

 

   

(Dollars in thousands)

 
   

Available-for-sale

 
   

Estimated

         
   

Fair

   

Tax-Equivalent

 

September 30, 2019

 

Value

   

Yield (%)

 

Due in one year or less

  $ 8,840       2.71  

Due from one to five years

    3,397       4.95  

Due from five to ten years

    20,270       3.71  

Due over ten years

    87,926       4.02  

Collateralized mortgage obligations and residential mortgage-backed securities

    140,621       2.70  

Total

  $ 261,054       3.25  

 

10

 

 

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

 

   

(Dollars in thousands)

 
   

September 30,

   

September 30,

 
   

2019

   

2018

 
                 

Proceeds

  $ 35,859     $ 29,049  

Gross gains

    838       1,159  

Gross losses

    (84 )     (4 )

 

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

 

   

(Dollars in thousands)

 
   

Unrealized
gain/(loss)

 

Ending balance, December 31, 2018

  $ (2,796 )

Current period change

    7,214  

Ending balance, September 30, 2019

  $ 4,418  

 

Securities with carrying values of approximately $69.2 million and $16.3 million were pledged as of September 30, 2019 and December 31, 2018, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law. The increase in pledged securities for September 30, 2019, was the result of new pledging requirements for Indiana public funds deposits.

 

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

 

   

(Dollars in thousands)

 
   

Less than 12 months

   

12 months or longer

   

Total

 
   

Estimated

           

Estimated

           

Estimated

         
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

September 30, 2019

                                               

U.S. government sponsored entities

  $ 1,427     $ (3 )   $ -     $ -     $ 1,427     $ (3 )

Collateralized mortgage obligations and residential mortgage-backed securities

    5,727       (34 )     17,351       (71 )     23,078       (105 )

Municipal securities

    2,579       (39 )     -       -       2,579       (39 )

Collateralized debt obligations

    -       -       2,070       (1,378 )     2,070       (1,378 )

Total temporarily impaired

  $ 9,733     $ (76 )   $ 19,421     $ (1,449 )   $ 29,154     $ (1,525 )

Number of securities

            8               19               27  

 

   

(Dollars in thousands)

 
   

Less than 12 months

   

12 months or longer

   

Total

 
   

Estimated

           

Estimated

           

Estimated

         
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

December 31, 2018

                                               

U.S. government sponsored entities

  $ -     $ -     $ 3,866     $ (131 )   $ 3,866     $ (131 )

Collateralized mortgage obligations and residential mortgage-backed securities

    28,388       (304 )     89,234       (2,384 )     117,622       (2,688 )

Municipal securities

    22,678       (367 )     3,495       (157 )     26,173       (524 )

Collateralized debt obligations

    -       -       2,049       (1,432 )     2,049       (1,432 )

Total temporarily impaired

  $ 51,066     $ (671 )   $ 98,644     $ (4,104 )   $ 149,710     $ (4,775 )

Number of securities

            52               75               127  

 

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

 

11

 

 

 

Note 5 - Loans Receivable

 

Loans receivable are summarized below:

 

(Dollars in thousands)

               
   

September 30, 2019

   

December 31, 2018

 

Loans secured by real estate:

               

Residential real estate

  $ 298,138     $ 224,082  

Home equity

    49,719       45,423  

Commercial real estate

    282,536       253,104  

Construction and land development

    79,351       64,433  

Multifamily

    50,878       47,234  

Farmland

    230       240  

Total loans secured by real estate

    760,852       634,516  

Commercial business

    109,485       103,628  

Consumer

    763       495  

Manufactured homes

    12,882       4,798  

Government

    17,609       21,101  

Subtotal

    901,591       764,538  

Less:

               

Net deferred loan origination fees

    2,813       530  

Undisbursed loan funds

    (131 )     (668 )

Loans receivable

  $ 904,273     $ 764,400  

 

 

(Dollars in thousands)

 

Beginning Balance

   

Charge-offs

   

Recoveries

   

Provisions

   

Ending Balance

 
                                         

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

 
                                         

Allowance for loan losses:

                                       

Residential real estate

  $ 1,660     $ (62 )   $ 5     $ 149     $ 1,752  

Home equity

    202       -       2       23       227  

Commercial real estate

    3,529       -       -       178       3,707  

Construction and land development

    806       -       -       188       994  

Multifamily

    453       -       -       51       504  

Farmland

    -       -       -       -       -  

Commercial business

    1,517       (9 )     8       405       1,921  

Consumer

    51       (13 )     5       7       50  

Manufactured homes

    505       -       -       (505 )     -  

Government

    21       -       -       (2 )     19  

Total

  $ 8,744     $ (84 )   $ 20     $ 494     $ 9,174  
                                         

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended September 30, 2018:

 
                                         

Allowance for loan losses:

                                       

Residential real estate

  $ 1,523     $ (30 )   $ -     $ 82     $ 1,575  

Home equity

    183       -       -       10       193  

Commercial real estate

    3,170       -       22       48       3,240  

Construction and land development

    611       -       -       (32 )     579  

Multifamily

    607       -       -       (150 )     457  

Farmland

    4       -       -       (1 )     3  

Commercial business

    1,264       -       8       61       1,333  

Consumer

    36       (19 )     8       298       323  

Manufactured homes

    -       -       -       -       -  

Government

    50       -       -       (4 )     46  

Total

  $ 7,448     $ (49 )   $ 38     $ 312     $ 7,749  

 

12

 

 

(Dollars in thousands)

 

Beginning Balance

   

Charge-offs

   

Recoveries

   

Provisions

   

Ending Balance

 
                                         

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

 
                                         

Allowance for loan losses:

                                       

Residential real estate

  $ 1,715     $ (128 )   $ 23     $ 142     $ 1,752  

Home equity

    202       -       4       21     $ 227  

Commercial real estate

    3,335       -       -       372     $ 3,707  

Construction and land development

    756       -       -       238     $ 994  

Multifamily

    472       -       -       32     $ 504  

Farmland

    -       -       -       -     $ -  

Commercial business

    1,362       (9 )     24       544     $ 1,921  

Consumer

    41       (38 )     14       33     $ 50  

Manufactured homes

    41       -       -       (41 )   $ -  

Government

    38       -       -       (19 )   $ 19  

Total

  $ 7,962     $ (175 )   $ 65     $ 1,322     $ 9,174  
                                         

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the nine months ended September 30, 2018:

 
                                         

Allowance for loan losses:

                                       

Residential real estate

  $ 1,568     $ (136 )   $ -     $ 143     $ 1,575  

Home equity

    166       (24 )     -       51       193  

Commercial real estate

    3,125       (119 )     24       210       3,240  

Construction and land development

    618       -       -       (39 )     579  

Multifamily

    622       -       -       (165 )     457  

Farmland

    -       -       -       3       3  

Commercial business

    1,298       (529 )     125       439       1,333  

Consumer

    31       (41 )     17       316       323  

Manufactured homes

    -       -       -       -       -  

Government

    54       -       -       (8 )     46  

Total

  $ 7,482     $ (849 )   $ 166     $ 950     $ 7,749  

 

13

 

 

The Bancorp's impairment analysis is summarized below:

 

   

Ending Balances

 
                                                 

(Dollars in thousands)

 

Individually

evaluated for

impairment

reserves

   

Collectively

evaluated for

impairment

reserves

   

Loan

receivables

   

Individually

evaluated for

impairment

   

Purchased credit

impaired

individually

evaluated for

impairment

   

Collectively

evaluated for

impairment

 
                                                 

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at September 30, 2019:

         
                                                 

Residential real estate

  $ 17     $ 1,735     $ 297,830     $ 628     $ 1,747     $ 295,455  

Home equity

    9       218       49,781       282       220       49,279  

Commercial real estate

    218       3,489       282,536       1,352       486       280,698  

Construction and land development

    -       994       79,351       -       -       79,351  

Multifamily

    -       504       50,878       -       684       50,194  

Farmland

    -       -       230       -       -       230  

Commercial business

    967       954       109,359       2,436       1,147       105,776  

Consumer

    -       50       1,334       -       -       1,334  

Manufactured homes

    -       -       15,365       -       -       15,365  

Government

    -       19       17,609       -       -       17,609  

Total

  $ 1,211     $ 7,963     $ 904,273     $ 4,698     $ 4,284     $ 895,291  
                                                 
                                                 

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2018:

         
                                                 

Residential real estate

  $ 22       1,693       223,323     $ 570     $ 980     $ 221,773  

Home equity

    9       193       45,483       141       123       45,219  

Commercial real estate

    210       3,125       253,104       1,703       402       250,999  

Construction and land development

    -       756       64,433       -       -       64,433  

Multifamily

    -       472       47,234       -       -       47,234  

Farmland

    -       -       240       -       -       240  

Commercial business

    5       1,357       103,439       423       1,440       101,576  

Consumer

    -       82       643       -       -       643  

Manufactured homes

    -       -       5,400       -       -       5,400  

Government

    -       38       21,101       -       -       21,101  

Total

  $ 246     $ 7,716     $ 764,400     $ 2,837     $ 2,945     $ 758,618  

 

14

 

 

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

 

   

Credit Exposure - Credit Risk Portfolio By Creditworthiness Category

         
   

September 30, 2019

         

(Dollars in thousands)

 

2

   

3

   

4

   

5

   

6

   

7

   

8

         
                                                                 

Loan Segment

 

Moderate

   

Above average

acceptable

   

Acceptable

   

Marginally acceptable

   

Pass/monitor

   

Special mention

   

Substandard

   

Total

 

Residential real estate

  $ 940     $ 114,219     $ 105,136     $ 13,338     $ 54,445       4,304       5,448     $ 297,830  

Home equity

    110       7,293       39,736       253       997       810       582       49,781  

Commercial real estate

    2,575       2,398       85,479       129,731       56,424       4,091       1,838       282,536  

Construction and land development

    -       573       21,143       42,371       15,264       -       -       79,351  

Multifamily

    -       920       18,426       27,673       3,042       133       684       50,878  

Farmland

    -       -       -       -       230       -       -       230  

Commercial business

    8,326       19,337       20,804       35,889       20,381       2,500       2,122       109,359  

Consumer

    689       3       637       -       5       -       -       1,334  

Manufactured homes

    2,483       2,571       9,256       186       869       -       -       15,365  

Government

    -       1,889       12,560       3,160       -       -       -       17,609  

Total

  $ 15,123     $ 149,203     $ 313,177     $ 252,601     $ 151,657     $ 11,838     $ 10,674     $ 904,273  

 

   

December 31, 2018

         

(Dollars in thousands)

 

2

   

3

   

4

   

5

   

6

   

7

   

8

         
                                                                 

Loan Segment

 

Moderate

   

Above average

acceptable

   

Acceptable

   

Marginally acceptable

   

Pass/monitor

   

Special mention

   

Substandard

   

Total

 

Residential real estate

  $ 261     $ 58,276     $ 100,374     $ 10,404     $ 44,734     $ 3,908     $ 5,366     $ 223,323  

Home equity

    192       3,736       40,165       37       323       657       373       45,483  

Commercial real estate

    -       5,042       78,611       110,984       51,982       4,715       1,770       253,104  

Construction and land development

    -       322       24,271       29,383       10,457       -       -       64,433  

Multifamily

    -       569       19,255       23,417       3,844       149       -       47,234  

Farmland

    -       -       -       -       240       -       -       240  

Commercial business

    10,655       19,127       20,941       34,996       14,034       2,958       728       103,439  

Consumer

    202       -       441       -       -       -       -       643  

Manufactured homes

    723       2,953       599       196       909       20       -       5,400  

Government

    -       2,111       14,795       4,195       -       -       -       21,101  

Total

  $ 12,033     $ 92,136     $ 299,452     $ 213,612     $ 126,523     $ 12,407     $ 8,237     $ 764,400  

 

15

 

 

The Bancorp has established a standard loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio. The use and application of these grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system is as follows:

 

 

1 – Minimal Risk

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

 

2 – Moderate risk

Borrower consistently internally generates sufficient cash flow to fund debt service, working assets, and some capital expenditures. Risk of default considered low.

