Company Quick10K Filing
Quick10K
Northwest Indiana Bancorp
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-24 Earnings
8-K 2019-05-31 Other Events, Exhibits
8-K 2019-04-25 Shareholder Vote
8-K 2019-04-25 Regulation FD, Exhibits
8-K 2019-04-23 Earnings, Exhibits
8-K 2019-03-20 Other Events, Exhibits
8-K 2019-02-22 Other Events, Exhibits
8-K 2019-01-25 Earnings, Exhibits
8-K 2019-01-25 Earnings, Exhibits
8-K 2019-01-24 Other Events, Exhibits
8-K 2019-01-24 Other Events, Exhibits
8-K 2018-12-19 Other Events
8-K 2018-12-14 Other Events
8-K 2018-12-03 Earnings, Exhibits
8-K 2018-11-02 Earnings, Other Events, Exhibits
8-K 2018-09-04 Regulation FD, Other Events, Exhibits
8-K 2018-08-31 Earnings, Exhibits
8-K 2018-08-06 Regulation FD, Other Events, Exhibits
8-K 2018-07-30 Enter Agreement, Regulation FD, Exhibits
8-K 2018-07-27 Officers, Exhibits
8-K 2018-07-26 Other Events, Exhibits
8-K 2018-07-23 Earnings, Other Events, Exhibits
8-K 2018-07-12 Other Events
8-K 2018-06-27 Other Events
8-K 2018-06-25 Other Events
8-K 2018-06-15 Other Events, Exhibits
8-K 2018-05-18 Earnings, Amend Bylaw, Other Events, Exhibits
8-K 2018-04-27 Shareholder Vote
8-K 2018-03-20 Regulation FD, Other Events, Exhibits
8-K 2018-02-20 Enter Agreement, Regulation FD, Exhibits
8-K 2018-02-16 Earnings, Exhibits
8-K 2018-01-25 Earnings, Exhibits
TJX TJX Companies 65,400
NKTR Nektar Therapeutics 6,180
NEOG Neogen 3,190
FMBI First Midwest Bancorp 2,220
TLND Talend 1,490
LABL Multi Color 1,030
IMXI International Money Express 431
FNLC First Bancorp 288
NWGI Newgioco Group 0
EFSH 1847 Holdings 0
NWIN 2019-06-30
Note 1 - Basis of Presentation
Note 2 - Use of Estimates
Note 3 - Acquisition Activity
Note 4 - Securities
Note 5 - Loans Receivable
Note 6 - Foreclosed Real Estate
Note 7 - Intangibles and Acquisition Related Accounting
Note 8 - Concentrations of Credit Risk
Note 9 - Earnings per Share
Note 10 - Stock Based Compensation
Note 11 - Change in Accounting Principles
Note 12 - Upcoming Accounting Standards
Note 13 - Fair Value
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
EX-31.1 tv526178_ex31-1.htm
EX-31.2 tv526178_ex31-2.htm
EX-32.1 tv526178_ex32-1.htm

Northwest Indiana Bancorp Earnings 2019-06-30

NWIN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv526178_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2019 or

 

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

 

For the transition period from ______ to ______

 

Commission File Number: 0-26128

 

NorthWest Indiana Bancorp

(Exact name of registrant as specified in its charter)

 

Indiana   35-1927981
(State or other jurisdiction of incorporation   (I.R.S. Employer Identification Number)
or organization)    
     
9204 Columbia Avenue    
Munster, Indiana   46321
(Address of principal executive offices)   (ZIP code)

 

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

 

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

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
N/A N/A N/A

 

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

 

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

Yes x              No ¨

 

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

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Smaller Reporting Company x Emerging growth company ¨

 

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

 

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

 

There were 3,451,797 shares of the registrant’s Common Stock, without par value, outstanding at August 7, 2019.

 

 

 

 

 

 

NorthWest Indiana Bancorp

Index

  

  Page
  Number
PART I. Financial Information  
   
Item 1. Unaudited Financial Statements and Notes 1
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
   
Item 4. Controls and Procedures 38
   
PART II. Other Information 39
   
SIGNATURES 40
   
EXHIBITS  
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications
101 XBRL Interactive Data File  

 

 

 

 

NorthWest Indiana Bancorp

Consolidated Balance Sheets

 

   June 30,     
(Dollars in thousands)  2019   December 31, 
   (unaudited)   2018 
ASSETS          
           
Cash and non-interest bearing deposits in other financial institutions  $24,713   $13,260 
Interest bearing deposits in other financial institutions   27,739    3,116 
Federal funds sold   8,720    763 
           
Total cash and cash equivalents   61,172    17,139 
           
Certificates of deposit in other financial institutions   1,970    2,024 
           
Securities available-for-sale   258,742    241,768 
Loans held-for-sale   3,835    2,863 
Loans receivable   894,274    764,400 
Less: allowance for loan losses   (8,744)   (7,962)
Net loans receivable   885,530    756,438 
Federal Home Loan Bank stock   3,912    3,460 
Accrued interest receivable   4,131    3,632 
Premises and equipment   28,355    24,824 
Foreclosed real estate   1,501    1,627 
Cash value of bank owned life insurance   29,920    23,142 
Goodwill   11,109    8,170 
Other assets   19,172    11,071 
           
Total assets  $1,309,349   $1,096,158 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Deposits:          
Non-interest bearing  $178,394   $127,277 
Interest bearing   948,727    802,509 
Total   1,127,121    929,786 
Repurchase agreements   20,628    11,628 
Borrowed funds   18,000    43,000 
Accrued expenses and other liabilities   14,788    10,280 
           
Total liabilities   1,180,537    994,694 
           
Stockholders' Equity:          
Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding   -    - 
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: June 30, 2019 - 3,451,797   -    - 
December 31, 2018 - 3,029,157          
Additional paid-in capital   29,510    11,927 
Accumulated other comprehensive income/(loss)   2,830    (2,796)
Retained earnings   96,472    92,333 
           
Total stockholders' equity   128,812    101,464 
           
Total liabilities and stockholders' equity  $1,309,349   $1,096,158 

 

See accompanying notes to consolidated financial statements.

