Company Quick10K Filing
Quick10K
West End Indiana Bancshares
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$33.00 1 $35
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 2019-08-09 Other Events, Exhibits
8-K 2019-07-31 Enter Agreement, Other Events, Exhibits
8-K 2019-05-29 Other Events, Exhibits
8-K 2019-05-15 Shareholder Vote, Exhibits
8-K 2019-05-03 Other Events, Exhibits
8-K 2019-03-06 Other Events, Exhibits
8-K 2019-03-06 Other Events, Exhibits
8-K 2018-11-28 Other Events, Exhibits
8-K 2018-10-31 Other Events, Exhibits
8-K 2018-08-29 Other Events, Exhibits
8-K 2018-08-22 Officers, Exhibits
8-K 2018-08-03 Other Events, Exhibits
8-K 2018-06-06 Other Events, Exhibits
8-K 2018-05-16 Shareholder Vote, Exhibits
8-K 2018-05-03 Other Events, Exhibits
8-K 2018-03-12 Other Events, Exhibits
8-K 2018-02-28 Other Events, Exhibits
NXTC NextCure 773
SOTK Sono Tek 40
CNNB Cincinnati Bancorp 29
PING Ping Identity 0
MYLI Music of Your Life 0
HICT Hiclasst 0
CPA18 Corporate Property Associates 18 Global 0
TRMM Trupal 0
MDEX Madison Technologies 0
PGEC Prestige Capital 0
WEIN 2019-03-31
Part I. - Financial Information
Item 1.Financial Statements
Note 1: Nature of Operations
Note 2: Securities
Note 3: Loans and Allowance
Note 4: Disclosures About Fair Value of Assets and Liabilities
Note 5: Recent Accounting Pronouncements
Note 6: Earnings per Share
Note 7: Share Based Compensation
Note 8: Employee Stock Ownership Plan
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 tv521025_ex31-1.htm
EX-31.2 tv521025_ex31-2.htm
EX-32 tv521025_ex32.htm

West End Indiana Bancshares Earnings 2019-03-31

WEIN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv521025_10q.htm FORM 10-Q

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 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 No. 000-54578

 

West End Indiana Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland   36-4713616

(State or other jurisdiction of

in Company or organization)

 

(I.R.S. Employer

Identification Number)

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

 

(765) 962-9587

(Registrant’s telephone number)

 

N/A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

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 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company “in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer ¨   Smaller reporting company x
(Do not check if smaller reporting company)   Emerging growth company ¨

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨     NO x

 

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

 

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

 

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

 

 

 

 

 

 

West End Indiana Bancshares, Inc.

Form 10-Q

 

Index

 

    Page
Part I. Financial Information
     
Item 1. Condensed Consolidated Financial Statements  
     
  Condensed Consolidated Balance Sheets 1
     
  Condensed Consolidated Statements of Income 2
     
  Condensed Consolidated Statements of Comprehensive Income 3
     
  Condensed Consolidated Statements of Cash Flows 4
     
  Condensed Statements of Stockholders’ Equity 5
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
     
Item 4. Controls and Procedures 35
     
Part II. Other Information
     
Item 1. Legal Proceedings 35
     
Item 1A. Risk Factors 35
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
     
Item 3. Defaults upon Senior Securities 35
     
Item 4. Mine Safety Disclosures 35
     
Item 5. Other Information 35
     
Item 6. Exhibits 36
     
  Signature Page 37

 

 

 

 

Part I. – Financial Information

Item 1.Financial Statements

 

West End Indiana Bancshares, Inc.