 

3 – Above average acceptable risk

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

 

4 – Acceptable risk

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

 

5 – Marginally acceptable risk

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

 

6 – Pass/monitor

The borrower has significant weaknesses resulting from performance trends or management concerns. The financial condition of the company has taken a negative turn and may be temporarily strained. Cash flow may be weak but cash reserves remain adequate to meet debt service. Management weaknesses are evident. Borrowers in this category will warrant more than the normal level of supervision and more frequent reporting.

 

7 – Special mention (watch)

Special mention credits are considered bankable assets with no apparent loss of principal or interest envisioned but requiring a high level of management attention. Assets in this category are currently protected but are potentially weak. These borrowers are subject to economic, industry, or management factors having an adverse impact upon their prospects for orderly service of debt. The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted. These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of Substandard.

 

8 – Substandard

This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit, some loss could be incurred in collection if the deficiencies are not corrected.

 

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

 

16

 

 

During the first nine months of 2019, five home equity loans and one commercial business loan totaling $472 thousand were renewed as troubled debt restructurings and two loans, consisting of one commercial business and one residential loan, totaling $135 thousand were restructured as new TDR loans. Two troubled debt restructurings totaling $163 thousand have subsequently defaulted during the periods presented. All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

 

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

 

                           

For the nine months ended

 
   

As of September 30, 2019

   

September 30, 2019

 

(Dollars in thousands)

 

Recorded

Investment

   

Unpaid Principal

Balance

   

Related Allowance

   

Average Recorded

Investment

   

Interest Income

Recognized

 

With no related allowance recorded:

                                       

Residential real estate

  $ 2,222     $ 3,697     $ -     $ 1,915     $ 55  

Home equity

    439       462       -       368       6  

Commercial real estate

    1,380       1,976       -       1,586       41  

Construction and land development

    -       -       -       -       -  

Multifamily

    684       766       -       525       12  

Farmland

    -       -       -       -       -  

Commercial business

    1,832       1,942       -       1,933       63  

Consumer

    -       -       -       -       -  

Manufactured homes

    -       -       -       -       -  

Government

    -       -       -       -       -  
                                         

With an allowance recorded:

                                       

Residential real estate

    153       153       17       158       3  

Home equity

    63       63       9       60       1  

Commercial real estate

    458       458       218       473       -  

Construction and land development

    -       -       -       -       -  

Multifamily

    -       -       -       -       -  

Farmland

    -       -       -       -       -  

Commercial business

    1,751       1,751       967       547       3  

Consumer

    -       -       -       -       -  

Manufactured homes

    -       -       -       -       -  

Government

    -       -       -       -       -  
                                         

Total:

                                       

Residential real estate

  $ 2,375     $ 3,850     $ 17     $ 2,073     $ 58  

Home equity

  $ 502     $ 525     $ 9     $ 428     $ 7  

Commercial real estate

  $ 1,838     $ 2,434     $ 218     $ 2,059     $ 41  

Construction & land development

  $ -     $ -     $ -     $ -     $ -  

Multifamily

  $ 684     $ 766     $ -     $ 525     $ 12  

Farmland

  $ -     $ -     $ -     $ -     $ -  

Commercial business

  $ 3,583     $ 3,693     $ 967     $ 2,480     $ 66  

Consumer

  $ -     $ -     $ -     $ -     $ -  

Manufactured homes

  $ -     $ -     $ -     $ -     $ -  

Government

  $ -     $ -     $ -     $ -     $ -  

 

17

 

 

                           

For the nine months ended

 
   

As of December 31, 2018

   

September 30, 2018

 

(Dollars in thousands)

 

Recorded

Investment

   

Unpaid Principal

Balance

   

Related Allowance

   

Average Recorded

Investment

   

Interest Income

Recognized

 

With no related allowance recorded:

                                       

Residential real estate

  $ 1,389     $ 3,628     $ -     $ 1,208     $ 61  

Home equity

    207       214       -       87       1  

Commercial real estate

    1,624       2,222       -       1,114       46  

Construction & land development

    -       -       -       67       -  

Multifamily

    -       -       -       -       -  

Farmland

    -       -       -       -       -  

Commercial business

    1,799       2,038       -       651       20  

Consumer

    -       -       -       -       -  

Manufactured homes

    -       -       -       -       -  

Government

    -       -       -       -       -  
                                         

With an allowance recorded:

                                       

Residential real estate

    161       161       22       114       4  

Home equity

    57       57       9       29       -  

Commercial real estate

    481       481       210       280       3  

Construction & land development

    -       -       -       -       -  

Multifamily

    -       -       -       -       -  

Farmland

    -       -       -       -       -  

Commercial business

    64       64       5       159       1  

Consumer

    -       -       -       -       -  

Manufactured homes

    -       -       -       -       -  

Government

    -       -       -       -       -  
                                         

Total:

                                       

Residential real estate

  $ 1,550     $ 3,789     $ 22     $ 1,322     $ 65  

Home equity

  $ 264     $ 271     $ 9     $ 116     $ 1  

Commercial real estate

  $ 2,105     $ 2,703     $ 210     $ 1,394     $ 49  

Construction & land development

  $ -     $ -     $ -     $ 67     $ -  

Multifamily

  $ -     $ -     $ -     $ -     $ -  

Farmland

  $ -     $ -     $ -     $ -     $ -  

Commercial business

  $ 1,863     $ 2,102     $ 5     $ 810     $ 21  

Consumer

  $ -     $ -     $ -     $ -     $ -  

Manufactured homes

  $ -     $ -     $ -     $ -     $ -  

Government

  $ -     $ -     $ -     $ -     $ -  

 

18

 

 

The Bancorp's age analysis of past due loans is summarized below:

 

(Dollars in thousands)

 

30-59 Days Past

Due

   

60-89 Days Past

Due

   

Greater Than 90

Days Past Due

   

Total Past Due

   

Current

   

Total Loans

   

Recorded

Investments

Greater than 90

Days Past Due

and Accruing

 

September 30, 2019

                                                       

Residential real estate

  $ 2,179     $ 1,716     $ 4,268     $ 8,163     $ 289,667     $ 297,830     $ 318  

Home equity

    300       20       582       902       48,879       49,781       136  

Commercial real estate

    6,655       -       976       7,631       274,905       282,536       63  

Construction and land development

    -       299       -       299       79,052       79,351       -  

Multifamily

    282       133       31       446       50,432       50,878       31  

Farmland

    -       -       -       -       230       230       -  

Commercial business

    535       133       2,186       2,854       106,505       109,359       237  

Consumer

    -       -       -       -       1,334       1,334       -  

Manufactured homes

    165       128       -       293       15,072       15,365       -  

Government

    -       -       -       -       17,609       17,609       -  

Total

  $ 10,116     $ 2,429     $ 8,043     $ 20,588     $ 883,685     $ 904,273     $ 785  
                                                         

December 31, 2018

                                                       

Residential real estate

  $ 3,659     $ 909     $ 4,362     $ 8,930     $ 214,393     $ 223,323     $ 122  

Home equity

    143       5       304       452       45,031       45,483       50  

Commercial real estate

    842       18       611       1,471       251,633       253,104       -  

Construction and land development

    491       533       -       1,024       63,409       64,433       -  

Multifamily

    -       149       -       149       47,085       47,234       -  

Farmland

    -       -       -       -       240       240       -  

Commercial business

    733       260       436       1,429       102,010       103,439       149  

Consumer

    1       -       -       1       642       643       -  

Manufactured homes

    -       72       -       72       5,328       5,400       -  

Government

    -       -       -       -       21,101       21,101       -  

Total

  $ 5,869     $ 1,946     $ 5,713     $ 13,528     $ 750,872     $ 764,400     $ 321  

 

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

 

(Dollars in thousands)

               
   

September 30,

2019

   

December 31,

2018

 

Residential real estate

  $ 5,132     $ 5,135  

Home equity

    547       270  

Commercial real estate

    913       695  

Construction and land development

    -       -  

Multifamily

    260       -  

Farmland

    -       -  

Commercial business

    1,951       495  

Consumer

    -       -  

Manufactured homes

    -       -  

Government

    -       -  

Total

  $ 8,803     $ 6,595  

 

As a result of acquisition activity, the Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At September 30, 2019, total purchased credit impaired loans with unpaid principal balances totaled $6.6 million with a recorded investment of $4.3 million. At December 31, 2018, purchased credit impaired loans with unpaid principal balances totaled $6.0 million with a recorded investment of $2.9 million.

