|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||2018-08-03||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|
|NMFC||New Mountain Finance||1,110|
|BBW||Build A Bear Workshop||84|
|ACF||General Motors Financial Company||0|
|Item 1A.Risk Factors|
|Item 1B.Unresolved Staff Comments|
|Item 3.Legal Proceedings|
|Item 4.Mine Safety Disclosures.|
|Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities|
|Item 6.Selected Financial Data|
|Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations|
|Item 7A.Quantitative and Qualitative Disclosures About Market Risk|
|Item 8.Financial Statements and Supplementary Data|
|Note 1:Nature of Operations and Summary of Significant Accounting Policies|
|Note 3:Loans and Allowance|
|Note 4:Premises and Equipment|
|Note 5:Loan Servicing|
|Note 7:Federal Home Loan Bank Advances|
|Note 8:Income Taxes|
|Note 9:Commitments and Contingent Liabilities|
|Note 10:Regulatory Capital|
|Note 11:Employee Benefits|
|Note 12:Share Based Compensation|
|Note 13:Employee Stock Ownership Plan|
|Note 14:Earnings per Share|
|Note 15:Related Party Transactions|
|Note 16:Disclosures About Fair Value of Assets and Liabilities|
|Note 17:Condensed Financial Information (Parent Company Only)|
|Note 18:Recent Accounting Pronouncements|
|Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure|
|Item 9Acontrols and Procedures|
|Item 9B.Other Information|
|Item 10.Directors, Executive Officers and Corporate Governance|
|Item 11.Executive Compensation|
|Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters|
|Item 13.Certain Relationships and Related Transactions and Director Independence|
|Item 14.Principal Accountant Fees and Services|
|Item 15.Exhibits and Financial Statement Schedules|
|Item 16.Form 10-K Summary|
|Balance Sheet||Income Statement||Cash Flow|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|x||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal ended December 31, 2018.
|¨||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the transition period from _______________ to _______________.
Commission file number: 001-54578
WEST END INDIANA BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
|34 South 7th Street, Richmond, Indiana||47374|
|(Address of principal executive offices)||(Zip Code)|
Registrant's telephone number, including area code: (765) 962-9587
Securities registered pursuant to Section 12(b) of the Act: None
|(Title of each class to be registered)|
(Name of each exchange on which
each class is to be registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer ¨||Accelerated filer ¨|
|Non-accelerated filer x||Smaller reporting company x|
|Emerging growth company ¨|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2018 ($31.40) was approximately $33.4 million.
As of March 29, 2019, there were 1,065,336 issued and outstanding shares of the Registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Proxy Statement for the 2019 Annual Meeting of Stockholders of the Registrant (Part III).
TABLE OF CONTENTS
|ITEM 1A.||Risk Factors||45|
|ITEM 1B.||Unresolved Staff Comments||45|
|ITEM 3.||Legal Proceedings||46|
|ITEM 4.||Mine Safety Disclosures.||46|
|ITEM 5.||Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities||46|
|ITEM 6.||Selected Financial Data||47|
|ITEM 7.||Management’s Discussion and Analysis of Financial Condition and Results of Operations||47|
|ITEM 7A.||Quantitative and Qualitative Disclosures about Market Risk||59|
|ITEM 8.||Financial Statements and Supplementary Data||59|
|ITEM 9.||Changes in and Disagreements with Accountants on Accounting and Financial Disclosure||60|
|ITEM 9A||Controls and Procedures||60|
|ITEM 9B.||Other Information||61|
|ITEM 10.||Directors, Executive Officers and Corporate Governance||61|
|ITEM 11.||Executive Compensation||62|
|ITEM 12.||Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters||62|
|ITEM 13.||Certain Relationships and Related Transactions and Director Independence||62|
|ITEM 14.||Principal Accountant Fees and Services||62|
|ITEM 15.||Exhibits and Financial Statement Schedules||62|
|ITEM 16.||Form 10-K Summary||63|
This annual 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 annual report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
|·||general economic conditions, either nationally or in our market areas, that are worse than expected;|
|·||competition among depository and other financial institutions;|
|·||our success in continuing to emphasize consumer lending, including indirect automobile lending;|
|·||our ability to improve our asset quality even as we increase our non-residential lending;|
|·||our success in maintaining our commercial and multi-family real estate and our non-owner occupied one- to four-family residential real estate and commercial business lending;|
|·||changes in the interest rate environment that reduce our margins or reduce the fair value of our financial instruments;|
|·||adverse changes in the securities markets;|
|·||changes in laws or government regulations or policies affecting financial institutions, including changes in deposit insurance premiums, regulatory fees and capital requirements, which increase our compliance costs;|
|·||our ability to enter new markets successfully and capitalize on growth opportunities;|
|·||changes in consumer spending, borrowing and savings habits;|
|·||changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;|
|·||changes in our organization, compensation and benefit plans;|
|·||loan delinquencies and changes in the underlying cash flows of our borrowers;|
|·||changes in our financial condition or results of operations that reduce capital available to pay dividends; and|
|·||changes in the financial condition or future prospects of issuers of securities that we own.|
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
West End Indiana Bancshares, Inc.
West End Indiana Bancshares, Inc. was incorporated in the State of Maryland in June 2011 for the purpose of becoming the savings and loan holding company for West End Bank, S.B. (the “Bank”), upon consummation of the mutual to stock conversion of West End Bank, MHC, the Bank’s former mutual holding company, which occurred on January 10, 2012. Other than owning the Bank and making a loan to the Bank’s employee stock ownership plan, the Company has engaged in no material operations to date.
As a registered savings and loan holding company, West End Indiana Bancshares, Inc. is authorized to pursue other business activities permitted by applicable laws and regulations, which may include the acquisition of banking and financial services companies. See “Supervision and Regulation –Holding Company Regulation” for a discussion of the activities that are permitted for savings and loan holding companies. We currently have no understandings or agreements to acquire other financial institutions although we may determine to do so in the future. We may also borrow funds for reinvestment in West End Bank, S.B.
West End Bank, S.B.
West End Bank, S.B. is an Indiana-chartered savings bank headquartered in Richmond, Indiana. West End Bank, S.B. was organized in 1894 under the name West End Building and Loan Association and has operated continuously in Richmond, Indiana since its founding. We reorganized into the mutual holding company structure in 2007 by forming West End Bank, MHC; and completed our mutual to stock conversion in January 2012, thereby becoming the wholly owned subsidiary of West End Indiana Bancshares, Inc. At December 31, 2018, we had total assets of $300.2 million, net loans of $245.0 million, total deposits of $217.9 million and equity of $30.2 million.
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 primarily of securities issued by United States Government agencies and government-sponsored entities and mortgage-backed securities.
West End Bank is a community bank with a broad base of financial products and services while continuing to emphasize superior customer service associated with our traditional thrift focus. Residential real estate lending has and will remain an important part of our operations, however, we have also expanded our focus into non-residential lending, including in particular indirect automobile lending. Our consumer lending business lines and our interest rate risk strategies (such as selling most of the fixed-rate one- to four-family residential real estate loans that we originate) have allowed us to continue to grow and remain profitable despite the challenging economy and interest rate environment of recent years and increasing regulatory burden placed on all financial institutions.
Our website address is www.westendbank.com. Information on this website should not be considered a part of this annual report.
Market Area and Competition
We primarily conduct business through our main office located in Richmond, Indiana and our three branch offices in Richmond, Hagerstown and Liberty, Indiana. Three of our offices are located in Wayne County, Indiana and our Liberty office is located in Union County, Indiana. Richmond, Indiana is located in east/central Indiana on the Interstate 70 corridor, approximately 70 miles east of Indianapolis, Indiana and 35 miles west of Dayton, Ohio. In addition to our four full-service locations, we also host eight additional limited service branches in select schools within Richmond Community Schools. These student-operated branches are currently featured in all six Richmond Community Elementary Schools and one intermediate school and are in operation once a month. We also have a limited service branch and ATM located within Richmond High School. This student-operated branch is available to students and faculty of RCS twice a week.
Our primary market area consists of Union and Wayne Counties, Indiana, and select parts of western Ohio with respect to commercial and multi-family real estate lending, and to a lesser extent, indirect automobile lending. This area includes small towns and rural communities. Our market area was historically a manufacturing and agricultural-based economy. In recent years, the economy has transitioned into a more service-oriented base, including health care, educational facilities and distribution services. Most notable, Wayne County is home to Reid Hospital & Health Care Services and four universities; Earlham College, Indiana University East, Purdue Polytechnic Institute and Ivy Tech Community College.
The regional economy is fairly diversified, with services, wholesale/retail trade, manufacturing and government providing the primary support for the area economy. The population of Wayne County decreased slightly from 69,003 in 2010 to 66,185 in 2017 which is a decrease of 4.1%. The population of Union County decreased slightly from 7,516 in 2010 to 7,200 in 2017 which is a decrease of 4.2% (statsindiana.edu). Our lack of population growth and our general market conditions may limit our ability to grow our assets at a rapid rate. To counter this, in addition to our traditional means of advertising, we have also employed digital channels, most specifically but not limited to Google ad network advertising, SEO strategies and social media engagement. Our school branch initiative enhances our ability to attract smaller deposit relationships, nurture them and in turn grow our brand awareness with a younger generation of potential customers. We also specialize in offering a superior suite of products, services and customer service to small and mid-sized companies in our market area.
Wayne and Union Counties’ and Indiana’s annual unemployment rates for 2017 were 3.8%, 3.1% and 3.6%, respectively, as compared to a U.S. unemployment rate of 4.1% (December 2017 US Bureau of Labor Statistics). This was an overall decrease from 2016. 2017 per capita personal incomes for Wayne and Union Counties were $39,888 and $36,298, respectively, and 2017 median household incomes for these counties were $44,179 and $48,206 compared to 2017 per capita income for the state of Indiana and the United States of $45,150 and $44,107 respectively, and 2017 median household incomes of $54,134 and $63,372, respectively (statsindiana.edu, statista.com)
We face competition within our market area and through the internet outside of our market area both in making loans and attracting deposits. Our market area has a concentration of financial institutions that include large regional banks, community banks and credit unions. As of June 30, 2018, based on the most recent available FDIC data, our market share of deposits represented 14.41% and 29.94% of FDIC-insured deposits in Wayne and Union Counties, Indiana, respectively.
Our principal lending activity is originating one- to four-family residential real estate loans, indirect automobile loans, and commercial and multi-family real estate loans, and, to a lesser extent, second mortgages and equity lines of credit, construction loans and commercial business loans. As a long-standing community lender, we believe we can effectively compete for this business by emphasizing superior customer service and local underwriting, which we believe differentiates us from larger commercial banks in our primary market area.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
|At December 31,|
|(Dollars in thousands)|
|Real estate loans:|
|One- to four-family residential (1)||$||63,787||25.71||%||$||61,885||25.38||%||$||65,160||27.72||%||$||60,968||27.67||%||$||61,886||31.86||%|
|Commercial and multi-family||59,725||24.07||57,485||23.58||50,070||21.30||47,721||21.66||39,492||20.33|
|Second mortgages and equity lines of credit||6,971||2.81||6,594||2.71||5,716||2.44||5,521||2.51||4,625||2.38|
|Net deferred loan fees, premiums and discounts||99||112||116||115||119|
|Allowance for losses||3,040||2,745||2,277||2,193||1,944|
|(1)||At December 31, 2018, December 31, 2017, December 31, 2016, December 31, 2015, and December 31, 2014, included non-owner occupied loans of $8.0 million, $9.2 million, $11.7 million, $11.6 million, $12.8 million, respectively.|
Contractual Maturities. The following table sets forth the contractual maturities of our total loan portfolio at December 31, 2018. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.
|December 31, 2018||One- to Four-|
|Amounts due in:|
|One year or less||$||665||$||1,127||$||4,122||$||281||$||2,210||$||3,356||$||11,761|
|More than one to two years||331||710||3,479||––||2,095||7,019||13,634|
|More than two to three years||419||692||1,253||10||2,608||15,228||20,210|
|More than three to five years||1,316||2,885||9,392||––||2,867||50,470||66,930|
|More than five to ten years||5,795||1,229||8,650||2,064||2,080||24,559||44,377|
|More than ten to fifteen years||16,273||328||13,863||434||397||1,032||32,327|
|More than fifteen years||38,988||-||18,966||303||568||30||58,855|
The following table sets forth our fixed and adjustable-rate loans at December 31, 2018 that are contractually due after December 31, 2019.
|Due After December 31, 2018|
|Real estate loans:|
|One- to four-family residential||$||50,456||$||12,666||$||63,122|
|Commercial and multi-family||28,090||27,513||55,603|
|Second mortgages and equity lines of credit||4,535||1,309||5,844|
|Consumer Loans & Other||98,338||-||98,338|
Loan Approval Procedures and Authority. Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of West End Bank, S.B.’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At December 31, 2018, our largest credit totaled $3.9 million and was secured by multi-family real estate, which was performing in accordance with its repayment terms at this date. Our second largest at this date was a $3.6 million loan secured by real estate used for student hoursing and account/notes receivable and inventory. At December 31, 2018, this loan was performing in accordance with its repayment terms.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.