 

1

 

 

NorthWest Indiana Bancorp

Consolidated Statements of Income

(unaudited)

 

   Three Months Ended   Six Months Ended 
(Dollars in thousands)  June 30,   June 30, 
   2019   2018   2019   2018 
Interest income:                    
Loans receivable                    
Real estate loans  $9,653   $6,134   $18,401   $12,051 
Commercial loans   1,651    1,119    3,335    2,191 
Consumer loans   181    4    292    9 
Total loan interest   11,485    7,257    22,028    14,251 
Securities   1,777    1,696    3,578    3,418 
Other interest earning assets   143    43    285    60 
                     
Total interest income   13,405    8,996    25,891    17,729 
                     
Interest expense:                    
Deposits   2,011    838    3,683    1,513 
Repurchase agreements   66    45    115    77 
Borrowed funds   128    237    294    428 
                     
Total interest expense   2,205    1,120    4,092    2,018 
                     
Net interest income   11,200    7,876    21,799    15,711 
Provision for loan losses   511    297    828    638 
                     
Net interest income after provision for loan losses   10,689    7,579    20,971    15,073 
                     
Noninterest income:                    
Fees and service charges  $1,243   $947   $2,405   $1,839 
Wealth management operations   479    424    979    839 
Gain on sale of securities, net   301    246    652    1,004 
Gain on sale of loans held-for-sale, net   400    359    642    570 
Increase in cash value of bank owned life insurance   179    120    342    228 
Gain on sale of foreclosed real estate, net   13    68    40    100 
Other   54    39    178    72 
Total noninterest income  $2,669   $2,203   $5,238   $4,652 
                     
Noninterest expense:                    
Compensation and benefits  $4,600   $3,516   $9,401   $7,376 
Occupancy and equipment   1,169    842    2,291    1,695 
Data processing   351    703    1,947    1,064 
Marketing   176    166    613    300 
Federal deposit insurance premiums   177    75    268    159 
Other   1,951    1,604    4,193    3,279 
Total noninterest expense  $8,424   $6,906   $18,713   $13,873 
                     
Income before income tax expenses   4,934    2,876    7,496    5,852 
Income tax expenses   911    365    1,251    780 
Net income  $4,023   $2,511   $6,245   $5,072 
                     
Earnings per common share:                    
Basic  $1.17   $0.88   $1.84   $1.77 
Diluted  $1.17   $0.88   $1.84   $1.77 
                     
Dividends declared per common share  $0.31   $0.30   $0.61   $0.59 

 

See accompanying notes to consolidated financial statements.

 

2

 

 

NorthWest Indiana Bancorp

Consolidated Statements of Comprehensive Income

(unaudited)

 

   Three Months Ended   Six Months Ended 
(Dollars in thousands)  June 30,   June 30, 
   2019   2018   2019   2018 
                 
Net income  $4,023   $2,511   $6,245   $5,072 
                     
Net change in net unrealized gains and losses on securities available-for-sale:                    
Unrealized gains/(losses) arising during the period   3,584    (880)   7,766    (5,230)
Less: reclassification adjustment for gains included in net income   (301)   (246)   (652)   (1,004)
Net securities gain/(loss) during the period   3,283    (1,126)   7,114    (6,234)
Tax effect   (690)   237    (1,488)   1,313 
Net of tax amount   2,593    (889)   5,626    (4,921)
                     
Comprehensive income/(loss), net of tax  $6,616   $1,622   $11,871   $151 

 

See accompanying notes to consolidated financial statements. 

 

3

 

 

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   (Loss)/Income   Earnings   Equity 
                     
Balance at January 1, 2018  $     -   $4,867   $684   $86,509   $92,060 
                          
Comprehensive income:                         
Net income   -    -    -    2,561    2,561 
Net unrealized loss on securities available-for-sale, net of reclassification and tax effects   -    -    (4,032)   -    (4,032)
Comprehensive income                       (1,471)
Stock-based compensation expense   -    52    -    -    52 
Cash dividends, $0.29 per share   -    -    -    (833)   (833)
                          
Balance at March 31, 2018  $-   $4,919   $(3,348)  $88,237   $89,808 
                          
Comprehensive income:                         
Net income   -    -    -    2,511    2,511 
Net unrealized loss on securities available-for-sale, net of reclassification and tax effects   -    -    (889)   -    (889)
Comprehensive income                       1,622 
Net surrender value of 1,029 restricted stock awards        (45)             (45)
Stock-based compensation expense   -    51    -    -    51 
Cash dividends, $0.30 per share   -    -    -    (859)   (859)
                          
Balance at June 30, 2018  $-   $4,925   $(4,237)  $89,889   $90,577 
                          
Balance at January 1, 2019  $-   $11,927   $(2,796)  $92,333   $101,464 
                          
Comprehensive income:                         
Net income   -    -    -    2,222    2,222 
Net unrealized gain on securities available-for-sale, net of reclassification and tax effects   -    -    3,033    -    3,033 
Comprehensive income                       5,255 
Stock-based compensation expense   -    71    -    -    71 
Issuance of 416,478 shares at $42.00 per share, for acquisition of AJS Bancorp, Inc.        17,492              17,492 
Cash dividends, $0.30 per share   -    -    -    (1,035)   (1,035)
                          
Balance at March 31, 2019  $-   $29,490   $237   $93,520   $123,247 
                          
Comprehensive income:                         
Net income   -    -    -    4,023    4,023 
Net unrealized gain on securities available-for-sale, net of reclassification and tax effects   -    -    2,593    -    2,593 
Comprehensive income                       6,616 
Net surrender value of 1,245 restricted stock awards        (63)             (63)
Stock-based compensation expense   -    83    -    -    83 
Cash dividends, $0.31 per share   -    -    -    (1,071)   (1,071)
                          
Balance at June 30, 2019  $-   $29,510   $2,830   $96,472   $128,812 

 

See accompanying notes to consolidated financial statements.