 

19

 

 

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

 

(dollars in thousands)

 

First Personal

 

2018

  $ 26  

2019

    118  

 

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

 

(dollars in thousands)

 

First Personal

 

2019

  $ (25 )

2020

    (100 )

2021

    (25 )

Total

  $ (150 )

 

 

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

 

(dollars in thousands)

 

First Federal

   

Liberty Savings

   

First Personal

   

AJ Smith

 
   

Net fair value

   

Accretable period

   

Net fair value

   

Accretable period

   

Net fair value

   

Accretable period

   

Net fair value

   

Accretable period

 
   

discount

   

in months

   

discount

   

in months

   

discount

   

in months

   

discount

   

in months

 

Residential real estate

  $ 1,062       59     $ 1,203       44     $ 948       56     $ 3,734       52  

Home equity

    44       29       5       29       51       50       141       32  

Commercial real estate

    -       -       -       -       208       56       8       9  

Construction and land development

    -       -       -       -       1       30       -       -  

Multifamily

    -       -       -       -       11       48       2       48  

Consumer

    -       -       -       -       146       50       1       5  

Commercial business

    -       -       -       -       348       24       -       -  

Purchased credit impaired loans

    -       -       -       -       424       32       -       -  

Total

  $ 1,106             $ 1,208             $ 2,137             $ 3,886          

 

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

 

(dollars in thousands)

 

First Federal

   

Liberty Savings

   

First Personal

   

AJ Smith

   

Total

 

2018

  $ 105     $ 200     $ 114     $ -     $ 419  

2019

    22       42       402       843     $ 1,309  

 

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

 

(dollars in thousands)

 

First Personal

   

AJ Smith

   

Total

 

2019

  $ 112     $ 216     $ 328  

2020

    402       833       1,236  

2021

    341       826       1,167  

2022

    330       826       1,156  

2023

    74       341       415  

Total

  $ 1,259     $ 3,043     $ 4,303  

 

 

 

Note 6 - Foreclosed Real Estate

Foreclosed real estate at period-end is summarized below:

 

   

(Dollars in thousands)

 
   

September 30, 2019

   

December 31, 2018

 

Residential real estate

  $ 752     $ 1,132  

Commercial real estate

    346       346  

Construction and land development

    -       149  

Total

  $ 1,098     $ 1,627  

 

20

 

 

 

Note 7 Intangibles and Acquisition Related Accounting

The Bancorp established a goodwill balance totaling $11.1 million with the acquisitions of AJSB, First Personal, First Federal, and Liberty Savings. Goodwill of $2.9 million, $5.4 million, $2.0 million, and $804 thousand were established with the acquisition of AJSB, First Personal, First Federal, and Liberty Savings, respectively. Goodwill is tested annually for impairment. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Bancorp’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Bancorp to provide quality, cost effective banking services in a competitive marketplace. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. There has not been any impairment of goodwill identified or recorded. Goodwill totaled $11.1 million and $8.2 million as of September 30, 2019 and December 31, 2018, respectively.

 

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

 

Amortization recorded for the nine months ended September 30, is as follows:

 

(dollars in thousands)

 

First Federal

   

Liberty Savings

   

First Personal

   

AJ Smith

   

Total

 

Current period

  $ 9     $ 44     $ 356     $ 299     $ 708  

 

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

 

(dollars in thousands)

 

First Federal

   

Liberty Savings

   

First Personal

   

AJ Smith

   

Total

 

Remainder 2019

    3       14       119       112       248  

2020

    12       58       475       449       994  

2021

    12       58       475       449       994  

2022

    1       58       475       449       983  

2023

    -       38       475       449       962  

2024

    -       -       470       449       919  

2025

    -       -       -       261       261  

Total

  $ 28     $ 226     $ 2,489     $ 2,618     $ 5,361  

 

For the First Personal acquisition, as part of the fair value of certificates of deposit, a fair value premium was established of $133 thousand that is being amortized over 8 months on a straight line basis. Approximately $53 thousand of amortization was taken as income during the nine months ended September 30, 2019. The premium has been fully amortized as of September 30, 2019. For the AJSB acquisition, as part of the fair value of certificates of deposit, a fair value premium was established of $174 thousand that is being amortized over 14 months on a straight line basis. Approximately $102 thousand of amortization was taken as income during the nine months ended September 30, 2019. It is estimated that an additional $38 thousand of amortization will occur during 2019 and an additional $34 thousand of amortization will occur during 2020.

 

 

Note 8 - Concentrations of Credit Risk

The primary lending area of the Bancorp encompasses Lake County in northwest Indiana and Cook County in northeast Illinois, where collectively a majority of loan activity is concentrated. The Bancorp is also an active lender in Porter County, and to a lesser extent, LaPorte, Newton and Jasper counties in Indiana; and Lake and Will counties in Illinois. Substantially all loans are secured by specific items of collateral including residences, commercial real estate, land development, business assets and consumer assets.

 

 

Note 9 - Earnings per Share

Earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding. A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations for the three and nine months ended September 30, 2019 and 2018 are as follows:

 

   

Three Months Ended

   

Nine Months Ended

 

(Dollars in thousands, except per share data)

 

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Basic earnings per common share:

                               

Net income as reported

  $ 3,578     $ 1,625     $ 9,823     $ 6,697  

Weighted average common shares outstanding

    3,451,797       3,029,369       3,416,045       2,922,271  

Basic earnings per common share

  $ 1.04     $ 0.54     $ 2.88     $ 2.29  

Diluted earnings per common share:

                    -          

Net income as reported

  $ 3,578     $ 1,625     $ 9,823     $ 6,697  

Weighted average common shares outstanding

    3,451,797       3,029,369       3,416,045       2,922,271  

Weighted average common and dilutive potential common shares outstanding

    3,451,797       3,029,369       3,416,045       2,922,271  

Diluted earnings per common share

  $ 1.04     $ 0.54     $ 2.88     $ 2.29  

 

21

 

 

 

Note 10 - Stock Based Compensation

The Bancorp’s 2015 Stock Option and Incentive Plan (the “Plan”), which was adopted by the Bancorp’s Board of Directors on February 27, 2015 and approved by the Bancorp’s shareholders on April 24, 2015, permits the grant of equity awards for up to 250,000 shares of common stock. Awards granted under the Plan may be in the form of incentive stock options, non-qualified stock options, restricted stock, unrestricted stock, performance shares, or performance units.

 

As required by the Stock Compensation Topic, companies are required to record compensation cost for stock options and awards provided to employees in return for employment service. For the nine months ended September 30, 2019, stock based compensation expense of $233 thousand was recorded, compared to $104 thousand for the nine months ended September 30, 2018. It is anticipated that current outstanding unvested awards will result in additional compensation expense of approximately $478 thousand through 2022 as follows: $68 thousand in 2019, $242 thousand in 2020, $149 thousand in 2021, and $19 thousand in 2022.

 

There were no incentive stock options granted during the first nine months of 2019 or 2018. When options are granted, the cost is measured at the fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options or awards. At September 30, 2019, there were no outstanding incentive stock options.

 

There were 7,407 shares of restricted stock granted during the first nine months of 2019 compared to 4,433 shares granted during the first nine months of 2018. Restricted stock awards are issued with an award price equal to the market price of the Bancorp’s common stock on the award date and vest between three and five years after the grant date. Forfeiture provisions exist for personnel that separate employment before the vesting period expires. A summary of restricted stock activity under the Bancorp’s Plan described above for the year ended December 31, 2018 and nine months ended September 30, 2019 follows:

 

 

Non-vested Shares

 

Shares

   

Weighted
Average
Grant Date
Fair Value

 

Non-vested at January 1, 2018

    30,690     $ 28.51  

Granted

    4,433       43.50  

Vested

    (7,700 )     22.64  

Forfeited

    -       -  

Non-vested at December 31, 2018

    27,423     $ 32.58  
                 

Non-vested at January 1, 2019

    27,423     $ 32.58  

Granted

    7,407       43.00  

Vested

    (4,625 )     29.37  

Forfeited

    -       -  

Non-vested at September 30, 2019

    30,205     $ 35.63  

 

22

 

 

 

Note 11 Change in Accounting Principles

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

 

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

 

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

 

 

Note 12 - Upcoming Accounting Standards 

In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU includes increased disclosures and various changes to the accounting and measurement of financial assets including the Bancorp’s loans and available-for-sale and held-to-maturity debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. In October 2019, the FASB voted and approved proposed changes to the effective date of this ASU for smaller reporting companies, such as the Bancorp, and other non-SEC reporting entities. The approval changed the effective date of the ASU to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. The new credit loss guidance will be effective for the Bancorp's year ending December 31, 2023. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Early adoption for all institutions is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is in the process of evaluating the impact adoption of this update will have on the Bancorp’s consolidated financial statements. This process of evaluation has engaged multiple areas of the Bancorp’s management in discussing loss estimation methods and the application of these methods to specific segments of the loans receivable portfolio. Management has been actively monitoring developments and evaluating the use of different methods allowed. Due to continuing development of understanding of application, additional time is required to understand how this ASU will affect the Bancorp’s financial statements. Management plans on running parallel calculations during the year and finalizing a method or methods of adoption in time for the effective date.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This Standard simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU No. 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in this ASU, an entity should

(1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU No. 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. Finally, this ASU amends the Overview and Background sections of the Accounting Standards Codification as part of the FASB’s initiative to unify and improve such sections across Topics and Subtopics. The new guidance will be effective for the Company’s year ending December 31, 2020.

 

23

 

 

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

 

 

Note 13 - Fair Value

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

 

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

 

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

 

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

 

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

 

At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with GAAP. Impairment is other-than-temporary if the decline in the fair value is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received. Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates. The Bancorp considers the following factors when determining an other-than-temporary impairment for a security: the length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; an assessment of whether the Bancorp (1) has the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before their anticipated market recovery. If either of these conditions is met, management will recognize other-than-temporary impairment. If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.

 

24

 

 

The Bancorp’s management utilizes a specialist to perform an other-than-temporary impairment analysis for each of its pooled trust preferred securities. The analysis is performed annually during December and utilizes analytical models used to project future cash flows for the pooled trust preferred securities based on current assumptions for prepayments, default and deferral rates, and recoveries. The projected cash flows are then tested for impairment consistent with GAAP. The other-than-temporary impairment testing compares the present value of the cash flows from quarter to quarter to determine if there is a “favorable” or “adverse” change. Other-than-temporary impairment is recorded if the projected present value of cash flows is lower than the book value of the security. To perform the annual other-than-temporary impairment analysis, management utilizes current reports issued by the trustee, which contain principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled trust preferred security. In addition, a detailed review of the performing collateral was performed. Based on current market conditions and a review of the trustee reports, management performed an analysis of the pooled trust preferred securities and no additional impairment was taken at December 31, 2018. A specialist will be used to review all pooled trust preferred securities again at December 31, 2019.

 

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

 

   

(Dollars in thousands)

 
   

Collateralized

 
   

debt obligations

 
   

other-than-temporary

 
   

impairment

 

Ending balance, December 31, 2018

  $ 235  

Additions not previously recognized

    -  

Ending balance, September, 2019

  $ 235  

 

At September 30, 2019, trust preferred securities with a cost basis of $3.4 million continue to be in “payment in kind” status. These trust preferred securities classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For these trust preferred securities in “payment in kind” status, management anticipates to receive the unpaid contractual interest payments from the issuer, because of the self-correcting cash flow waterfall provisions within the structure of the securities. When a tranche senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest cash flows are paid to the senior tranche and recorded as a reduction of principal. The coverage test represents an over collateralization target by stating the balance of the performing collateral as a percentage of the balance of the Bancorp’s tranche, plus the balance of all senior tranches. The principal reduction in the senior tranche continues until the appropriate coverage test is passed. As a result of the principal reduction in the senior tranche, more cash is available for future payments to the Bancorp’s tranche. Consistent with GAAP, management considered the failure of the issuer of the security to make scheduled interest payments in determining whether a credit loss existed. Management will not capitalize the “payment in kind” interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume on a consistent basis.