Our President and Chief Executive Officer has approval authority of up to $750,000 for one- to four-family residential real estate loans, commercial and multi-family loans and commercial business loans, and up to $100,000 for unsecured consumer loans. Our Senior Vice President and Credit Manager has approval authority of up to $250,000 for one- to four-family residential real estate loans, commercial and multi-family loans and commercial business loans, and up to $25,000 for unsecured consumer loans. Loans above the amounts authorized to our President and Chief Executive Officer require approval by the Loan Committee, which consists of our President and Chief Executive Officer, our Executive Vice President and Chief Financial Officer, and three outside board members, which may approve loans of up to $1,500,000. These approvals are reported at the next board meeting following approval. Aggregate credit exposure in excess of $1,500,000 must be approved by a majority of the full Board of Directors.
Generally, we require title insurance on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan. We also require flood insurance if the improved property is determined to be in a flood zone area.
One- to Four-Family Residential Real Estate Lending. The focus of our lending program has historically been the origination of one- to four-family residential real estate loans. At December 31, 2018, $63.8 million, or 25.7% of our total loan portfolio, consisted of loans secured by one- to four-family real estate.
We originate both fixed-rate and adjustable-rate one- to four-family residential real estate loans. At December 31, 2018, 80.3% of our one- to four-family residential real estate loans were fixed-rate loans, and 19.7% of such loans were adjustable-rate loans.
At December 31, 2018, $8.0 million, or 12.7% of our total one- to four-family residential real estate loans were secured by non-owner occupied properties. Generally, we require personal guarantees from the borrowers on these properties and will not make loans in excess of 80% loan to value on non-owner- occupied properties. However, we recognize that there is a greater credit risk inherent in non-owner- occupied properties, than in owner-occupied properties since, like commercial real estate and multi-family loans, the repayment of these loans may depend, in part, on the successful management of the property and/or the borrower’s ability to lease the property. A downturn in the real estate market or the local economy could adversely affect the value of properties securing these loans or the revenues derived from these properties which could affect the borrower’s ability to repay the loan.
Our fixed-rate one- to four-family residential real estate loans are generally underwritten according to Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Freddie Mac, which as of December 31, 2018 was generally $453,000 for single-family homes in our market area. We also originate loans above the lending limit for conforming loans, which are referred to as “jumbo loans.” The majority of our one- to four-family residential real estate loans are secured by properties located in our market area.
We generally limit the loan-to-value ratios of our mortgage loans to 80% of the sales price or appraised value, whichever is lower. Loans with certain credit enhancements, such as private mortgage insurance, may be made with loan-to-value ratios up to 97%.
Our fixed-rate one- to four-family residential real estate loans typically have terms of 15 or 30 years.
Our adjustable-rate one- to four-family residential real estate loans generally have fixed rates for initial terms of five years, and adjust annually thereafter at a margin, which in recent years has been 4.50% over the weekly average yield on U.S. treasury securities adjusted to a constant maturity of one year. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan. Our adjustable-rate loans carry terms to maturity of up to 30 years.
Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically reprice, as interest rates increase the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on most of our adjustable-rate loans do not adjust for up to five years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.
We do not offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” on one-to four- family residential real estate loans (i.e., loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios), or “Alt-A” (i.e., loans that generally target borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income).
We actively monitor our interest rate risk position to determine the desirable level of investment in fixed-rate mortgages. Depending on market interest rates and our capital and liquidity position, we may retain all of our newly originated longer-term fixed-rate residential mortgage loans, or we may sell all or a portion of such loans in the secondary mortgage market. In recent years, we have sold, and may continue to sell, subject to market conditions, most of the conforming fixed-rate one- to four-family residential real estate loans that we originate to Freddie Mac, with servicing retained.
Commercial and Multi-Family Real Estate Lending. Consistent with our strategy to expand our loan products and to enhance the yield and reduce the term to maturity of our loan portfolio, we have increased our commercial and multi-family real estate loans in recent years. At December 31, 2018, we had $59.7 million in commercial and multi-family real estate loans, representing 24.1% of our total loan portfolio. Subject to future economic, market and regulatory conditions, we intend to continue to focus on this kind of lending, and may continue to increase our loan activity for these types of loans in western Ohio.
Most of our commercial and multi-family real estate loans have fixed-rate terms of up to five years with amortization terms of 25 years. The maximum loan-to-value ratio of our commercial real estate loans is generally 80%.
Set forth below is information regarding our commercial and multi-family real estate loans at December 31, 2018.
Type of Loan
|Number of Loans||Balance|
|(Dollars in thousands)|
|Real estate investors/lessors||71||18,859|
We consider a number of factors in originating commercial and multi-family real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). All commercial and multi-family real estate loans are appraised by outside independent appraisers approved by the board of directors or by internal evaluations, where permitted by regulation. Personal guarantees are generally obtained from the principals of commercial and multi-family real estate loans.
Commercial and multi-family real estate loans entail greater credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial and multi-family real estate than residential properties.
Indirect Consumer Lending. As part of our effort to enhance our net interest margin and the interest rate risk sensitivity of our loan portfolio, we originate indirect automobile loans, including on a selective basis, recreational vehicle and boat loans. Indirect consumer loans totaled $83.4 million at December 31, 2018, or 33.6% of our total loan portfolio.
We acquire and underwrite our indirect automobile loans from approximately 80 dealers located primarily in our market area under a tiered-rate structure providing for a dealer reserve premium. The aggregate principal balance of our automobile loan portfolio as of December 31, 2018 was secured primarily by late-model used automobiles. The weighted average current term to maturity of our automobile loan portfolio at December 31, 2018 was 5 years and 9 months.
At December 31, 2018 the average credit score for borrowers of our indirect loans that were originated since May 2008 was 680, and the weighted average rate of these loans was 6.99%. At December 31, 2018, $27.4 million, or 32.8% of our total indirect loan portfolio, consisted of automobile loans where the borrower’s credit score was 660 or less (a possible indication of a less credit-worthy borrower).
Each dealer that originates automobile loans makes representations and warranties with respect to our security interests in the related financed vehicles in a separate dealer agreement with us. These representations and warranties do not relate to the creditworthiness of the borrowers or the collectability of the loan. The dealers are also responsible for ensuring that our security interest in the financed vehicles is perfected.
Each automobile loan requires the borrower to keep the financed vehicle fully insured against loss or damage by fire, theft and collision. The dealer agreements require the dealers to represent that adequate physical damage insurance (collision and comprehensive) was in effect at the time the related loan was originated and financed by us. In addition, we have the right to force place insurance coverage (supplemental insurance taken out by West End Bank, S.B.) in the event the required physical damage insurance on an automobile is not maintained by the borrower. Nevertheless, there can be no assurance that each financed vehicle will continue to be covered by physical damage insurance provided by the borrower during the entire term during which the related loan is outstanding. As additional protection, each borrower is required to obtain Vendor Secured Interest (VSI) insurance on each automobile loan.
Each dealer submits credit applications directly to us, and the borrower’s creditworthiness and the age of the automobile are the most important criteria we use in determining whether to purchase an automobile loan from a dealer. Each credit application requires that the borrower provide current information regarding the borrower’s income, employment history, debts, and other factors that bear on creditworthiness. We generally apply uniform underwriting standards when originating the automobile loan although on occasion we will underwrite loans outside of these guidelines. We also obtain a credit report from a major credit reporting agency summarizing the borrower’s credit history and paying habits, including such items as open accounts, delinquent payments, bankruptcies, repossessions, lawsuits and judgments.
The borrower’s credit score and the age of the car are the principal factors used in determining the interest rate and term on the loan. Our underwriting procedures evaluate information relating to the borrower and supplied by the borrower on the credit application combined with information provided by credit reporting agencies and the amount to be financed relative to the value of the related financed vehicle. Additionally, our underwriters may also verify a borrower’s employment income and/or residency or where appropriate, verify a borrower’s payment history directly with the borrower’s creditors. Based on these procedures, a credit decision is considered and approved either automatically or by our personnel at various levels of authority. We generally follow the same underwriting guidelines in originating direct automobile loans.
We generally finance up to the full sales price of the vehicle plus sales tax, dealer preparation fees, license fees and title fees, plus the cost of service and warranty contracts and premiums for physical damage, credit life and disability insurance obtained in connection with the vehicle or the financing (amounts in addition to the sales price are collectively referred to as the “Additional Vehicle Costs”). In addition, we may finance the negative equity related to the vehicle traded in by the borrower in connection with the financing. Accordingly, the amount we finance may exceed, depending on the borrower’s credit score in the case of new vehicles, the dealer’s invoice price of the financed vehicle and the Additional Vehicle Costs, or in the case of a used vehicle, the vehicle’s value and the Additional Vehicle Costs. The maximum amount borrowed generally may not exceed 100% of the Manufacturer’s Suggested Retail Price (MSRP) of the financed vehicle that is new, or the vehicle’s “retail” value in the case of a used vehicle, including Additional Vehicle Costs. The vehicle’s value is determined by using one of the standard reference sources for dealers of used cars. We regularly review the quality of the loans we purchase from the dealers and periodically conduct quality control audits to ensure compliance with our established policies and procedures. We retain the right to recapture the individual dealer reserve if the loan should default within 120 days.
Generally, automobile loans have greater risk of loss or default than one- to four-family residential real estate loans. We face the risk that any collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Thus, the recovery and sale of such property could be insufficient to compensate us for the principal outstanding on these loans. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit our ability to recover on such loans. However, we have attempted to address these inherent risks by lending primarily on late-model used vehicles for which, generally, most of the asset’s rapid depreciation has already occurred. Additionally, we actively monitor delinquencies and losses on our indirect loans to each dealership that originates the loan, and we limit and/or discontinue future loans with dealerships that we deem to contain additional risk to our underwriting.
Direct Consumer Lending. Our direct consumer loans, including unsecured loans, totaled $18.3 million or 7.4% of our total loan portfolio, at December 31, 2018 and consisted principally of loans secured by a wide variety of collateral, including certificates of deposit and marketable securities. At December 31, 2018 unsecured consumer loans included in the above amount totaled $554,000 or 0.22% of our total loan portfolio. These loans have either a fixed-rate of interest for a maximum term of 60 months, or are revolving lines of credit with an adjustable-rate of interest tied to the prime rate of interest as reported in The Wall Street Journal.
Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.
Consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Second Mortgage Loans and Equity Lines of Credit. At December 31, 2018, $7.0 million, or 2.8% of our loan portfolio were second mortgage loans and equity lines of credit. We offer second mortgage loans and equity lines of credit secured by a first or second mortgage on residential property. Second mortgage loans and equity lines of credit are made with fixed or adjustable rates, and with combined loan-to-value ratios up to 90% on an owner-occupied principal residence.
Second mortgage loans and equity lines of credit have greater risk than one- to four-family residential real estate loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure. When customers default on their loans, we attempt to foreclose on the property and resell the property as soon as possible to minimize foreclosure and carrying costs. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our second mortgage loans, decreases in real estate values could adversely affect the value of property used as collateral for our loans.
At December 31, 2018, the average loan balance of our outstanding home equity lines of credit was $23,000 and the largest outstanding balance of any such loan was $160,000. This loan was performing in accordance with its repayment terms at December 31, 2018.
Construction Lending. At December 31, 2018, we had $3.1 million, or 1.3% of our total loan portfolio, in construction loans. We make construction loans to individuals for the construction of their primary residences. These loans generally have maximum terms of 12 months, and upon completion of construction convert to conventional amortizing mortgage loans. Our construction loans have rates and terms comparable to one- to four-family residential real estate loans that we originate. During the construction phase, the borrower generally pays interest only. The maximum loan-to-value ratio of our owner-occupied construction loans is generally 80% of construction costs or completed-appraised-value, whichever is less. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans. On occasion, we may consider loans for the construction of commercial properties.
To a lesser extent, we will make loans for the construction of “presold” homes. No more than two such loans may be outstanding to one builder/borrower at any time. These loans generally have initial maximum terms of nine months, although the term may be extended to up to 18 months. The loans generally carry variable rates of interest. The maximum loan-to-value ratio of these construction loans is generally 80% of construction costs or completed-appraised-value, whichever is less.
Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.