 

4

 

  

NorthWest Indiana Bancorp

Consolidated Statements of Cash Flows

(unaudited)

 

   Six Months Ended 
(Dollars in thousands)  June 30, 
   2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $6,245   $5,072 
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:          
Origination of loans for sale   (29,585)   (24,266)
Sale of loans originated for sale   29,252    22,099 
Depreciation and amortization, net of accretion   1,516    1,312 
Amortization of mortgage servicing rights   33    32 
Stock based compensation expense   154    104 
Net surrender value of restricted stock awards   (63)   (45)
Gain on sale of securities, net   (652)   (1,004)
Gain on sale of loans held-for-sale, net   (642)   (570)
Gain on sale of foreclosed real estate, net   (40)   (100)
Provision for loan losses   828    638 
Net change in:          
Interest receivable   (499)   9 
Other assets   (3,567)   (17)
Accrued expenses and other liabilities   3,026    2,468 
Total adjustments   (239)   660 
Net cash - operating activities   6,006    5,732 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from maturities of certificates of deposits in other financial institutions   54    150 
Proceeds from maturities and pay downs of securities available-for-sale   11,747    10,314 
Proceeds from sales of securities available-for-sale   30,281    22,545 
Purchase of securities available-for-sale   (48,347)   (32,339)
Net change in loans receivable   (42,336)   (27,002)
Purchase of Federal Home Loan Bank Stock   59    (17)
Purchase of premises and equipment, net   (962)   (398)
Proceeds from sale of foreclosed real estate, net   514    965 
Cash and cash equivalents from acquisition activity, net   52,195    - 
Change in cash value of bank owned life insurance   (343)   (228)
Net cash - investing activities   2,862    (26,010)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net change in deposits   53,109    12,973 
Proceeds from FHLB advances   -    44,000 
Repayment of FHLB advances   (25,000)   (29,000)
Change in other borrowed funds   9,000    2,734 
Dividends paid   (1,944)   (1,662)
Net cash - financing activities   35,165    29,045 
Net change in cash and cash equivalents   44,033    8,767 
Cash and cash equivalents at beginning of period   17,139    11,025 
Cash and cash equivalents at end of period  $61,172   $19,792 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Cash paid during the period for:          
Interest  $4,112   $1,949 
Income taxes   650    955 
Acquisition activity:          
Fair value of assets acquired, including cash and cash equivalents  $172,560   $- 
Value of goodwill and other intangible assets   5,856    - 
Fair value of liabilities assumed   145,546    - 
Cash paid for acquisition   15,743    - 
Issuance of common stock for acquisition   17,492    - 
Noncash activities:          
Transfers from loans to foreclosed real estate  $193   $253 

 

See accompanying notes to consolidated financial statements.

 

5

 

  

NorthWest Indiana Bancorp

Notes to Consolidated Financial Statements

(unaudited)

 

Note 1 - Basis of Presentation

 

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

 

Note 2 - Use of Estimates

 

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

 

Note 3 - Acquisition Activity

 

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

 

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

 

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

 

6

 

 

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

  

ASSETS        
Cash and due from banks   $ 30,178  
Investment securities, available for sale     2  
         
Commercial     53,026  
Residential mortgage     32,542  
Consumer     9,004  
Total Loans     94,572  
         
Premises and equipment, net     5,799  
FHLB stock     219  
Goodwill     5,437  
Core deposit intangible     3,044  
Interest receivable     274  
Other assets     6,405  
Total assets purchased   $ 145,930  
Common shares issued     6,928  
Cash paid     8,689  
Total purchase price   $ 15,617  
LIABILITIES        
Deposits        
Non-interest bearing   $ 14,517  
NOW accounts     22,177  
Savings and money market     41,852  
Certificates of deposits     46,355  
Total Deposits     124,901  
         
         
Borrowings     4,124  
Interest payable     32  
Other liabilities     1,256  
         
         
         
         
         
         
Total liabilities assumed   $ 130,313  

 

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

 

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

 

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

 

The Bancorp issued 416,478 shares of Bancorp common stock to the former AJSB stockholders, and paid cash consideration of approximately $15.4 million. Based upon the closing price of NWIN’s common stock on January 23, 2019, the transaction had an implied valuation of approximately $32.9 million, which includes unallocated shares held by the AJSB Employee Stock Ownership Plan (“ESOP”), some of which were cancelled in connection with the closing to satisfy the ESOP’s outstanding loan balance. As of June 30, 2019, acquisition costs related to the AJSB Merger equaled approximately $2.1 million. The acquisition further expanded the Bank’s banking center network in Cook County, Illinois, expanding the Bank’s full-service retail banking network to 22 banking centers.

 

7

 

 

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

 

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

 

During the second quarter of 2019, it was discovered that $365 thousand that was paid to the holders of AJSB stock options as of the effective time of the merger (during the first quarter of 2019) for the cash-out of those options, per the terms of the AJSB Merger Agreement had not been recognized as part of the consideration paid in connection with the acquisition. This was corrected during the second quarter and properly applied as an adjustment to goodwill and an increase in the consideration paid for AJSB.

 

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

 

Note 4 - Securities

 

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

 

   (Dollars in thousands) 
       Gross   Gross   Estimated 
   Cost   Unrealized   Unrealized   Fair 
June 30, 2019  Basis   Gains   Losses   Value 
Money market fund  $5,598   $-   $-   $5,598 
U.S. government sponsored entities   12,986    96    -    13,082 
U.S. treasury securities   599    -    -    599 
Collateralized mortgage obligations and residential mortgage-backed securities   144,079    1,368    (273)   145,174 
Municipal securities   88,451    3,819    (28)   92,242 
Collateralized debt obligations   3,455    -    (1,408)   2,047 
Total securities available-for-sale  $255,168   $5,283   $(1,709)  $258,742 

 

   (Dollars in thousands) 
       Gross   Gross   Estimated 
   Cost   Unrealized   Unrealized   Fair 
December 31, 2018  Basis   Gains   Losses   Value 
Money market fund  $2,480   $-   $-   $2,480 
U.S. government sponsored entities   7,997    28    (131)   7,894 
U.S. treasury securities   -    -    -    - 
Collateralized mortgage obligations and residential mortgage-backed securities   137,834    135    (2,688)   135,281 
Municipal securities   93,516    1,072    (524)   94,064 
Collateralized debt obligations   3,481    -    (1,432)   2,049 
Total securities available-for-sale  $245,308   $1,235   $(4,775)  $241,768 

 

8

 

 

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

 

   (Dollars in thousands) 
   Available-for-sale 
   Estimated     
   Fair   Tax-Equivalent 
June 30, 2019  Value   Yield (%) 
Due in one year or less  $9,263    2.71 
Due from one to five years   3,311    4.91 
Due from five to ten years   17,524    3.79 
Due over ten years   83,470    4.06 
Collateralized mortgage obligations and residential mortgage-backed securities   145,174    2.69 
Total  $258,742    3.24 

 

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

 

   (Dollars in thousands) 
   June 30,   June 30, 
   2019   2018 
         
Proceeds  $30,281   $22,545 
Gross gains   733    1,004 
Gross losses    (81)   - 

 

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

 

   (Dollars in thousands) 
   Unrealized
gain/(loss)
 
Ending balance, December 31, 2018  $(2,796)
Current period change   5,626 
Ending balance, June 30, 2019  $2,830 

 

Securities with carrying values of approximately $76.2 million and $16.3 million were pledged as of June 30, 2019 and December 31, 2018, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law. The increase in pledged securities for June 30, 2019, was the result of new pledging requirements for Indiana public funds deposits.