 

25

 

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

 

           

Fair Value Measurements at September 30, 2019 Using

 

(Dollars in thousands)

 

Estimated
Fair
Value

   

Quoted Prices in

Active Markets

for Identical

Assets
(Level 1)

   

Significant Other

Observable

Inputs
(Level 2)

   

Significant

Unobservable

Inputs
(Level 3)

 

Available-for-sale debt securities:

                               

Money market fund

  $ 5,771     $ 5,771     $ -     $ -  

U.S. treasury securities

    -       -       -       -  

U.S. government sponsored entities

    14,513       -       14,513       -  

Collateralized mortgage obligations and residential mortgage-backed securities

    140,621       -       140,621       -  

Municipal securities

    98,079       -       98,079       -  

Collateralized debt obligations

    2,070       -       -       2,070  

Total securities available-for-sale

  $ 261,054     $ 5,771     $ 253,213     $ 2,070  

 

           

Fair Value Measurements at December 31, 2018 Using

 

(Dollars in thousands)

 

Estimated
Fair
Value

   

Quoted Prices in

Active Markets

for Identical

Assets
(Level 1)

   

Significant Other

Observable

Inputs
(Level 2)

   

Significant

Unobservable

Inputs
(Level 3)

 

Available-for-sale debt securities:

                               

Money market fund

  $ 2,480     $ 2,480     $ -     $ -  

U.S. treasury securities

    -       -       -       -  

U.S. government sponsored entities

    7,894       -       7,894       -  

Collateralized mortgage obligations and residential mortgage-backed securities

    135,281       -       135,281       -  

Municipal securities

    94,064       -       94,064       -  

Collateralized debt obligations

    2,049       -       -       2,049  

Total securities available-for-sale

  $ 241,768     $ 2,480     $ 237,239     $ 2,049  

 

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

 

(Dollars in thousands)

 

Estimated Fair Value
Measurements Using
Significant Unobservable
Inputs (Level 3)

 
   

Available-for-
sale securities

 

Beginning balance, January 1, 2018

  $ 3,439  

Principal payments

    (51 )

Total unrealized gains, included in other comprehensive income

    (36 )

Transfers in and/or (out) of Level 3

    (1,303 )

Ending balance, December 31, 2018

  $ 2,049  
         

Beginning balance, January 1, 2019

  $ 2,049  

Principal payments

    (33 )

Total unrealized gains, included in other comprehensive income

    54  

Sale out of Level 3

    -  

Ending balance, September 30, 2019

  $ 2,070  

 

26

 

 

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

 

           

(Dollars in thousands)

 
           

Fair Value Measurements at September 30, 2019 Using

 

(Dollars in thousands)

 

Estimated
Fair
Value

   

Quoted Prices in

Active Markets

for Identical

Assets
(Level 1)

   

Significant Other

Observable

Inputs
(Level 2)

   

Significant

Unobservable

Inputs
(Level 3)

 

Impaired loans

  $ 7,771     $ -     $ -     $ 7,771  

Foreclosed real estate

    1,098       -       -       1,098  

 

           

(Dollars in thousands)

 
           

Fair Value Measurements at December 31, 2018 Using

 

(Dollars in thousands)

 

Estimated
Fair
Value

   

Quoted Prices in

Active Markets

for Identical

Assets
(Level 1)

   

Significant Other

Observable

Inputs
(Level 2)

   

Significant

Unobservable

Inputs
(Level 3)

 

Impaired loans

  $ 5,536     $ -     $ -     $ 5,536  

Foreclosed real estate

    1,627       -       -       1,627  

 

The fair value of impaired loans with specific allocations of the allowance for loan losses or loans for which charge-offs have been taken is generally based on a present value of cash flows or, for collateral dependent loans, based on recent real estate appraisals. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The recorded investment in impaired loans was approximately $9.0 million and the related specific reserves totaled approximately $1.2 million, resulting in a fair value of impaired loans totaling approximately $7.8 million, at September 30, 2019. The recorded investment of impaired loans was approximately $5.8 million and the related specific reserves totaled approximately $246 thousand, resulting in a fair value of impaired loans totaling approximately $5.5 million, at December 31, 2018. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. The fair value of foreclosed real estate is similarly determined by using the results of recent real estate appraisals. The numerical range of unobservable inputs for these valuation assumptions is not meaningful to this presentation.

 

27

 

 

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

 

   

September 30, 2019

   

Estimated Fair Value Measurements at September 30, 2019 Using

 

(Dollars in thousands)

 

Carrying
Value

   

Estimated
Fair Value

   

Quoted Prices in
Active Markets for Identical Assets
(Level 1)

   

Significant
Other Observable
Inputs
(Level 2)

   

Significant
Unobservable
Inputs
(Level 3)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 71,942     $ 71,942     $ 71,942     $ -     $ -  

Certificates of deposit in other financial institutions

    2,170       2,137       -       2,137       -  

Securities available-for-sale

    261,054       261,054       5,771       253,213       2,070  

Loans held-for-sale

    4,641       4,761       4,761       -       -  

Loans receivable, net

    895,099       907,899       -       -       907,899  

Federal Home Loan Bank stock

    3,912       3,912       -       3,912       -  

Interest rate swap agreements

    1,860       1,860       -       1,860       -  

Accrued interest receivable

    3,995       3,995       -       3,995       -  
                                         

Financial liabilities:

                                       

Non-interest bearing deposits

    176,878       176,878       176,878       -       -  

Interest bearing deposits

    975,589       975,443       638,314       337,129       -  

Repurchase agreements

    14,931       14,931       13,158       1,773       -  

Borrowed funds

    16,000       16,105       -       16,105       -  

Interest rate swap agreements

    1,860       1,860       -       1,860       -  

Accrued interest payable

    166       166       -       166       -  

 

   

December 31, 2018

   

Estimated Fair Value Measurements at December 31, 2018 Using

 

(Dollars in thousands)

 

Carrying
Value

   

Estimated
Fair Value

   

Quoted Prices in
Active Markets for Identical Assets
(Level 1)

   

Significant
Other Observable
Inputs
(Level 2)

   

Significant
Unobservable
Inputs
(Level 3)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 17,139     $ 17,139     $ 17,139     $ -     $ -  

Certificates of deposit in other financial institutions

    2,024       2,001       -       2,001       -  

Securities available-for-sale

    241,768       241,768       2,480       237,239       2,049  

Loans held-for-sale

    2,863       2,910       2,910       -       -  

Loans receivable, net

    756,438       747,553       -       -       747,553  

Federal Home Loan Bank stock

    3,460       3,460       -       3,460       -  

Interest rate swap agreements

    196       196       -       196          

Accrued interest receivable

    3,632       3,632       -       3,632       -  
                                         

Financial liabilities:

                                       

Non-interest bearing deposits

    127,277       127,277       127,277       -       -  

Interest bearing deposits

    802,509       800,349       543,617       256,732       -  

Repurchase agreements

    11,628       11,626       9,867       1,759       -  

Borrowed funds

    43,000       42,888       -       42,888       -  

Interest rate swap agreements

    196       196               196          

Accrued interest payable

    186       186       -       186       -  

 

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

 

Cash and cash equivalent carrying amounts approximate fair value. Certificates of deposits in other financial institutions carrying amounts approximate fair value (Level 2). The fair values of securities available-for-sale are obtained from broker pricing (Level 2), with the exception of collateralized debt obligations, which are valued by a third-party specialist (Level 3). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 1). The estimated fair value for net loans receivable is based on the exit price notion which is the exchange price that would be received to transfer the loans at the most advantageous market price in an orderly transaction between market participants on the measurement date (Level 3). Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer of the security. Interest rate swap agreements, both assets and liabilities, are valued by a third-party pricing agent using an income approach (Level 2). Fair values of accrued interest receivable and payable approximate book value, as the carrying values are determined using the observable interest rate, balance, and last payment date.

 

Non-interest and interest bearing deposits, which include checking, savings, and money market deposits, are estimated to have fair values based on the amount payable as of the reporting date (Level 1). The fair value of fixed-maturity certificates of deposit (included in interest bearing deposits) are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Estimated fair values for short-term repurchase agreements, which represent sweeps from demand deposits to accounts secured by pledged securities, are estimated based on the amount payable as of the reporting date (Level 1). Longer-term repurchase agreements, with contractual maturity dates of three months or more, are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Short-term borrowings are generally only held overnight, therefore, their carrying amount is a reasonable estimate of fair value (Level 1). The fair value of FHLB Advances are estimated by discounting the future cash flows using quoted rates from the FHLB for similar advances with similar maturities (Level 2). The estimated fair value of other financial instruments, and off-balance sheet loan commitments, approximate cost and are not considered significant to this presentation.

 

28

 

 

 

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

 

Summary

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

 

At September 30, 2019, the Bancorp had total assets of $1.3 billion, total loans receivable of $904.3 million and total deposits of $1.2 billion. Stockholders' equity totaled $133.0 million or 10.00% of total assets, with a book value per share of $38.53. Net income for the quarter ended September 30, 2019, was $3.6 million, or $1.04 earnings per common share for both basic and diluted calculations. For the quarter ended September 30, 2019, the return on average assets (ROA) was 1.08%, while the return on average stockholders’ equity (ROE) was 11.05%. Net income for the nine months ended September 30, 2019, was $9.8 million, or $2.88 earnings per common share for both basic and diluted calculations. For the nine months ended September 30, 2019, the ROA was 1.03%, while the ROE was 10.54%. 

 

Financial Condition

During the nine months ended September 30, 2019, total assets increased by $234.3 million (21.4%), with interest-earning assets increasing by $202.8 million (19.9%). At September 30, 2019, interest-earning assets totaled $1.2 billion compared to $1.0 billion at December 31, 2018. Earning assets represented 91.8% of total assets at September 30, 2019 and 92.9% of total assets at December 31, 2018. The increase in total assets and interest earning assets for the nine months was primarily the result of the completion of the acquisition of AJSB as well as internally generated growth.

 

Net loans receivable totaled $895.1 million at September 30, 2019, compared to $756.4 million at December 31, 2018. The loan portfolio, which is the Bancorp’s largest asset, is the primary source of both interest and fee income. The Bancorp’s lending strategy emphasizes quality loan growth, product diversification, and competitive and profitable pricing.