Commercial Business Lending. At December 31, 2018, commercial business loans represented $12.8 million, or 5.2% of our total loan portfolio. Our commercial business loans consist of term loans as well as regular lines of credit and revolving lines of credit to finance short-term working capital needs like accounts receivable and inventory. Our commercial lines of credit are generally priced on an adjustable-rate basis and may be secured or unsecured. We generally obtain personal guarantees with all commercial business loans. Business assets such as accounts receivable, inventory, equipment, furniture and fixtures may be used to secure lines of credit. Our lines of credit typically have a maximum term of 12 months. We also originate commercial term loans to fund long-term borrowing needs such as purchasing equipment, property improvements or other fixed asset needs. We fix the maturity of a term loan to correspond to 80% of the useful life of any equipment purchased or seven years, whichever is less. Term loans can be secured with a variety of collateral, including business assets such as accounts receivable and inventory or long-term assets such as equipment, furniture, fixtures or real estate.
Unlike one- to four-family residential real estate loans, which we generally originate on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, we typically originate commercial business loans on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business or rental income produced by the property. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business or rental property itself and the general economic environment. Therefore, commercial business loans that we originate have greater credit risk than one- to four-family residential real estate loans or, generally, consumer loans. In addition, commercial business loans often result in larger outstanding balances to single borrowers, or related groups of borrowers, and also generally require substantially greater evaluation and oversight efforts.
At December 31, 2018, the average loan balance of our outstanding commercial business lines of credit was $98,000, and the largest outstanding balance of such loans was a $1.8 million loan secured by marketable securities. This loan was performing in accordance with its repayment terms at December 31, 2018.
We believe that commercial business loans will provide growth opportunities for us, and we expect to increase, subject to our conservative underwriting standards and market conditions, this business line in the future. The additional capital we receive in connection with the stock offering will increase our maximum lending limits and will allow us to increase the amounts of our loans to one borrower.
We also offer commercial loans utilizing the Small Business Administration’s 7a Program. The 75% loan guaranty provided under the SBA program reduces our credit risk. In addition, the guaranteed portion of the credit can be sold in the secondary market generating significant fee income opportunities. We face recourse liability on these loans if they do not meet all SBA requirements. We address this risk by utilizing a third-party SBA partner which specializes in underwriting, portfolio composition and servicing of SBA credit facilities. During the year ended December 31, 2018, we originated SBA guaranteed commercial loans of $1.2 million. The guaranteed portion of those loans originated in 2018 was sold for a gain of $113,000.
Originations, Purchases and Sales of Loans
We originate real estate and other loans through marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys. All loans originated by us are underwritten pursuant to our policies and procedures.
We may sell a certain amount of the loans we originate into the secondary market and in recent years, based upon our interest rate risk analysis, we have sold most of the fixed-rate, one- to four-family residential real estate loans that we originated to Freddie Mac, although we are also approved to sell to the Federal Home Loan Bank of Indianapolis. On an ongoing basis, we consider our balance sheet as well as market conditions in making decisions as to whether to hold the mortgage loans we originate for investment or to sell such loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint. To date, all of our loan sales have been on a servicing-retained basis. At December 31, 2018 we serviced $73.6 million of fixed-rate, one- to four-family residential real estate loans held by other institutions.
From time to time, we purchase loan participations secured by properties within and outside of our primary lending market area in which we are not the lead lender. Historically, the loan participations have been secured by commercial and multi-family real estate. In these circumstances, we follow our customary loan underwriting and approval policies.
The following table sets forth our loan origination, sale and principal repayment activity during the periods indicated. There were no loans purchased during the years presented.
|Years Ended December 31,|
|Total loans at beginning of period||$||243,716||$||235,042|
|Real estate loans:|
|One- to four-family residential (1)||22,700||19,742|
|Commercial and multi-family||10,545||12,842|
|Second mortgages and equity lines of credit||2,899||1,802|
|Total loans originated||88,066||97,082|
|Real estate loans:|
|One- to four-family residential||(11,560||)||(10,311||)|
|Commercial and multi-family||—||(2,649||)|
|Second mortgages and equity lines of credit||—||—|
|Total loans sold||(11,560||)||(12,960||)|
|Advances on commercial and home equity lines-of-credit loans||11,813||5,506|
|Net loan activity||4,378||8,674|
|Total loans at end of period||$||248,092||$||243,716|
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required monthly loan payment by the last day of the month, a late notice is generated stating the payment and late charges due. Our policies provide that borrowers are first contacted by phone or mail when they are 16 to 21 days past due to determine the reason for nonpayment and to discuss future payments. Once the loan is considered in default, a certified letter is sent to the borrower explaining that the entire balance of the loan is due and payable. If the borrower does not respond, we will initiate foreclosure proceedings. If the loan is reinstated, foreclosure proceedings will be discontinued and the borrower will be permitted to continue to make payments.
When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as foreclosed real estate held for sale until it is sold. The real estate is recorded at estimated fair value at the date of acquisition less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Estimated fair value is based on a new appraisal which is obtained as soon as practicable, typically after the foreclosure process is completed. Subsequent decreases in the value of the property are charged to operations. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.
Troubled Debt Restructurings (“TDRs”). We occasionally modify loans to extend the term or make concessions to help a borrower stay current on his or her loan and to avoid foreclosure/repossession. We generally do not forgive principal or interest on loans. We may modify the terms of loans, to lower interest rates (which may be at below market rates), defer delinquent payments, and/or to provide for longer amortization schedules (up to 40 years on loans secured by real estate), and/or provide for interest-only terms. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests.
During the year ended December 31, 2018 there were no new restructuring classified as TDRs. During the year ended December 31, 2017, there was one new restructuring classified as TDR. The loan balance at December 31, 2017 was $738,000 with a pre-modification recorded balance and a post modification recorded balance of $738,000. Modifications include continuation of interest-only payment for a six month time period on the $738,000 TDR balance, and deferment of principal payments.
Delinquent Loans. The following table sets forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.
|At December 31,|
|Real estate loans:|
|One- to four-family residential|
|Total one- to four-family residential||110||181||529||378||18||149|
|Commercial and multi-family||387||—||—||––||39||8|
|Second mortgages and equity lines of credit||3||—||2||57||—||—|
|At December 31,|
|Real estate loans:|
|One- to four-family residential|
|Total one- to four-family residential||322||93||289||55||43||386|
|Commercial and multi-family||––||—||257||––||—||122|
|Second mortgages and equity lines of credit||8||10||18||8||7||80|
|At December 31,|
|Real estate loans:|
|One- to four-family residential|
|Total one- to four-family residential||111||236||835|
|Commercial and multi-family||––||—||975|
|Second mortgages and equity lines of credit||––||—||—|
Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Federal Deposit Insurance Corporation to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic reports and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of emerging financial weaknesses even though the loan is currently performing as agreed, or delinquency status, or if the loan possesses weaknesses although currently performing. Management reviews the status of each impaired loan on our watch list on a quarterly basis with the Directors’ Loan Committee and then with the full Board of Directors. If a loan deteriorates in asset quality, the classification is changed to “special mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified “substandard.”
See Note 3 to our Financial Statements beginning on page F-1 of this annual report for a description by loan category of our classified and special mention assets as of December 31, 2018 and December 31, 2017.
Non-Performing Assets. We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans generally is applied against principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Restructured loans are restored to accrual status when the obligation is brought current, has performed in accordance with the revised contractual terms for a reasonable period of time (typically six months) and the ultimate collectability of the total contractual principal and interest is reasonably assured.
The following table sets forth information regarding our non-performing assets and troubled debt restructurings at the dates indicated. Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, or for loans modified at interest rates materially less than current market rates.
|At December 31,|
|(Dollars in thousands)|
|Real estate loans:|
|One- to four-family residential||$||507||$||115||$||230||$||564||$||762|
|Commercial and multi-family (1)||—||8||257||2,337||825|
|Second mortgages and equity lines of credit||—||—||—||30||––|
|Total non-accrual loans||518||123||487||2,931||1,587|
|Accruing loans past due 90 days or more:|
|Real estate loans:|
|One- to four-family residential||22||34||71||149||73|
|Commercial and multi-family||—||—||—||—||150|
|Second mortgages and equity lines of credit||2||—||18||50||21|
|Total accruing loans past due 90 days or more||965||700||817||1,098||1,039|
|Total of nonaccrual and 90 days or more past due loans||1,483||823||1,304||4,029||2,626|
|Real estate owned:|
|One- to four-family||—||—||103||109||74|
|Commercial and multi-family||16||39||2,400||699||225|
|Total real estate owned||16||39||2,503||808||299|
|Other non-performing assets||369||266||237||152||140|
|Total non-performing assets||1,868||1,128||4,044||4,989||3,065|
|Troubled debt restructurings (not included above) – commercial and multifamily real estate||738||738||—||—||2,275|
|Troubled debt restructurings and total non-performing assets||$||2,606||$||1,866||$||4,044||$||4,988||$||5,340|
|Total non-performing loans to total loans||0.60||%||0.34||%||0.55||%||1.83||%||1.35||%|
|Total non-performing assets to total assets||0.62||%||0.38||%||1.41||%||1.84||%||1.18||%|
|Total non-performing assets and troubled debt restructurings to total assets||0.87||%||0.62||%||1.41||%||1.84||%||2.06||%|
|(1)||At December 31, 2015, includes $2.2 million of troubled debt restructurings.|
Interest income that would have been recorded for the year ended December 31, 2018 had nonaccruing loans been current according to their original terms amounted to $9,000. No interest was recognized on these loans nor included in net income for the year ended December 31, 2018.
Non-performing one- to four-family residential real estate loans totaled $529,000 at December 31, 2018 and consisted of five loans of which the largest totaled $100,000.
Consumer non-performing loans totaled $952,000 at December 31, 2018.
Other real estate owned totaled $16,000 at December 31, 2018, which is comprised of a single commercial property.
There were no other loans at December 31, 2018 that are not already disclosed where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
We identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans, and other loans about which management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as well as the shortfall in collateral value would result in our charging off the loan or the portion of the loan that was impaired.
Among other factors, we consider current general economic conditions, including current housing price depreciation, in determining the appropriateness of the allowance for loan losses for our residential real estate portfolio. We use evidence obtained from our own loan portfolio as well as published housing data on our local markets from third party sources we believe to be reliable as a basis for assumptions about the impact of housing depreciation. We have increased general and specific allowances for our residential real estate loans over the past several quarters, in part, because the values of residential real estate in our local markets securing our portfolio have declined significantly and may continue to decline.
Substantially all of our loans are secured by collateral. Loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are established. Typically for a nonperforming real estate loan in the process of collection, the value of the underlying collateral is estimated using the original independent appraisal, adjusted for current economic conditions and other factors, and related general or specific reserves are adjusted on a quarterly basis. If a nonperforming real estate loan is in the process of foreclosure and/or there are serious doubts about further collectability of principal or interest, and there is uncertainty about the value of the underlying collateral, we will order a new independent appraisal. Any shortfall would result in immediately charging off the portion of the loan that was impaired.
Specific Allowances for Identified Problem Loans. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.
General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not classified as impaired to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.
As an integral part of their examination process, the FDIC and the Indiana Department of Financial Institutions will periodically review our allowance for loan losses. Such agencies may require that we recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.
