Finward Bancorp - Quarter Report: 2021 March (Form 10-Q)

nwin20210331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

	For the quarterly period ended March 31, 2021 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 ☒ No ☐

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

Yes ☒ No ☐

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

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒

Smaller Reporting Company ☒ Emerging growth company ☐

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

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

There were 3,477,416 shares of the registrant’s Common Stock, without par value, outstanding at May 7, 2021.

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	26

Item 3. Quantitative and Qualitative Disclosures about Market Risk	41

Item 4. Controls and Procedures	41

PART II. Other Information	42

SIGNATURES	43

EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications
101 XBRL Interactive Data File

NorthWest Indiana Bancorp
Consolidated Balance Sheets

	March 31,
(Dollars in thousands)	2021			December 31,
	(unaudited)			2020
ASSETS

Cash and non-interest bearing deposits in other financial institutions	$	14,559		$	14,014
Interest bearing deposits in other financial institutions		52,854			5,908
Federal funds sold		596			-

Total cash and cash equivalents		68,009			19,922

Certificates of deposit in other financial institutions		1,474			1,897

Securities available-for-sale		422,868			410,669
Loans held-for-sale		4,256			11,329
Loans receivable		974,054			966,578
Less: allowance for loan losses		(13,047	)		(12,458	)
Net loans receivable		961,007			954,120
Federal Home Loan Bank stock		3,918			3,918
Accrued interest receivable		4,997			4,713
Premises and equipment		30,563			30,785
Foreclosed real estate		491			538
Cash value of bank owned life insurance		30,894			30,725
Goodwill		11,109			11,109
Other intangible assets		3,871			4,119
Other assets		13,260			13,681

Total assets	$	1,556,717		$	1,497,525

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Non-interest bearing	$	286,969		$	241,620
Interest bearing		1,079,725			1,060,719
Total		1,366,694			1,302,339
Repurchase agreements		15,917			13,711
Borrowed funds		-			6,149
Accrued expenses and other liabilities		23,967			22,404

Total liabilities		1,406,578			1,344,603

Commitments and contingent liabilties

Stockholders' Equity:
Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding		-			-
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: March 31, 2021 - 3,478,921		-			-
December 31, 2020 - 3,462,916
Additional paid-in capital		30,065			29,987
Accumulated other comprehensive income		3,980			10,441
Retained earnings		116,094			112,494

Total stockholders' equity		150,139			152,922

Total liabilities and stockholders' equity	$	1,556,717		$	1,497,525

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp
Consolidated Statements of Income
(unaudited)

	Three Months Ended
(Dollars in thousands)	March 31,
(unaudited)	2021			2020
Interest income:
Loans receivable
Real estate loans	$	8,239		$	9,357
Commercial loans		2,240			1,485
Consumer loans		267			187
Total loan interest		10,746			11,029
Securities		1,961			1,705
Other interest earning assets		20			135

Total interest income		12,727			12,869

Interest expense:
Deposits		651			2,064
Repurchase agreements		10			40
Borrowed funds		20			94

Total interest expense		681			2,198

Net interest income		12,046			10,671
Provision for loan losses		578			514

Net interest income after provision for loan losses		11,468			10,157

Noninterest income:
Gain on sale of loans held-for-sale, net	$	2,049		$	1,153
Fees and service charges		1,066			1,049
Wealth management operations		607			554
Gain on sale of securities, net		417			510
Increase in cash value of bank owned life insurance		169			169
(Loss) gain on sale of foreclosed real estate, net		(9	)		60
Other		14			51
Total noninterest income	$	4,313		$	3,546

Noninterest expense:
Compensation and benefits	$	5,530		$	5,217
Occupancy and equipment		1,372			1,409
Data processing		528			556
Marketing		199			208
Federal deposit insurance premiums		180			196
Other		2,529			2,413
Total noninterest expense	$	10,338		$	9,999

Income before income tax expenses		5,443			3,704
Income tax expenses		764			512
Net income	$	4,679		$	3,192

Earnings per common share:
Basic	$	1.35		$	0.92
Diluted	$	1.35		$	0.92

Dividends declared per common share	$	0.31		$	0.31

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp
Consolidated Statements of Comprehensive Income
(unaudited)

	Three Months Ended
(Dollars in thousands)	March 31,
	2021			2020

Net income	$	4,679		$	3,192

Net change in net unrealized gains and losses on securities available-for-sale:
Unrealized (losses)/gains arising during the period		(7,761	)		6,112
Less: reclassification adjustment for gains included in net income		(417	)		(510	)
Net securities (loss)/gain during the period		(8,178	)		5,602
Tax effect		1,717			(1,177	)
Net of tax amount		(6,461	)		4,425

Other comprehensive (loss)/income, net of tax		(6,461	)		4,425

Comprehensive (loss)/income, net of tax	$	(1,782	)	$	7,617

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

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

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

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

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

Balance at January 1, 2021	$	-	$	29,987		$	10,441		$	112,494		$	152,922

Comprehensive income:
Net income		-		-			-			4,679			4,679
Net unrealized loss on securities available-for- sale, net of reclassification and tax effects		-		-			(6,461	)		-			(6,461	)
Comprehensive income													(1,782	)
Net surrender value of 1,711 restricted stock awards				(68	)								(68	)
Stock-based compensation expense		-		146			-			-			146
Cash dividends, $0.31 per share		-		-			-			(1,079	)		(1,079	)

Balance at March 31, 2021	$	-	$	30,065		$	3,980		$	116,094		$	150,139

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp
Consolidated Statements of Cash Flows
(unaudited)

	Three Months Ended
(Dollars in thousands)	March 31,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,679		$	3,192
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Origination of loans for sale		(49,083	)		(24,870	)
Sale of loans originated for sale		57,876			26,197
Depreciation and amortization, net of accretion		990			1,039
Amortization of mortgage servicing rights		53			12
Stock based compensation expense		146			94
Net surrender value of restricted stock awards		(68	)		(85	)
Gain on sale of securities, net		(417	)		(510	)
Gain on sale of loans held-for-sale, net		(2,026	)		(635	)
Gain on derivatives		(23	)		(518	)
Loss/(gain) on sale of foreclosed real estate, net		9			(60	)
Provision for loan losses		578			514
Net change in:
Interest receivable		(284	)		(85	)
Other assets		2,662			(637	)
Cash value of bank owned life insurance		(169	)		(169	)
Accrued expenses and other liabilities		1,558			5,885
Total adjustments		11,802			6,172
Net cash - operating activities		16,481			9,364

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposits in other financial institutions		423			429
Proceeds from maturities and pay downs of securities available-for-sale		27,287			16,671
Proceeds from sales of securities available-for-sale		6,904			17,886
Purchase of securities available-for-sale		(54,540	)		(44,972	)
Net change in loans receivable		(4,486	)		(12,118	)
Purchase of loans receivable		(2,989	)		-
Purchase of premises and equipment, net		(379	)		(200	)
Proceeds from sale of foreclosed real estate, net		48			134
Net cash - investing activities		(27,732	)		(22,170	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		64,355			7,272
Repayment of FHLB advances		(6,000	)		-
Change in other borrowed funds		2,057			1,492
Dividends paid		(1,074	)		(1,070	)
Net cash - financing activities		59,338			7,694
Net change in cash and cash equivalents		48,087			(5,112	)
Cash and cash equivalents at beginning of period		19,922			47,258
Cash and cash equivalents at end of period	$	68,009		$	42,146

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	690		$	2,283
Noncash activities:
Transfers from loans to foreclosed real estate	$	-		$	23
Dividends declared not paid	$	1,079		$	1,074

See accompanying notes to consolidated financial statements.

NorthWest Indiana Bancorp

Notes to Consolidated Financial Statements

(unaudited)

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of NorthWest Indiana Bancorp (the “Bancorp” or “NWIN”), its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary) and Peoples Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC, NWIN Funding, Incorporated, and Columbia Development Company, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are primarily dependent upon the earnings of the Bank. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by U.S. generally accepted accounting principles for complete presentation of consolidated financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of the Bancorp as of March 31, 2021, and December 31, 2020, and the consolidated statements of income, comprehensive income, changes in stockholders’ equity, and consolidated statements of cash flows for the three months ended March 31, 2021, and 2020. The income reported for the three month period ended March 31, 2021, is not necessarily indicative of the results to be expected for the full year.

The Notes to the Consolidated Financial Statements appearing in NorthWest Indiana Bancorp’s Annual Report on Form 10-K (2020 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. The Consolidated Balance Sheet at December 31, 2020 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on net income.

Note 2 - Use of Estimates

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

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

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

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

In addition, COVID-19 could cause a further and sustained decline in the Bancorp’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform goodwill and intangible asset impairment tests and result in an impairment charge being recorded for that period. In the event that the Bancorp concludes that all or a portion of its goodwill or intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. Details on goodwill impairment testing can be found in Note 6, Intangibles and Acquisition Related Accounting.

Note 3 - 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
March 31, 2021
U.S. government sponsored entities		12,881		-		(264	)		12,617
U.S. treasury securities		402		-		-			402
Collateralized mortgage obligations and residential mortgage-backed securities		188,823		2,205		(2,906	)		188,122
Municipal securities		213,556		8,212		(985	)		220,783
Collateralized debt obligations		2,177		-		(1,233	)		944
Total securities available-for-sale	$	417,839	$	10,417	$	(5,388	)	$	422,868

	(Dollars in thousands)
			Gross		Gross			Estimated
	Cost		Unrealized		Unrealized			Fair
	Basis		Gains		Losses			Value
December 31, 2020
Money market fund	$	52,941	$	-	$	-		$	52,941
U.S. government sponsored entities		7,881		3		(24	)		7,860
Collateralized mortgage obligations and residential mortgage-backed securities		151,355		3,417		(36	)		154,736
Municipal securities		183,103		11,102		(2	)		194,203
Collateralized debt obligations		2,182		-		(1,253	)		929
Total securities available-for-sale	$	397,462	$	14,522	$	(1,315	)	$	410,669

The estimated fair value of available-for-sale debt securities at March 31, 2021, 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
March 31, 2021	Value		Yield (%)
Due in one year or less	$	202		1.13
Due from one to five years		3,787		4.44
Due from five to ten years		29,327		2.48
Due over ten years		201,430		3.18
Collateralized mortgage obligations and residential mortgage-backed securities		188,122		1.80
Total	$	422,868		2.53

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

	(Dollars in thousands)
	March 31,		March 31,
	2021		2020

Proceeds	$	6,904	$	17,886
Gross gains		417		513
Gross losses		-		(3	)

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, 2020	$	10,441
Current period change		(6,461	)
Ending balance, March 31, 2021	$	3,980

Securities with market values of approximately $47.7 million and $52.4 million were pledged as of March 31, 2021, and December 31, 2020, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.