Condensed Consolidated Balance Sheets

 

   March 31,   December 31, 
   2019   2018 
         
Assets          
Cash and due from banks  $1,713,837   $1,551,865 
Interest-bearing demand deposits   10,602,163    8,383,465 
Cash and cash equivalents   12,316,000    9,935,330 
Investment securities available for sale   19,257,202    19,796,452 
Loans held for sale   -    132,517 
Loans, net of allowance for loan losses of $2,940,082 and $3,039,697   242,552,604    244,955,065 
Premises and equipment   8,785,569    8,897,904 
Federal Home Loan Bank stock   2,435,700    2,435,700 
Interest receivable   1,031,709    1,128,409 
Bank-owned life insurance   6,120,738    7,136,110 
Foreclosed real estate held for sale   -    16,000 
Other assets   6,630,693    5,717,756 
           
Total assets  $299,130,215   $300,151,243 
           
Liabilities and Equity          
           
Liabilities          
Deposits  $218,410,453   $217,914,164 
Federal Home Loan Bank advances   48,500,000    50,500,000 
Interest payable   124,215    133,353 
Other liabilities   1,426,303    1,442,833 
Total liabilities   268,460,971    269,990,350 
           
Commitments and Contingencies          
           
Redeemable common stock held by Employee Stock Ownership Plan (ESOP)   904,179    1,028,282 
           
Stockholders’ Equity          
Common stock, $.01 par value per share: Issued and outstanding – 1,065,336 and 1,065,336   10,653    10,653 
Additional paid in capital   6,275,796    6,251,261 
Retained earnings   25,457,594    25,211,544 
Unearned employee stock ownership plan (ESOP)   (714,510)   (728,520)
Accumulated other comprehensive loss   (360,289)   (584,045)
           
Total stockholders’ equity   30,669,244    30,160,893 
           
Less maximum cash obligation related to ESOP shares   (904,179)   (1,028,282)
           
Total stockholders’ equity less maximum cash obligation related to ESOP shares   29,765,065    29,132,611 
           
Total liabilities and stockholders’ equity  $299,130,215   $300,151,243 

 

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

 

1

 

 

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements of Income

 

   Three Months Ended March 31, 
   2019   2018 
   (Unaudited) 
Interest and Dividend Income          
Loans receivable, including fees  $3,523,478   $3,454,656 
Investment securities   112,739    102,671 
Other   73,960    68,121 
Total interest income   3,710,177    3,625,448 
           
Interest Expense          
Deposits   601,412    499,481 
Federal Home Loan Bank advances   260,951    201,150 
Total interest expense   862,363    700,631 
           
Net Interest Income   2,847,814    2,924,817 
Provision for loan losses   333,000    555,045 
Net Interest After Provision for Loan Losses   2,514,814    2,369,772 
           
Other Income          
Service charges on deposit accounts   158,331    172,735 
Loan servicing income, net   (8,568)   80,681 
Debit card income   96,075    94,062 
Gain on sale of loans   55,440    111,778 
Gain on cash surrender value and redemption of life insurance policies   141,274    43,402 
Loss on sale of other assets   (24,274)   (7,656)
Other income   8,908    11,344 
Total other income   427,186    506,346 
           
Other Expense          
Salaries and employee benefits   1,456,054    1,386,618 
Net occupancy   191,001    208,459 
Data processing fees   141,617    124,015 
Professional fees   150,125    99,728 
Director expenses   25,065    24,300 
Advertising   60,024    55,778 
ATM charges   42,616    41,608 
Postage and courier   63,517    62,656 
FDIC insurance premiums   31,000    39,000 
Foreclosed real estate and repossession expense   84,582    46,317 
Other expenses   300,277    320,584 
Total other expenses   2,545,878    2,409,063 
           
Income Before Income Tax   396,122    467,055 
Income tax expense   80,598    119,526 
           
Net Income  $315,524   $347,529 
Earnings Per Share          
Basic  $0.32   $0.35 
Diluted   0.31    0.34 
Dividends Per Share   0.07    0.06 

 

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

 

2

 

 

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements

of Comprehensive Income

 

  