|Year Ended December 31,|
|Allowance at beginning of period||$||2,745||$||2,277||$||2,193||$||1,944||$||2,398|
|Provision for loan losses||1,948||2,021||1,861||1,507||1,699|
|Real estate loans:|
|One- to four-family residential||(50||)||(75||)||(159||)||(220||)||(653||)|
|Commercial and multi-family||(1||)||(99||)||(353||)||(211||)||(947||)|
|Second mortgages and equity lines of credit||—||(9||)||—||—||—|
|Real estate loans:|
|One- to four-family residential||22||3||8||56||32|
|Commercial and multi-family||—||—||—||4||—|
|Second mortgages and equity lines of credit||—||—||—||—||—|
|Net (charge-offs) recoveries||(1,653||)||(1,553||)||(1,777||)||(1,258||)||(2,153||)|
|Allowance at end of period||$||3,040||$||2,745||$||2,277||$||2,193||$||1,944|
|Allowance to non-performing loans||204.99||%||333.54||%||174.62||%||54.44||%||74.03||%|
|Allowance to total loans outstanding at the end of the period||1.23||%||1.13||%||0.97||%||1.00||%||1.00||%|
|Net (charge-offs) recoveries to average loans outstanding during the period||(0.67||)%||(0.66||)%||(0.77||)%||(0.60||)%||(1.17||)%|
Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category, the percent of allowance in each loan category to the total allowance, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
|At December 31, 2018||At December 31, 2017|
|Amount||% of Allowance|
|Amount||% of Allowance to|
|(Dollars in thousands)|
|Real estate loans:|
|One- to four-family residential||$||164||5.39||%||25.71||%||$||191||6.96||%||25.38||%|
|Commercial and multi-family||942||31.00||24.07||886||32.28||23.58|
|Second mortgages and equity lines of credit||12||0.39||2.81||10||0.36||2.71|
|Total allowance for loan losses||$||3,040||100.00||%||100.00||%||$||2,745||100.00||%||100.00||%|
|At December 31, 2016||At December 31, 2015|
|Amount||% of Allowance|
|Amount||% of Allowance to|
|(Dollars in thousands)|
|Real estate loans:|
|One- to four-family residential||$||329||14.45||%||27.72||%||$||390||17.78||%||27.67||%|
|Commercial and multi-family||670||29.42||21.30||749||34.15||21.66|
|Second mortgages and equity lines of credit||-||-||2.44||11||0.50||2.51|
|Total allowance for loan losses||$||2,277||100.00||%||100.00||%||$||2,193||100.00||%||100.00||%|
|At December 31, 2014|
|Amount||% of Allowance|
|Real estate loans:|
|One- to four-family residential||$||447||23.00||%||31.86||%|
|Commercial and multi-family||694||35.70||20.33|
|Second mortgages and equity lines of credit||14||0.72||2.38|
|Total allowance for loan losses||$||1,944||100.00||%||100.00||%|
At December 31, 2018, our allowance for loan losses represented 1.23% of total loans and 205.0% of nonperforming loans, and at December 31, 2017, our allowance for loan losses represented 1.13% of total loans and 333.54% of nonperforming loans. The allowance for loan losses was $3.0 million at December 31, 2018 and was $2.7 million at December 31, 2017, due to a provision for loan losses of $1.9 million, offset by net charge-offs of $1.7 million during 2018. Net charge-offs for 2018 included $1.6 million in consumer loans secured by autos, $47,000 in commercial credits, $28,000 in secured residential real estate, and $1,000 in commercial and multifamily real estate loans.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, regulators, in reviewing our loan portfolio, may request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and increases may be necessary should the quality of any loan deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
General. The goals of our investment policy are to provide and maintain liquidity to meet deposit withdrawal and loan funding needs, to help mitigate our interest rate risk, and to generate a favorable return on idle funds within the context of our interest rate and credit risk objectives. In recent years beginning with the recession which began in 2008 and the subsequent challenging economic environment, our strategy has been to reduce the maturities of our investment securities portfolio. Subject to loan demand and our interest rate risk analysis, we may increase the balance of our investment securities portfolio when we have excess liquidity.
Our board of directors is responsible for adopting our investment policy. The investment policy is reviewed annually by management and any changes to the policy are recommended to and subject to the approval of the board of directors. Authority to make investments under the approved investment policy guidelines is delegated to our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer. All investment transactions are reviewed quarterly by the board of directors.
Our current investment policy permits, with certain limitations, investments in securities issued by the United States Government and its agencies or government sponsored enterprises, mortgage-backed securities and, to a lesser extent, corporate debt securities, commercial paper, certificates of deposits in other financial institutions, investments in bank-owned life insurance, collateralized mortgage obligations, asset-backed securities, real estate mortgage investment conduits, securities sold under agreements to repurchase, and debt securities of state and political subdivisions.
At December 31, 2018, we did not have an investment in the securities of any single non-government issuer that exceeded 10% of our equity at that date.
Our current investment policy does not permit investment in stripped mortgage-backed securities, complex securities and derivatives as defined in federal banking regulations and other high-risk securities. Our current policy does not permit hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.
At December 31, 2018, none of the collateral underlying our securities portfolio was considered subprime or Alt-A, and we did not hold any common or preferred stock issued by Freddie Mac or Fannie Mae as of that date.
Municipal Bonds. At December 31, 2018, the carrying value of municipal bonds in our portfolio totaled $1.8 million. These securities generally provide similar or higher yields than other investments in our securities investment portfolio. While they do not provide the liquidity of other securities, we maintain these investments, to the extent appropriate, for tax planning, as collateral for borrowings and for prepayment protection.
Mortgage-Backed Securities. At December 31, 2018, the carrying value of our mortgage-backed securities portfolio totaled $18.0 million. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or multifamily mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as West End Bank, S.B. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. Most of our mortgage-backed securities are either backed by Ginnie Mae, a United States Government agency, or government-sponsored entities, such as Fannie Mae and Freddie Mac.
Residential mortgage-backed securities issued by United States Government agencies and government-sponsored entities are more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Federal Home Loan Bank Stock. We hold common stock of the Federal Home Loan Bank of Indianapolis in connection with our borrowing activities totaling $2.4 million at December 31, 2018. The common stock of such entity is carried at cost and classified as restricted equity securities.
Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide us with a funding source for certain of our benefit plan obligations. Bank-owned life insurance also generally provides us non-interest income that is non-taxable. At December 31, 2018, our investment in bank-owned life insurance totaled $7.1 million and was issued by four insurance companies.
Securities Portfolio Composition. The following table sets forth the amortized cost and fair value of our securities portfolio, all of which were available for sale, at the dates indicated. Securities available for sale are carried at fair value.
|At December 31,|
|Securities available for sale:|
|Mortgage-backed securities – GSE residential||18,569||17,978||18,757||18,345||22,278||21,874|
|Total available for sale||$||20,587||$||19,797||$||20,776||$||20,297||$||24,299||$||23,728|
Securities Portfolio Maturities and Yields. The following table sets forth the stated maturities and weighted average yields of our securities at December 31, 2018. Securities available for sale are carried at fair value. Municipal bond yields have not been adjusted to a tax-equivalent basis. Mortgage-backed securities, including collateralized mortgage obligations, are anticipated to be repaid in advance of their contractual maturities as a result of projected mortgage loan repayments. Certain securities have interest rates that are adjustable and will reprice annually within the various maturity ranges. These repricing schedules have not been reflected in the table below.
|One Year or Less||More than One Year to|
|More than Five Years to|
|More than Ten Years||Total|
|December 31, 2018||Amortized|
|(Dollars in thousands)|
|Securities available for sale:|
|Mortgage-backed securities – GSE residential||-||-||-||-||7,540||1.69||%||10,337||2.20||%||17,877||1.98||%|
|Collateralized Mortgage Obligations||-||-||-||-||-||-||692||2.55||%||692||2.55||%|
|Total available for sale||$||-||-||$||-||-||$||7,540||1.69||%||$||13,047||2.37||%||$||20,587||2.12||%|
Sources of Funds
General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings, primarily Federal Home Loan Bank of Indianapolis advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. To a lesser extent, we may utilize repurchase agreements or Federal Fund Sold as funding sources
Deposits. Our deposits are generated primarily from residents within our primary market area. We offer a selection of deposit accounts, including non-interest-bearing and interest-bearing checking accounts, NOW accounts, money market accounts, savings accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We have not in the past nor presently have any brokered deposits. However, dependent on our future needs for, we could utilize this avenue for liquidity purposes.
In recent years, we have focused on deposit generation from small- and mid-sized businesses and professionals in our market area through aggressive marketing campaigns, including our Business Links program, a selection of commercial deposit services, including deposit pick-up services and, as requested, remote capture. Additionally, we offer non-conforming loan products on one- to four-family residential real estate loans in connection with which the borrower is required to open a money market deposit account with us.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. Personalized customer service, long-standing relationships with customers, and the favorable image of West End Bank, S.B. in the community are relied upon to attract and retain deposits.
The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. Our ability to gather deposits is impacted by the competitive market in which we operate which includes numerous financial institutions of varying sizes offering a wide range of products. We often use promotional rates to meet asset/liability and market segment goals.
The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on our experience, we believe that non-interest-bearing and interest-bearing checking, money market and savings accounts may be somewhat more stable sources of deposits than certificates of deposits. Also, we believe that our deposits allow us a greater opportunity to connect with our customers and offer them other financial services and products. As a result, we have used marketing and other initiatives to increase such accounts. However, it can be difficult to attract and maintain such deposits at favorable interest rates under current market conditions.
The following table sets forth the distribution of total deposits by account type, for the periods indicated.
|For the Year Ended December 31,|
|(Dollars in Thousands)|
|Certificates and other time deposits of $250,000 or more||21,843||10.02||1.98||18,768||8.27||1.64||19,732||8.77||1.41|
|Other certificates and time deposits||84,444||38.75||1.86||88,151||38.83||1.50||88,747||39.46||1.15|
As of December 31, 2018, the aggregate amount of all our certificates of deposit in amounts greater than or equal to $100,000 was approximately $62.6 million. The following table sets forth the maturity of these certificates as of December 31, 2018.
December 31, 2018
|Three months or less||$||3,595|
|Over three through six months||9,461|
|Over six through twelve months||28,172|
|Over twelve months||21,418|
The following table sets forth all our certificates of deposit classified by interest rate as of the dates indicated.
|At December 31,|
|Less than 1%||$||7,120||$||12,686|
|1.00% - 1.99%||42,045||73,515|
|2.00% - 2.99%||57,074||20,670|
|3.00% - 3.99%||-||-|
|4.00% - 4.99%||48||48|
Borrowings. At December 31, 2018 our borrowings consisted of $50.5 million in advances from the Federal Home Loan Bank of Indianapolis. We may obtain advances from the Federal Home Loan Bank of Indianapolis upon the security of our capital stock in the Federal Home Loan Bank of Indianapolis and certain of our mortgage loans. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile.
From time to time during recent years, we have utilized short-term borrowings to fund loan demand. To a limited extent, we have also used borrowings where market conditions permit to purchase securities of a similar duration in order to increase our net interest income by the amount of the spread between the asset yield and the borrowing cost. From time to time, we have obtained advances with terms of more than one year to extend the term of our liabilities.
At December 31, 2018, based on available collateral and our ownership of FHLB stock, and based upon our internal policy, we had access to additional Federal Home Loan Bank advances of up to $12.5 million.
The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances at the date and for the periods indicated.
|Year Ended December 31,|
|(Dollars in Thousands)|
|Average amount outstanding during the period:|
|Weighted average interest rate during the period:|
|Balance outstanding at end of period:|
|Weighted average interest rate at end of period:|
Expense and Tax Allocation
West End Bank, S.B. has entered into an agreement with West End Indiana Bancshares, Inc. to provide it with certain administrative support services for compensation not less than the fair market value of the services provided. In addition, West End Bank, S.B. and West End Indiana Bancshares, Inc. have entered into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability.
As of December 31, 2018, we had 80 full-time equivalent employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.
SUPERVISION AND REGULATION
West End Bank, S.B. is examined and supervised by the Division of Banking of the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation. West End Indiana Bancshares, as a registered savings and loan holding company, is supervised and examined by the Federal Reserve Board. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance fund and depositors. These regulators are not, however, generally charged with protecting the interests of stockholders of West End Indiana Bancshares, Inc. Under this system of state and federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. West End Bank, S.B. also is a member of and owns stock in the Federal Home Loan Bank of Indianapolis, which is one of the twelve regional banks in the Federal Home Loan Bank System. West End Bank, S.B.’s relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in matters concerning the ownership of deposit accounts and the form and content of West End Bank, S.B.’s mortgage documents.
The Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation have extensive enforcement authority over Indiana-chartered savings banks, such as West End Bank, S.B. This enforcement authority includes, among other things, the ability to issue cease-and-desist or removal orders, to assess civil money penalties and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe and unsound banking practices.
The Indiana Department of Financial Institutions has established a schedule for the assessment of “supervisory fees” for all Indiana savings banks to fund the operations of the Indiana Department of Financial Institutions. These supervisory fees are computed on the basis of each savings bank’s total assets (including consolidated subsidiaries) and are payable at the end of each calendar quarter. A schedule of fees has also been established for certain filings made by Indiana savings banks with the Indiana Department of Financial Institutions. The Indiana Department of Financial Institutions also assesses fees for examinations conducted by the Indiana Department of Financial Institutions’ staff, based upon the number of hours spent by the staff performing the examination. During the year ended December 31, 2018, West End Bank, S.B. paid approximately $24,400 in supervisory fees and no examination fees. The Federal Deposit Insurance Corporation does not assess fees for its examination and supervisory activities.
The material regulatory requirements that are applicable to West End Bank, S.B. and West End Indiana Bancshares, Inc. are described below. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on West End Bank, S.B. and West End Indiana Bancshares, Inc. Any change in these laws or regulations, whether by the Federal Deposit Insurance Corporation, the Indiana Department of Financial Institutions, the Federal Reserve Board, or Congress, could have a material adverse impact on West End Indiana Bancshares, Inc. and West End Bank, S.B., and their operations.
As a savings and loan holding company, West End Indiana Bancshares, Inc. is required to file certain reports with, and is subject to inspection and supervision by the Federal Reserve Bank of Chicago, and otherwise must comply with the rules and regulations of the Federal Reserve Board. West End Indiana Bancshares, Inc. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
The Dodd-Frank Act
The Dodd-Frank Act made extensive changes in the regulation of depository institutions and their holding companies. Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates and/or still require the issuance of implementing regulations. Their impact on operations cannot yet be fully assessed. However, there is significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden, compliance costs and interest expense for West End Bank, S.B. and West End Indiana Bancshares, Inc.