 

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

 

   (Dollars in thousands) 
   Less than 12 months   12 months or longer   Total 
   Estimated       Estimated       Estimated     
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
June 30, 2019  Value   Losses   Value   Losses   Value   Losses 
U.S. government sponsored entities  $-   $-   $-   $-   $     -   $- 
Collateralized mortgage obligations and residential mortgage-backed securities   -    -    34,364    (273)     34,364    (273)
Municipal securities   -    -    607    (28)      607    (28)
Collateralized debt obligations   -    -    2,047    (1,408)     2,047    (1,408)
Total temporarily impaired  $-   $-   $37,018   $(1,709)  $  37,018   $(1,709)
Number of securities        0         31         31 
                               
   (Dollars in thousands) 
   Less than 12 months   12 months or longer   Total 
   Estimated       Estimated       Estimated     
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
December 31, 2018  Value   Losses   Value   Losses   Value   Losses 
U.S. government sponsored entities  $-   $-   $3,866   $(131)  $3,866   $(131)
Collateralized mortgage obligations and residential mortgage-backed securities   28,388    (304)   89,234    (2,384)   117,622    (2,688)
Municipal securities   22,678    (367)   3,495    (157)   26,173    (524)
Collateralized debt obligations   -    -    2,049    (1,432)   2,049    (1,432)
Total temporarily impaired  $51,066   $(671)  $98,644   $(4,104)  $149,710   $(4,775)
Number of securities        52         75         127 

 

9

 

 

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

 

Note 5 - Loans Receivable

 

Loans receivable are summarized below:

 

(Dollars in thousands)        
   June 30, 2019   December 31, 2018 
Loans secured by real estate:          
Residential real estate  $301,770   $224,082 
Home equity   50,093    45,423 
Commercial real estate   275,954    253,104 
Construction and land development   71,655    64,433 
Multifamily   51,149    47,234 
Farmland   234    240 
Total loans secured by real estate   750,855    634,516 
Commercial business   112,238    103,628 
Consumer   10,273    5,293 
Government   19,284    21,101 
Subtotal   892,650    764,538 
Less:          
Net deferred loan origination fees   1,804    530 
Undisbursed loan funds   (180)   (668)
Loans receivable  $894,274   $764,400 

 

10

 

  

(Dollars in thousands)  Beginning Balance   Charge-offs   Recoveries   Provisions   Ending Balance 
                     
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2019:
                          
Allowance for loan losses:                         
Residential real estate  $1,680   $(18)  $4   $(6)  $1,660 
Home equity   194    -    2    6    202 
Commercial real estate   3,485    -    -    44    3,529 
Construction and land development   777    -    -    29    806 
Multifamily   434    -    -    19    453 
Farmland   -    -    -    -    - 
Commercial business   1,391    -    10    116    1,517 
Consumer   254    (7)   6    303    556 
Government   21    -    -    -    21 
Total  $8,236   $(25)  $22   $511   $8,744 
                          
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2018: 
                          
Allowance for loan losses:                         
Residential real estate  $1,493   $(38)  $-   $68   $1,523 
Home equity   159    (5)   -    29    183 
Commercial real estate   2,996    -    2    172    3,170 
Construction and land development   661    -    -    (50)   611 
Multifamily   615    -    -    (8)   607 
Farmland   4    -    -    -    4 
Commercial business   1,077    (3)   107    83    1,264 
Consumer   35    (14)   5    10    36 
Government   57    -    -    (7)   50 
Total  $7,097   $(60)  $114   $297   $7,448 
                          
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2019: 
                          
Allowance for loan losses:                         
Residential real estate  $1,715   $(66)  $18   $(7)  $1,660 
Home equity   202    -    2    (2)   202 
Commercial real estate   3,335    -    -    194    3,529 
Construction and land development   756    -    -    50    806 
Multifamily   472    -    -    (19)   453 
Farmland   -    -    -    -    - 
Commercial business   1,362    -    16    139    1,517 
Consumer   82    (25)   9    490    556 
Government   38    -    -    (17)   21 
Total  $7,962   $(91)  $45   $828   $8,744 
                          
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the six months ended June 30, 2018: 
                          
Allowance for loan losses:                         
Residential real estate  $1,568   $(106)  $-   $61   $1,523 
Home equity   166    (24)   -    41    183 
Commercial real estate   3,125    (119)   2    162    3,170 
Construction and land development   618    -    -    (7)   611 
Multifamily   622    -    -    (15)   607 
Farmland   -    -    -    4    4 
Commercial business   1,298    (529)   117    378    1,264 
Consumer   31    (22)   9    18    36 
Government   54    -    -    (4)   50 
Total  $7,482   $(800)  $128   $638   $7,448 

 

11

 

  

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   Loans individually
evaluated for
impairment
   Purchased credit
impaired loans
individually
evaluated for
impairment
   Loans
collectively
evaluated for
impairment
 
                         
The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at June 30, 2019: 
                               
Residential real estate  $22   $1,638   $301,488   $547   $1,894   $299,047 
Home equity   11    191    50,155    214    225    49,716 
Commercial real estate   196    3,333    275,954    1,651    485    273,818 
Construction and land development   -    806    71,655    -    -    71,655 
Multifamily   -    453    51,149    -    701    50,448 
Farmland   -    -    234    -    -    234 
Commercial business   334    1,183    112,076    1,753    1,152    109,171 
Consumer   -    556    12,279    -    -    12,279 
Government   -    21    19,284    -    -    19,284 
Total  $563   $8,181   $894,274   $4,165   $4,457   $885,652 
                               
The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2018: 
                               
Residential real estate  $22    1,693    223,323   $570   $980   $221,773 
Home equity   9    193    45,483    141    123    45,219 
Commercial real estate   210    3,125    253,104    1,703    402    250,999 
Construction and land development   -    756    64,433    -    -    64,433 
Multifamily   -    472    47,234    -    -    47,234 
Farmland   -    -    240    -    -    240 
Commercial business   5    1,357    103,439    423    1,440    101,576 
Consumer   -    82    6,043    -    -    6,043 
Government   -    38    21,101    -    -    21,101 
Total  $246   $7,716   $764,400   $2,837   $2,945   $758,618 