Securities with gross unrealized losses at March 31, 2021, and December 31, 2020, 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
March 31, 2021
U.S. government sponsored entities	$	12,617	$	(264	)	$	-	$	-		$	12,617	$	(264	)
Collateralized mortgage obligations and residential mortgage-backed securities		112,550		(2,906	)		-		-			112,550		(2,906	)
Municipal securities		56,360		(985	)		-		-			56,360		(985	)
Collateralized debt obligations		-		-			944		(1,233	)		944		(1,233	)
Total temporarily impaired	$	181,527	$	(4,155	)	$	944	$	(1,233	)	$	182,471	$	(5,388	)
Number of securities				126					2					128

	(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, 2020
U.S. government sponsored entities	$	4,975	$	(24	)	$	-	$	-		$	4,975	$	(24	)
Collateralized mortgage obligations and residential mortgage-backed securities		11,953		(36	)		-		-			11,953		(36	)
Municipal securities		1,864		(2	)		-		-			1,864		(2	)
Collateralized debt obligations		-		-			929		(1,253	)		929		(1,253	)
Total temporarily impaired	$	18,792	$	(62	)	$	929	$	(1,253	)	$	19,721	$	(1,315	)
Number of securities				8					2					10

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

Note 4 - Loans Receivable

The Bancorp’s current lending programs are described below:

Residential Real Estate. The primary lending activity of the Bancorp has been the granting of conventional mortgage loans to enable borrowers to purchase existing homes, refinance existing homes, or construct new homes. Conventional loans are made up to a maximum of 97% of the purchase price or appraised value, whichever is less. For loans made in excess of 80% of value, private mortgage insurance is generally required in an amount sufficient to reduce the Bancorp’s exposure to 80% or less of the appraised value of the property. Loans insured by private mortgage insurance companies can be made for up to 97% of value. Loans closed with over 20% of equity do not require private mortgage insurance because of the borrower’s level of equity investment.

Fixed rate loans currently originated generally conform to Freddie Mac guidelines for loans purchased under the one‑to‑four family program. Loan interest rates are determined based on secondary market yield requirements and local market conditions. Fixed rate mortgage loans with contractual maturities generally exceeding fifteen years and greater may be sold and/or classified as held for sale to control exposure to interest rate risk.

The 15 year mortgage loan program has gained wide acceptance in the Bancorp’s primary market area. As a result of the shortened maturity of these loans, this product has been priced below the comparable 20 and 30 year loan offerings. Mortgage applicants for 15 year loans tend to have a larger than normal down payment; this, coupled with the larger principal and interest payment amount, has caused the 15 year mortgage loan portfolio to consist, to a significant extent, of second time home buyers whose underwriting qualifications tend to be above average.

The Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice annually or are “Mini-Fixed.” The “Mini‑Fixed” mortgage reprices annually after a one, three, five, seven or ten year period. The ability of the Bancorp to successfully market ARM’s depends upon loan demand, prevailing interest rates, volatility of interest rates, public acceptance of such loans and terms offered by competitors.

Home Equity Line of Credit. The Bancorp offers a fixed and variable rate revolving line of credit secured by the equity in the borrower’s home. Both products offer an interest only option where the borrower pays interest only on the outstanding balance each month. Equity lines will typically require a second mortgage appraisal and a second mortgage lender’s title insurance policy. Loans are generally made up to a maximum of 89% of the appraised value of the property less any outstanding liens.

Fixed term home improvement and equity loans are made up to a maximum of 85% of the appraised value of the improved property, less any outstanding liens. These loans are offered on both a fixed and variable rate basis with a maximum term of 240 months. All home equity loans are made on a direct basis to borrowers.

Commercial Real Estate and Multifamily Loans. Commercial real estate loans are typically made to a maximum of 80% of the appraised value. Such loans are generally made on an adjustable rate basis. These loans are typically made for terms of 15 to 20 years. Loans with an amortizing term exceeding 15 years normally have a balloon feature calling for a full repayment within seven to ten years from the date of the loan. The balloon feature affords the Bancorp the opportunity to restructure the loan if economic conditions so warrant. Commercial real estate loans include loans secured by commercial rental units, apartments, condominium developments, small shopping centers, owner occupied commercial/industrial properties, hospitality units and other retail and commercial developments.

While commercial real estate lending is generally considered to involve a higher degree of risk than single‑family residential lending due to the concentration of principal in a limited number of loans and the effects of general economic conditions on real estate developers and managers, the Bancorp has endeavored to reduce this risk in several ways. In originating commercial real estate loans, the Bancorp considers the feasibility of the project, the financial strength of the borrowers and lessees, the managerial ability of the borrowers, the location of the project and the economic environment. Management evaluates the debt coverage ratio and analyzes the reliability of cash flows, as well as the quality of earnings. All such loans are made in accordance with well-defined underwriting standards and are generally supported by personal guarantees, which represent a secondary source of repayment.

Loans for the construction of commercial properties are generally located within an area permitting physical inspection and regular review of business records. Projects financed outside of the Bancorp’s primary lending area generally involve borrowers and guarantors who are or were previous customers of the Bancorp or projects that are underwritten according to the Bank’s underwriting standards.

Construction and Land Development. Construction loans on residential properties are made primarily to individuals and contractors who are under contract with individual purchasers. These loans are personally guaranteed by the borrower. The maximum loan-to-value ratio is 89% of either the current appraised value or the cost of construction, whichever is less. Residential construction loans are typically made for periods of six months to one year.

Loans are also made for the construction of commercial properties. All such loans are made in accordance with well-defined underwriting standards. Generally if the loans are not owner occupied, these types of loans require proof of intent to lease and a confirmed end-loan takeout. In general, loans made do not exceed 80% of the appraised value of the property. Commercial construction loans are typically made for periods not to exceed two years or date of occupancy, whichever is less.

Commercial Business and Farmland Loans. Although the Bancorp’s priority in extending various types of commercial business loans changes from time to time, the basic considerations in determining the makeup of the commercial business loan portfolio are economic factors, regulatory requirements and money market conditions. The Bancorp seeks commercial loan relationships from the local business community and from its present customers. Conservative lending policies based upon sound credit analysis governs the extension of commercial credit. The following loans, although not inclusive, are considered preferable for the Bancorp’s commercial loan portfolio: loans collateralized by liquid assets; loans secured by general use machinery and equipment; secured short‑term working capital loans to established businesses secured by business assets; short‑term loans with established sources of repayment and secured by sufficient equity and real estate; and unsecured loans to customers whose character and capacity to repay are firmly established.

Consumer Loans. The Bancorp offers consumer loans to individuals for personal, household or family purposes. Consumer loans are either secured by adequate collateral, or unsecured. Unsecured loans are based on the strength of the applicant’s financial condition. All borrowers must meet current underwriting standards. The consumer loan program includes both fixed and variable rate products.

Manufactured Homes. The Bancorp purchases fixed rate closed loans from a third party that are subject to Bancorp’s underwriting requirements and secured by manufactured homes. The maturity date on these loans can range up to 25 years. In addition, these loans have partial recourse secured by a reserve account held at the Bancorp.

Government Loans. The Bancorp is permitted to purchase non-rated municipal securities, tax anticipation notes and warrants within the local market area.

(Dollars in thousands)
	March 31, 2021		December 31, 2020
Loans secured by real estate:
Residential real estate	$	276,728	$	286,048
Home equity		36,222		39,233
Commercial real estate		304,851		298,257
Construction and land development		97,400		93,562
Multifamily		51,933		50,571
Farmland		315		215
Total loans secured by real estate		767,449		767,886
Commercial business		163,896		158,140
Consumer		438		1,025
Manufactured homes		26,260		24,232
Government		9,372		10,142
Subtotal		967,415		961,425
Add (less):
Net deferred loan origination fees and purchase premiums		5,673		5,303
Undisbursed loan funds and clearings		966		(150	)
Loans receivable	$	974,054	$	966,578

(Unaudited)	Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance
(Dollars in thousands)
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended March 31, 2021:

Allowance for loan losses:
Residential real estate	$	2,211	$	(4	)	$	10	$	(41	)	$	2,176
Home equity		276		(1	)		-		34			309
Commercial real estate		5,406		-			-		320			5,726
Construction and land development		1,405		-			-		182			1,587
Multifamily		626		-			-		54			680
Farmland		-		-			-		-			-
Commercial business		2,508		-			8		36			2,552
Consumer		26		(6	)		4		(7	)		17
Manufactured homes		-		-			-		-			-
Government		-		-			-		-			-
Total	$	12,458	$	(11	)	$	22	$	578		$	13,047

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended March 31, 2020:

Allowance for loan losses:
Residential real estate	$	1,812	$	-		$	6	$	10		$	1,828
Home equity		223		-			-		23			246
Commercial real estate		3,773		-			-		(80	)		3,693
Construction and land development		1,098		-			-		125			1,223
Multifamily		529		-			-		33			562
Farmland		-		-			-		-			-
Commercial business		1,504		-			1		396			1,901
Consumer		43		(12	)		3		8			42
Manufactured homes		-		-			-		-			-
Government		17		-			-		(1	)		16
Total	$	8,999	$	(12	)	$	10	$	514		$	9,511

A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased. This reserve is available for use for manufactured home loan nonperformance and costs associated with nonperformance. If the segment performs in line with expectation, the deferred cost reserve is paid as a premium to the third party originator of the loan. The unamortized balance of the deferred cost reserve totaled $4.1 million and $3.8 million as of March 31, 2021 and December 31, 2020, respectively, and is included in net deferred loan origination costs and purchase premiums.