Set forth below is a brief description of material regulatory requirements that are or will be applicable to West End Bank, S.B., and West End Indiana Bancshares, Inc. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on West End Bank, S.B. and West End Indiana Bancshares, Inc.
State and Federal Regulation
As an Indiana savings bank, West End Bank, S.B. is subject to federal regulation and supervision by the Federal Deposit Insurance Corporation and to state regulation and supervision by the Indiana Department of Financial Institutions. West End Bank, S.B.’s deposit accounts are insured by the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. West End Bank, S.B. is not a member of the Federal Reserve System.
Both federal and Indiana law extensively regulate various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Current federal law also requires savings banks, among other things, to make deposited funds available within specified time periods.
Under Federal Deposit Insurance Corporation regulations, an insured state-chartered bank, such as West End Bank, S.B., is prohibited from engaging as principal in activities that are not permitted for national banks, unless: (i) the Federal Deposit Insurance Corporation determines that the activity would pose no significant risk to the appropriate deposit insurance fund and (ii) the bank is, and continues to be, in compliance with all applicable capital standards.
Branching and Interstate Banking. The establishment of branches by West End Bank, S.B. is subject to approval of the Indiana Department of Financial Institutions and Federal Deposit Insurance Corporation and geographic limits established by state laws. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) facilitates the interstate expansion and consolidation of banking organizations by permitting, among other things, (i) bank holding companies that are adequately capitalized and managed to acquire banks located in states outside their home state regardless of whether such acquisitions are authorized under the law of the host state, (ii) the interstate merger of banks, subject to the right of individual states to “opt out” of this authority, and (iii) banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state.
Qualified Thrift Lender Test. In order for West End Indiana Bancshares, Inc. to be regulated as a savings and loan holding company by the Federal Reserve Board (rather than as a bank holding company by the Federal Reserve Board), West End Bank, S.B. must satisfy the “qualified thrift lender” or “QTL,” test. Under the QTL test, West End Bank, S.B. must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings bank, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings bank’s business.
West End Bank, S.B. also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.
At December 31, 2018, West End Bank, S.B. maintained 80% of its portfolio assets in qualified thrift investments and has met the qualified thrift lender test in each of the last 12 months.
Transactions with Related Parties. A savings bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated by the Board of Governors of the Federal Reserve System. An affiliate is generally a company that controls, is controlled by, or is under common control with an insured depository institution such as West End Bank, S.B. West End Indiana Bancshares, Inc. is an affiliate of West End Bank, S.B. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In addition, applicable regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Applicable regulators require savings banks to maintain detailed records of all transactions with affiliates.
West End Bank, S.B.’s authority to extend credit to its directors, executive officers and 10% or greater stockholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated by the Board of Governors of the Federal Reserve System. Among other things, these provisions require that extensions of credit to insiders:
|(i)||be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and|
|(ii)||not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of West End Bank, S.B.’s capital.|
In addition, extensions of credit in excess of certain limits must be approved in advance by West End Bank, S.B.’s Board of Directors.
Capital Requirements. Federal regulations require Federal Deposit Insurance Corporation-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to average assets leverage ratio.
For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that made such an election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). West End Indiana Bancshares, Inc. has exercised the opt-out and therefore does not include AOCI in its regulatory capital determinations. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four- family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement began being phased in starting on January 1, 2016 at 0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% on January 1, 2019. At December 31, 2018, West End Bank, S.B. exceeded the fully phased in regulatory requirement for the capital conservation buffer.
Legislation enacted in May 2018 requires the federal banking agencies, including the Federal Deposit Insurance Corporation, to establish for qualifying institutions with assets of less than $10 billion of assets a “community bank leverage ratio” of between 8% to 10% tangible equity/consolidated assets. Institutions with capital levels meeting or exceeding the specified requirement will be considered to comply with the applicable regulatory capital requirements, including all risk-based requirements. The establishment of the community bank leverage ratio is subject to notice and comment rulemaking by the federal regulators. A proposed rule issued by the federal regulators in December 2018 would specify a 9% community bank leverage ratio minimum for institutions to opt into the alternative framework.
The Federal Deposit Insurance Corporation Improvement Act required each federal banking agency to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. The Federal Deposit Insurance Corporation, along with the other federal banking agencies, adopted a regulation providing that the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The Federal Deposit Insurance Corporation also has authority to establish individual minimum capital requirements in appropriate cases upon determination that an institution’s capital level is, or is likely to become, inadequate in light of the particular circumstances.
Standards for Safety and Soundness. As required by statute, the federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. The agencies have also established standards for safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.
Investment Activities. All state-chartered Federal Deposit Insurance Corporation insured banks, including savings banks, are generally limited in their investment activities to principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law, subject to certain exceptions. For example, state-chartered banks may, with Federal Deposit Insurance Corporation approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange or the NASDAQ Global Market and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. The maximum permissible investment is 100% of Tier 1 Capital, as specified by the Federal Deposit Insurance Corporation’s regulations, or the maximum amount permitted by Indiana law, whichever is less.
In addition, the Federal Deposit Insurance Corporation is authorized to permit such a state bank to engage in state-authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if it meets all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the Deposit Insurance Fund. The Federal Deposit Insurance Corporation has adopted procedures for institutions seeking approval to engage in such activities or investments. In addition, a nonmember bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.
Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
The Federal Deposit Insurance Corporation has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. As of December 31, 2018, West End Bank, S.B. was classified as a “well capitalized” institution.
At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the Federal Deposit Insurance Corporation to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
The previously referenced proposed rulemaking to establish a “community bank leverage ratio” would adjust the referenced categories for qualifying institutions that opt into the alternative framework for regulatory capital requirements. Institutions that comply with this ratio would be deemed “well capitalized.”
Transaction with Affiliates and Regulation W of the Federal Reserve Regulations. Transactions between banks and their affiliates are governed by federal law. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank (although subsidiaries of the bank itself, except financial subsidiaries, are generally not considered affiliates). Generally, Section 23A of the Federal Reserve Act and the Federal Reserve Board’s Regulation W limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of such institution’s capital stock and surplus, and with all such transactions with all affiliates to an amount equal to 20.0% of such institution’s capital stock and surplus. Section 23B applies to “covered transactions” as well as to certain other transactions and requires that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from, and issuance of a guarantee to an affiliate, and other similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a bank to an affiliate. In addition, loans or other extensions of credit by the financial institution to the affiliate are required to be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act.
Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to a bank’s insiders, i.e., executive officers, directors and principal shareholders. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a greater than 10.0% shareholder of a financial institution, and certain affiliated interests of these, together with all other outstanding loans to such person and affiliated interests, may not exceed specified limits. Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers and principal shareholders be made on terms and conditions substantially the same as offered in comparable transactions to persons who are not insiders and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a financial institution to insiders cannot exceed the institution’s unimpaired capital and surplus. Section 22(g) of the Federal Reserve Act places additional restrictions on loans to executive officers.
Enforcement. The Federal Deposit Insurance Corporation has extensive enforcement authority over insured state savings banks, including West End Bank, S.B. The enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations, breaches of fiduciary duty and unsafe or unsound practices. The Federal Deposit Insurance Corporation is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” The Federal Deposit Insurance Corporation may also appoint itself as conservator or receiver for an insured state non-member bank under specified circumstances, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; (4) insufficient capital; or (5) the incurrence of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.
Federal Insurance of Deposit Accounts. West End Bank, S.B. is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. Deposit accounts in West End Bank, S.B. are insured up to a maximum of $250,000 for each separately insured depositor.
The Federal Deposit Insurance Corporation imposes an assessment for deposit insurance on all depository institutions. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by Federal Deposit Insurance Corporation regulations, with less risky institutions paying lower rates. Assessment rates (inclusive of possible adjustments) for banks with less than $10 billion of assets currently range from 1.5 to 30 basis points of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation was required to seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more were supposed to fund the increase. The Federal Deposit Insurance Corporation indicated in November 2018 that the 1.35% ratio was exceeded. Insured institutions of less than $10 billion of assets will receive credits for the portion of their assessments that contributed to raising the reserve ratio between 1.15% and 1.35% when the fund ratio achieves 1.38%. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long-range fund ratio of 2%.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of West End Bank, S.B. Future insurance assessment rates cannot be predicted.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule order or regulatory condition imposed in writing. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.
In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2018, the annualized FICO assessment was equal to 0.32 basis points of total assets less tangible capital.
Dividend Limitations. The primary source of West End Indiana Bancshares, Inc.’s cash flow, including cash flow to pay dividends on West End Indiana Bancshares, Inc.’s common stock, is the payment of dividends to West End Indiana Bancshares, Inc. by West End Bank, S.B. Under Indiana law, West End Bank, S.B. may pay dividends of so much of its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by West End Bank, S.B.’s board. However, West End Bank, S.B. must obtain the approval of the Indiana Department of Financial Institutions for the payment of a dividend if the total of all dividends declared by West End Bank, S.B. during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income” means net income as calculated for call report purposes, less all dividends declared for the applicable period. Also, the Federal Deposit Insurance Corporation has the supervisory authority to prohibit West End Bank, S.B. from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound banking practice in light of the financial condition of West End Bank, S.B. In addition, since West End Bank, S.B. is a subsidiary of a savings and loan holding company, West End Bank, S.B. must file a notice with the Federal Reserve Bank of Chicago at least 30 days before the board of directors of West End Bank, S.B. declares a dividend or approves a capital distribution.
For the year ended December 31, 2018, the Bank expensed $162,000 related to the FICO bonds and deposit insurance assessments.
Federal Home Loan Bank System. West End Bank, S.B. is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Indianapolis, West End Bank, S.B. is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2018, West End Bank, S.B. was in compliance with this requirement.
Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), West End Bank, S.B. has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the Federal Deposit Insurance Corporation in connection with its examination of West End Bank, S.B., to assess its record of meeting the credit needs of its community and to take that record into account in its evaluation of certain applications by West End Bank, S.B. For example, the regulations specify that a bank’s CRA performance will be considered in its expansion (e.g., branching) proposals and may be the basis for approving, denying or conditioning the approval of an application. As of the date of its most recent regulatory examination, West End Bank, S.B. was rated “satisfactory” with respect to its CRA compliance.
Qualified Mortgages and Retention of Credit Risk
The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:
|·||excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);|
|·||terms longer than 30 years|
Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrow for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive/and or time consuming to make these loans, which could limit our growth or profitability.
In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain not less than 5% of the credit risk for any assets that is not a “qualified residential mortgage.” The regulatory agencies have issued a proposed rule to implement this requirement. The Dodd-Frank Act provides that the definition of “qualified residential mortgage” can be no broader than the definition of “qualified mortgage” issued by the Consumer Financial Protection Bureau for purposes of its regulations (as described above). Although the final rule with respect to the retention of credit risk has not yet been issued, the final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans.
Consumer Protection and Fair Lending Regulations. Indiana savings banks are subject to a variety of federal and Indiana statutes and regulations that are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and regulations provide for a range of sanctions for non-compliance with their terms, including imposition of administrative fines and remedial orders, and referral to the Attorney General for prosecution of a civil action for actual and punitive damages and injunctive relief. Certain of these statutes authorize private individual and class action lawsuits and the award of actual, statutory and punitive damages and attorneys’ fees for certain types of violations.
USA Patriot Act. West End Bank, S.B. is subject to the USA PATRIOT Act, which gave federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act provided measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents, and parties registered under the Commodity Exchange Act.
Federal Reserve System
The Federal Reserve Board regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $124.2 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts greater than $124.2 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $16.3 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. West End Bank, S.B. is in compliance with these requirements.
Interest and other charges collected or contracted for by West End Bank, S.B. are subject to state usury laws and federal laws concerning interest rates. West End Bank, S.B.’s operations are also subject to federal and state laws applicable to credit transactions, such as the:
|·||Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;|
|·||Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;|
|·||Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;|
|·||Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;|
|·||Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;|
|·||Truth in Savings Act;|
|·||Indiana High Risk Home Loan Act, which protects borrowers who enter into high risk home loans;|
|·||Indiana Predatory Lending Database Program, which helps provide counseling for homebuyers in connection with certain loans; and|
|·||rules and regulations of the various federal and state agencies charged with the responsibility of implementing such laws.|
The operations of West End Bank, S.B. also are subject to the:
|·||Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;|
|·||Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;|
|·||Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;|
|·||The USA PATRIOT Act, which requires savings banks operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and|
Holding Company Regulation
General. West End Indiana Bancshares, Inc. is a non-diversified unitary savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such, West End Indiana Bancshares, Inc. is registered with the Federal Reserve Board and subject to inspection and supervision by the Federal Reserve Bank of Chicago. West End Indiana Bancshares, Inc. is subject to the Federal Reserve Board regulations (including applicable regulations of the former Office of Thrift Supervision), and reporting requirements. In addition, the Federal Reserve Board has enforcement authority over West End Indiana Bancshares, Inc. and its non-insured subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.