 

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

 

   Credit Exposure - Credit Risk Portfolio By Creditworthiness Category     
   June 30, 2019     
(Dollars in thousands)  2   3   4   5   6   7   8     
                                 
Loan Segment  Moderate   Above average
acceptable
   Acceptable   Marginally
acceptable
   Pass/monitor   Special mention   Substandard   Total 
Residential real estate  $881   $115,857   $105,661   $13,342   $55,872    3,900    5,975   $301,488 
Home equity   64    7,639    39,725    258    1,161    744    564    50,155 
Commercial real estate   -    4,336    85,845    126,413    53,058    4,253    2,049    275,954 
Construction and land development   -    310    23,891    32,407    15,047    -    -    71,655 
Multifamily   -    934    18,915    27,298    3,161    140    701    51,149 
Farmland   -    -    -    -    234    -    -    234 
Commercial business   9,634    21,596    20,230    36,348    20,081    2,423    1,764    112,076 
Consumer   2,155    2,666    6,371    190    897    -    -    12,279 
Government   -    1,889    13,485    3,910    -    -    -    19,284 
Total  $12,734   $155,227   $314,123   $240,166   $149,511   $11,460   $11,053   $894,274 

                                 
   December 31, 2018     
(Dollars in thousands)  2   3   4   5   6   7   8     
                                 
Loan Segment  Moderate   Above average
acceptable
   Acceptable   Marginally
acceptable
   Pass/monitor   Special mention   Substandard   Total 
Residential real estate  $261   $58,276   $100,374   $10,404   $44,734   $3,908   $5,366   $223,323 
Home equity   192    3,736    40,165    37    323    657    373    45,483 
Commercial real estate   -    5,042    78,611    110,984    51,982    4,715    1,770    253,104 
Construction and land development   -    322    24,271    29,383    10,457    -    -    64,433 
Multifamily   -    569    19,255    23,417    3,844    149    -    47,234 
Farmland   -    -    -    -    240    -    -    240 
Commercial business   10,655    19,127    20,941    34,996    14,034    2,958    728    103,439 
Consumer   925    2,953    1,040    196    909    20    -    6,043 
Government   -    2,111    14,795    4,195    -    -    -    21,101 
Total  $12,033   $92,136   $299,452   $213,612   $126,523   $12,407   $8,237   $764,400 

 

12

 

  

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

 

1 – Minimal Risk

 

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

 

2 – Moderate risk

 

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

 

3 – Above average acceptable risk

 

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

 

4 – Acceptable risk

 

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

 

5 – Marginally acceptable risk

 

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

 

6 – Pass/monitor

 

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

 

7 – Special mention (watch)

 

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

 

8 – Substandard

 

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

 

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

 

13

 

 

During the first six months of 2019, three home equity loans and one commercial business loan totaling $128 thousand were renewed as troubled debt restructurings. No troubled debt restructurings have subsequently defaulted during the periods presented. All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

 

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

 

               For the six months ended 
   As of June 30, 2019   June 30, 2019 
(Dollars in thousands)  Recorded
Investment
   Unpaid Principal
Balance
   Related Allowance   Average Recorded
Investment
   Interest Income
Recognized
 
With no related allowance recorded:                         
Residential real estate  $2,284   $3,762   $-   $1,813   $31 
Home equity   375    398    -    344    3 
Commercial real estate   1,665    2,264    -    1,655    33 
Construction and land development   -    -    -    -    - 
Multifamily   701    783    -    472    3 
Farmland   -    -    -    -    - 
Commercial business   2,565    2,695    -    1,967    43 
Consumer   -    -    -    -    - 
Government   -    -    -    -    - 
                          
With an allowance recorded:                         
Residential real estate   157    157    22    159    2 
Home equity   64    64    11    59    1 
Commercial real estate   471    471    196    478    - 
Construction and land development   -    -    -    -    - 
Multifamily   -    -    -    -    - 
Farmland   -    -    -    -    - 
Commercial business   340    340    334    145    - 
Consumer   -    -    -    -    - 
Government   -    -    -    -    - 
                          
Total:                         
Residential real estate  $2,441   $3,919   $22   $1,972   $33 
Home equity  $439   $462   $11   $403   $4 
Commercial real estate  $2,136   $2,735   $196   $2,133   $33 
Construction & land development  $-   $-   $-   $-   $- 
Multifamily  $701   $783   $-   $472   $3 
Farmland  $-   $-   $-   $-   $- 
Commercial business  $2,905   $3,035   $334   $2,112   $43 
Consumer  $-   $-   $-   $-   $- 
Government  $-   $-   $-   $-   $- 

 

14

 

 

               For the six months ended 
   As of December 31, 2018   June 30, 2018 
(Dollars in thousands)  Recorded
Investment
   Unpaid Principal
Balance
   Related Allowance   Average Recorded
Investment
   Interest Income
Recognized
 
With no related allowance recorded:                         
Residential real estate  $1,389   $3,628   $-   $1,108   $16 
Home equity   207    214    -    45    - 
Commercial real estate   1,624    2,222    -    561    - 
Construction & land development   -    -    -    89    - 
Multifamily   -    -    -    -    - 
Farmland   -    -    -    -    - 
Commercial business   1,799    2,038    -    257    - 
Consumer   -    -    -    -    - 
Government   -    -    -    -    - 
                          
With an allowance recorded:                         
Residential real estate   161    161    22    114    10 
Home equity   57    57    9    20    - 
Commercial real estate   481    481    210    160    16 
Construction & land development   -    -    -    -    - 
Multifamily   -    -    -    -    - 
Farmland   -    -    -    -    - 
Commercial business   64    64    5    186    8 
Consumer   -    -    -    -    - 
Government   -    -    -    -    - 
                          
Total:                         
Residential real estate  $1,550   $3,789   $22   $1,222   $26 
Home equity  $264   $271   $9   $65   $- 
Commercial real estate  $2,105   $2,703   $210   $721   $16 
Construction & land development  $-   $-   $-   $89   $- 
Multifamily  $-   $-   $-   $-   $- 
Farmland  $-   $-   $-   $-   $- 
Commercial business  $1,863   $2,102   $5   $443   $8 
Consumer  $-   $-   $-   $-   $- 
Government  $-   $-   $-   $-   $- 

 

As a result of acquisition activity, the Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At June 30, 2019, total purchased credit impaired loans with unpaid principal balances totaled $6.8 million with a recorded investment of $4.5 million. At December 31, 2018, purchased credit impaired loans with unpaid principal balances totaled $6.0 million with a recorded investment of $2.9 million.