 

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

 

   

September 30,

                 
   

2019

   

December 31,

 

(Dollars in thousands)

 

(unaudited)

   

2018

 
   

Balance

   

% Loans

   

Balance

   

% Loans

 
                                 

Residential real estate

  $ 297,830       32.9 %     223,323       29.2 %

Home equity

    49,781       5.5 %     45,483       6.0 %

Commercial real estate

    282,536       31.2 %     253,104       33.1 %

Construction and land development

    79,351       8.8 %     64,433       8.4 %

Multifamily

    50,878       5.6 %     47,234       6.2 %

Farmland

    230       0.0 %     240       0.0 %

Consumer

    1,334       0.2 %     643       0.1 %
Manufactured homes     15,365       1.7 %     5,400       0.7 %

Commercial business

    109,359       12.1 %     103,439       13.5 %

Government

    17,609       2.0 %     21,101       2.8 %

Loans receivable

  $ 904,273       100.0 %   $ 764,400       100.0 %

Adjustable rate loans / loans receivable

  $ 499,900       55.3 %   $ 348,559       45.6 %

 

29

 

 

   

September 30,

         
   

2019

   

December 31,

 
   

(unaudited)

   

2018

 
                 

Loans receivable to total assets

    68.0 %     69.7 %

Loans receivable to earning assets

    74.1 %     75.1 %

Loans receivable to total deposits

    78.5 %     82.2 %

 

The Bancorp is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the nine months ended September 30, 2019, the Bancorp originated $54.6 million in new fixed rate mortgage loans for sale, compared to $41.8 million during the nine months ended September 30, 2018. Net gains realized from the mortgage loan sales totaled $1.3 million for the nine months ended September 30, 2019, compared to $1.0 million for the nine months ended September 30, 2018. At September 30, 2019, the Bancorp had $4.6 million in loans that were classified as held for sale, compared to $2.9 million at December 31, 2018.

 

Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status. At September 30, 2019, non-performing loans that remained accruing and more than 90 days past due include three residential real estate loans totaling $318 thousand, one commercial business loan totaling $237 thousand, one commercial real estate loan totaling $63 thousand, one multifamily loan totaling $31 thousand, and two home equity loans totaling $136 thousand. The Bancorp will at times leave notes accruing, despite being over 90 days past due, for short periods of time when management has reason to believe payments are in process of being received.

 

The Bancorp's nonperforming loans are summarized below:

 
   

(Dollars in thousands)

               

Loan Segment

 

(unaudited)
September 30,

2019

   

December 31,

2018

 

Residential real estate

  $ 5,450     $ 5,257  

Home equity

    683       320  

Commercial real estate

    976       695  

Construction and land development

    -       -  

Multifamily

    291       -  

Farmland

    -       -  

Commercial business

    2,188       644  

Consumer

    -       -  

Manufactured homes

    -          

Government

    -       -  

Total

  $ 9,588     $ 6,916  

Nonperforming loans to total loans

    1.06 %     0.90 %

Nonperforming loans to total assets

    0.72 %     0.63 %

 

30

 

 

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

 

The Bancorp's substandard loans are summarized below:

         

(Dollars in thousands)

               

Loan Segment

 

(unaudited)
September 30,

2019

   

December 31,

2018

 

Residential real estate

  $ 5,448     $ 5,366  

Home equity

    582       373  

Commercial real estate

    1,838       1,770  

Construction and land development

    -       -  

Multifamily

    684       -  

Farmland

    -       -  

Commercial business

    2,122       728  

Consumer

    -       -  

Manufactured homes

    -       -  

Government

    -       -  

Total

  $ 10,674     $ 8,237  

 

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

 

The Bancorp's special mention loans are summarized below:

(Dollars in thousands)

 

Loan Segment

 

(unaudited)
September 30,

2019

   

December 31,

2018

 

Residential real estate

  $ 4,304     $ 3,908  

Home equity

    810       657  

Commercial real estate

    4,091       4,715  

Construction and land development

    -       -  

Multifamily

    133       149  

Farmland

    -       -  

Commercial business

    2,500       2,958  

Consumer

    -       -  

Manufactured homes

    -       20  

Government

    -       -  

Total

  $ 11,838     $ 12,407  

 

A loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. Typically, management does not individually classify smaller-balance homogeneous loans, such as residential mortgages or consumer loans, as impaired, unless they are troubled debt restructurings.

 

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. Purchased loans with evidence of credit quality deterioration since origination are considered purchased credit impaired loans. Expected future cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable (“accretable yield”). The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and represents probable losses in the portfolio. In determining the acquisition date fair value of purchased credit impaired loans, and in subsequent accounting, the Bancorp aggregates these purchased loans into pools of loans by common risk characteristics, such as credit risk rating and loan type. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.

 

31

 

 

The Bancorp's impaired loans, including purchased credit impaired loans, are summarized below:

 

(Dollars in thousands)

               

Loan Segment

 

(unaudited)
September 30,

2019

   

December 31,

2018

 

Residential real estate

  $ 2,375     $ 1,550  

Home equity

    502       264  

Commercial real estate

    1,838       2,105  

Construction and land development

    -       -  

Multifamily

    684       -  

Farmland

    -       -  

Commercial business

    3,583       1,863  

Consumer

    -       -  

Manufactured homes

    -       -  

Government

    -       -  

Total

  $ 8,982     $ 5,782  

 

At times, the Bancorp will modify the terms of a loan to forego a portion of interest or principal or reduce the interest rate on the loan to a rate materially less than market rates, or materially extend the maturity date of a loan as part of a troubled debt restructuring. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of expected future cash flows; unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

 

The Bancorp's troubled debt restructured loans are summarized below:

 

(Dollars in thousands)

               

Loan Segment

 

(unaudited)
September 30,

2019

   

December 31,

2018

 

Residential real estate

  $ 436     $ 457  

Home equity

    178       141  

Commercial real estate

    840       1,074  

Construction and land development

    -       -  

Multifamily

    -       -  

Farmland

    -       -  

Commercial business

    647       359  

Consumer

    -       -  

Manufactured homes

    -       -  

Government

    -       -  

Total

  $ 2,101     $ 2,031  

 

The increase in the troubled debt restructure loans reflected in the table above for the nine months ending September 30, 2019 was due to five home equity loans and one commercial business loan totaling $472 thousand which were renewed as troubled debt restructurings and two loans, consisting of one commercial business and one residential loan, totaling $135 thousand which were approved as new TDR loans, which was offset by scheduled payments totaling $138 thousand, the payoff of one commercial real estate loan totaling $176 thousand and the removal of the TDR status for two residential and four home equity loans totaling $222 thousand due to positive payment performance. These restructurings along with nine commercial business loans to five customers and the AJSB purchased credit impaired loans all contributed to the increase in impaired loans.

 

The increase in the nonperforming, substandard, and impaired loans reflected in the tables above for the nine months ending September 30, 2019, are due primarily to the completion of the AJSB acquisition as well as ten commercial business loans to five customers .The majority of new additions to these loan categories after AJSB acquisition were not related to the acquisition. AJSB loans totaling $1.2 million and eleven commercial business loans to six customers totaling $2.1 million contributed to the September 30, 2019 increase in nonperforming loans. AJSB loans totaling $1.5 million and ten commercial business loans to five customers totaling $1.8 million contributed to the September 30, 2019 increase in substandard loans. The movement of various loans out of watch totaling $3.5 million contributed to the September 30, 2019 decrease in watch loans, which was offset by AJSB loans totaling $1.1 million, five commercial business loans totaling $933 thousand and various residential loans totaling $1.1 million. AJSB purchased credit impaired loans totaling $1.6 million and eleven commercial business loans to six customers totaling $2.1million contributed to the September 30, 2019 increase in impaired loans.

 

32

 

 

At September 30, 2019, management is of the opinion that there are no loans, except certain of those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure. Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources.

 

The allowance for loan losses (ALL) is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses, and decreased by charge-offs net of recoveries. A loan is charged-off against the allowance by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. The determination of the amounts of the ALL and provisions for loan losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability as of the reporting date. The appropriateness of the current period provision and the overall adequacy of the ALL are determined through a disciplined and consistently applied quarterly process that reviews the Bancorp’s current credit risk within the loan portfolio and identifies the required allowance for loan losses given the current risk estimates.

 

The Bancorp's provision for loan losses for the nine months ended are

 

summarized below:

               

(Dollars in thousands)

               
                 

Loan Segment

 

(unaudited)
September 30,

2019

   

(unaudited)
September 30,

2018

 

Residential real estate

  $ 142     $ 143  

Home equity

    21       51  

Commercial real estate

    372       210  

Construction and land development

    238       (39 )

Multifamily

    32       (165 )

Farmland

    -       3  

Commercial business

    544       439  

Consumer

    33       316  

Manufactured homes

    (41 )     -  

Government

    (19 )     (8 )

Total

  $ 1,322     $ 950  

 

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

         

(Dollars in thousands)

 

(unaudited)

 
   

As of September 30, 2019

 

Loan Segment

 

Charge-off

   

Recoveries

   

Net Charge-offs

 

Residential real estate

  $ (128 )   $ 23     $ (105 )

Home equity

    -       4       4  

Commercial real estate

    -       -       -  

Construction and land development

    -       -       -  

Multifamily

    -       -       -  

Farmland

    -       -       -  

Commercial business

    (9 )     24       15  

Consumer

    (38 )     14       (24 )

Manufactured homes

    -       -          

Government

    -       -       -  

Total

  $ (175 )   $ 65     $ (110 )

 

The ALL provisions take into consideration management’s current judgments about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio mix and local economic conditions. In determining the provision for loan losses for the current period, management has considered risks associated with the local economy, changes in loan balances and mix, and asset quality.

 

33

 

 

In addition, management considers reserves that are not part of the ALL that have been established from acquisition activity. The Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At September 30, 2019, total purchased credit impaired loans nonaccretable and accretable discount totaled $2.3 million compared to $3.1 million at December 31, 2018. Additionally, the Bancorp has acquired loans where there was no evidence of credit quality deterioration since origination and has marked these loans to their fair values. As part of the fair value of loans receivable, a net fair value discount was established for loans acquired of $4.3 million at September 30, 2019, compared to $1.8 million at December 31, 2018. The increase in the fair value discount and purchase credit impaired discounts, as of September 30, 2019, is the result of the AJSB acquisition. Details on these fair value marks and the additional reserves created can be found in Note 5, Loans Receivable.

 

A deferred cost reserve is maintained for manufactured home loans. This reserve is available for use for manufactured home loan nonperformance and costs associated with nonperformance. As the manufactured home loan segment performs a portion of this reserve is paid as an origination cost.

 

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

 

summarized below:

               

(Dollars in thousands)

               
   

(unaudited)
September 30,

2019

   

December 31,

2018

 
                 

Allowance for loan losses

  $ 9,174     $ 7,962  

Total loans

  $ 904,273     $ 764,400  

Non-performing loans

  $ 9,588     $ 6,916  

ALL-to-total loans

    1.01 %     1.04 %

ALL-to-non-performing loans (coverage ratio)

    95.7 %     115.1 %

 

The balance in the ALL account is considered adequate by management after evaluation of the loan portfolio, past experience, current economic and market conditions, and additional reserves from acquisition accounting as described in the immediately preceding paragraph. While management may periodically allocate portions of the allowance for specific problem loans, the whole allowance is available for any loan charge offs that occur. The allocation of the ALL reflects performance and growth trends within the various loan categories, as well as consideration of the facts and circumstances that affect the repayment of individual loans, and loans which have been pooled as of the evaluation date, with particular attention given to non-performing loans and loans which have been classified as substandard, doubtful or loss. Management has allocated reserves to both performing and non-performing loans based on current information available.