Capital. Savings and loan holding companies have not historically been subjected to consolidated regulatory capital requirements. However, the Dodd-Frank Act required the Federal Reserve Board to set for all depository institution holding companies minimum consolidated capital levels that are as stringent as those required for the insured depository subsidiaries. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act as to savings and loan holding companies. Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions apply to savings and loan holding companies. As is the case with institutions themselves, the capital conservation buffer will be phased in between 2016 and 2019.
Dividends. The Federal Reserve Board has issued a policy guidance regarding the payment of dividends by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Federal Reserve Board guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of West End Indiana Bancshares, Inc. to pay dividends or otherwise engage in capital distributions.
A savings and loan holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. There is an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions.
Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
Permissible Activities. Under present law, the business activities of West End Indiana Bancshares, Inc. are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Federal Reserve Board, and certain additional activities authorized by Federal Reserve Board regulations.
Federal law prohibits a savings and loan holding company, including West End Indiana Bancshares, Inc., directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the Federal Reserve Bank of Chicago. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Bank of Chicago must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Bank of Chicago is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:
|(i)||the approval of interstate supervisory acquisitions by savings and loan holding companies; and|
|(ii)||the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.|
The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Federal Securities Laws
Our common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.
Change in Control Regulations
Under the Change in Bank Control Act, no person, or group of persons acting in concert, may acquire control of a bank holding company such as West End Indiana Bancshares, Inc. or West End Indiana Bancshares unless the Federal Reserve Board has been given 60 days’ prior written notice and not disapproved the proposed acquisition. The Federal Reserve Board considers several factors in evaluating a notice, including the financial and managerial resources of the acquirer and competitive effects. Control, as defined under the applicable regulations, means the power, directly or indirectly, to direct the management or policies of the company or to vote 25% or more of any class of voting securities of the company. Acquisition of more than 10% of any class of a bank holding company’s voting securities constitutes a rebuttable presumption of control under certain circumstances, including where, as is the case with West End Indiana Bancshares, Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
In addition, federal regulations provide that no company may acquire control (as defined in the Bank Holding Company Act) of a bank holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “bank company” subject to registration, examination and regulation by the Federal Reserve Board.
General. West End Indiana Bancshares, Inc. and West End Bank, S.B. are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to West End Indiana Bancshares, Inc. and West End Bank, S.B.
Method of Accounting. For federal income tax purposes, West End Bank, S.B. currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31st for filing its consolidated federal income tax returns. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995.
Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent alternative minimum taxable income is in excess of an exemption amount. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At December 31, 2018, West End Bank, S.B. had no minimum tax credit carry forward.
Corporate Dividends. We may exclude from our income 100% of dividends received from West End Bank, S.B. as a member of the same affiliated group of corporations.
Audit of Tax Returns. West End Bank, S.B.’s federal income tax returns have not been audited in the most recent five-year period.
Indiana State Taxation. West End Indiana Bancshares, Inc., and West End Bank, S.B. are subject to Indiana’s Financial Institutions Tax (“FIT”), which is imposed at a flat rate of 8.0% on apportioned “adjusted gross income.” “Adjusted gross income,” for purposes of FIT, begins with taxable income as defined by Section 63 of the Code, and thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several modifications pursuant to Indiana tax regulation.
Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. West End Bank, S.B.’s state income tax returns have not been audited in recent years.
Availability of Annual Report on Form 10-K
This Annual Report on Form 10-K is available on our website at www.westendbank.com. Information on the website is not incorporated into, and is not otherwise considered a part of, this Annual Report on Form 10-K.
|ITEM 1A.||Risk Factors|
The presentation of Risk Factors is not required for smaller reporting companies such as West End Indiana Bancshares, Inc.
|ITEM 1B.||Unresolved Staff Comments|
As of December 31, 2018, the net book value of our office properties was $7.8 million. The following table sets forth information regarding our offices.
|Square Footage||Net Book Value of|
Main (Richmond) Office:
34 South 7th Street
Richmond, Indiana 47374
Main Office Parking
48 South 7th Street
Richmond, Indiana 47374
|Owned||2010||No building on site (adjacent to main office)||200|
700 South A Street
Richmond, Indiana 47374
Corporate Office Parking:
102 South 8th Street
Richmond, Indiana 47374
|Owned||2016||No building on site (adjacent to Corporate Office)||313|
Corporate Office Greenspace:
48 South 8th Street
Richmond, Indiana 47374
|Owned||2018||No building on site (adjacent to Corporate Office)||103|
Eastside (Richmond) Office:
101 South 37th Street
Richmond, Indiana 47374
10 East Main Street
207 North Main Street
Liberty, Indiana 47353
|ITEM 3.||Legal Proceedings|
On March 15, 2017, a complaint styled Audrey (Adams) Easler v. West End Bank, S.B., Case No. 89D02-17-3-CT-00001, Wayne County Circuit Court, Superior II, Richmond, Indiana (the “Complaint”), was served on West End Bank, S.B. (the “Bank”), naming it as defendant and alleging, among other things, that the Bank sent to the plaintiff a post-repossession notice that failed to include consumer rights required by the Uniform Commercial Code (“UCC”) as enacted in Indiana, and that the Bank's process of repossession violated the UCC. The complaint alleges that the named plaintiff is a representative of a class of plaintiffs and that the complaint would become a class action law suit. The complaint asks for both equitable relief and monetary damages. The Bank and plaintiff mediated in November 2017 and reached a class-wide settlement for the state of Indiana, which was supposedly approved by the Court. The class-wide settlement is being administered at this time. Upon completion of settlement administration, the case will be dismissed with prejudice. The parties have negotiated a settlement in order to avoid the risk of loss. In entering into this settlement, the Bank continues to deny that it has done anything unlawful, and entered into the settlement only to contain its risk of loss. The Wayne County Superior Court No. 2 approved the settlement on September 27, 2018. The deadline for claimants to submit claim forms was October 27, 2018. Settlement class members making a claim have received their settlement checks. Any uncashed checks will expire on March 27, 2019. Unpaid settlement funds will revert to the Bank. Based on the settlement agreement, the Bank has estimated the losses will not exceed the amount to be paid by our insurance company. Should the losses exceed the amounts covered by insurance, the Bank's maximum contribution based on the tentative settlement agreement is $250,000.
At December 31, 2018, other than as disclosed above, we were not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which management believes will not materially adversely affect our financial condition, our results of operations and our cash flows.
|ITEM 4.||Mine Safety Disclosures.|
|ITEM 5.||Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities|
|(a)||Market Information, Holders and Dividend Information. Our common stock is quoted on the OTC Pink Marketplace under the symbol “WEIN.” The number of holders of record of West End Indiana Bancshares, Inc.’s common stock as of December 31, 2018 was 172. Certain shares of West End Indiana Bancshares, Inc. are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.|
The following table presents high and low quarterly trading prices for our shares and dividends declared per share for the periods indicated.
|High Sale||Low Sale||Dividends Declared|
|Quarter ended December 31||$||30.09||$||24.30||$||0.07|
|Quarter ended September 30||31.75||29.75||0.07|
|Quarter ended June 30||29.94||28.50||0.07|
|Quarter ended March 31||28.89||28.26||0.06|
|Quarter ended December 31||$||29,25||$||28.26||$||0.06|
|Quarter ended September 30||29.75||28.88||0.06|
|Quarter ended June 30||30.50||28.50||0.06|
|Quarter ended March 31||34.00||30.10||0.06|
|(b)||Sales of Unregistered Securities. Not applicable.|
|(c)||Use of Proceeds. Not applicable.|
(d) Securities Authorized for Issuance Under Equity Compensation Plans. The following table sets forth the information as of December 31, 2018 with respect to compensation plans (other than the Company’s employee stock ownership plan) under which equity securities of the registrant are authorized for issuance.
|Number of |
securities to be
|Weighted average |
exercise prices of
warrants and rights
|Number of common |
available for future
issuance under stock
securities reflected in
|Equity compensation plans approved by stockholders||127,250||$||19.00||1,300|
|Equity compensation plans not approved by stockholders||––||––||––|
(e) Stock Repurchases. On May 25, 2016 the Board of Directors authorized a continuation of its stock repurchase program pursuant to which the Company may repurchase 5% of its common stock outstanding as of May 25, 2016, or approximately 56,000 shares. There are 11,247 remaining to be requrchases under this repurchase program.
There were no issuer repurchases of securities during the period covered by this Report.
(f) Stock Performance Graph. Not required for smaller reporting companies.
|ITEM 6.||Selected Financial Data|
Not required for smaller reporting companies.
|ITEM 7.||Management’s Discussion and Analysis of Financial Condition and Results of Operations|
This section is intended to help a reader understand the financial performance of West End Indiana Bancshares, Inc. and its subsidiaries through a discussion of the factors affecting our financial condition at December 31, 2018 and December 31, 2017 and our results of operations for the years ended December 31, 2018 and 2017. This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K.
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, and 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 primarily of securities issued by United States Government agencies and government sponsored entities and mortgage-backed securities. At December 31, 2018, we had total assets of $300.2 million, total deposits of $217.9 million and total equity of $30.2 million.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charges on deposit accounts, loan servicing income, gain on sales of securities and loans, debit card income, income from bank-owned life insurance and miscellaneous other income. Non-interest expense currently consists primarily of expenses related to compensation and employee benefits, occupancy and equipment, data processing, federal deposit insurance premiums, ATM charges, debit card charges, professional fees, advertising and other operating expenses.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
During recent years, in order to reduce our vulnerability to changes in interest rates and enhance our net interest rate spread, we have increased our acquisitions of indirect automobile loans and commercial and multi-family real estate loans. At December 31, 2018 our indirect automobile loan portfolio had an average life of 2 years 7 months which allows us to reinvest these funds into market-rate loans as interest rates change. Additionally, we sell the majority of our fixed-rate one- to four-family residential real estate loans that we originate. As part of our asset/liability management, we have also increased our core deposits (which we consider to be non-interest bearing and interest bearing checking, money market and statement savings accounts). Finally, we have also employed a strategy to shorten our investment portfolio maturities in recent years.
We have focused primarily on improving the execution of our community oriented retail banking strategy. Highlights of our current business strategy include the following:
|·||Increasing our holdings of loans other than one- to four-family residential real estate loans. While we will continue to emphasize one- to four-family residential real estate loans, we also intend, subject to market conditions, to increase our holdings of indirect automobile loans, commercial and multi-family real estate loans, and to a lesser extent, other consumer loans and commercial business loans, in order to increase the yield of, and reduce the term to repricing of, our total loan portfolio. Between December 31, 2014 and December 31, 2018, indirect loans and other consumer loans increased $28.1 million, or 38.1%, commercial and multi-family real estate loans increased $20.2 million, or 51.2%, and commercial business loans increased $2.5 million, or 24.8%, and we expect that these loan categories will continue to provide growth opportunities.|
|·||Continuing to emphasize the origination of one- to four-family residential real estate loans, while increasing, to the extent practicable, the amount of our adjustable-rate residential mortgage loans. We are and will continue to be a one- to four-family residential real estate lender to borrowers in our market area. As of December 31, 2018, $63.8 million, or 25.7%, of our total loans and 21.2% of our total assets consisted of one- to four-family residential real estate loans, compared to $61.9 million, or 31.9%, of total loans and 23.9% of total assets at December 31, 2014. To the extent practicable under applicable market conditions, we seek to emphasize the origination of adjustable-rate residential mortgage loans for retention in our portfolio.|
|·||Managing interest rate risk, including following our strategy of selling most of our fixed-rate one- to four-family residential real estate loans into the secondary market, while attempting to maximize, to the extent practicable, our net interest margin. During the last several years, we have taken steps that are intended to increase our net interest margin as well as our ability to manage our interest rate risk in the future. In particular, we have increased our holdings of indirect automobile loans and commercial and multi-family real estate loans, which generally have shorter terms to maturity and higher yields than fixed-rate one- to four-family residential real estate loans. We have also reduced the average maturity in our investment securities portfolio. In addition, we perform on an ongoing basis, an asset/liability management analysis to determine the amount of fixed-rates loans to sell, and in recent years, based on these ongoing analyses, we have sold most of our fixed-rate one- to four-family residential real estate loans that we originate, while retaining the servicing rights.|
|·||Maintaining strong asset quality. We have sought to build strong asset quality by following conservative underwriting guidelines, sound loan administration, and generally focusing on secured loans located in our market area. Our non-performing assets and troubled debt restructurings totaled $1.9 million or 0.62% of total assets at December 31, 2018. Our total nonperforming loans and troubled debt restructurings to total loans ratio was 0.87% at December 31, 2018. Total loan delinquencies greater than 90 days and non-accrual loans, as of December 31, 2018, were $1.5 million, or 0.60% of total loans.|
|·||Executing our cross-marketing strategy, including community outreach programs, to enhance our profile in our market area, increase our relationships with small- to mid-sized businesses and professionals, and build our core deposits. We are seeking to build our demand, NOW, statement savings and money market deposits and seeking to reduce our reliance on borrowings and certificates of deposit for liquidity purposes and to fund loan demand. We believe such core deposits not only have favorable cost and interest rate change resistance but also allow us greater opportunity to connect with our customers and offer them other financial services and products. In recent years, we have grown our core deposits from commercial business customers through our various marketing strategies. Those strategies include our Business Links program (a suite of services provided to small- and mid-sized businesses and professionals in our market area), deposit pick up service, remote capture, mobile banking, enhanced online banking, electronic statements and social media implementation on Facebook, Twitter and LinkedIn. Our school branch program in an elementary school and a high school in Richmond, Indiana provides limited-service branches operated by students as well as financial education classes taught by West End Bank, S.B. employees. Additionally, our new charitable foundation that we established in connection with the conversion and stock offering will provide us continued opportunities to grow our brand recognition in our market area.|
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies:
Allowance for Loan Losses. Our allowance for loan losses is the estimated amount considered necessary to reflect probable incurred credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical for West End Indiana Bancshares, Inc. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
Since a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the value of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.