 

15

 

 

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

 

(Dollars in thousands)  30-59 Days Past
Due
   60-89 Days Past
Due
   Greater Than 90
Days Past Due
   Total Past Due   Current   Total Loans   Recorded
Investments
Greater than 90
Days Past Due
and Accruing
 
June 30, 2019                                   
Residential real estate  $4,342   $1,597   $4,612   $10,551   $290,937   $301,488   $294 
Home equity   245    6    426    677    49,478    50,155    - 
Commercial real estate   753    174    1,146    2,073    273,881    275,954    220 
Construction and land development   248    -    -    248    71,407    71,655    - 
Multifamily   -    -    438    438    50,711    51,149    173 
Farmland   -    -    -    -    234    234    - 
Commercial business   372    331    1,320    2,023    110,053    112,076    238 
Consumer   181    34    -    215    12,064    12,279    - 
Government   -    -    -    -    19,284    19,284    - 
Total  $6,141   $2,142   $7,942   $16,225   $878,049   $894,274   $925 
                                    
December 31, 2018                                   
Residential real estate  $3,659   $909   $4,362   $8,930   $214,393   $223,323   $122 
Home equity   143    5    304    452    45,031    45,483    50 
Commercial real estate   842    18    611    1,471    251,633    253,104    - 
Construction and land development   491    533    -    1,024    63,409    64,433    - 
Multifamily   -    149    -    149    47,085    47,234    - 
Farmland   -    -    -    -    240    240    - 
Commercial business   733    260    436    1,429    102,010    103,439    149 
Consumer   1    72    -    73    5,970    6,043    - 
Government   -    -    -    -    21,101    21,101    - 
Total  $5,869   $1,946   $5,713   $13,528   $750,872   $764,400   $321 

 

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

 

(Dollars in thousands)        
   June 30, 2019   December 31, 2018 
Residential real estate  $5,720   $5,135 
Home equity   543    270 
Commercial real estate   926    695 
Construction and land development   -    - 
Multifamily   265    - 
Farmland   -    - 
Commercial business   1,521    495 
Consumer   -    - 
Government   -    - 
Total  $8,975   $6,595 

 

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

 

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

 

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

 

(dollars in thousands)  First Federal   Liberty Savings   First Personal   AJ Smith   Total 
2018  $36   $68   $-   $-   $104 
2019   22    42    357    451   $872 

  

16

 

  

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

 

(dollars in thousands)  First Personal   AJ Smith   Total 
2019  $281   $455   $736 
2020   538    879    1,417 
2021   345    871    1,216 
2022   334    871    1,205 
2023   75    359    434 
Total  $1,573   $3,435   $5,008 

 

Note 6 - Foreclosed Real Estate

 

Foreclosed real estate at period-end is summarized below:

 

   (Dollars in thousands) 
   June 30, 2019   December 31, 2018 
Residential real estate  $1,155   $1,132 
Commercial real estate   126    126 
Construction and land development   -    149 
Commercial business   220    220 
Total  $1,501   $1,627 

 

Note 7 – Intangibles and Acquisition Related Accounting

 

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

 

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

 

(dollars in thousands)   First Federal     Liberty Savings     First Personal     AJ Smith     Total  
Current period   $ 6     $ 29     $ 238     $ 187     $ 460  
Remainder 2019     6       29       237       224       496  
2020     12       58       475       449       994  
2021     12       58       475       449       994  
2022     1       58       475       449       983  
2023     -       38       475       449       962  
2024     -       -       470       449       919  
2025     -       -       -       261       261  
Total   $ 37     $ 270     $ 2,845     $ 2,917     $ 6,069  

 

For the First Personal acquisition, as part of the fair value of certificates of deposit, a fair value premium was established of $133 thousand that is being amortized over 8 months on a straight line basis. Approximately $53 thousand of amortization was taken as income during the six months ended June 30, 2019. The premium has been fully amortized as of June 30, 2019. For the AJSB acquisition, as part of the fair value of certificates of deposit, a fair value premium was established of $174 thousand that is being amortized over 14 months on a straight line basis. Approximately $64 thousand of amortization was taken as income during the six months ended June 30, 2019. It is estimated that an additional $76 thousand of amortization will occur during 2019 and an additional $34 thousand of amortization will occur during 2020.

 

Note 8 - Concentrations of Credit Risk

 

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

 

17

 

 

Note 9 - Earnings per Share

 

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

 

   Three Months Ended   Six Months Ended 
  June 30,   June 30, 
(Dollars in thousands, except per share data)  2019   2018   2019   2018 
Basic earnings per common share:                
Net income as reported  $4,023   $2,511   $6,245   $5,072 
Weighted average common shares outstanding   3,451,961    2,868,250    3,397,872    2,867,834 
Basic earnings per common share  $1.17   $0.88   $1.84   $1.77 
Diluted earnings per common share:             -      
Net income as reported  $4,023   $2,511   $6,245   $5,072 
Weighted average common shares outstanding   3,451,961    2,868,250    3,397,872    2,867,834 
Weighted average common and dilutive potential common shares outstanding   3,451,961    2,868,250    3,397,872    2,867,834 
Diluted earnings per common share  $1.17   $0.88   $1.84   $1.77 

 

Note 10 - Stock Based Compensation

 

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

 

As required by the Stock Compensation Topic, companies are required to record compensation cost for stock options and awards provided to employees in return for employment service. For the six months ended June 30, 2019, stock based compensation expense of $154 thousand was recorded, compared to $104 thousand for the six months ended June 30, 2018. It is anticipated that current outstanding unvested awards will result in additional compensation expense of approximately $556 thousand through 2022 with an additional $139 thousand in 2019, $246 thousand in 2020, $152 thousand in 2021, and $19 thousand in 2022.