 

At September 30, 2019, foreclosed real estate totaled $1.1 million, which was comprised of nineteen properties, compared to $1.6 million and twenty-four properties at December 31, 2018. Net gains from the sale of foreclosed real estate totaled $83 thousand for the nine months ended September 30, 2019. At the end of September 2019, all of the Bancorp’s foreclosed real estate is located within its primary market area, which has been expanded into the Cook County, Illinois and Chicagoland metropolitan area with the acquisition of First Personal and AJSB.

 

The primary objective of the Bancorp’s investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest bearing balances in other financial institutions, U.S. government securities, federal agency obligations, obligations of state and local municipalities and corporate securities. The securities portfolio, all of which is designated as available-for-sale, totaled $261.1 million at September 30, 2019, compared to $241.8 million at December 31, 2018, an increase of $19.3 million (8.0%). The increase in the securities portfolio during the year is a result of market value adjustments and the AJSB acquisition. At September 30, 2019, the securities portfolio represented 21.4% of interest-earning assets and 19.6% of total assets compared to 23.7% of interest-earning assets and 22.1% of total assets at December 31, 2018.

 

 

34

 

 

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

 

   

September 30,

                 
   

2019

   

December 31,

 

(Dollars in thousands)

 

(unaudited)

   

2018

 
   

Balance

   

% Securities

   

Balance

   

% Securities

 
                                 

Money market fund

  $ 5,771       2.2 %   $ 2,480       1.0 %

U.S. government sponsored entities

    14,513       5.6 %     7,894       3.3 %

Collateralized mortgage obligations and residential mortgage-backed securities

    140,621       53.9 %     135,281       56.0 %

Municipal securities

    98,079       37.6 %     94,064       38.9 %

Collateralized debt obligations

    2,070       0.7 %     2,049       0.8 %

Total securities available-for-sale

  $ 261,054       100.0 %   $ 241,768       100.0 %

 

 

   

September 30,

                         
   

2019

   

December 31,

   

YTD

 

(Dollars in thousands)

 

(unaudited)

   

2018

   

Change

 
   

Balance

   

Balance

    $    

%

 
                                 

Interest bearing deposits in other financial institutions

  $ 42,953     $ 3,116     $ 39,837       1278.5 %

Fed funds sold

    2,150       763       1,387       181.8 %

Certificates of deposit in other financial institutions

    2,170       2,024       146       7.2 %

Federal Home Loan Bank stock

    3,912       3,460       452       13.1 %

 

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

 

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

 

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

 

   

September 30,

                         
   

2019

   

December 31,

   

YTD

         

(Dollars in thousands)

 

(unaudited)

   

2018

   

Change

         
   

Balance

   

Balance

    $    

%

 
                                 

Checking

  $ 399,102     $ 341,677     $ 57,425       16.8 %

Savings

    212,517       160,490       52,027       32.4 %

Money market

    203,573       168,727       34,846       20.7 %

Certificates of deposit

    337,275       258,892       78,383       30.3 %

Total deposits

  $ 1,152,467     $ 929,786     $ 222,681       23.9 %

 

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

 

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

 

   

September 30,

                         
   

2019

   

December 31,

   

YTD

         

(Dollars in thousands)

 

(unaudited)

   

2018

   

Change

         
   

Balance

   

Balance

    $    

%

 
                                 

Repurchase agreements

  $ 14,931     $ 11,628     $ 3,303       28.4 %

Borrowed funds

    16,000       43,000       (27,000 )     -62.8 %

Total borrowed funds

  $ 30,931     $ 54,628     $ (23,697 )     -43.4 %

 

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

 

Liquidity and Capital Resources

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

 

35

 

 

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

 

During the nine months ended September 30, 2019, cash and cash equivalents increased by $54.8 million compared to a $2.9 million increase for the nine months ended September 30, 2018. The primary sources of cash and cash equivalents were the growth of deposits, net cash received from the acquisition of AJSB, sale of loans originated for sale, and proceeds from sales of securities. The primary uses of cash and cash equivalents were the purchase of securities, loan originations, and the repayment of FHLB advances. Cash provided by operating activities totaled $11.4 million for the nine months ended September 30, 2019, compared to cash provided of $2.3 million for the nine month period ended September 30, 2018. Cash provided from operating activities was primarily a result of net income, and sale of loans originated for sale, offset by the origination of loans for sale. Cash outflows from investing activities totaled $8.3 million for the current period, compared to cash outflows of $10.4 million for the nine months ended September 30, 2018. Cash outflows from investing activities for the current nine months were primarily related to purchases of securities available-for-sale and origination of loans, offset against the net cash received from the acquisition of AJSB. Net cash provided from financing activities totaled $51.7 million during the current period compared to net cash provided of $11.0 million for the nine months ended September 30, 2018. The net cash inflows from financing activities were primarily a result of net change in deposits offset against repayment of FHLB advances. On a cash basis, the Bancorp paid dividends on common stock of $3.0 million for the nine months ended September 30, 2019 and $2.5 million for the nine months ended September 30, 2018.

 

At September 30, 2019, outstanding commitments to fund loans totaled $205.1 million. Approximately 55.5% of the commitments were at variable rates. Standby letters of credit, which are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party, totaled $10.4 million at September 30, 2019. Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity.

 

Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the nine months ended September 30, 2019, stockholders' equity increased by $31.5 million (31.1%). During the nine months ended September 30, 2019, stockholders’ equity was primarily increased by net income of $9.8 million, increased unrealized gains on available securities of $7.2 million, and the issuance of 416,478 shares for $17.5 million as part of the acquisition of AJSB. Decreasing stockholders’ equity was the declaration of $3.2 million in cash dividends. On April 24, 2014 the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased under the program during the first nine months of 2019 or 2018. During 2019, 4,625 restricted stock shares vested under the Incentive Plan outlined in Note 10 of the financial statements, of which 1,245 of these shares were withheld in the form of a net surrender to cover the withholding tax obligations of the vesting employees. The repurchase of these surrendered shares is considered outside of the scope of the formal stock repurchase program.

 

The Bancorp is subject to risk-based capital guidelines adopted by the Board of Governors of the Federal Reserve System (the “FRB”), and the Bank is subject to risk-based capital guidelines adopted by the FDIC. As applied to the Bancorp and the Bank, the FRB and FDIC capital requirements are substantially the same. These regulations divide capital into multiple tiers. The first tier (Common Equity Tier 1 Capital) includes common shareholders’ equity, after deductions for various items including goodwill and certain other intangible assets, and after certain other adjustments. Common Equity Tier 1 Capital also includes accumulated other comprehensive income (for organizations that do not make opt-out elections). The next tier (Tier 1 Capital) is comprised of Common Equity Tier 1 Capital plus other qualifying capital instruments such as perpetual noncumulative preferred stock and junior subordinated debt issued to trusts, and other adjustments. The third tier (Tier 2 Capital) includes instruments such as subordinated debt that have a minimum original maturity of at least five years and are subordinated to the claims of depositors and general creditors, total capital minority interest not included in Tier 1 Capital, and limited amounts of the allowance for loan losses, less applicable regulatory adjustments and deductions. The Bancorp and the Bank are required to maintain a Common Equity Tier 1 Capital ratio of 4.5%, a Tier 1 Capital ratio of 6%, and a Total Capital ratio (comprised of Tier 1 Capital plus Tier 2 Capital) of 8%. In addition, the capital regulations provide for a minimum leverage ratio (Tier 1 capital to adjusted average assets) of 4%.

 

36

 

 

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

 

During the nine months ended September 30, 2019, the Bancorp’s and Bank’s regulatory capital ratios continued to be negatively impacted by regulatory requirements regarding collateralized debt obligations. The regulatory requirements state that for collateralized debt obligations that have been downgraded below investment grade by the rating agencies, increased risk based asset weightings are required. The Bancorp currently holds pooled trust preferred securities with a cost basis of $3.4 million. These investments currently have ratings that are below investment grade. As a result, approximately $15.8 million of risk-based assets are generated by the trust preferred securities in the Bancorp’s and Bank’s total risk based capital calculation.

 

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

 

(Dollars in millions)

                                 

Minimum Required To Be

 
                   

Minimum Required For

   

Well Capitalized Under Prompt

 
   

Actual

           

Capital Adequacy Purposes

   

Corrective Action Regulations

 

At September 30, 2019

 

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

Common equity tier 1 capital to risk-weighted assets

  $ 109.2       11.7 %   $ 41.8       4.5 %     N/A       N/A  

Tier 1 capital to risk-weighted assets

  $ 109.2       11.7 %   $ 55.8       6.0 %     N/A       N/A  

Total capital to risk-weighted assets

  $ 118.4       12.7 %   $ 74.4       8.0 %     N/A       N/A  

Tier 1 capital to adjusted average assets

  $ 109.2       8.4 %   $ 52.0       4.0 %     N/A       N/A  

 

(Dollars in millions)

                                 

Minimum Required To Be

 
                   

Minimum Required For

   

Well Capitalized Under Prompt

 
   

Actual

           

Capital Adequacy Purposes

   

Corrective Action Regulations

 

At December 31, 2018

 

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

Common equity tier 1 capital to risk-weighted assets

  $ 92.8       11.6 %   $ 26.1       4.5 %     N/A       N/A  

Tier 1 capital to risk-weighted assets

  $ 92.8       11.6 %   $ 42.2       6.0 %     N/A       N/A  

Total capital to risk-weighted assets

  $ 100.8       12.6 %   $ 64.2       8.0 %     N/A       N/A  

Tier 1 capital to adjusted average assets

  $ 92.8       8.6 %   $ 43.2       4.0 %     N/A       N/A  

 

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

 

(Dollars in millions)

                                 

Minimum Required To Be

 
                   

Minimum Required For

   

Well Capitalized Under Prompt

 
   

Actual

   

Capital Adequacy Purposes

   

Corrective Action Regulations

 

At September 30, 2019

 

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

Common equity tier 1 capital to risk-weighted assets

  $ 105.9       11.4 %   $ 41.9       4.5 %   $ 60.5       6.5 %

Tier 1 capital to risk-weighted assets

  $ 105.9       11.4 %   $ 55.8       6.0 %   $ 74.4       8.0 %

Total capital to risk-weighted assets

  $ 115.1       12.4 %   $ 74.4       8.0 %   $ 93.1       10.0 %

Tier 1 capital to adjusted average assets

  $ 105.9       8.2 %   $ 51.9       4.0 %   $ 64.9       5.0 %

 

(Dollars in millions)

                                 

Minimum Required To Be

 
                   

Minimum Required For

   

Well Capitalized Under Prompt

 
   

Actual

   

Capital Adequacy Purposes

   

Corrective Action Regulations

 

At December 31, 2018

 

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

Common equity tier 1 capital to risk-weighted assets

  $ 89.9       11.2 %   $ 36.2       4.5 %   $ 52.2       6.5 %

Tier 1 capital to risk-weighted assets

  $ 89.9       11.2 %   $ 48.2       6.0 %   $ 64.3       8.0 %

Total capital to risk-weighted assets

  $ 97.9       12.2 %   $ 64.3       8.0 %   $ 80.3       10.0 %

Tier 1 capital to adjusted average assets

  $ 89.9       8.4 %   $ 42.9       4.0 %   $ 53.6       5.0 %

 

37

 

 

The Bancorp’s ability to pay dividends to its shareholders is primarily dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. The aggregate amount of dividends that may be declared by the Bank in 2019, without the need for qualifying for an exemption or prior DFI approval, is $1.5 million plus 2019 net profits. Moreover, the FDIC and the FRB may prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. On August 23rd, 2019, the Board of Directors of the Bancorp declared a third quarter dividend of $0.31 per share. The Bancorp’s third quarter dividend was paid to shareholders on October 3, 2019.