Three Months Ended

March 31,

 
   2019   2018 
   (Unaudited) 
Net income  $315,524   $347,529 
Other comprehensive income(loss), net of tax          
Unrealized holding gains (losses) arising during the period, net of tax expense (benefit) of $78,354 and $(81,228)   223,756    (229,568)
           
Comprehensive income  $539,280   $117,961 

 

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

 

3

 

 

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

 

   Three Months Ended 
   March 31, 
   2019   2018 
   (Unaudited) 
Operating Activities          
Net income  $315,524   $347,529 
Items not requiring (providing) cash          
Provision for loan losses   333,000    555,045 
Depreciation and amortization   115,935    124,236 
Investment securities amortization, net   51,806    73,760 
Loan originated for sale   (1,736,580)   (2,592,065)
Proceeds on loan sold   1,904,411    3,744,806 
Gain on loans sold   (55,440)   (111,778)
Loss on other assets   24,274    7,656 
ESOP shares earned   36,599    40,171 
Stock based compensation   1,946    71,375 
Gain on cash surrender value and redemption of life insurance policies   (141,274)   (43,402)
Net change in          
Interest receivable   96,701    122,861 
Interest payable   (9,138)   22,891 
Other adjustments   200,391    (161,509)
Net cash provided by operating activities   1,138,155    2,201,576 
           
Investing Activities          
Purchases of securities available for sale   -    (4,126,227)
Proceeds from maturities of securities available for sale   789,554    1,029,809 
Net change in loans   1,828,873    (2,575,534)
Purchase of premises and equipment   (3,600)   (35,094)
Proceeds from sale of foreclosed real estate and repossessions   200,873    138,423 
Net cash provided by (used in) investing activities   2,815,700    (5,568,623)
           
Financing Activities          
Net change in demand deposits, money market, NOW, and savings accounts   88,935    (1,716,586)
Net change in certificates of deposit   407,354    4,115,192 
Repayment of FHLB advances   (21,000,000)   (8,000,000)
Proceeds from FHLB advances   19,000,000    15,000,000 
Cash dividends   (69,474)   (59,305)
Net cash provided by (used in) financing activities   (1,573,185)   9,339,301 
           
Net Change in Cash and Cash Equivalents   2,380,670    5,972,254 
           
Cash and Cash Equivalents, Beginning of Period   9,935,330    10,345,822 
           
Cash and Cash Equivalents, End of Period  $12,316,000   $16,318,076 
           
Additional Cash Flows Information          
Interest paid  $871,501   $677,740 
Real estate acquired in settlement of loans   338,674    187,840 
Sales and financing of foreclosed real estate and repossessions   98,086    - 

 

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

 

4

 

 

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

For the Three Months Ended March 31, 2019 and 2018

 

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

 

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

 

 

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

 

5

 

 

West End Indiana Bancshares, Inc.

Form 10-Q

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 1: Nature of Operations

 

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

 

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

 

Basis of Presentation

 

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

 

Principals of Consolidation and Revenue from Contract with Customers

 

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

 

Revenue from Contracts with Customers

 

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

 

6

 

 

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

 

NOTE 2: Securities

 

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

 

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

 

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

 

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

 

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

 

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

 

7

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Municipal Bonds

 

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

 

Mortgage-backed Securities – GSE Residential

 

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

 

8

 

 

NOTE 3: Loans and Allowance

 

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

 

Loans

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

9

 

 

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

 

Allowance for Loan Losses

 

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

 

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

 

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

 

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

 

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

 

10

 

 

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

 

Categories of loans include:

 

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

 

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

 

Commercial

 

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

 

Commercial and Multi-Family Real Estate

 

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

 

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

 

11

 

 

Construction

 

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

 

Residential, Second mortgages and equity lines of credit and Consumer

 

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

 

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

 