 

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

 

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

 

Non-vested Shares  Shares   Weighted
Average
Grant Date
Fair Value
 
Non-vested at January 1, 2018   30,690   $28.51 
Granted   4,433    43.50 
Vested   (7,700)   22.64 
Forfeited   -    - 
Non-vested at December 31, 2018   27,423   $32.58 
           
Non-vested at January 1, 2019   27,423   $32.58 
Granted   7,407    43.00 
Vested   (4,310)   28.37 
Forfeited   -    - 
Non-vested at June 30, 2019   30,520   $35.70 

 

18

 

 

Note 11 – Change in Accounting Principles

 

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

 

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

 

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

 

Note 12 - Upcoming Accounting Standards

 

In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU includes increased disclosures and various changes to the accounting and measurement of financial assets including the Bancorp’s loans and available-for-sale and held-to-maturity debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. The new credit loss guidance will be effective for the Bancorp's year ending December 31, 2020. However, in July 2019, the FASB proposed changes to the effective date of this ASU for smaller reporting companies, such as the Bancorp, and other non-SEC reporting entities. The proposal would delay the effective date of this ASU to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Bancorp is a smaller reporting company, the proposed delay would be applicable to the Bancorp if it is approved by the FASB. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Early adoption for all institutions is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is in the process of evaluating the impact adoption of this update will have on the Bancorp’s consolidated financial statements. This process of evaluation has engaged multiple areas of the Bancorp’s management in discussing loss estimation methods and the application of these methods to specific segments of the loans receivable portfolio. Management has been actively monitoring developments and evaluating the use of different methods allowed. Due to continuing development of understanding of application, additional time is required to understand how this ASU will affect the Bancorp’s financial statements. Management plans on running parallel calculations during the year and finalizing a method or methods of adoption in time for the effective date.

 

19

 

 

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

 

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

 

Note 13 - Fair Value

 

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

 

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

 

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

 

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

 

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

 

20

 

 

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, 2018. A specialist will be used to review all pooled trust preferred securities again at December 31, 2019.

 

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

 

   (Dollars in thousands) 
   Collateralized 
   debt obligations 
   other-than-temporary 
   impairment 
Ending balance, December 31, 2018  $235 
Additions not previously recognized   - 
Ending balance, June, 2019  $235 

 

At June 30, 2019, trust preferred securities with a cost basis of $3.5 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.

 

21

 

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

       Fair Value Measurements at June 30, 2019 Using 
(Dollars in thousands)  Estimated
Fair
Value
   Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   Significant Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Available-for-sale debt securities:                    
Money market fund  $5,598   $5,598   $-   $- 
U.S. treasury securities   599    -    599    - 
U.S. government sponsored entities   13,082    -    13,082    - 
Collateralized mortgage obligations and residential mortgage-backed securities   145,174    -    145,174    - 
Municipal securities   92,242    -    92,242    - 
Collateralized debt obligations   2,047    -    -    2,047 
Total securities available-for-sale  $258,742   $5,598   $251,097   $2,047 

 

       Fair Value Measurements at December 31, 2018 Using 
(Dollars in thousands)  Estimated
Fair
Value
   Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   Significant Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Available-for-sale debt securities:                    
Money market fund  $2,480   $2,480   $-   $- 
U.S. treasury securities   -    -    -    - 
U.S. government sponsored entities   7,894    -    7,894    - 
Collateralized mortgage obligations and residential mortgage-backed securities   135,281    -    135,281    - 
Municipal securities   94,064    -    94,064    - 
Collateralized debt obligations.   2,049    -    -    2,049 
Total securities available-for-sale  $241,768   $2,480   $237,239   $2,049 

 

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

 

(Dollars in thousands)  Estimated Fair Value
Measurements Using
Significant Unobservable
Inputs (Level 3)
 
   Available-for-
sale securities
 
Beginning balance, January 1, 2018  $3,439 
Principal payments   (51)
Total unrealized gains, included in other comprehensive income   (36)
Transfers in and/or (out) of Level 3   (1,303)
Ending balance, December 31, 2018  $2,049 
      
Beginning balance, January 1, 2019  $2,049 
Principal payments   (26)
Total unrealized gains, included in other comprehensive income   24 
Sale out of Level 3   - 
Ending balance, June 30, 2019  $2,047 

 

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

 

       (Dollars in thousands) 
       Fair Value Measurements at June 30, 2019 Using 
(Dollars in thousands)  Estimated
Fair
Value
   Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   Significant Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Impaired loans  $8,059   $-   $-   $8,059 
Foreclosed real estate   1,501    -    -    1,501 

 

       (Dollars in thousands) 
       Fair Value Measurements at December 31, 2018 Using 
(Dollars in thousands)  Estimated
Fair
Value
   Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   Significant Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Impaired loans  $5,536   $-   $-   $5,536 
Foreclosed real estate   1,627    -    -    1,627 

 

22

 

 

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 $8.6 million and the related specific reserves totaled approximately $563 thousand, resulting in a fair value of impaired loans totaling approximately $8.1 million, at June 30, 2019. The recorded investment of impaired loans was approximately $5.8 million and the related specific reserves totaled approximately $246 thousand, resulting in a fair value of impaired loans totaling approximately $5.5 million, at December 31, 2018. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. The fair value of foreclosed real estate is similarly determined by using the results of recent real estate appraisals. The numerical range of unobservable inputs for these valuation assumptions is not meaningful to this presentation.

 

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

 

   June 30, 2019   Estimated Fair Value Measurements at June 30, 2019 Using 
(Dollars in thousands)  Carrying
Value
   Estimated
Fair Value
   Quoted Prices in
 Active Markets for
Identical Assets
(Level 1)
   Significant
Other Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Financial assets:                         
Cash and cash equivalents  $61,172   $61,172   $61,172   $-   $- 
Certificates of deposit in other financial institutions   1,970    1,940    -    1,940    - 
Securities available-for-sale   258,742    258,742    5,598    251,097    2,047 
Loans held-for-sale   3,835    3,920    3,920    -    - 
Loans receivable, net   885,530    891,109    -    -    891,109 
Federal Home Loan Bank stock   3,912    3,912    -    3,912    - 
Accrued interest receivable   4,131    4,131    -    4,131    - 
                          
Financial liabilities:                         
Non-interest bearing deposits   178,394    178,394    178,394    -    - 
Interest bearing deposits   948,727    947,957    631,162    316,795    - 
Repurchase agreements   20,628    20,628    18,863    1,765    - 
Borrowed funds   18,000    18,081    -    18,081    - 
Accrued interest payable   166    166    -    166    - 

 

   December 31, 2018   Estimated Fair Value Measurements at December 31, 2018 Using 
(Dollars in thousands)  Carrying
Value
   Estimated
Fair Value
   Quoted Prices in
 Active Markets for
Identical Assets
(Level 1)
   Significant
Other Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Financial assets:                         
Cash and cash equivalents  $17,139   $17,139   $17,139   $-   $- 
Certificates of deposit in other financial institutions   2,024    2,001    -    2,001    - 
Securities available-for-sale   241,768    241,768    2,480    237,239    2,049 
Loans held-for-sale   2,863    2,910    2,910    -    - 
Loans receivable, net   756,438    747,553    -    -    747,553 
Federal Home Loan Bank stock   3,460    3,460    -    3,460    - 
Accrued interest receivable   3,632    3,632    -    3,632    - 
                          