 

Results of Operations - Comparison of the Quarter Ended September 30, 2019 to the Quarter Ended September 30, 2018

 

For the quarter ended September 30, 2019, the Bancorp reported net income of $3.6 million, compared to net income of $1.6 million for the quarter ended September 30, 2018, an increase of $2.0 million (120.2%). For the quarter, the ROA was 1.08%, compared to 0.62% for the quarter ended September 30, 2018. The ROE was 11.05% for the quarter ended September 30, 2019, compared to 6.70% for the quarter ended September 30, 2018. The primary increase in income is driven by the timing of the First Personal acquisition, see discussion of the First Personal acquisition in footnote 3 and related income and expense timing in the discussion below.

     

Net interest income for the quarter ended September 30, 2019 was $10.8 million, an increase of $1.8 million (19.7%), compared to $9.0 million for the quarter ended September 30, 2018. The weighted-average yield on interest-earning assets was 4.40% for the quarter ended September 30, 2019, compared to 4.26% for the quarter ended September 30, 2018. The weighted-average cost of funds for the quarter ended September 30, 2019 was 0.86% compared to 0.56% for the quarter ended September 30, 2018. The impact of the 4.40% return on interest earning assets and the 0.86% cost of funds resulted in an interest rate spread of 3.54% for the current quarter, a decrease from the 3.69% spread for the quarter ended September 30, 2018. The net interest margin on earning assets was 3.56% for the quarter ended September 30, 2019 and 3.72% for the quarter ended September 30, 2018. The net interest margin decrease is the result of continued compression of the yield curve. On a tax equivalent basis, the Bancorp’s net interest margin was 3.63% for the quarter ended September 30, 2019, compared to 3.91% for the quarter ended September 30, 2018. Comparing the net interest margin on a tax equivalent basis more accurately compares the returns on tax-exempt loans and securities to those on taxable interest-earning assets.

 

38

 

 

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

 

Quarter-to-Date

                                               

(Dollars in thousands)

 

Average Balances, Interest, and Rates

 

(unaudited)

 

September 30, 2019

   

September 30, 2018

 
   

Average
Balance

   

Interest

   

Rate (%)

   

Average
Balance

   

Interest

   

Rate (%)

 

ASSETS

                                               

Interest bearing deposits in other financial institution.

  $ 45,686     $ 262       2.29     $ 6,502     $ 38       2.34  

Federal funds sold

    5,141       46       3.58       1,104       11       3.99  

Certificates of deposit in other financial institutions.

    2,076       18       3.47       3,570       25       2.80  

Securities available-for-sale

    258,851       1,612       2.49       236,629       1,674       2.83  

Loans receivable.

    896,096       11,335       5.06       719,654       8,552       4.75  

Federal Home Loan Bank stock

    3,912       47       4.81       3,177       35       4.41  

Total interest earning assets

    1,211,762     $ 13,320       4.40       970,636     $ 10,335       4.26  

Cash and non-interest bearing deposits in other financial institutions

    23,183                       10,348                  

Allowance for loan losses

    (8,887 )                     (7,542 )                

Other noninterest bearing assets

    93,937                       68,849                  

Total assets

  $ 1,319,995                     $ 1,042,291                  
                                                 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                               

Total deposits

  $ 1,146,053     $ 2,353       0.82     $ 883,405     $ 1,018       0.46  

Repurchase agreements

    13,696       64       1.87       12,615       47       1.49  

Borrowed funds

    17,000       108       2.54       38,624       254       2.63  

Total iinterest bearing liabilities

    1,176,749     $ 2,525       0.86       934,644     $ 1,319       0.56  

Other noninterest bearing liabilities

    13,781                       10,626                  

Total liabilities

    1,190,530                       945,270                  

Total stockholders' equity

    129,465                       97,021                  

Total liabilities and stockholders' equity

  $ 1,319,995                     $ 1,042,291                  

 

The increase in interest income for interest bearing deposits in other financial institutions was the result of higher average balances for the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018. The increase in interest income for federal funds sold was primarily the result of higher average balances for the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018. The decrease in interest income for certificates of deposit in other financial institutions was the result of lower average balances for the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018. The decrease in interest income for securities available-for-sale was primarily the result of lower average rates for the quarter ended September 30, 2019, compared to the quarter ended September 30 2018. The increase in interest income for loans receivable was the result of higher average balances and higher weighted average rates during the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018. The increase in the interest expense of total deposits was the result of higher average balances and higher weighted average rates for the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018. The increase in the interest expense for repurchase agreements was the result of higher average balances and weighted average rates for the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018. The decrease in the interest expense for borrowed funds was the result of lower average balances and lower average rates for the quarter ended September 30, 2019, compared to the quarter ended September 30, 2018.

 

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

 

(unaudited)

 

Three Months Ended

       

(Dollars in thousands)

 

September 30,

   

Three Months Ended

 
   

2019

   

2018

   

$ Change

   

% Change

 

Noninterest income:

                               

Fees and service charges

  $ 1,203     $ 991     $ 212       21.4 %

Wealth management operations

    447       414       33       8.0 %

Gain on sale of loans held-for-sale, net

    681       451       230       51.0 %

Gain on sale of securities, net

    102       151       (49 )     -32.5 %

Increase in cash value of bank owned life insurance

    177       130       47       36.2 %

Benefit from bank owned life insurance

    205       -       205       0.0 %

Gain on sale of foreclosed real estate, net

    43       54       (11 )     -20.4 %

Other

    39       32       7       21.9 %

Total noninterest income

  $ 2,897     $ 2,223     $ 674       30.3 %

 

The increase in fees and service charges is the result of the Bancorp’s continued focus on maintaining competitive fees within its market place, as well the acquisition of First Personal and AJSB. The increase in gains on sale of loans is a result of overall increase in loan origination volume. Due to a death benefit recorded during the quarter, the Bancorp will receive a benefit from bank owned life insurance. The increase in cash value of bank owned life insurance is related to the increased bank owned life insurance balances from the AJSB and First Personal acquisitions. The decrease in gains on sale of securities is a result of current market conditions and maintaining current securities cash flows.

 

39

 

 

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

 

(unaudited)

 

Three Months Ended

                 

(Dollars in thousands)

 

September 30,

   

Three Months Ended

 
   

2019

   

2018

   

$ Change

   

% Change

 

Noninterest expense:

                               

Compensation and benefits

  $ 4,932     $ 4,669     $ 263       5.6 %

Occupancy and equipment

    1,231       829       402       48.5 %

Data processing

    806       1,012       (206 )     -20.4 %

Marketing

    170       223       (53 )     -23.8 %

Federal deposit insurance premiums

    18       91       (73 )     -80.2 %

Other

    2,112       2,233       (121 )     -5.4 %

Total noninterest expense

  $ 9,269     $ 9,057     $ 212       2.3 %

 

The increase in compensation and benefits is primarily the result of increased compensation due to the acquisition of AJSB and First Personal. Additionally, increases to compensation and benefits can be attributed to management’s continued focus on talent management and retention. The increase in occupancy and equipment is primarily related to the First Personal and AJSB acquisitions and related assets brought over. The decrease in data processing expense is primarily related to timing of the First Personal acquisition. The decrease in other operating expenses expense is primarily related to timing of the First Personal acquisition. The decrease in federal deposit insurance premiums is the result of application of the Small Bank Assessment Credit that was applied to the second quarter assessment period and credited in the third quarter of 2019. The decrease in marketing expense is primarily related to timing of the First Personal acquisition. The decrease in other noninterest expense is primarily related to timing of the First Personal acquisition. The Bancorp’s efficiency ratio was 67.7% for the quarter ended September 30, 2019, compared to 80.59% for the quarter ended September 30, 2018. The decreased ratio is related primarily to the increase in interest income and timing of the First Personal acquisition. The efficiency ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period. The acquisition of AJSB and First Personal acquisitions are discussed in Note 3 of the financial statements.

 

Income tax expenses for the quarter ended September 30, 2019, totaled $351 thousand, compared to income tax expense of $245 thousand for the quarter ended September 30, 2018, an increase of $106 thousand (43.3%). The combined effective federal and state tax rates for the Bancorp was 8.9% for the quarter ended September 30, 2019, compared to 13.1% for the quarter ended September 30, 2018. The decrease in the effective tax rate is the result of a larger increase to tax preferred income relative to the increase to earnings and the tax benefits resulting from a new market tax credit.

 

 

Results of Operations - Comparison of the Nine Months Ended September 30, 2019 to the Nine Months Ended September 30, 2018

 

For the nine months ended September 30, 2019, the Bancorp reported net income of $9.8 million, compared to net income of $6.7 million for the nine months ended September 30, 2018, an increase of $3.1 million (46.7%). For the nine months ended, the ROA was 1.03%, compared to 0.92% for the nine months ended September 30, 2018. The ROE was 10.54% for the nine months ended September 30, 2019, compared to 9.56% for the nine months ended September 30, 2018.

     

Net interest income for the nine months ended September 30, 2019, was $32.6 million, an increase of $7.9 million (31.8%), compared to $24.7 million for the nine months ended September 30, 2018. The weighted-average yield on interest-earning assets was 4.49% for the nine months ended September 30, 2019, compared to 4.11% for the nine months ended September 30, 2018. The weighted-average cost of funds for the nine months ended September 30, 2019, was 0.78% compared to 0.51% for the nine months ended September 30, 2018. The impact of the 4.49% return on interest earning assets and the 0.78% cost of funds resulted in an interest rate spread of 3.71% for the current nine months, which is an increase from the spread of 3.60% as of September 30, 2018. The net interest margin on earning assets was 3.73% for the nine months ended September 30, 2019, and 3.62% for the nine months ended September 30, 2018. On a tax equivalent basis, the Bancorp’s net interest margin was 3.80% for the nine months ended September 30, 2019, compared to 3.81% for the nine months ended September 30, 2018. Comparing the net interest margin on a tax equivalent basis more accurately compares the returns on tax-exempt loans and securities to those on taxable interest-earning assets.