   (Unaudited)     
   Real Estate     
   Commercial   Residential   Commercial
and
Multi-Family
   Construction   Seconds
and
Equity Line
   Consumer   Total 
   (In Thousands) 
Three Months Ended March 31, 2019:                                   
Balance, beginning of year  $408   $164   $942   $4   $12   $1,510   $3,040 
Provision for losses   (124)   (2)   (23)   1        481    333 
Recoveries on loans   9    1                21    31 
Loans charged off                       (464)   (464)
Balance, end of period  $293   $163   $919   $5   $12   $1,548   $2,940 
                                    
Three Months Ended March 31, 2018:                                   
Balance, beginning of year  $303   $191   $886   $2   $10   $1,353   $2,745 
Provision for losses   253    19    (10)   1    (1)   293    555 
Recoveries on loans       15                32    47 
Loans charged off       (27)   (1)           (347)   (375)
Balance, end of period  $556   $198   $875   $3   $9   $1,331   $2,972 

 

12

 

 

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

 

       March 31, 2019         
       Real Estate         
   Commercial   Residential   Commercial
and Multi-
Family
   Construction   Seconds and
Equity Line
   Consumer   Total 
                             
   (In Thousands) 
Allowance:                                   
Balance, end of period  $293   $163   $919   $5   $12   $1,548   $2,940 
Individually evaluated for impairment   201    -    680    -    -    -    881 
Collectivity evaluated for impairment   92    163    239    5    12    1,548    2,059 
Loans:                                   
Ending balance  $12,784   $63,422   $59,534   $3,612   $6,827   $99,411   $245,590 
Individually evaluated for impairment   759    -    1,345    -    -    86    2,190 
Collectivity evaluated for impairment   12,025    63,422    58,189    3,612    6,827    99,325    243,400 

 

       December 31, 2018         
       Real Estate         
   Commercial   Residential   Commercial
and Multi-
Family
   Construction   Seconds and
Equity Line
   Consumer   Total 
                             
   (In Thousands) 
Allowance:                                   
Balance, end of year  $408   $164   $942   $4   $12   $1,510   $3,040 
Individually evaluated for impairment   317    -    700    -    -    -    1,017 
Collectivity evaluated for impairment   91    164    242    4    12    1,510    2,023 
Loans:                                   
Ending balance  $12,825   $63,787   $59,725   $3,092   $6,971   $101,694   $248,094 
Individually evaluated for impairment   787    -    1,355    -    -    -    2,142 
Collectivity evaluated for impairment   12,038    63,787    58,370    3,092    6,971    101,694    245,952 

 

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

 

   March 31, 2019     
   Real Estate     
   Commercial   Residential   Commercial
and
Multi-Family
   Construction   Seconds
and
Equity Line
   Consumer   Total 
     
   (In Thousands) 
Pass  $11,912   $63,051   $53,617   $3,612   $6,827   $99,325   $238,344 
Watch   113    ––    2,599            86    2,798 
Special Mention   ––    371    1,973        ––        2,344 
Substandard   759    ––    1,345            ––    2,104 
Doubtful   ––                        –– 
Loss                   ––        –– 
Total  $12,784   $63,422   $59,534   $3,612   $6,827   $99,411   $245,590 

 

13

 

 

       December 31, 2018     
       Real Estate     
   Commercial   Residential   Commercial
and
Multi-Family
   Construction   Seconds
and
Equity Line
   Consumer   Total 
                             
   (In Thousands) 
Pass  $11,916   $63,415   $53,778   $3,092   $6,971   $101,694   $240,866 
Watch   122    ––    2,608                2,730 
Special Mention   ––    372    1,984        ––        2,356 
Substandard   787    ––    1,355            ––    2,142 
Doubtful   ––                        –– 
Loss                   ––        –– 
Total  $12,825   $63,787   $59,725   $3,092   $6,971   $101,694   $248,094 

 

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

 

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

 

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

 

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

 

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

 

14

 

 

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

 

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

 

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

 

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

 

       March 31, 2019         
       Real Estate         
   Commercial   Residential   Commercial
and
Multi-
Family
   Construction   Seconds
and Equity
Line
   Consumer   Total 
     