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 March 31, 2021:

Residential real estate	$	92	$	2,084	$	277,465	$	737	$	1,165	$	275,563
Home equity		5		304		36,273		220		132		35,921
Commercial real estate		1,269		4,457		304,851		6,952		151		297,748
Construction and land development		-		1,587		97,400		-		-		97,400
Multifamily		-		680		51,933		90		609		51,234
Farmland		-		-		315		-		-		315
Commercial business		518		2,034		162,375		999		1,163		160,213
Consumer		-		17		438		-		-		438
Manufactured homes		-		-		33,632		-		-		33,632
Government		-		-		9,372		-		-		9,372
Total	$	1,884	$	11,163	$	974,054	$	8,998	$	3,220	$	961,836


The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2020:

Residential real estate	$	173	$	2,038	$	285,651	$	868	$	1,297	$	283,486
Home equity		1		275		39,286		216		137		38,933
Commercial real estate		1,089		4,317		298,257		6,190		151		291,916
Construction and land development		-		1,405		93,562		-		-		93,562
Multifamily		-		626		50,571		95		621		49,855
Farmland		-		-		215		-		-		215
Commercial business		512		1,996		156,965		1,086		1,160		154,719
Consumer		-		26		1,025		-		-		1,025
Manufactured homes		-		-		30,904		-		-		30,904
Government		-		-		10,142		-		-		10,142
Total	$	1,775	$	10,683	$	966,578	$	8,455	$	3,366	$	954,757

The Bancorp's credit quality indicators are summarized below at March 31, 2021 and December 31, 2020:

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
	March 31, 2021
(Dollars in thousands)	1155		6		7		8

Loan Segment	Pass		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	229,246	$	38,206	$	5,344	$	4,669	$	277,465
Home equity		34,123		908		755		487		36,273
Commercial real estate		228,938		52,578		14,456		8,879		304,851
Construction and land development		79,839		13,939		3,622		-		97,400
Multifamily		45,035		5,013		1,390		495		51,933
Farmland		104		211		-		-		315
Commercial business		140,656		19,487		1,260		972		162,375
Consumer		438		-		-		-		438
Manufactured homes		32,821		750		61		-		33,632
Government		9,372		-		-		-		9,372
Total	$	800,572	$	131,092	$	26,888	$	15,502	$	974,054

	December 31, 2020
(Dollars in thousands)	1155		6		7		8

Loan Segment	Pass		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	233,920	$	41,805	$	3,539	$	6,387	$	285,651
Home equity		37,097		933		761		495		39,286
Commercial real estate		222,892		55,202		11,983		8,180		298,257
Construction and land development		77,855		12,055		3,652		-		93,562
Multifamily		43,594		5,065		1,408		504		50,571
Farmland		-		215		-		-		215
Commercial business		134,496		20,067		1,341		1,061		156,965
Consumer		1,025		-		-		-		1,025
Manufactured homes		30,173		731		-		-		30,904
Government		10,142		-		-		-		10,142
Total	$	791,194	$	136,073	$	22,684	$	16,627	$	966,578

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 – Superior Quality

Loans in this category are substantially risk free. Loans fully collateralized by a Bank certificate of deposit or Bank deposits with a hold are substantially risk free.

2 – Excellent Quality

The borrower generates excellent and consistent cash flow for debt coverage, excellent average credit scores, excellent liquidity and net worth and are reputable operators with over 15 years experience. Current and debt to tangible net worth ratios are excellent. Loan to value is substantially below policy and collateral condition is excellent.

3 – Great Quality

The borrower generates more than sufficient cash flow to fund debt service and cash flow is improving. Average credit scores are very strong. Operators are reputable with significant years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are very strong. Loan to value is significantly below policy and collateral condition is significantly above average.

4 – Above Average Quality

The borrower generates more than sufficient cash flow to fund debt service but cash flow trends may be stable or slightly declining. Average credit scores are strong. The borrower is a reputable operator with many years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are strong. Loan to value is below policy and collateral condition is above average.

5 – Average Quality

Borrowers are considered creditworthy and can repay the debt in the normal course of business, however, cash flow trends may be inconsistent or fluctuating. Average credit scores are satisfactory and years of experience is acceptable. Liquidity and net worth are satisfactory. Current and debt to tangible net worth ratios are average. Loan to value is slightly below policy and the collateral condition is slightly above average.

6 – Pass

Borrowers are considered credit worthy but financial condition may show signs of weakness due to internal or external factors. Cash flow trends may be declining annually. Average credit scores may be low but remain acceptable. Borrower has limited years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are below average. Loan to value is nearing policy limits and collateral condition is average.

7 – Special Mention

A special mention asset has identified weaknesses that deserve Management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. There is still adequate protection by the current sound worth and paying capacity of the obligor or of the collateral pledged. The Special Mention rating is viewed as transitional and will be monitored closely.

Loans in this category may exhibit some of the following risk factors. Cash flow trends may be consistently declining or may be questionable. Debt coverage ratios may be at or near 1:1. Average credit scores may be very weak or the borrower may have minimal years of experience. Liquidity, net worth, current and debt to tangible net worth ratios may be very weak. Loan to value may be at policy limits or may exceed policy limits. Collateral condition may be below average.

8 – Substandard

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

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

During the three months ending March 31, 2021, two residential real estate loans to one customer totaling $150 thousand were modified to included deferral of principal resulting troubled debt restructuring classification. One residential real estate trouble debt restructuring loan totaling $39 thousand had subsequently defaulted during the three months ending March 31, 2021. During the three months ending March 31, 2020, one commercial real estate loan totaling $149 thousand and one residential loan totaling $53 thousand was renewed as a troubled debt restructuring. One commercial business trouble debt restructuring loan totaling $312 thousand has subsequently defaulted during the three months ending March 31, 2020. All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

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

							For the three months ended
	As of March 31, 2021						March 31, 2021
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,739	$	3,072	$	-	$	1,817	$	22
Home equity		329		341		-		341		4
Commercial real estate		1,170		1,753		-		1,174		12
Construction and land development		-		-		-		-		-
Multifamily		699		781		-		708		5
Farmland		-		-		-		-		-
Commercial business		1,437		1,436		-		1,467		18
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

With an allowance recorded:
Residential real estate	$	163	$	163	$	92	$	217	$	5
Home equity		23		23		5		12		-
Commercial real estate		5,933		5,933		1,269		5,549		50
Construction and land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Farmland		-		-		-		-		-
Commercial business		725		725		518		737		11
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

Total:
Residential real estate	$	1,902	$	3,235	$	92	$	2,034	$	27
Home equity	$	352	$	364	$	5	$	353	$	4
Commercial real estate	$	7,103	$	7,686	$	1,269	$	6,723	$	62
Construction & land development	$	-	$	-	$	-	$	-	$	-
Multifamily	$	699	$	781	$	-	$	708	$	5
Farmland	$	-	$	-	$	-	$	-	$	-
Commercial business	$	2,162	$	2,161	$	518	$	2,204	$	29
Consumer	$	-	$	-	$	-	$	-	$	-
Manufactured homes	$	-	$	-	$	-	$	-	$	-
Government	$	-	$	-	$	-	$	-	$	-

							For the three months ended
	As of December 31, 2020						March 31, 2020
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,895	$	3,228	$	-	$	2,122	$	24
Home equity		352		363		-		390		5
Commercial real estate		1,177		1,761		-		1,520		13
Construction & land development		-		-		-		-		-
Multifamily		716		798		-		792		7
Farmland		-		-		-		-		-
Commercial business		1,497		1,514		-		1,650		17
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

With an allowance recorded:
Residential real estate	$	270	$	314	$	173	$	68	$	1
Home equity		1		9		1		8		-
Commercial real estate		5,164		5,164		1,089		18		-
Construction & land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Farmland		-		-		-		-		-
Commercial business		749		749		512		618		3
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

Total:
Residential real estate	$	2,165	$	3,542	$	173	$	2,190	$	25
Home equity	$	353	$	372	$	1	$	398	$	5
Commercial real estate	$	6,341	$	6,925	$	1,089	$	1,538	$	13
Construction & land development	$	-	$	-	$	-	$	-	$	-
Multifamily	$	716	$	798	$	-	$	792	$	7
Farmland	$	-	$	-	$	-	$	-	$	-
Commercial business	$	2,246	$	2,263	$	512	$	2,268	$	20
Consumer	$	-	$	-	$	-	$	-	$	-
Manufactured homes	$	-	$	-	$	-	$	-	$	-
Government	$	-	$	-	$	-	$	-	$	-

The Bancorp's age analysis of past due loans is summarized below:
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investments Greater than 90 Days Past Due and Accruing
March 31, 2021
Residential real estate	$	1,610	$	926	$	3,161	$	5,697	$	271,768	$	277,465	$	300
Home equity		266		19		384		669		35,604		36,273		-
Commercial real estate		1,585		453		497		2,535		302,316		304,851		257
Construction and land development		-		-		42		42		97,358		97,400		42
Multifamily		259		90		145		494		51,439		51,933		-
Farmland		-		-		-		-		315		315		-
Commercial business		652		-		282		934		161,441		162,375		-
Consumer		2		-		-		2		436		438		-
Manufactured homes		429		65		-		494		33,138		33,632		-
Government		-		-		-		-		9,372		9,372		-
Total	$	4,803	$	1,553	$	4,511	$	10,867	$	963,187	$	974,054	$	599

December 31, 2020
Residential real estate	$	2,797	$	1,119	$	4,875	$	8,791	$	276,860	$	285,651	$	80
Home equity		616		323		416		1,355		37,931		39,286		29
Commercial real estate		1,172		237		680		2,089		296,168		298,257		437
Construction and land development		471		-		20		491		93,071		93,562		20
Multifamily		94		266		150		510		50,061		50,571		-
Farmland		-		-		-		-		215		215		-
Commercial business		845		96		269		1,210		155,755		156,965		-
Consumer		2		-		-		2		1,023		1,025		-
Manufactured homes		303		173		-		476		30,428		30,904		-
Government		380		-		-		380		9,762		10,142		-
Total	$	6,680	$	2,214	$	6,410	$	15,304	$	951,274	$	966,578	$	566

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

(Dollars in thousands)
	March 31, 2021		December 31, 2020
Residential real estate	$	4,658	$	6,390
Home equity		469		476
Commercial real estate		6,173		5,390
Construction and land development		-		-
Multifamily		495		504
Farmland		-		-
Commercial business		462		1,039
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	12,257	$	13,799

As a result of acquisition activity, the Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At March 31, 2021, total purchased credit impaired loans with unpaid principal balances totaled $5.2 million with a recorded investment of $3.2 million. At December 31, 2020, purchased credit impaired loans with unpaid principal balances totaled $5.4 million with a recorded investment of $3.4 million.