Financial liabilities:                         
Non-interest bearing deposits   127,277    127,277    127,277    -    - 
Interest bearing deposits   802,509    800,349    543,617    256,732    - 
Repurchase agreements   11,628    11,626    9,867    1,759    - 
Borrowed funds   43,000    42,888    -    42,888    - 
Accrued interest payable   186    186    -    186    - 

 

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

 

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

 

23

 

 

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

 

At June 30, 2019, the Bancorp had total assets of $1.3 billion, total loans receivable of $894.3 million and total deposits of $1.1 billion. Stockholders' equity totaled $128.8 million or 9.84% of total assets, with a book value per share of $42.52. Net income for the quarter ended June 30, 2019, was $4.0 million, or $1.17 earnings per common share for both basic and diluted calculations. For the quarter ended June 30, 2019, the return on average assets (ROA) was 1.27%, while the return on average stockholders’ equity (ROE) was 12.77%. Net income for the six months ended June 30, 2019, was $6.2 million, or $1.84 earnings per common share for both basic and diluted calculations. For the six months ended June 30, 2019, the ROA was 1.00%, while the ROE was 10.25%.

 

Recent Developments

 

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

 

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

 

The Bancorp issued 416,478 shares of Bancorp common stock to the former AJSB stockholders, and paid cash consideration of approximately $15.7 million. Based upon the closing price of NWIN’s common stock on January 23, 2019, the transaction had an implied valuation of approximately $32.9 million, which includes unallocated shares held by the AJSB Employee Stock Ownership Plan (“ESOP”), some of which were cancelled in connection with the closing to satisfy the ESOP’s outstanding loan balance. As of June 30, 2019, acquisition costs related to the AJSB Merger equaled approximately $2.1 million. The acquisition further expanded the Bank’s banking center network in Cook County, Illinois, expanding the Bank’s full-service retail banking network to 22 banking centers.

 

24

 

 

Acquisition of First Personal. On July 26, 2018, the Bancorp completed its previously announced acquisition of First Personal, pursuant to an Agreement and Plan of Merger dated February 20, 2018 (the “First Personal Merger Agreement”) between the Bancorp and First Personal. Pursuant to the terms of the First Personal Merger Agreement, First Personal merged with and into the Bancorp, with the Bancorp as the surviving corporation (the “First Personal Merger”). Simultaneous with the First Personal Merger, First Personal Bank, an Illinois state chartered commercial bank and wholly-owned subsidiary of First Personal, merged with and into Peoples Bank SB, with Peoples Bank as the surviving institution. The acquisition represented the Bank’s first expansion into the South Suburban Chicagoland market, and expanded the Bank’s full-service retail banking network to 19 banking centers.

 

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

 

The Bancorp issued a total of 161,875 shares of Bancorp common stock to the former First Personal stockholders, and paid cash consideration of approximately $8.7 million. Based upon the closing price of Bancorp’s common stock on July 25, 2018, the transaction had an implied valuation of approximately $15.6 million.

 

Financial Condition

 

During the six months ended June 30, 2019, total assets increased by $213.2 million (19.4%), with interest-earning assets increasing by $180.8 million (17.8%). At June 30, 2019, interest-earning assets totaled $1.2 billion compared to $1.0 billion at December 31, 2018. Earning assets represented 91.6% of total assets at June 30, 2019 and 92.9% of total assets at December 31, 2018. The increase in total assets and interest earning assets for the six months was primarily the result of the completion of the acquisition of AJSB as well as internally generated growth.

 

Net loans receivable totaled $885.5 million at June 30, 2019, compared to $756.4 million at December 31, 2018. The loan portfolio, which is the Bancorp’s largest asset, is the primary source of both interest and fee income. The Bancorp’s lending strategy emphasizes quality loan growth, product diversification, and competitive and profitable pricing.

 

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

 

   June 30,         
   2019   December 31, 
(Dollars in thousands)  (unaudited)   2018 
   Balance   % Loans   Balance   % Loans 
                 
Residential real estate  $301,488    33.7%   223,323    29.2%
Home equity   50,155    5.6%   45,483    6.0%
Commercial real estate   275,954    30.9%   253,104    33.1%
Construction and land development   71,655    8.0%   64,433    8.4%
Multifamily.   51,149    5.7%   47,234    6.2%
Farmland   234    0.0%   240    0.0%
Consumer   12,279    1.4%   6,043    0.8%
Commercial business   112,076    12.5%   103,439    13.5%
Government   19,284    2.2%   21,101    2.8%
Loans receivable  $894,274    100.0%  $764,400    100.0%
                     
Adjustable rate loans / loans receivable  $490,694    54.9%  $348,559    45.6%

 

   June 30,     
   2019   December 31, 
   (unaudited)   2018 
         
Loans receivable to total assets   68.3%   69.7%
Loans receivable to earning assets   74.6%   75.1%
Loans receivable to total deposits   79.3%   82.2%

 

The Bancorp is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the six months ended June 30, 2019, the Bancorp originated $29.6 million in new fixed rate mortgage loans for sale, compared to $24.3 million during the six months ended June 30, 2018. Net gains realized from the mortgage loan sales totaled $642 thousand for the six months ended June 30, 2019, compared to $570 thousand for the six months ended June 30, 2018. At June 30, 2019, the Bancorp had $3.8 million in loans that were classified as held for sale, compared to $2.9 million at December 31, 2018.

 

25

 

 

Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status. At June 30, 2019, non-performing loans that remained accruing and more than 90 days past due include four residential real estate loans totaling $294 thousand, one commercial business totaling $238 thousand, three commercial real estate loans totaling $220 thousand, and two multifamily loans totaling $173 thousand. The Bancorp will at times leave notes accruing, despite being over 90 days past due, for short periods of time when management has reason to believe payments are in process of being received.

 

The Bancorp's nonperforming loans are summarized below:
 
(Dollars in thousands)            
Loan Segment   (unaudited)
June 30, 2019
    December 31,
2018
 
Residential real estate   $ 6,014     $ 5,257  
Home equity     543       320  
Commercial real estate     1,146       695  
Construction and land development     -       -  
Multifamily     438