   (In Thousands) 
30-59 days past due  $46   $15   $-   $-   $43   $1,246   $1,350 
60-89 days past due   35    23    -    -    43    733    834 
Greater than 90 days past due   -    619    387    -    -    847    1,853 
Total past due   81    657    387    -    86    2,826    4,037 
Current   12,703    62,765    59,147    3,612    6,741    96,585    241,553 
Total loans  $12,784   $63,422   $59,534   $3,612   $6,827   $99,411   $245,590 
                                    
Nonaccrual loans  $-   $511   $-   $-   $-   $-   $511 
Past due 90 days and accruing   -    108    387    -    -    847    1,342 
Total  $-   $619   $387   $-   $-   $847   $1,853 

 

       December 31, 2018         
       Real Estate         
   Commercial   Residential   Commercial
and
Multi-
Family
   Construction   Seconds
and Equity
Line
   Consumer   Total 
                             
   (In Thousands) 
30-59 days past due  $17   $110   $387   $-   $3   $1,140   $1,657 
60-89 days past due   -    181    -    -    -    495    676 
Greater than 90 days   -    529    -    -    2    952    1,483 
Total past due   17    820    387    -    5    2,587    3,816 
Current   12,808    62,967    59,338    3,092    6,966    99,107    244,278 
Total loans  $12,825   $63,787   $59,725   $3,092   $6,971   $101,694   $248,094 
                                    
Nonaccrual loans  $-   $507   $-   $-   $-   $11   $518 
Past due 90 days and accruing   -    22    -    -    2    941    965 
Total  $-   $529   $-   $-   $2   $952   $1,483 

 

15

 

 

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

 

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

 

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

 

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

 

16

 

 

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

 

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

 

       (Unaudited)     
       Real Estate     
   Commercial   Residential   Commercial
and
Multi-Family
   Construction   Seconds
and
Equity Line
   Consumer   Total 
   (In Thousands) 
Three Months Ended March 31, 2018:                            
Total impaired loan:                                   
Average recorded investment  $812   $   $1,601   $––   $––   $––   $2,413 
Interest income recognized   12        22    ––    ––    ––    34 
Interest income recognized on a cash basis           ––    ––    ––    ––    –– 

 

Troubled Debt Restructurings

 

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

 

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

 

17

 

 

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

 

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

 

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

 

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

 

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

 

NOTE 4: Disclosures About Fair Value of Assets and Liabilities

 

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

 

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

 

Level 1Quoted prices in active markets for identical assets or liabilities

 

Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

Recurring Measurements

 

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

 

Available-for-Sale Securities

 

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

 

18

 

 

Mortgage-Servicing Rights

 

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

 

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

 

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

 

 

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

 

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

 

19

 

 

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

 

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

 

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

 

Nonrecurring Measurements

 

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

 

Impaired Loans (Collateral Dependent)

 

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

 

The fair values of collateral dependent impaired loans are based on independent appraisals of the collateral. In general, the Company acquires an updated appraisal upon identification of impairment and annually thereafter for commercial, commercial real estate and multi-family loans. If the most recent appraisal is over a year old, and a new appraisal is not performed, due to lack of comparable values or other reasons, the existing appraisal is utilized and discounted 25% - 35% based on the age of the appraisal, condition of the subject property, and overall economic conditions. After determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses.