Accretable interest taken from the purchase credit impaired portfolio, or income recorded for the three months ended March 31, is as follows:

(dollars in thousands)	First Personal
2020	$	29
2021		21

The accetable interest portion of the purchase credit impaired portfolio has fully amortized at March 31, 2021.

For the acquisitions of First Personal Bank (“First Personal”) and A.J. Smith Federal Savings Bank (“AJSB”), 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 Personal				AJSB
	Net fair value discount		Accretable period in months		Net fair value discount		Accretable period in months
Residential real estate	$	948		56	$	3,734		52
Home equity		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	$	2,137			$	3,886

Accretable yield, or income recorded for the three months ended March 31, is as follows:
(dollars in thousands)	First Personal		AJSB		Total
2020	$	115	$	245	$	360
2021		113		192		305

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

(dollars in thousands)	First Personal		AJ Smith		Total
2021	$	186	$	428	$	614
2022		239		571		810
2023		54		235		289
Total	$	479	$	1,234	$	1,713

Note 5 - Foreclosed Real Estate

Foreclosed real estate at period-end is summarized below:

	(Dollars in thousands)
	March 31, 2021		December 31, 2020
Residential real estate	$	281	$	328
Commercial business		210		210
Total	$	491	$	538

Note 6 – Intangibles and Acquisition Related Accounting

The Bancorp established a goodwill balance totaling $11.1 million from past acquisitions. 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. Additionally, as part of the Bancorp’s annual impairment test of goodwill as of December 31, 2020, the Bancorp enlisted a third party expert to assist with the evaluation of goodwill for impairment. The evaluation involved the comparison of the fair value of the Bancorp to its carrying value. The Bancorp determined its fair value using a blend of the income approach (discounted cash flow model) and market approach (guideline public company method and guideline transaction method). The determination of the fair value using the discounted cash flow model required the Bancorp to make significant estimates and assumptions related to forecasts of future income, provision for credit losses, and discount rates. The determination of the fair value using the guideline public company method required management to make significant assumptions related to price to tangible book value multiples and price to earnings multiples, as well as significant assumptions related to control premiums. The determination of the fair value using the guideline transaction method required management to review the value of the business based on pricing multiples derived from the sale of companies that are similar to the Bancorp. The Bancorp’s estimation of fair value for the quantitative goodwill impairment testing exceeded its carrying value as of December 31, 2020 and therefore, no impairment was recognized. There has not been any impairment of goodwill identified or recorded. Goodwill totaled $11.1 million as of March 31, 2021 and December 31, 2020.

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 three months ended March 31, 2021 is as follows:

(dollars in thousands)	First Federal		Liberty Savings		First Personal		AJSB		Total
Current period	$	3	$	14	$	119	$	112	$	248

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

(dollars in thousands	First Federal		Liberty Savings		First Personal		AJSB		Total
Remainder 2021		9		44		356		337		746
2022		1		58		475		449		983
2023		-		38		475		449		962
2024		-		-		470		449		919
2025		-		-		-		261		261
Total	$	10	$	140	$	1,776	$	1,945	$	3,871

Note 7 - Concentrations of Credit Risk

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

Note 8 - 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 months ended March 31, 2021, and 2020 are as follows:

	Three Months Ended
(Dollars in thousands, except per share data)	March 31,
	2021		2020
Basic earnings per common share:
Net income as reported	$	4,679	$	3,192
Weighted average common shares outstanding		3,471,604		3,458,505
Basic earnings per common share	$	1.35	$	0.92
Diluted earnings per common share:
Net income as reported	$	4,679	$	3,192
Weighted average common shares outstanding..		3,471,604		3,458,505
Add: Dilutive effect of assumed stock option exercises		-		-
Weighted average common and dilutive potential common shares outstanding		3,471,604		3,458,505
Diluted earnings per common share	$	1.35	$	0.92

Note 9 - 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 three months ended March 31, 2021, stock based compensation expense of $146 thousand was recorded, compared to $94 thousand for the three months ended March 31, 2020. It is anticipated that current outstanding unvested awards will result in additional compensation expense of approximately $1.1 million through 2024 with an additional $407 thousand in 2021, $435 thousand in 2022, $262 thousand in 2023, and $38 thousand in 2024.

There were 17,716 shares of restricted stock granted during the first three months of 2021 compared to 13,243 shares granted during the first three months of 2020. 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, 2020, and three months ended March 31, 2021, follows:

Non-vested Shares	Shares			Weighted Average Grant Date Fair Value
Non-vested at January 1, 2020		30,205		$	35.63
Granted		13,243			44.30
Vested		(6,400	)		27.50
Forfeited		(220	)		43.65
Non-vested at December 31, 2020		36,828		$	40.11

Non-vested at January 1, 2021		36,828		$	40.11
Granted		17,716			40.50
Vested		(9,993	)		36.71
Forfeited		-			-
Non-vested at March 31, 2021		44,551		$	41.03

Note 10 – Change in Accounting Principles

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

On January 1, 2020, the Bancorp adopted the provision of ASU 2018–13, which modifies the disclosure requirements on fair value measurements. The amendment removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The update also adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, the Bancorp may disclose other quantitative information in lieu of the weighted average if we determine that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The adoption of this new guidance did not have a material impact on our consolidated financial statements

In December 2019, the FASB issued ASU 2019-12 which remove specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences where there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. It also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacts changes in tax laws in interim periods. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Bancorp adopted ASU 2019-12 on January 1, 2021 and it did not have a material impact on its accounting and disclosures.

Note 11 - 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 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 and finalizing a method or methods of adoption in time for the effective date.

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020, through December 31, 2022. The Bancorp is implementing a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Bancorp is continuing to assess ASU 2020-04 and its impact on the Bancorp’s transition away from LIBOR for its loan and other financial instruments.

Note 12 – Derivative Financial Instruments

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

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

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

March 31, 2021
(Unaudited)	Notational or contractual		Asset derivatives			Liability derivatives
(Dollars in thousands)	amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification		Fair value
Interest rate swap contracts	$	72,151	Other assets	$	3,391	Other liabilties		$	3,391
Interest rate lock commitments		21,987	Other assets		397		N/A		-
Total	$	94,138		$	3,788			$	3,391

December 31, 2020
	Notational or contractual		Asset derivatives			Liability derivatives
(Dollars in thousands)	amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification		Fair value
Interest rate swap contracts	$	72,707	Other assets	$	3,638	Other liabilties		$	3,638
Interest rate lock commitments		26,443	Other assets		374		N/A		-
Total	$	99,150		$	4,012			$	3,638

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

		Three Months Ended
(Unaudited)		March 31,
(Dollars in thousands)	Statement of Income Classification	2021			2020
Interest rate swap contracts	Fees and service charges	$	(13	)	$	-
Interest rate lock commitments	Gain on sale of loans held-for-sale, net		23			518
Total		$	10		$	518

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

							Gross Amounts not Offset in the
(Unaudited)							Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
March 31, 2021
Interest rate swap contracts	$	3,391	$	-	$	3,391	$	-	$	-	$	3,391
Interest rate lock commitments		397		-		397		-		-		397
Total	$	3,788	$	-	$	3,788	$	-	$	-	$	3,788

							Gross Amounts not Offset in the
							Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
December 31, 2020
Interest rate swap contracts	$	3,638	$	-	$	3,638	$	-	$	-	$	3,638
Interest rate lock commitments		374		-		374		-		-		374
Total	$	4,012	$	-	$	4,012	$	-	$	-	$	4,012

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

							Gross Amounts not Offset in the
							Statement of Financial Condition
(Unaudited) (Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged		Net Amount
March 31, 2021
Interest rate swap contracts	$	3,391	$	-	$	3,391	$	-	$	3,930	$	(539	)
Total	$	3,391	$	-	$	3,391	$	-	$	3,930	$	(539	)

							Gross Amounts not Offset in the
							Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged		Net Amount
December 31, 2020
Interest rate swap contracts	$	3,638	$	-	$	3,638	$	-	$	3,930	$	(292	)
Total	$	3,638	$	-	$	3,638	$	-	$	3,930	$	(292	)

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.

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, 2020. A specialist will be used to review all pooled trust preferred securities again at December 31, 2021.