 

40

 

 

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

 

Year-to-Date

                                               

(Dollars in thousands)

 

Average Balances, Interest, and Rates

 
   

September 30, 2019

   

September 30, 2018

 
   

Average
Balance

   

Interest

   

Rate (%)

   

Average
Balance

   

Interest

   

Rate (%)

 

ASSETS

                                               

Interest bearing deposits in other financial institutions

  $ 33,191     $ 438       1.76     $ 4,203     $ 66       2.09  

Federal funds sold

    4,811       123       3.41       1,055       30       3.79  

Certificates of deposit in other financial institutions

    2,149       50       3.10       2,251       38       2.25  

Securities available-for-sale

    253,004       5,101       2.69       239,020       5,010       2.79  

Loans receivable

    867,941       33,363       5.13       661,300       22,803       4.60  

Federal Home Loan Bank stock

    3,894       136       4.66       3,063       117       5.09  

Total interest earning assets

    1,164,990     $ 39,211       4.49       910,892     $ 28,064       4.11  

Cash and non-interest bearing deposits in other financial institutions

    23,496                       10,351                  

Allowance for loan losses

    (8,449 )                     (7,415 )                

Other noninterest bearing assets

    92,595                       58,729                  

Total asset

  $ 1,272,632                     $ 972,563                  
                                                 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                               

Total deposit

  $ 1,094,631     $ 6,036       0.74     $ 816,880     $ 2,531       0.41  

Repurchase agreements

    12,636       179       1.89       12,374       124       1.34  

Borrowed

    19,935       402       2.69       40,225       682       2.26  

Total interest bearing liabilities

    1,127,202     $ 6,617       0.78       869,479     $ 3,337       0.51  

Other noninterest bearing liabilities

    21,179                       9,676                  

Total liabilities

    1,148,381                       879,155                  

Total stockholders' equity

    124,251                       93,408                  

Total liabilities and stockholders' equity

  $ 1,272,632                     $ 972,563                  

  

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

 

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

 

(unaudited)

 

Nine Months Ended

                 

(Dollars in thousands)

 

September 30,

   

Nine Months Ended

 
   

2019

   

2018

   

$ Change

   

% Change

 

Noninterest income:

                               
                                 

Fees and service charges

  $ 3,608     $ 2,830     $ 778       27.5 %

Wealth management operations

    1,426       1,253       173       13.8 %

Gain on sale of loans held-for-sale, net

    1,323       1,021       302       29.6 %

Gain on sale of securities, net

    754       1,155       (401 )     -34.7 %

Increase in cash value of bank owned life insurance

    519       358       161       45.0 %

Benefit from bank owned life insurance

    205       -       205       0.0 %

Gain on sale of foreclosed real estate, net

    83       154       (71 )     -46.1 %

Other

    217       104       113       108.7 %

Total noninterest income

  $ 8,135     $ 6,875     $ 1,260       18.3 %

 

41

 

 

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

 

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

 

(unaudited)

 

Nine Months Ended

                 

(Dollars in thousands)

 

September 30,

   

Nine Months Ended

 
   

2019

   

2018

   

$ Change

   

% Change

 

Noninterest expense:

                               

Compensation and benefits

  $ 14,333     $ 12,045     $ 2,288       19.0 %

Occupancy and equipment

    3,522       2,524       998       39.5 %

Data processing

    2,753       2,076       677       32.6 %

Marketing

    783       523       260       49.7 %

Federal deposit insurance premiums

    286       250       36       14.4 %

Other

    6,305       5,512       793       14.4 %

Total noninterest expense

  $ 27,982     $ 22,930     $ 5,052       22.0 %

 

The increase in compensation and benefits is primarily the result of increased compensation due to the acquisitions of AJSB and First Personal. Additionally, increases to compensation and benefits can be attributed to management’s continued focus on talent management and retention. The increase in occupancy and equipment is primarily related to the First Personal and AJSB acquisitions and related assets brought over. The increase in data processing expense is primarily the result of increased utilization of systems. The increase in marketing expenses is primarily related to the acquisition of AJSB as well as regular advertising initiatives. The increase in other operating expenses is related to timing of acquisition costs for AJSB and higher third party costs. The Bancorp’s efficiency ratio was 68.7% for the nine-months ended September 30, 2019, compared to 72.6% for the nine-months ended September 30, 2018. The decreased ratio is related primarily to the increase in interest income. The acquisition of AJSB and First Personal acquisitions are discussed in Note 3 of the financial statements.

 

Income tax expenses for the nine months ended September 30, 2019 totaled $1.6 million, compared to income tax expense of $1.0 for the nine months ended September 30, 2018, an increase of $577 thousand (56.3%). The combined effective federal and state tax rates for the Bancorp was 14.0% for the nine months ended September 30, 2019, compared to 13.3% for the quarter ended September 30, 2018. The Bancorp’s higher current period effective tax rate is a result of a larger increase to earnings relative to increased tax preferred income.

 

Critical Accounting Policies

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

 

Forward-Looking Statements

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

 

 

42

 

 

Item

3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

 

Item

4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

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

 

(b) Changes in Internal Control Over Financial Reporting.

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

 

43

 

 

PART II - Other Information

Item 1.

Legal Proceedings

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

 

Item 1A.

Risk Factors

Not Applicable.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On April 24, 2014 the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased during the nine months ended September 30, 2019 under the stock repurchase program.

 

Period

Total Number
of Shares Purchased

 

Average Price
Paid per Share

 

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

 

Maximum Number of Shares That May Yet Be Purchased Under the Program(1)

January 1, 2019 – January 31, 2019

-

 

 N/A 

 

-

 

48,828

February 1, 2019 – February 28, 2019

-

 

 N/A 

 

-

 

48,828

March 1, 2019 – March 31, 2019

-

 

 N/A 

 

-

 

48,828

April 1, 2019 – April 30, 2019

-

 

 N/A 

 

-

 

48,828

May 1, 2019 – May 31, 2019

-

 

 N/A 

 

-

 

48,828

June 1, 2019 – June 30, 2019

-

 

 N/A 

 

-

 

48,828

July 1, 2019 – July 31, 2019

-

 

 N/A 

 

-

 

48,828

August 1, 2019 – August 31, 2019

-

 

 N/A 

 

-

 

48,828

September 1, 2019 – September 30, 2019

-

 

N/A

 

-

 

48,828

(1)

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

 

Item 3.

Defaults Upon Senior Securities

There

are no matters reportable under this item.

 

Item 4.

Mine Safety Disclosures

Not

Applicable

 

Item 5.

Other Information 

 

On October 28, 2019, the Board of Directors of the Bancorp adopted the NorthWest Indiana Bancorp Executive Change in Control Severance Plan (the “Severance Plan”).  The purpose of the Severance Plan is to attract and retain talent and to assure the present and future continuity, objectivity, and dedication of management in the event of any change in control of the Bancorp or the Bank. The participants under the Severance Plan (each, a “Participant”) include any full-time employee of the Bancorp who is a President, Chief Financial Officer, Chief Operating Officer, or Executive Vice President, and any other full-time employee of the Bancorp or the Bank who is recommended by the Chief Executive Officer of the Bancorp to the Compensation and Benefits Committee of the Bancorp’s Board of Directors to be a key employee who should be eligible to participate in the Severance Plan, and who, in each case, has at least three years of continuous employment and as of the date of the occurrence of a change in control does not have a separate written agreement with the Bancorp or the Bank providing for the payment of severance or other compensation following a change in control.

 

The Bancorp will provide a Participant with the payments and benefits set forth in the Severance Plan if (i) his or her employment is terminated by the Bancorp or the Bank (or any successor) without Cause (as such term is defined in the Severance Plan) during the period beginning on the first occurrence of a Change in Control (as such term is defined in the Severance Plan) and lasting through the earlier of the Participant’s death, or the 18-month anniversary of the occurrence of the Change in Control (such period, the “Covered Period”); or (ii) both (A) an event of Good Reason (as such term is defined in the Severance Plan) occurs during the Covered Period, and (B) the Participant terminates his or her employment with the Bancorp or the Bank (or any successor) for such event of Good Reason within 60 calendar days following the date the Participant provides notice of Good Reason to the Bancorp (or successor) and after the Bancorp (or successor) has had an opportunity to cure such Good Reason.

 

44

 

 

The payments and benefits under the Severance Plan will include: (i) a cash severance payment equal to one times the sum of (A) the Participant’s base salary in effect on the date of termination, or, if greater, in effect on the date of the change in control, plus (B) the greater of the actual annual cash bonus received by the Participant for the calendar year immediately preceding the calendar year in which termination occurs or the annual cash bonus that the Participant would have earned for the entire calendar year in which the termination occurs, at target level; (ii) a lump sum amount equal to 100% of the aggregate annual COBRA premium amounts (based on COBRA rates then in effect) for the medical and dental coverage that was being provided to the Participant and his or her spouse and eligible dependents as of the date of termination; and (iii) a lump sum amount equal to 100% of the annual premiums paid by the Bancorp in respect of the life insurance coverage provided for an active employee similarly situated to the Participant (based upon coverage and rates in effect on the date of the Participant’s termination). The benefits are generally to be paid in a single lump sum, in cash, on the later of the 25th business day following the date of termination, or the fifth business day following the date the release required under the Severance Plan to be executed by the Participant in favor of the Bancorp and the Bank (or successor) becomes effective and irrevocable.

 

The foregoing description of the Severance Plan does not purport to be complete and is qualified in its entirety by reference to the complete copy of the Severance Plan attached hereto as Exhibit 10.1.

 

Item 6.

Exhibits

 

Exhibit 

Number

  Description
  10.1   NorthWest Indiana Bancorp Executive Change in Control Severance Plan.
  31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
  31.2   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
  32.1   Section 1350 Certifications.
  101   The following materials from the Bancorp’s Form 10-Q for the quarterly period ended September 30, 2019, formatted in an XBRL Interactive Data File: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Changes in Stockholders’ Equity; (iv) Consolidated Statement of Comprehensive Income; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements, with detailed tagging of notes and financial statement schedules.

 

45

 

 

SIGNATURES

 

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

 

 

    NORTHWEST INDIANA BANCORP  

 

 

 

Date: October 29, 2019    /s/ Benjamin J. Bochnowski  
    Benjamin J. Bochnowski  
    President and Chief Executive Officer  

 

 

 

Date: October 29, 2019    /s/ Robert T. Lowry  
    Robert T. Lowry  
    Executive Vice President, Chief Financial  
    Officer and Treasurer  

 

46