 

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

 

20

 

 

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

 

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

 

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

 

Unobservable (Level 3) Inputs

 

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

 

   Fair Value at
March 31, 2019
   Valuation
Technique
  Unobservable
Inputs
  Range (Weighted Average) 
   (In Thousands) (unaudited) 
Impaired loans  $764   Comparative sales based on independent appraisals
  Marketability Discount   50.0%
Mortgage-servicing rights  $771   Discounted Cash Flow
  Discount rate
Conditional prepayment rate
Expected loan servicing years
   

5.9% -6.6% (6.4%)

9.1% - 11.7% (9.7%)

1.4 – 4.7 (4.2)

 

 

   Fair Value at
December 31, 2018
   Valuation
Technique
  Unobservable
Inputs
  Range (Weighted Average) 
    (In Thousands) 
Impaired loans  $661   Comparative sales based on independent appraisals
  Marketability Discount   57.0%
Mortgage-servicing rights  $801   Discounted Cash Flow
 

Discount rate
Conditional prepayment rate
Expected loan servicing years

 

   

6.0% -6.8% (6.6%)

8.6% - 11.4% (9.2%)

1.5 – 4.8 (4.4)

 
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Sensitivity of Significant Unobservable Inputs

 

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

 

Mortgage –Servicing Rights

 

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

 

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

 

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

 

The carrying amount approximates fair value.

 

Loans Held for Sale

 

Loans held for sale are based on current market prices.

 

Loans

 

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

 

Deposits

 

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

 

Federal Home Loan Bank Advances

 

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

 

22

 

 

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

 

   March 31, 2019 
       Fair Value 
   Carrying
Amount
   Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Financial assets                    
Cash and cash equivalents  $12,316   $12,316   $––   $ 
Loans, net   242,553        ––    239,507 
Federal Home Loan Bank stock   2,436        2,436     
Interest receivable   1,032        1,032     
Financial liabilities                    
Deposits   218,410    111,716    106,925     
Federal Home Loan Bank advances   48,500        48,147     
Interest payable   124        124     

 

   December 31, 2018 
       Fair Value 
   Carrying
Amount
   Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Financial assets                    
Cash and cash equivalents  $9,935   $9,935   $––   $ 
Loans held for sale   133    ––    133     
Loans, net   244,955        ––    241,786 
Federal Home Loan Bank stock   2,436        2,436     
Interest receivable   1,128        1,128     
Financial liabilities                    
Deposits   217,914    111,627    106,413     
Federal Home Loan Bank advances   50,500        50,400     
Interest payable   133        133     

 

23

 

 

NOTE 5: Recent Accounting Pronouncements

 

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

 

24

 

 

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

 

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

 

25

 

 

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

 

NOTE 6: Earnings per Share

 

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

 

   (Unaudited) 
  

Three Months Ended

March 31,

 
   2019   2018 
   (In Thousands) 
Net Income   316    347 
Allocated to participating securities   -    (4)
Net income allocated to common stockholders  $316   $343 
           
Weighted average common shares outstanding, gross   1,065,336    1,066,858 
Less:  Average unearned ESOP shares and participating securities   (72,369)   (89,181)
Weighted average common shares outstanding, net   992,967    977,677 
Effect of diluted based awards   34,279    41,613 
Weighted average shares and common stock equivalents   1,027,246    1,019,290 
           
Income per common share:          
Basic  $0.32   $0.35 
Diluted  $0.31   $0.34 
           
Options excluded from the calculation due to their anti-dilutive effect on earnings per share   -    - 

 

26

 

 

NOTE 7: Share Based Compensation

 

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

 

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

 

Stock Options

 

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

 

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

 

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

 

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

 

27

 

 

Restricted Stock Awards

 

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

 

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

 

NOTE 8: Employee Stock Ownership Plan

 

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

 

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

 

   March 31,   December 31, 
   2019   2018 
   (Unaudited) 
Allocated shares   35,159    35,159 
Unreleased shares   72,852    72,852 
Total ESOP shares   108,011    108,011 
           
Fair value of unreleased shares at March 31, 2019, and December 31, 2018 (in thousands)  $1,985   $1,909 

 

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

 

28

 

 

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

 

29

 

 

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

 

General

 

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

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

statements of our goals, intentions and expectations;

 

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

 

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

 

estimates of our risks and future costs and benefits.