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
(Dollars in thousands)	impairment
Ending balance, December 31, 2020	$	173
Additions not previously recognized		-
Ending balance, March 31, 2021	$	173

At March 31, 2021, trust preferred securities with a cost basis of $2.2 million continue to be in “payment in kind” status. These trust preferred securities classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For these trust preferred securities in “payment in kind” status, management anticipates to receive the unpaid contractual interest payments from the issuer, because of the self-correcting cash flow waterfall provisions within the structure of the securities. When a tranche senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest cash flows are paid to the senior tranche and recorded as a reduction of principal. The coverage test represents an over collateralization target by stating the balance of the performing collateral as a percentage of the balance of the Bancorp’s tranche, plus the balance of all senior tranches. The principal reduction in the senior tranche continues until the appropriate coverage test is passed. As a result of the principal reduction in the senior tranche, more cash is available for future payments to the Bancorp’s tranche. Consistent with GAAP, management considered the failure of the issuer of the security to make scheduled interest payments in determining whether a credit loss existed. Management will not capitalize the “payment in kind” interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume on a consistent basis.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

There were no transfers to or from Levels 1 and 2 during the three months ended March 31, 2021. Assets measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements at March 31, 2021 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:
U.S. government sponsored entities		12,617		-		12,617		-
U.S. treasury securities		402		-		402		-
Collateralized mortgage obligations and residential mortgage-backed securities		188,122		-		188,122		-
Municipal securities		220,783		-		220,783		-
Collateralized debt obligations		944		-		-		944
Total securities available-for-sale	$	422,868	$	-	$	421,924	$	944

			Fair Value Measurements at December 31, 2020 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale debt securities:
Money market fund	$	52,941	$	52,941	$	-	$	-
U.S. government sponsored entities		7,860		-		7,860		-
Collateralized mortgage obligations and residential mortgage-backed securities		154,736		-		154,736		-
Municipal securities		194,203		-		194,203		-
Collateralized debt obligations		929		-		-		929
Total securities available-for-sale	$	410,669	$	52,941	$	356,799	$	929

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, 2020	$	1,076
Principal payments		(20	)
Total unrealized gains, included in other comprehensive income		(127	)
Ending balance, December 31, 2020	$	929

Beginning balance, January 1, 2021	$	929
Principal payments		(5	)
Total unrealized losses, included in other comprehensive income		20
Ending balance, March 31, 2021	$	944

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

			(Dollars in thousands)
			Fair Value Measurements at March 31, 2021 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	$	10,334	$	-	$	-	$	10,334
Foreclosed real estate		491		-		-		491

			(Dollars in thousands)
			Fair Value Measurements at December 31, 2020 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	10,046	$	-	$	-	$	10,046
Foreclosed real estate		538		-		-		538

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 $12.2 million and the related specific reserves totaled approximately $1.9 million, resulting in a fair value of impaired loans totaling approximately $10.3 million, at March 31, 2021. The recorded investment of impaired loans was approximately $11.8 million and the related specific reserves totaled approximately $1.8 million, resulting in a fair value of impaired loans totaling approximately $10.0 million, at December 31, 2020. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. The fair value of foreclosed real estate is similarly determined by using the results of recent real estate appraisals. The numerical range of unobservable inputs for these valuation assumptions is not meaningful to this presentation.

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

	March 31, 2021				Estimated Fair Value Measurements at March 31, 2021 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	$	68,009	$	68,009	$	68,009	$	-	$	-
Certificates of deposit in other financial institutions		1,474		1,522		-		1,522		-
Securities available-for-sale		422,868		422,868		-		421,924		944
Loans held-for-sale		4,256		4,364		4,364		-		-
Loans receivable, net		961,007		983,783		-		-		983,783
Federal Home Loan Bank stock		3,918		3,918		-		3,918		-
Interest rate swap agreements		3,391		3,391		-		3,391		-
Accrued interest receivable		4,997		4,997		-		4,997		-

Financial liabilities:
Non-interest bearing deposits		286,969		286,969		286,969		-		-
Interest bearing deposits		1,079,725		1,081,621		797,644		283,977		-
Repurchase agreements		15,917		15,928		14,182		1,746		-
Interest rate swap agreements		3,391		3,391		-		3,391		-
Accrued interest payable		45		45		-		45		-

	December 31, 2020				Estimated Fair Value Measurements at December 31, 2020 Using
(Dollars in thousands)	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	19,922	$	19,922	$	19,922	$	-	$	-
Certificates of deposit in other financial institutions		1,897		1,868		-		1,868		-
Securities available-for-sale		410,669		410,669		52,941		356,799		929
Loans held-for-sale		11,329		11,660		11,660		-		-
Loans receivable, net		954,120		984,270		-		-		984,270
Federal Home Loan Bank stock		3,918		3,918		-		3,918		-
Interest rate swap agreements		3,638		3,638		-		3,638		-
Accrued interest receivable		4,713		4,713		-		4,713		-

Financial liabilities:
Non-interest bearing deposits		241,620		241,620		241,620		-		-
Interest bearing deposits		1,060,719		1,061,294		775,891		285,403		-
Repurchase agreements		13,711		13,713		11,976		1,737		-
Borrowed funds		6,149		6,018		-		6,018		-
Interest rate swap agreements		3,638		3,638		-		3,638		-
Accrued interest payable		54		54		-		54		-

The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended March 31, 2021, and December 31, 2020:

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.

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

Summary

NorthWest Indiana Bancorp (the “Bancorp”) is a financial holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank (the “Bank”), an Indiana commercial bank, and NWIN Risk Management, Inc., a captive insurance company, are wholly-owned subsidiaries of the Bancorp. The Bancorp has no other business activity other than being a holding company for the Bank and NWIN Risk Management, Inc. The following management’s discussion and analysis presents information concerning our financial condition as of March 31, 2021, as compared to December 31, 2020, and the results of operations for the three months ending March 31, 2021, and March 31, 2020. 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, 2020.

At March 31, 2021, the Bancorp had total assets of $1.6 billion, total loans receivable of $974.1 million and total deposits of $1.4 billion. Stockholders' equity totaled $150.1 million or 9.64% of total assets, with a book value per share of $43.16. Net income for the three months ended March 31, 2021, was $4.7 million, or $1.35 earnings per common share for both basic and diluted calculations. For the three months ended March 31, 2021, the return on average assets (ROA) was 1.22%, while the return on average stockholders’ equity (ROE) was 12.30%.

Recent Developments

COVID-19

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

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

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

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

Our wealth management revenues may decline with continuing market volatility.

●

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

●

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

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

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

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

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

Impacts of COVID-19

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

●

Participating in the U.S. Small Business Administration’s Paycheck Protection Program (“PPP”), a program initiated to help small businesses maintain their workforces during the pandemic. As of March 31, 2020, the Bancorp approved 782 applications totaling $91.5 million for the first round, with an average loan size of approximately $117,000. These loans will help local business owners retain 10,758 employees based on the borrowers’ applications. The Bancorp’s SBA lender fee is averaging approximately 3.80% for the first round of the program, and fees will be earned over the life of the associated loans. The first round of PPP closed in August of 2020. On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, which included provisions for a second round of Paycheck Protection Funding in 2021. The Bancorp is currently participating in the second round of the program. As of March 31, 2021, the Bancorp approved 350 applications totaling $34.6 million for the second round, with an average loan size of approximately $98,989. These loans will help local business owners retain 4,080 employees based on the borrowers’ applications. The Bancorp’s SBA lender fee is averaging approximately 5.10% for this program, and fees will be earned over the life of the associated loans. As of March 31, 2021, the Bancorp had remaining loan balances under the Paycheck Protection Program totaling $66.3 million.

●

Prudently helping borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. Consistent with regulatory guidance, the Bancorp will consider deferring or modifying a loan customer’s repayment obligation if the customer’s cash flow has been negatively impacted by the pandemic. The Bancorp’s management anticipates that additional borrower deferral and modification requests will continue in 2021. Loans modified to interest only payment or full payment deferral as part of the effects of COVID-19 as of March 31, 2021, are as follows:

(Dollars in thousands)	(Unaudited)
As of March 31, 2021	Mortgage loans				Commercial Loans
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Interest only payment		18	$	1,932		9	$	10,960
Full payment deferral		2		153		2		482
Total $		20	$	2,085		11	$	11,442

●

As the Bancorp continues to monitor the borrowers that are in and outside of deferral status, some loan relationships may be deemed non-performing. As of March 31, 2021, a single large commercial real estate loan relationship, which operates a hotel, with a carrying balance of $5.3 million, remains in deferral and was deemed non-performing after COVID-19 pandemic stresses negatively impacted weak operating performance which occurred prior to the pandemic. Through management’s review of the loan relationship, a specific reserve within the allowance for loan losses was allocated as of March 31, 2021. As of March 31, 2021, the customer has opened a payment reserve account with the Bancorp to be used for future contractual payments and is currently in compliance with all modified loan terms. No other material COVID-19 impacted loans that are in deferral status have been deemed non-performing at this time. As of March 31, 2021, a total of 150 loans have come out of COVID-19 related deferral status with carrying balances of $69.0 million. All of these loans continue to be performing, except one commercial real estate loan with a carrying balance of $835 thousand and one residential real estate loan with a carrying balances of $108 thousand.

●

Key loan data, sourced from origination or last credit review, for loans secured by restaurants, hotels, and retail non-owner occupied properties indicate the following weighted average loan-to-value and debt service coverage. As of March 31, 2021, loans secured by restaurants totaled $26.5 million and represented 3% of the loan portfolio, and had a weighted average debt coverage ratio of 1.60 and loan to value of 51%. The restaurant portfolio is comprised of 51% quick service and fast casual loan balances. As of March 31, 2021, loans secured by hotels totaled $35.6 million and represented 4% of the loan portfolio, and had a weighted average debt coverage ratio of 0.85 and loan to value of 65%. The hotel weighted average debt coverage was reduced at March 31, 2021, due to the refreshment of debt coverages for two hotels in the first quarter of 2021. Both hotels are considered performing at March 31, 2021. The hotel portfolio is comprised of 93% flagged hotel loan balances. As of March 31, 2021, loans secured by retail non-owner occupied properties totaled $66.0 million and represented 7% of the loan portfolio, and had a weighted average debt coverage of 1.64 and loan to value of 57%.