The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating classified loans from the remaining loans, and then categorizing each group by type of loan. Loans within each type exhibit common characteristics including terms, collateral type, and other risk characteristics. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations.
Mortgage Servicing Rights. We sell to investors a portion of our originated one- to four-family residential real estate loans. When we acquire mortgage servicing rights through the origination of mortgage loans and the sale of those loans with servicing rights retained, we allocate a portion of the total cost of the mortgage loans to the mortgage servicing rights based on their relative fair value. As of December 31, 2018, we were servicing loans sold to others totaling $73.6 million. We have elected to initially and subsequently measure the mortgage-servicing rights for residential mortgage loans using the fair value method. Under the fair value method, the servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in earnings in the period in which the changes occur.
Fair value is based on market prices for comparable mortgage-servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model calculates the present value of the future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The valuation model uses a discounted cash flow methodology. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage-servicing right and may result in a reduction to our other income.
The key economic assumptions made in determining the fair value of the mortgage servicing rights at December 31, 2018 included the following:
|Annual constant prepayment speed (CPR):||9.2||%|
|Weighted average life remaining:||4.35 years|
|Discount rate used:||6.6||%|
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage-servicing rights is netted against loan servicing fee income.
Comparison of Financial Condition at December 31, 2018 and December 31, 2017
Total assets increased $737,000 or 0.2%, to $300.2 million at December 31, 2018. The increase was a result of increases in loans, and bank-owned life insurance, partially offset by decreases in cash and cash equivalents, investment securities classified as available for sale and premises and equipment.
Cash and cash equivalents decrease $410,000, or 4.0%, to $9.9 million at December 31, 2018, based on normal operations and cash flow. Bank-owned life insurance increased to $7.1 million at December 31, 2018 from $7.0 million at December 31, 2017. Securities classified as available for sale decreased $501,000, or 2.5%, to $19.8 million at December 31, 2018 from $20.3 million at December 31, 2017. Additionally, loans held for sale decreased to $133,000 from $2.9 million resulting from timing of loan sales at year end in 2017.
Net loans increased $4.1 million, or 1.7%, to $245.0 million at December 31, 2018 from December 31, 2017. Commercial and multi-family real estate loans increased $2.2 million, or 3.9%, to $59.7 million from $57.5 million. One to four-family residential loans increased $1.9 million, or 3.1% to $63.8 million from $61.9 million Commercial and business loans increased $1.3 to $12.8 million from $11.6 million and. Second mortgages and equity lines of credit increased $377,000, or 5.7%, to $7.0 million from $6.6 million. The consumer loan portfolio decreased $2.4 million, or 2.3%, to $101.7 million. Included within consumer loans, direct consumer loans increased $317,000 to $18.3 million, and indirect loans decreased $2.7 million to $83.4 million from $86.1 million.
Deposits decreased $9.1 million, or 4.2%, to $217.9 million from $227.0 million year to year. Core deposits, including savings, interest bearing and non-interest bearing checking, and money market deposit accounts, decreased $8.4 million to $111.6 million at December 31, 2018 from $120.1 million at December 31, 2017. Money market deposit accounts decreased $10.5 million, or 25.6% ,to $30.5 million at December 31, 2018 from $41.1 million at December 31, 2017. Interest bearing and non-interest bearing checking accounts decreased $894,000, or 1.6%, to $56.6 million at December 31, 2018 while certificates of deposit decreased $632,000, or 0.7%, to $106.3 million at December 31, 2018 from $106.9 million at December 31, 2017. Savings accounts increased $3.0 million, or 13.9%, to $24.5 million at December 31, 2018.
Borrowings, which consisted entirely of Federal Home Loan Bank advances, increased $9.0 million, or 21.7%, to $50.5 million at December 31, 2018 from $41.5 million at December 31, 2017.
Total stockholders’ equity increased $1.1 million, or 3.9%, to $30.2 million at December 31, 2018 from $29.0 million at December 31, 2017. The increase resulted primarily from 2018 net income of $1.4 million, stock based ESOP shares earned of $163,000, stock-based compensation expense of $137,000, and increases to accumulated other comprehensive loss of $230,000, dividends of $267,000, and stock repurchases of $54,000.
Comparison of Operating Results for the Years Ended December 31, 2018 and 2017
General. Net income for the year ended December 31, 2018 was $1.4 million, an increase of $806,000 from $578,000 for the year ended December 31, 2017. Changes to net income resulted primarily from an increase in interest income of $927,000, noninterest income of $811,000, a decreases to the provision for loan losses of $73,000, and a decrease to the provision of income tax expense of $59,000, offset by increases in other expenses of $103,000.
Interest Income. Interest income increased to $15.0 million for 2018 from $14.1 million for 2017. The average balance of total interest earning assets increased $12.8 million, or 4.7%, to $281.9 million for the year ended December 31, 2018 from $269.1 million for the year ended December 31, 2017. The average yield on total interest earning assets increased nine basis points to 5.33% for 2018 from 5.24% for 2017 due to the increased average balance of the loan portfolio and the higher yielding investment portfolio.
Interest income and fees on loans increased to $14.3 million for 2018 from $13.6 million in 2017. The average yield on loans increased three basis points to 5.77% for the year ended December 31, 2018 from 5.74% for the year ended December 31, 2017.
Interest income on investment securities increased to $434,000 from $390,000 the year ended December 31, 2018 and 2017, respectively, due to an increase in the yield across the portfolio. The decrease of $1.0 million to the average balance of investment securities to $21.1 million for the year ended December 31, 2018 from $22.1 million for the year ended December 31, 2017 reflects management’s overall funding strategy for loan growth.
Interest Expense. Interest expense increased $962,000, or 44.2%, to $3.1 million for 2018 from $2.2 million in 2017 reflecting an increase in the average balance of interest bearing liabilities and higher average market interest rates. The average balance of interest bearing deposit accounts increased to $201.8 million for the year ended December 31, 2018 from $200.7 million for the year ended December 31, 2017, and the interest expense on these liabilities also increased $530,000 to $2.2 million for the year ended December 31, 2018.
The average balance of interest bearing demand deposits (savings, checking and money market accounts) decreased $4.3 million to $92.7 million for the year ended December 31, 2018 from $97.0 million for the year ended December 31, 2017. The average balance of interest bearing checking accounts decreased $2.6 million at December 31, 2018, the average balance of money market accounts decreased $2.7 million, the average balance of savings accounts increased $1.0 million for the year ended December 31, 2018.
Interest expense on certificates of deposit increased $500,000, or 37.0%, to $1.9 million for the year ended 2018 from $1.4 million for 2017. The average balance of certificates of deposit increased $5.5 million or 5.3%, to $109.1 million for 2018 from $103.7 million for 2017. Additionally the average interest paid increased as the average rate increased 40 basis point to 1.70% for the year ended December 31, 2018 from 1.30% for the year ended December 31, 2017.
Interest expense on borrowed funds, consisting entirely of Federal Home Loan Bank advances, increased $432,000, or 84.0% to $946,000 for the year ended December 31, 2018 from $514,000 for the year ended December 31, 2017. The average balance of advances increased to $48.9 million for the year ended December 31, 2018 from $38.2 million for the year ended December 31, 2017, the average rate paid increased 59 basis points to an average rate of 1.94% for the year ended December 31, 2018 from 1.35% for the year ended December 31, 2017.
Net Interest Income. Net interest income decreased $36,000 to $11.88 million for December 31, 2018 from $11.92 million for the year ended December 31, 2017. Net interest income consisted of an increase on income on loans of $720,000 to $14.3 million from $13.6 million, securities increased $44,000 to $434,000 from $390,000 and other interest income increased $162,000 to $296,000, offset by increases in interest expense on deposits of $530,000 to $2.2 million from $1.7 million and an increase in the cost of borrowings of $432,000 to $946,000 from $514,000.
Provision for Loan Losses. Based on our analysis of the factors described in “Critical Account Policies – Allowance for Loan Losses,” we recorded a provision for loan losses of $1.9 million for 2018 and $2.0 million for 2017. The allowance for loan losses was $3.0 million, or 1.23% to total loans outstanding at December 31, 2018, compared to $2.7 million, or 1.13% of total loans outstanding at December 31, 2017. Total nonperforming loans were $1.5 million, or 0.60% of total loans outstanding at December 31, 2018 compared to $823,000, or 0.34% of total loans outstanding at December 31, 2017. Nonperforming loans increased primarily due to multiple one-to-four family residential loans put on nonaccrual in 2018. The allowance for loan losses as percentage of nonperforming loans decreased to 205.0% at December 31, 2018, from 333.5% at December 31, 2017. 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 and third quarters of 2018 management tightened up lending on our consumer loans to help minimize risk in the largest portion of the portfolio.
Noninterest Income. Noninterest income increased $811,000, or 81.6%, to $1.8 million, for the year ended December 31, 2018, from $994,000 for the year ended December 31, 2017. The increase was due in large part to an decrease in loss on sale of other assets of $594,000, and the increase other income of $198,000. The reduction in losses on other assets was due primarily to management’s determination that the fair market value on a single commercial property held in foreclosed real estate held for sale had decreased during the second quarter of 2017 resulting in a write down of $400,000 in that year. Additionally, there was a $142,000 decrease in a reserve established in the prior year against reimbursable expenses and interest due from the SBA for the afformentioned property.
Noninterest Expense. Noninterest expense increased $103,000, or 1.0%, to $10.0 million, from $9.9 million for the year ended December 31, 2017. The increase was due primarily to decreases in foreclosed real estate and repossession expense of $395,000, professional fees of $131,000, and ATM charges of $69,000, offset by increases in salaries and employee benefits of $382,000, and net occupancy of $255,000. Salaries and employee benefits increased due to normal cost of living and merit increases, and other employee benefit programs. Net occupancy expense increased due to the completion of the administrative and operations building late in 2017 and affixed depreciation on the building and furniture fixtures and equipment. The savings in ATM charges are due to the transition to a new servicer. Expenses related to foreclosed real estate decreased due to the sale in 2017 of a commercial property held in foreclosure and relief of the related carryforward costs.
Income tax expense. We recorded $320,000 of income tax expense for the year ended December 31, 2018 compared to $379,000 for the year ended December 31, 2017, reflecting the decrease in Federal tax rate from 34% to 21% and the $102,000 of expense taken in 2017 related to the remeasurement of certain deferred tax assets and liabilities due to the Tax Cuts and Jobs Act. Our effective tax rate was 18.8% for the year ended December 31, 2018, compared to 39.6% for the year ended December 31, 2017.