 

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

 

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

 

·general economic conditions, either nationally or in our market areas, that are worse than expected;
·competition among depository and other financial institutions;
·our success in continuing to emphasize consumer lending, including indirect automobile lending;
·our ability to improve our asset quality even as we increase our non-residential lending;
·our success in maintaining our commercial and multi-family real estate and our non-owner occupied one- to four-family residential real estate and commercial business lending;
·changes in the interest rate environment that reduce our margins or reduce the fair value of our financial instruments;
·adverse changes in the securities markets;
·changes in laws or government regulations or policies affecting financial institutions, including changes in deposit insurance premiums, regulatory fees and capital requirements, which increase our compliance costs;
·our ability to enter new markets successfully and capitalize on growth opportunities;
·changes in consumer spending, borrowing and savings habits;
·changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;
·changes in our organization, compensation and benefit plans;
·loan delinquencies and changes in the underlying cash flows of our borrowers;

 

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·changes in our financial condition or results of operations that reduce capital available to pay dividends; and
·changes in the financial condition or future prospects of issuers of securities that we own.

 

Critical Accounting Policies

 

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


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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

   Three months ended March 31, 
   2019   2018 
   Average
Balance
   Interest
and
Dividends
   Yield/Cost   Average
Balance
   Interest
and
Dividends
   Yield/Cost 
Assets:                              
Interest-earning assets:                              
Loans  $243,590   $3,523    5.87%  $243,679   $3,454    5.75%
Investment Securities   19,225    113    2.38%   20,863    103    2.00%
Other interest-earning assets   10,731    74    2.80%   12,838    68    2.15%
    273,546    3,710    5.50%   277,380    3,625    5.30%
Noninterest-earning assets   24,447              24,261           
Total assets  $297,993             $301,641           
                               
Liabilities and stockholders' equity                              
Interest-bearing liabilities:                              
Now accounts  $30,604    13    0.17%  $32,542    16    0.20%
Money market accounts   29,417    49    0.68%   40,279    49    0.49%
Savings accounts   24,639    31    0.51%   21,388    14    0.27%
Certificates of deposit   106,686    508    1.93%   108,455    420    1.57%
Total interest-bearing deposits   191,346    601    1.27%   202,664    499    1.00%
FHLB advances   50,078    261    2.11%   45,533    201    1.79%
Total interest-bearing liabilities   241,424    862    1.45%   248,197    700    1.14%
Noninterest-bearing deposits   24,452              22,889           
Other noninterest-bearing liabilities   1,540              1,502           
Total liabilities   267,416              272,588           
Total stockholders' equity   30,577              29,053           
Total liabilities and stockholders' equity  $297,993             $301,641           
Net interest income       $2,848             $2,925      
Interest rate spread             4.05%             4.16%
Net interest margin (annualized)             4.16%             4.22%
Average interest-earning assets to average interest-bearing liabilities             113.31%             111.76%

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4.Controls and Procedures

 

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

 

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

 

Part II – Other Information

 

Item 1.Legal Proceedings

 

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

 

Item 1A.Risk Factors

 

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

 

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

 

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

 

(b)Not applicable.

 

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

 

Item 3.Defaults Upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosures

 

None.

 

Item 5.Other Information

 

None.

 

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Item 6.Exhibits

 

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS XBRL Instance Document.
   
101.SCH XBRL Schema Document.
   
101.CAL XBRL Calculation Linkbase Document.
   
101.DEF XBRL Definition Linkbase Document.
   
101.LAB XBRL Label Linkbase Document.
   
101.PRE XBRL Presentation Linkbase Document

 

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SIGNATURES

 

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

 

  WEST END INDIANA BANCSHARES, INC.
   
Date:  May 15, 2019 /s/ Timothy R. Frame
  Timothy R. Frame
  President/Chief Executive Officer
   
   
Date:  May 15, 2019 /s/ Shelley D. Miller
  Shelley D. Miller
  Executive Vice President and Chief Financial Officer

 

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