●

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

●

Implementing remote working policies for the Bancorp’s workforce. 142 employees or 54% of the workforce have been provided remote work capabilities to support social distancing measures.

●

Keeping the Bancorp’s 22 banking centers open during the pandemic. In an effort to maintain safe social distancing practices and ensure banking processes continue to run efficiently, drive-ups are open and fully functional, and a wide range of digital banking options are available. With the exception of our Taft and Orland Park-Wolf Road Banking Centers transitioning to a drive-up-only facility and our Dyer Banking Center lobby available by appointment, all Banking Centers’ lobbies are open. Customers can make appointments conveniently via the Bank’s website.

U.S. Small Business Administration Paycheck Protection Program

The Bank has participated in the U.S. Small Business Administration’s (“SBA”) PPP, which was initiated on April 3, 2020 in order to help small businesses maintain their workforce during the COVID-19 pandemic. The Bank began accepting applications from qualified business customers immediately upon the initiation of the PPP. Under the PPP, borrowers who use the funds for payroll and certain other expenses are eligible to have the loan balances forgiven by the SBA. Applications for forgiveness can be submitted to the Bank beginning eight weeks after loan disbursement. The PPP loans carry a fixed interest rate of 1.0% and a term of two years (for loans made before June 5, 2020) or five years (for loans made on or after June 5, 2020), if not forgiven, in whole or in part, and are 100% guaranteed by the SBA. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the Bank or the date that is nine months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. As of March 31, 2020, the Bancorp approved 782 applications totaling $91.5 million for the first round, with an average loan size of approximately $117,000. These loans will help local business owners retain 10,758 employees based on the borrowers’ applications. The Bancorp’s SBA lender fee is averaging approximately 3.80% for the first round of the program, and fees will be earned over the life of the associated loans. The first round of PPP expired on August 8, 2020. On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, which included provisions for a second round of Paycheck Protection Funding in 2021. The Bancorp is currently participating in the second round of the program. As of March 31, 2021, the Bancorp approved 350 applications totaling $34.6 million for the second round, with an average loan size of approximately $98,989. These loans will help local business owners retain 4,080 employees based on the borrowers’ applications. The Bancorp’s SBA lender fee for the second round of the program is averaging approximately 5.10% for this program, and fees will be earned over the life of the associated loans. As of March 31, 2021, the Bancorp had remaining loan balances under the Paycheck Protection Program totaling $66.3 million. We expect the majority of the PPP loans we have originated to qualify for and apply for forgiveness. This expectation is subject to change due to borrower behavior, changing SBA requirements and processes related to loan forgiveness, and other relevant factors. The Bank is a certified SBA lender and was one of the first local banks to fund loans under the PPP.

SBA Loan Subsidy Program

Pursuant to the CARES Act, Section 1112, Congress has determined that all existing borrowers under the SBA Section 7(a) program are adversely affected by COVID-19, and are therefore entitled to a subsidy in the form of relief payments. Specifically, the CARES Act provides that the SBA will pay the principal and interest on any existing and current SBA 7(a) loan for a period of nine months. These principal and interest payments will be made by the SBA directly to the SBA 7(a) lender and will begin with the next payment due. The Bancorp is a qualified SBA Section 7(a) lender, and is participating in the Section 1112 program. As of March 31, 2020, the Bancorp had 16 loans eligible for the program, with an aggregate principal amount of $1.5 million. Payments under the program will not constitute new loans for the Bancorp, but simply payments of principal and interest on loans that already exist in the Bancorp’s SBA 7(a) loan portfolio and are current on borrower payments.

Financial Condition

During the three months ended March 31, 2021, total assets increased by $59.2 million (4.0%), with interest-earning assets increasing by $59.7 million (4.3%). Interest-earning assets totaled $1.5 billion at March 31, 2021, and $1.4 billion at December 31, 2020. Earning assets represented 93.7% of total assets at March 31, 2021, and 93.5% of total assets at December 31, 2020. The increase in total assets and interest earning assets for the three months was primarily the result of the Bancorp’s participation in the second round of PPP, and increased cash balances related to strong core deposit growth.

Net loans receivable totaled $961.0 million at March 31, 2021, compared to $954.1 million at December 31, 2020. The loan portfolio, which is the Bancorp’s largest asset, is the primary source of both interest and fee income. The Bancorp’s lending strategy emphasizes quality loan growth, product diversification, and competitive and profitable pricing. The Bancorp continues to review its loan pipelines and credit product specifications in connection with the effects on economic activity and employment stemming from the COVID-19 global pandemic. As a result of this review, management believes the Bancorp’s loan portfolio and current pipelines are well-positioned to withstand the current effects of the pandemic and address the needs of the Bancorp’s customers.

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

	March 31,
	2021					December 31,
(Dollars in thousands)	(unaudited)					2020
	Balance		% Loans			Balance		% Loans

Residential real estate	$	277,465		28.5	%	$	285,651		29.6	%
Home equity		36,273		3.7	%		39,286		4.1	%
Commercial real estate		304,851		31.3	%		298,257		30.9	%
Construction and land development		97,400		10.0	%		93,562		9.7	%
Multifamily		51,933		5.3	%		50,571		5.2	%
Farmland		315		0.0	%		215		0.0	%
Commercial business		162,375		16.7	%		156,965		16.2	%
Consumer		438		0.0	%		1,025		0.1	%
Manufactured homes		33,632		3.5	%		30,904		3.2	%
Government		9,372		1.0	%		10,142		1.0	%
Loans receivable	$	974,054		100.0	%	$	966,578		100.0	%

Adjustable rate loans / loans receivable	$	512,404		52.6	%	$	491,860		50.9	%

	March 31,
	2021			December 31,
	(unaudited)			2020

Loans receivable to total assets		62.5	%		64.5	%
Loans receivable to earning assets		66.7	%		69.0	%
Loans receivable to total deposits		71.3	%		74.2	%

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 three months ended March 31, 2021, the Bancorp originated $49.1 million in new fixed rate mortgage loans for sale, compared to $24.9 million during the three months ended March 31, 2020. Net gains realized from the mortgage loan sales totaled $2.0 million for the three months ended March 31, 2021, compared to $1.2 million for the three months ended March 31, 2020. At March 31, 2021, the Bancorp had $4.3 million in loans that were classified as held for sale, compared to $11.3 million at December 31, 2020.

Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status. At March 31, 2021, all non-performing loans are also accounted for on a non-accrual basis, except for three residential real estate loans totaling $300 thousand, one commercial real estate loan totaling $257 thousand, and one construction and land development loan totaling $42 thousand that remained accruing and more than 90 days past due. 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 collected.

The Bancorp's nonperforming loans are summarized below:
(Dollars in thousands)
Loan Segment	March 31, 2021			December 31, 2020
Residential real estate	$	4,958		$	6,470
Home equity		469			505
Commercial real estate		6,430			5,827
Construction and land development		42			20
Multifamily		495			504
Farmland		-			-
Commercial business		462			1,039
Consumer		-			-
Manufactured homes		-			-
Government		-			-
Total	$	12,856		$	14,365
Nonperforming loans to total loans		1.32	%		1.49	%
Nonperforming loans to total assets		0.83	%		0.96	%

Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. No loans were internally classified as doubtful or loss at March 31, 2021 or December 31, 2020.

The Bancorp's substandard loans are summarized below:
(Dollars in thousands)
Loan Segment	March 31, 2021		December 31, 2020
Residential real estate	$	4,669	$	6,387
Home equity		487		495
Commercial real estate		8,879		8,180
Construction and land development		-		-
Multifamily		495		504
Farmland		-		-
Commercial business		972		1,061
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	15,502	$	16,627

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

The Bancorp's special mention loans are summarized below:
(Dollars in thousands)
Loan Segment	March 31, 2021		December 31, 2020
Residential real estate	$	5,344	$	3,539
Home equity		755		761
Commercial real estate		14,456		11,983
Construction and land development		3,622		3,652
Multifamily		1,390		1,408
Farmland		-		-
Commercial business		1,260		1,341
Consumer		-		-
Manufactured homes		61		-
Government		-		-
Total	$	26,888	$	22,684

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

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

The Bancorp's impaired loans, including purchased credit impaired loans, are summarized below:
(Dollars in thousands)
Loan Segment	March 31, 2021		December 31, 2020
Residential real estate	$	1,902	$	2,165
Home equity		352		353
Commercial real estate		7,103		6,341
Construction and land development		-		-
Multifamily		699		716
Farmland		-		-
Commercial business		2,162		2,246
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	12,218	$	11,821

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

The Bancorp's troubled debt restructured loans are summarized below:
(Dollars in thousands)
Loan Segment	March 31, 2021		December 31, 2020
Residential real estate	$	495	$	614
Home equity		195		187
Commercial real estate		852		872
Construction and land development		-		-
Multifamily		-		-
Farmland		-		-
Commercial business		441		448
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	1,983	$	2,121

The decrease in nonperforming and substandard loans as of March 31, 2021, is the result of the removal of residential real estate loans totaling $1.7 million, which was offset by the addition of one commercial real estate customer with loans totaling $835 thousand to nonaccrual. The increase in special mention loans as of March 31, 2021, is the result of the addition of four commercial real estate customers with loans totaling $3.4 million and residential loans totaling $1.9 million, which was offset by the movement of one commercial real estate customer with loans totaling $835 thousand to substandard. The increase in impaired loans as of March 31, 2021 is the result of the addition of one commercial real estate customer with loans totaling $835 thousand.

At March 31, 2021, management is of the opinion that there are no loans, except certain of those discussed above or as part of credit risk impacts of COVID-19, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure. Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources.