Analysis of Net Interest Income
Net interest income represents the difference between the income we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The following tables set forth average balance sheets, average yields and costs, and certain other information at or for the periods indicated. Average balances are derived from daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. No tax equivalent yield adjustments have been made. The yields set forth below include the effect of loan fees, discounts and premiums that are amortized or accreted to interest income.
|For the Year Ended December 31,|
|(Dollars in Thousands)|
|Other interest-earning assets||13,273||296||2.23||10,523||134||1.27||9,970||74||0.74|
|Total interest-earning assets||281,916||15,019||5.33||269,136||14,093||5.24||263,321||13,613||5.17|
|Liabilities and equity:|
|Certificates and other time deposits||109,107||1,851||1.70||103,651||1,351||1.30||107,484||1,265||1.18|
|Total interest-bearing deposits||201,818||2,190||1.09||200,671||1,660||0.83||199,335||1,486||0.75|
|Total interest-bearing liabilities||250,690||3,136||1.25||238,846||2,174||0.91||229,753||1,913||0.83|
|Noninterest-bearing demand deposits||24,425||24,302||21,757|
|Other noninterest-bearing liabilities||1,582||2,000||1,382|
|Total liabilities and equity||$||305,973||$||293,944||$||281,558|
|Net interest income||$||11,883||$||11,919||$||11,700|
|Interest rate spread||4.08||%||4.33||%||4.34||%|
|Net interest margin||4.22||%||4.43||%||4.44||%|
|Average interest-earning assets to average interest-bearing liabilities||112.45||%||112.68||%||114.61||%|
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
|Years Ended December 31,|
2018 vs. 2017
|Years Ended December 31,|
2017 vs. 2016
|Increase (Decrease) Due to||Increase|
|Increase (Decrease) Due to||Total|
|Other interest-earning assets||42||120||162||4||56||60|
|Increase (decrease) in net interest income||$||482||$||(518||)||$||(36||)||$||307||$||(88||)||$||219|
Management of Market Risk
Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings.
Historically, we have relied on funding longer-term, higher interest-earning assets with shorter- term, lower interest-bearing deposits to earn a favorable net interest rate spread. As a result, we have been vulnerable to adverse changes in interest rates. Over the past several years, management has implemented an asset/liability strategy to manage, subject to our profitability goals, our interest rate risk. Among the techniques we are currently using to manage interest rate risk are:
|1)||originating indirect automobile loans and other consumer loans, commercial and multi-family real estate loans and secured commercial business loans, all of which tend to have shorter terms and higher interest rates than one- to four-family residential real estate loans, and which generate customer relationships that can result in larger non-interest bearing demand deposit accounts;|
|2)||selling most of our long-term, fixed-rate one- to four-family residential real estate loans that we originate;|
|3)||lengthening the weighted average maturity of our liabilities through retail deposit pricing strategies and through longer-term wholesale funding sources such as fixed-rate advances from the Federal Home Loan Bank of Indianapolis;|
|4)||reducing our dependence on the acquisition of certificates of deposits and wholesale funding to support lending and investment activity;|
|5)||investing in shorter- to medium-term investment securities; and|
|6)||increasing other income as a percentage of total income.|
Our Board of Directors is responsible for the review and oversight of our Asset/Liability Committee, which is comprised of our executive management team and other essential operational staff. This committee is charged with developing and implementing an asset/liability management plan, and meets at least quarterly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.
We use an earnings simulation analysis that measures the sensitivity of net interest income to various interest rate movements. The base-case scenario is established using current interest rates. The comparative scenarios assume an immediate parallel shock in increments of 100 basis point (bp) rate movements. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The model is run at least quarterly showing shocks from -300bp to +300bp. At least annually, the model is run with a shock of +400bp along with a -300bp to +300bp with a non-parallel rate shift, meaning short-term and long-term rates would not move in equal increments.
The interest rate scenarios are used for analytical purposes and do not necessarily represent management’s view of future market movements. Results of the modeling are used to provide a measure of the degree of volatility interest rate movements may influence our earnings. Modeling the sensitivity of earnings to interest rate risk is decidedly reliant on numerous assumptions embedded in the model. These assumptions include, but are not limited to, management’s best assessment of the effect of changing interest rates on the prepayment speeds of certain assets and liabilities, projections for account balances in each of the product lines offered and the historical behavior of deposit rates and balances in relation to changes in interest rates. These assumptions are inherently changeable, and as a result, the model is not expected to precisely measure net interest income or precisely predict the impact of fluctuations in interest rate on net interest income. Actual results will differ from the simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions. Assumptions are supported with annual back testing of the model to actual market rate shifts.
The table below sets forth, as of December 31, 2018 and 2017, the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve. In the below table, “12 Month Horizon” and “24 Month Horizon” represent the assumed length of time for which the designated immediate change in the interest rate would remain effective. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
|At December 31,|
|Change in Interest Rates |
|Net Interest Change as a Percentage |
of Net Interest Income
|12 Month Horizon|
|24 Month Horizon|
The table above indicates that at December 31, 2018, in the event of a 200 basis point increase in interest rates, assuming a 12 month horizon, our net interest income would decline 1.21%. In the event of a 100 basis point decrease in interest rates, assuming a 12 month horizon, our net interest income would increase by 0.44%. A rising rate environment over a 24-month period shows even less favorable decreases to our net interest income than the correlating rate change over a 12-month period.
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 $6.6 million and $1.6 million for 2018 and 2017 respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from the sale securities and proceeds from maturing securities and pay downs on mortgage-backed securities, was $6.6 million and $10.2 million for 2018 and 2017, respectively. The 2018 period reflected a net change in loans of $6.7 million while the 2017 period reflected a net change in loans of $9.5 million. Net cash (used in) provided by financing activities, consisting primarily of the activity in borrowings and deposit accounts was ($387,000) and $11.3 million for 2018 and 2017, respectively, resulting from a shift in our strategy to utilize lower cost of funding in federal home loan bank advances and moving away from increasing costs of financial institution certificates of deposit.
At December 31, 2018, we exceeded all of our regulatory capital and well capitalized requirements with a Tier 1 (core) capital level of $30.4 million, or 10.0% of adjusted total assets, which is above the required regulatory capital level of $12.2 million, or 4.0% and well capitalized level of $15.3 million, or 5.0%; and total risk-based capital of $33.4 million, or 14.0% of risk-weighted assets, which is above the required level of $19.1 million, or 8.0% and well capitalized level of $23.8 million, or 10%. Management is not aware of any conditions or events since the most recent notification that would change our category.
At December 31, 2018 we had outstanding commitments to originate loans of $16.7 million. 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 December 31, 2018 totaled $66.7 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.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and standby letters of credit. For information about our loan commitments, unused lines of credit and standby letters of credit, see Note 9 of the Notes to our Consolidated Financial Statements beginning on page F-1 of this annual report.
We have not engaged in any other off-balance-sheet transactions in the normal course of our lending activities.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 18 of the notes to our consolidated financial statements beginning on page F-1 of this annual report.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
|ITEM 7A.||Quantitative and Qualitative Disclosures about Market Risk|
Not required for smaller reporting companies.
|ITEM 8.||Financial Statements and Supplementary Data|
The Company’s Consolidated Financial Statements are presented in this Annual Report on Form 10-K beginning at page F-1.
West End Indiana Bancshares, Inc.
Consolidated Financial Statements
December 31, 2018 and 2017
West End Indiana Bancshares, Inc.
As of December 31, 2018 and 2017
and Years Ended December 31, 2018 and 2017
|Report of Independent Registered Public Accounting Firm||F-2|
|Consolidated Financial Statements|
|Statements of Income||F-4|
|Statements of Comprehensive Income||F-5|
|Statements of Stockholders’ Equity||F-6|
|Statements of Cash Flows||F-7|
|Notes to Financial Statements||F-8|
Audit Committee, Board of Directors and Stockholders
West End Indiana Bancshares, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of West End Indiana Bancshares, Inc. (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2010.
March 29, 2019
Consolidated Balance Sheets
December 31, 2018 and 2017
|December 31,||December 31,|
|Cash and due from banks||$||1,551,865||$||1,588,203|
|Interest-bearing demand deposits||8,383,465||8,757,619|
|Cash and cash equivalents||9,935,330||10,345,822|
|Investment securities available for sale||19,796,452||20,296,672|
|Loans held for sale||132,517||2,877,012|
|Loans, net of allowance for loan losses of $3,039,697 and $2,744,684||244,955,065||240,858,812|
|Premises and equipment||8,897,904||9,127,886|
|Federal Home Loan Bank stock||2,435,700||2,435,700|
|Bank-owned life insurance||7,136,110||6,959,909|
|Foreclosed real estate held for sale||16,000||39,375|
|Liabilities and Equity|
|Federal Home Loan Bank advances||50,500,000||41,500,000|
|Commitments and Contingencies|
|Redeemable common stock held by Employee Stock Ownership Plan (ESOP)||1,028,282||854,526|
|Common stock, $.01 par value per share: Issued and outstanding – 1,065,336 and 1,066,858||10,653||10,668|
|Additional paid in capital||6,251,261||6,062,163|
|Unearned employee stock ownership plan (ESOP)||(728,520||)||(784,560||)|
|Accumulated other comprehensive loss||(584,045||)||(288,301||)|
|Total stockholders’ equity||30,160,893||29,029,367|
|Less maximum cash obligation related to ESOP shares||(1,028,282||)||(854,526||)|
|Total stockholders’ equity less maximum cash obligation related to ESOP shares||29,132,611||28,174,841|
|Total liabilities and stockholders’ equity||$||300,151,243||$||299,413,835|
See Notes to Consolidated Financial Statements
Consolidated Statements of Income
Years Ended December 31, 2018 and 2017
|Years Ended December 31,|
|Interest and Dividend Income|
|Loans receivable, including fees||$||14,289,426||$||13,568,859|
|Total interest income||15,019,618||14,093,576|
|Federal Home Loan Bank advances||945,669||513,879|
|Total interest expense||3,135,883||2,174,088|
|Net Interest Income||11,883,735||11,919,488|
|Provision for loan losses||1,947,746||2,021,000|
|Net Interest After Provision for Loan Losses||9,935,989||9,898,488|
|Service charges on deposit accounts||711,622||701,679|
|Loan servicing income, net||117,176||81,016|
|Debit card income||403,334||369,198|
|Gain on sale of loans||310,682||370,578|
|Gain on cash surrender value of life insurance||176,201||176,691|
|Loss on sale of other assets||(125,532||)||(719,341||)|
|Total other income||1,805,102||993,807|
|Salaries and employee benefits||5,603,343||5,221,524|
|Data processing fees||523,534||465,315|
|Postage and courier||247,442||244,356|
|FDIC insurance premiums||162,000||166,500|
|Foreclosed real estate and repossession expense||172,516||567,202|
|Total other expenses||10,037,735||9,935,047|
|Income Before Income Tax||1,703,356||957,248|
|Income tax expense||$||320,016||$||379,424|
|Earnings Per Share|
|Dividends Per Share||0.27||0.24|
See Notes to Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2018 and 2017
|Years Ended December 31,|
|Other comprehensive income (loss), net of tax|
|Unrealized holding gains (loss) arising during the period, net of tax expense (benefit) of $(81,519) and $35,937.||(230,395||)||57,115|
See Notes to Consolidated Financial Statements
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2018 and 2017
|Outstanding||Amount||Capital||Earnings||ESOP Shares||Income (Loss)||ESOP Shares||Equity|
|Balances at January 1, 2017||1,064,582||$||10,646||$||5,690,352||$||23,687,416||$||(840,600||)||$||(345,416||)||$||(660,957||)||$||27,541,441|
|Other comprehensive income||-||-||-||-||-||57,115||-||57,115|
|ESOP shares earned||-||-||110,656||-||56,040||-||-||166,696|
|Change related to ESOP shares||-||-||-||-||-||-||(193,569||)||(193,569||)|
|Stock based compensation expense||-||-||289,608||-||-||-||-||289,608|
|Cash dividends ($0.24) per share||-||-||-||(235,843||)||-||-||-||(235,843||)|
|Balances at December 31, 2017||1,066,858||10,668||6,062,163||24,029,397||(784,560||)||(288,301||)||(854,526||)||28,174,841|
|Other comprehensive loss||-||-||-||-||-||(230,395||)||-||(230,395||)|
|ESOP shares earned||-||-||106,574||-||56,040||-||-||162,614|
|Change related to ESOP shares||-||-||-||-||-||-||(173,756||)||(173,756||)|
|Stock based compensation expense||-||-||136,727||-||-||-||-||136,727|
|Cash dividends ($0.27) per share||-||-||-||(266,542||)||-||-||-||(266,542||)|
|Reclassification in connection with ASU 2018-02||-||-||-||65,349||-||(65,349||)||-||-|
|Balances at December 31, 2018||1,065,336||$||10,653||$||6,251,261||$||25,211,544||$||(728,520||)||$||(584,045||)||$||(1,028,282||)||$||29,132,611|
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
Years Ended December 31, 2018 and 2017
|Years Ended December 31,|
|Items not requiring (providing) cash|
|Provision for loan losses||1,947,746||2,021,000|
|Depreciation and amortization||521,850||303,510|
|Deferred income taxes||119,040||96,945|
|Investment securities amortization, net||275,843||324,133|
|Gain on loans sold||(310,682||)||(370,578||)|
|Loss on other assets||125,532||719,341|
|ESOP shares earned||162,614||166,696|
|Stock based compensation||136,727||289,608|
|Loan originated for sale||(10,019,649||)||(15,467,476||)|
|Proceeds on loan sold||12,961,023||13,226,078|