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 three months ended are
summarized below:
(Dollars in thousands)

Loan Segment	March 31, 2021			March 31, 2020
Residential real estate	$	(41	)	$	10
Home equity		34			23
Commercial real estate		320			(80	)
Construction and land development		182			125
Multifamily		54			33
Farmland		-			-
Commercial business		36			396
Consumer		(7	)		8
Manufactured homes		-			-
Government		-			(1	)
Total	$	578		$	514

The Bancorp's charge-off and recovery information is summarized below:
(Dollars in thousands)	(unaudited)
	As of March 31, 2021
Loan Segment	Charge-off			Recoveries		Net Charge-offs
Residential real estate	$	(4	)	$	10	$	6
Home equity		(1	)		-		(1	)
Commercial real estate		-			-		-
Construction and land development		-			-		-
Multifamily		-			-		-
Farmland		-			-		-
Commercial business		-			8		8
Consumer		(6	)		4		(2	)
Manufactured homes		-			-
Government		-			-		-
Total	$	(11	)	$	22	$	11

The Bancorp's charge-off and recovery information is summarized below:
(Dollars in thousands)	(unaudited)
	As of March 31, 2020
Loan Segment	Charge-off			Recoveries		Net Charge-offs
Residential real estate	$	-		$	6	$	6
Home equity		-			-		-
Commercial real estate		-			-		-
Construction and land development		-			-		-
Multifamily		-			-		-
Farmland		-			-		-
Commercial business		-			1		1
Consumer		(12	)		3		(9	)
Manufactured homes		-			-
Government		-			-		-
Total	$	(12	)	$	10	$	(2	)

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

In addition, management considers additional reserves that have been established from acquisition activity. The Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At March 31, 2021, total purchased credit impaired loan reserves totaled $2.0 million compared to $2.1 million at December 31, 2020. 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 and totaled $1.7 million at March 31, 2021, compared to $2.0 million at December 31, 2020. Details on these fair value marks and the additional reserves created can be found in Note 4, Loans Receivable.

The Bancorp's allowance to total loans and non-performing loans are
summarized below:
(Dollars in thousands)
	March 31, 2021			December 31, 2020

Allowance for loan losses	$	13,047		$	12,458
Total loans	$	974,054		$	966,578
Non-performing loans	$	12,856		$	14,365
ALL-to-total loans		1.34	%		1.29	%
ALL-to-non-performing loans (coverage ratio)		101.5	%		86.7	%

The March 31, 2021, 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. While management may periodically allocate portions of the allowance for specific problem loans, the whole allowance is available for any loan charge offs that occur. The allocation of the ALL reflects performance and growth trends within the various loan categories, as well as consideration of the facts and circumstances that affect the repayment of individual loans, and loans which have been pooled as of the evaluation date, with particular attention given to non-performing loans and loans which have been classified as substandard, doubtful or loss. Management has allocated reserves to both performing and non-performing loans based on current information available.

At March 31, 2021, foreclosed real estate totaled $491 thousand, which was comprised of eight properties, compared to $538 and ten properties at December 31, 2020. Net losses from the sale of foreclosed real estate totaled $9 thousand for the three months ended March 31, 2021. At the end of March 2021 all of the Bancorp’s foreclosed real estate is located within its primary market area.

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 $422.9 million at March 31, 2021, compared to $410.7 million at December 31, 2020, an increase of $12.2 million (3.0%). The increase in the securities portfolio during the year is a result of additional investment. At March 31, 2021, the securities portfolio represented 29.0% of interest-earning assets and 27.1% of total assets compared to 29.3% of interest-earning assets and 27.4% of total assets at December 31, 2020.

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

	March 31,
	2021					December 31,
(Dollars in thousands)	(unaudited)					2020
	Balance		% Securities			Balance		% Securities

Money market fund	$	-		0.0	%	$	52,941		12.9	%
U.S. government sponsored entities		12,617		3.0	%		7,860		1.9	%
U.S. treasury securities		402		0.1	%		-		0.0	%
Collateralized mortgage obligations and residential mortgage-backed securities		188,122		44.5	%		154,736		37.7	%
Municipal securities		220,783		52.2	%		194,203		47.3	%
Collateralized debt obligations		944		0.2	%		929		0.2	%
Total securities available-for-sale	$	422,868		100.0	%	$	410,669		100.0	%

	March 31,
	2021		December 31,		YTD
(Dollars in thousands)	(unaudited)		2020		Change
	Balance		Balance		$			%

Interest bearing deposits in other financial institutions	$	52,854	$	5,908	$	46,946			794.6	%
Fed funds sold		596		-		596			100.0	%
Certificates of deposit in other financial institutions		1,474		1,897		(423	)		-22.3	%
Federal Home Loan Bank stock		3,918		3,918		-			0.0	%

The net increase in interest bearing deposits in other financial institutions and fed funds sold is primarily the result of deposit growth.

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

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

	March 31,
	2021		December 31,		YTD
(Dollars in thousands)	(unaudited)		2020		Change
	Balance		Balance		$			%

Checking	$	566,953	$	516,487	$	50,466			9.8	%
Savings		271,910		254,108		17,802			7.0	%
Money market		245,750		246,916		(1,166	)		-0.5	%
Certificates of deposit		282,081		284,828		(2,747	)		-1.0	%
Total deposits	$	1,366,694	$	1,302,339	$	64,355			4.9	%

The overall increase in total deposits is primarily a result of management’s sales efforts along with customer preferences for competitively priced short-term liquid investments.

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

	March 31,
	2021		December 31,		YTD
(Dollars in thousands)	(unaudited)		2020		Change
	Balance		Balance					%

Repurchase agreements	$	15,917	$	13,711	$	2,206			16.1	%
Borrowed funds		-		6,149		(6,149	)		-100.0	%
Total borrowed funds	$	15,917	$	19,860	$	(3,943	)		-19.9	%

Repurchase agreements increased as part of normal account fluctuations within that product line. The decrease in borrowings was the result of paydowns on the Bancorp’s outstanding borrowed funds.

Liquidity and Capital Resources

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

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

During the three months ended March 31, 2021, cash and cash equivalents increased by $48.1 million compared to a $5.1 million decrease for the three months ended March 31, 2020. The primary sources of cash and cash equivalents were the sale loans originated for sale, proceeds from the sale of securities, proceeds from the maturity and paydown of securities, and growth of deposits. The primary uses of cash and cash equivalents were the purchase of securities, loan originations, and repayment of FHLB advances. Cash provided by operating activities totaled $16.5 million for the three months ended March 31, 2021, compared to cash provided of $9.4 million for the three month ended March 31, 2020. Cash provided from operating activities was primarily a result of net income, sale of loans originated for sale, and change in accrued expenses and other liabilities, offset by loans originated for sale. Cash outflows from investing activities totaled $27.7 million for the current period, compared to cash provided of $22.2 million for the three months ended March 31, 2020. Cash outflows from investing activities for the current three months were primarily related to the purchase of securities and loan originations, offset against proceeds from sales of securities, and proceeds from maturities and paydowns of securities. Net cash provided from financing activities totaled $59.3 million during the current period compared to net cash provided of $7.7 million for the three months ended March 31, 2020. The net cash inflows from financing activities were primarily a result of net change in deposits and repurchase agreements offset against repayment of FHLB advances. On a cash basis, the Bancorp paid dividends on common stock of $1.1 million for the three months ended March 31, 2021 and March 31, 2020.

At March 31, 2021, outstanding commitments to fund loans totaled $215.5 million. Approximately 53.2% of the commitments were at variable rates. Standby letters of credit, which are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party, totaled $11.8 million at March 31, 2021. 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 three months ended March 31, 2021, stockholders' equity decreased by $2.8 million (1.8%). During the three months ended March 31, 2021, stockholders’ equity was primarily decreased by decreased unrealized gains on available securities of $6.5 million and declaration of $1.1 million in cash dividends. Increasing stockholders’ equity was net income of $4.7 million. 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 three months of 2021 or 2020. During 2021, 9,993 restricted stock shares vested under the Incentive Plan outlined in Note 9 of the financial statements, of which 1,711 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%.

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

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

During the three months ended March 31, 2021, the Bancorp’s and Bank’s regulatory capital ratios continued to be negatively impacted by regulatory requirements regarding collateralized debt obligations. The regulatory requirements state that for collateralized debt obligations that have been downgraded below investment grade by the rating agencies, increased risk based asset weightings are required. The Bancorp currently holds pooled trust preferred securities with a cost basis of $2.2 million. These investments currently have ratings that are below investment grade. As a result, approximately $9.9 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 March 31, 2021, and December 31, 2020, 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 March 31, 2021	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$	129.4		13.4	%	$	43.6		4.5	%		N/A		N/A
Tier 1 capital to risk-weighted assets	$	129.4		13.4	%	$	58.1		6.0	%		N/A		N/A
Total capital to risk-weighted assets	$	141.5		14.6	%	$	77.5		8.0	%		N/A		N/A
Tier 1 capital to adjusted average assets	$	129.4		8.5	%	$	61.9		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, 2020	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$	125.3		12.8	%	$	43.9		4.5	%		N/A		N/A
Tier 1 capital to risk-weighted assets	$	125.3		12.8	%	$	58.6		6.0	%		N/A		N/A
Total capital to risk-weighted assets	$	137.5		14.0	%	$	78.1		8.0	%		N/A		N/A
Tier 1 capital to adjusted average assets	$	125.3		8.5	%	$	59.2		4.0	%		N/A		N/A

In addition, the following table shows that, at March 31, 2021, and December 31, 2020, 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 March 31, 2021	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$	127.3		13.2	%	$	43.4		4.5	%	$	62.6		6.5	%
Tier 1 capital to risk-weighted assets	$	127.3		13.2	%	$	57.8		6.0	%	$	77.1		8.0	%
Total capital to risk-weighted assets	$	139.6		14.5	%	$	77.1		8.0	%	$	96.4		10.0	%
Tier 1 capital to adjusted average assets	$	127.3		8.3	%	$	61.8		4.0	%	$	77.2		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, 2020	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$	123.3		12.7	%	$	43.8		4.5	%	$	63.2		6.5	%
Tier 1 capital to risk-weighted assets	$	123.3		12.7	%	$	58.4		6.0	%	$	77.8		8.0	%
Total capital to risk-weighted assets	$	135.4		13.9	%	$	77.8		8.0	%	$	97.3		10.0	%
Tier 1 capital to adjusted average assets	$	123.3		8.3	%	$	59.1		4.0	%	$	73.9		5.0	%

The Bancorp’s ability to pay dividends to its shareholders is entirely 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 2021, without the need for qualifying for an exemption or prior DFI approval, is its 2021 net profits plus $4.7 million. Moreover, the FDIC and the Federal Reserve Board 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 March 1, 2021, the Board of Directors of the Bancorp declared a first quarter dividend of $0.31 per share. The Bancorp’s first quarter dividend was paid to shareholders on April 8, 2021.

Results of Operations - Comparison of the Three Months Ended March 31, 2021, to the Three Months Ended March 31, 2020

For the three months ended March 31, 2021, the Bancorp reported net income of $4.7 million, compared to net income of $3.2 million for the three months ended March 31, 2020, an increase of $1.5 million (46.6%). For the three months ended March 31, 2020, the ROA was 1.22%, compared to 0.97% for the three months ended March 31, 2020. The ROE was 12.30% for the three months ended March 31, 2021, compared to 9.38% for the three months ended March 31, 2020.

Net interest income for the three months ended March 31, 2021, was $12.0 million, an increase of $1.4 million (12.9%), compared to $10.7 million for the three months ended March 31, 2020. The weighted-average yield on interest-earning assets was 3.59% for the three months ended March 31, 2021, compared to 4.22% for the three months ended March 31, 2020. The weighted-average cost of funds for the three months ended March 31, 2021 was 0.20% compared to 0.75% for the three months ended March 31, 2020. The impact of the 3.59% return on interest earning assets and the 0.20% cost of funds resulted in an interest rate spread of 3.39% for the current three months, a decrease from the 3.48% spread for the three months ended March 31, 2020. The net interest margin on earning assets was 3.40% for the three months ended March 31, 2021, and 3.50% for the three months ended March 31, 2020. On a tax equivalent basis, the Bancorp’s net interest margin was 3.58% for the three months ended March 31, 2021, compared to 3.64% for the three months ended March 31, 2020. The Bancorp believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Tax adjusted net interest margin represents a non-GAAP financial measure. See the non-GAAP reconciliation below and the “Non-GAAP Financial Measures” in Item 2 “Management's Discussion and Analysis of Financial Condition and Results of Operations” for further disclosure regarding non-GAAP financial measures.

(Dollars in thousands)	Three Months Ended
(unaudited)	March 31, 2021			March 31, 2020
Calculation of tax adjusted net interest margin
Net interest income	$	12,046		$	10,671
Tax adjusted interest on securities and loans		633			427
Adjusted net interest income		12,679			11,098
Total average earning assets		1,417,462			1,218,541
Tax adjusted net interest margin		3.58	%		3.64	%

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)	March 31, 2021							March 31, 2020
	Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
ASSETS
Interest bearing deposits in other financial institutions	$	51,688		$	12		0.09	$	13,488		$	107		3.17
Federal funds sold		788			-		-		5,713			14		0.98
Certificates of deposit in other financial institutions		1,598			8		2.00		1,967			14		2.85
Securities available-for-sale		383,877			1,941		2.02		281,584			1,670		2.37
Loans receivable		975,593			10,746		4.41		911,877			11,029		4.84
Federal Home Loan Bank stock		3,918			20		2.04		3,912			35		3.58
Total interest earning assets		1,417,462		$	12,727		3.59		1,218,541		$	12,869		4.22
Cash and non-interest bearing deposits in other financial institutions		33,719							19,081
Allowance for loan losses		(12,662	)						(9,046	)
Other noninterest bearing assets		98,316							93,852
Total assets	$	1,536,835						$	1,322,428

LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits	$	1,348,160		$	651		0.19	$	1,147,163		$	2,064		0.72
Repurchase agreements		14,479			10		0.28		11,934			40		1.34
Borrowed funds		2,967			20		2.70		14,193			94		2.65
Total interest bearing liabilities		1,365,606		$	681		0.20		1,173,290		$	2,198		0.75
Other noninterest bearing liabilities		19,049							13,010
Total liabilities		1,384,655							1,186,300
Total stockholders' equity		152,180							136,128
Total liabilities and stockholders' equity	$	1,536,835						$	1,322,428


Return on average assets		1.22	%						0.97	%
Return on average equity		12.30	%						9.38	%
Net interest margin (average earning assets)		3.40	%						3.50	%
Net interest margin (average earning assets) - tax equivalent		3.58	%						3.64	%

The decrease in interest earning asset income for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, is primarily related to continued decreased reinvestment rates in 2021 for loans, securities, and excess cash balances, as a result of the Federal Reserve cuts occurring in March 2020. The decrease in interest bearing liability expense is primarily the result of the Bancorp adjusting deposit and repurchase agreement pricing to align with the current interest rate cycle.

The following table shows the change in noninterest income for the three months ending March 31, 2021, and March 31, 2020.

	Three Months Ended
(Dollars in thousands)	March 31,					Three Months Ended
(unaudited)	2021			2020		$ Change			% Change
Noninterest income:
Gain on sale of loans held-for-sale, net	$	2,049		$	1,153	$	896			77.7	%
Fees and service charges		1,066			1,049		17			162.4	%
Wealth management operations		607			554		53			9.6	%
Gain on sale of securities, net		417			510		(93	)		-18.2	%
Increase in cash value of bank owned life insurance		169			169		0			0.0	%
(Loss) gain on sale of foreclosed real estate, net		(9	)		60		(69	)		-115.0	%
Other		14			51		(37	)		-72.5	%
Total noninterest income	$	4,313		$	3,546	$	767			21.6	%

The increase in gain on sale of loans is the result of the current economic and rate environment, and our ability to close loans in a timely fashion during a period of record demand. We anticipate the demand for mortgage loans will return to more normal levels as the current low rate environment persists or rates return to higher levels. The increase in wealth management income is the result of the Bancorp’s continued focus on expanding its wealth management line of business. The decrease in gains on the sale of securities is a result of current market conditions and managing current securities cash flows.

The following table shows the change in noninterest expense for the three months ending March 31, 2021, and March 31, 2020.

	Three Months Ended
(Dollars in thousands)	March 31,				Three Months Ended
(unaudited)	2021		2020		$ Change			% Change
Noninterest expense:
Compensation and benefits	$	5,530	$	5,217	$	313			6.0	%
Occupancy and equipment		1,372		1,409		(37	)		-2.6	%
Data processing		528		556		(28	)		-5.0	%
Marketing		199		208		(9	)		-4.3	%
Federal deposit insurance premiums		180		196		(16	)		-8.2	%
Other		2,529		2,413		116			4.8	%
Total noninterest expense	$	10,338	$	9,999	$	339			3.4	%

The increase in compensation and benefits is primarily the result of management’s continued focus on talent management and retention. The increase in other operating expenses is primarily the result of investments in strategic initiatives. The Bancorp’s efficiency ratio was 63.2% for the three months ended March 31, 2021, compared to 70.3% for the three months ended March 31, 2020. The improved ratio is related primarily to the decrease in interest expense and increase to noninterest income. The efficiency ratio is determined by dividing total noninterest expense by the sum of net interest income and total noninterest income for the period.

Income tax expenses for the three months ended March 31, 2021, totaled $764 thousand, compared to income tax expense of $512 thousand for the three months ended March 31, 2020, an increase of $252 thousand (49.2%). The increase in income tax expense is the result of higher pre-tax net income and a higher combined effective federal and state tax rate. The combined effective federal and state tax rates for the Bancorp was 14.0% for the three months ended March 31, 2021, compared to 13.8% for the three months ended March 31, 2020.

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, 2020 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 2020 Form 10-K.

Non-GAAP Financial Measures

This filing includes certain financial measures that are identified as non-GAAP. However, certain non-GAAP performance measures are used by management to evaluate and measure the Bancorp’s performance. Although these non-GAAP financial measures are frequently used by investors to evaluate a financial institution, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. This supplemental information should not be considered in isolation or as a substitute for the related GAAP measures.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures.

The Bancorp maintains disclosure controls and procedures (as defined in Sections 13a – 15(e) and 15d – 15(e)) of regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the "Exchange Act" is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bancorp's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The Bancorp's Chief Executive Officer and Chief Financial Officer evaluate the effectiveness of the Bancorp's disclosure controls and procedures as of the end of each quarter. Based on that evaluation as of March 31, 2021, 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 three months ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, the Bancorp's internal control over financial reporting.

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 three months ended March 31, 2021 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, 2021 – January 31, 2021		-		N/A		-		48,828
February 1, 2021 – February 28, 2021		-		N/A		-		48,828
March 1, 2021 – March 31, 2021		-		N/A		-		48,828
		-		N/A		-		48,828

(1)

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

Item 3.

Defaults Upon Senior Securities

There are no matters reportable under this item.

Item 4.

Mine Safety Disclosures

Not Applicable

Item 5.

Other Information

None

Item 6.

Exhibits

Exhibit
Number	Description
10.1	Second Amendment to Employment Agreement dated as of March 15, 2021 between NorthWest Indiana Bancorp, Peoples Bank, and Benjamin J. Bochnowski (incorporated by reference to Exhibit 10.3 of the registrant’s Current Report on Form 8-K filed with the SEC on March 17, 2021).
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1	Section 1350 Certifications.
101	The following materials from the Bancorp’s Form 10-Q for the quarterly period ended March 31, 2021, formatted in an Inline XBRL Interactive Data File: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Changes in Stockholders’ Equity; (iv) Consolidated Statement of Comprehensive Income; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements, with detailed tagging of notes and financial statement schedules.
104	Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

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: May 7, 2021		/s/ Benjamin J. Bochnowski
		Benjamin J. Bochnowski
		President and Chief Executive Officer


Date: May 7, 2021		/s/ Peymon S. Torabi
		Peymon S. Torabi
		Executive Vice President, Chief Financial
		Officer and Treasurer