West End Indiana Bancshares, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - West End Indiana Bancshares, Inc.	t1600327_ex32.htm
EX-31.1 - EXHIBIT 31.1 - West End Indiana Bancshares, Inc.	t1600327_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - West End Indiana Bancshares, Inc.	t1600327_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2016

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 000-54578

West End Indiana Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Maryland		36-4713616
(State or other jurisdiction of in Company or organization)		(I.R.S. Employer Identification Number)

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

(765) 962-9587

(Registrant’s telephone number)

N/A

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

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

YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

YES x NO ¨

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

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

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

YES ¨ NO x

As of May 16, 2016, there were 1,106,476 issued and outstanding shares of the Registrant’s Common Stock.

West End Indiana Bancshares, Inc.

Form 10-Q

Index

		Page
Part I. Financial Information

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets	1

	Condensed Consolidated Statements of Income	2

	Condensed Consolidated Statements of Comprehensive Income	3

	Condensed Consolidated Statements of Cash Flows	4

	Condensed Statement of Stockholders’ Equity	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39

Item 4.	Controls and Procedures	39

Part II. Other Information

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults upon Senior Securities	40

Item 4.	Mine Safety Disclosures	40

Item 5.	Other Information	40

Item 6.	Exhibits	41

	Signature Page	42

Part I. – Financial Information

Item 1.

Financial Statements

West End Indiana Bancshares, Inc.

Condensed Consolidated Balance Sheets

	March 31, 2016			December 31, 2015
	(Unaudited)
Assets
Cash and due from banks	$	1,413,903		$	1,474,318
Interest-bearing demand deposits		7,959,802			5,363,107
Cash and cash equivalents		9,373,705			6,837,425
Investment securities available for sale		24,502,547			28,100,901
Loans held for sale		1,933,410			1,668,264
Loans, net of allowance for loan losses of $2,241,325 and $2,192,709		221,818,267			218,008,838
Premises and equipment		3,723,244			3,583,353
Federal Home Loan Bank stock		1,323,000			1,323,000
Interest receivable		932,270			1,079,875
Bank-owned life insurance		6,510,984			5,279,009
Foreclosed real estate held for sale		825,202			807,702
Other assets		4,107,064			4,334,433

Total assets	$	275,049,693		$	271,022,800

Liabilities and Equity

Liabilities
Deposits	$	214,687,525		$	215,278,068
Federal Home Loan Bank advances		31,000,000			27,000,000
Interest payable		83,450			75,412
Other liabilities		1,222,948			1,265,015
Total liabilities		246,993,923			243,618,495

Commitments and Contingencies

Stockholders’ Equity
Common stock, $0.01 par value per share: Issued and outstanding 1,106,476 and 1,106,476		11,065			11,065
Additional paid in capital		6,455,480			6,367,059
Retained earnings		22,478,761			22,081,030
Unearned employee stock ownership plan (ESOP)		(882,630	)		(896,640	)
Accumulated other comprehensive loss		(6,906	)		(158,209	)
Total stockholder’s equity		28,055,770			27,404,305
Total liabilities and stockholder’s equity	$	275,049,693		$	271,022,800

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

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements of Income

	Three Months Ended March 31,
	2016			2015
	(Unaudited)
Interest and Dividend Income
Loans receivable, including fees	$	3,121,230		$	2,842,380
Investment securities		117,902			205,041
Other		17,710			18,968
Total interest income		3,256,842			3,066,389

Interest Expense
Deposits		358,803			289,935
Federal Home Loan Bank advances		121,650			108,281
Total interest expense		480,453			398,216

Net Interest Income		2,776,389			2,668,173
Provision for loan losses		270,000			330,000
Net Interest After Provision for Loan Losses		2,506,389			2,338,173

Other Income
Service charges on deposit accounts		145,194			122,864
Loan servicing income, net		(11,052	)		(11,971	)
Debit card income		81,707			72,259
Gain on sale of loans		100,546			88,866
Net realized gains on sales of available-for-sale securities (includes $14,203 and $24,625, respectively, related to accumulated other comprehensive earnings reclassifications)		14,203			24,625
Gain on cash surrender value of life insurance		31,975			30,914
Gain (loss) on sale of other assets		123			23,999
Other income		458			11,433
Total other income		363,154			362,989

Other Expense
Salaries and employee benefits		1,248,925			1,202,984
Net occupancy		131,962			120,086
Data processing fees		80,037			80,796
Professional fees		88,075			111,951
Director Expenses		25,546			43,873
Advertising		62,183			60,004
ATM charges		65,078			58,605
Postage and courier		60,350			57,515
FDIC insurance premiums		45,000			51,000
Other expenses		355,243			268,456
Total other expenses		2,162,399			2,055,270

Income Before Income Tax		707,144			645,892
Income tax expense (includes $5,626 and $9,754 respectively, related to income tax expense from reclassification items)		249,727			227,071

Net Income	$	457,417		$	418,821

Earnings Per Share
Basic	$	0.45		$	0.34
Diluted		0.44			0.34
Dividends Per Share		0.06			0.06

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

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income

	Three Months Ended March 31,
	2016		2015
	(Unaudited)
Net income	$	457,417	$	418,821
Other comprehensive income, net of tax
Unrealized holding gains arising during the period, net of tax expense of $104,824 and $40,940		159,880		62,437
Less: Reclassification adjustment for gains included in net income, net of tax expense of $5,626 and $9,754
		8,577		14,871

		151,303		47,566
Comprehensive income	$	608,720	$	466,387

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

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

	Three Months Ended March 31,
	2016			2015
	(Unaudited)
Operating Activities
Net income	$	457,417		$	418,821
Items not requiring (providing) cash
Provision for loan losses		270,000			330,000
Depreciation and amortization		68,400			49,954
Investment securities amortization, net		82,763			111,648
Investment securities gains		(14,203	)		(24,625	)
Loan originated for sale		(3,909,592	)		(4,051,118	)
Proceeds on loans sold		3,710,868			3,813,970
Gain on loans sold		(100,546	)		(88,866	)
Loss (gain) on other assets		(123	)		(23,999	)
ESOP shares earned		31,326			28,485
Stock based compensation		71,105			69,659
Net change in
Interest receivable		147,605			101,190
Interest payable		8,038			5,642
Cash surrender value of life insurance		(31,975	)		(30,914	)
Other adjustments		120,350			(57,166	)
Net cash provided by operating activities		911,433			652,681

Investing Activities
Proceeds from maturities of securities available for sale		1,041,678			1,391,180
Proceeds from the sales of securities available for sale		2,738,618			3,007,542
Net change in loans		(4,096,929	)		(11,280,845	)
Purchase of premises and equipment		(208,291	)		(51,174	)
Purchase of bank owned life insurance		(1,200,000	)		-
Proceeds from sale of foreclosed real estate		-			154,979
Net cash used in investing activities		(1,724,924	)		(6,778,318	)

Financing Activities
Net change in demand deposits, money market, NOW, and savings accounts		2,453,697			20,931
Net change in certificates of deposit		(3,044,240	)		(2,026,594	)
Repurchased shares		-			(560,475	)
Repayment of FHLB advances		(4,000,000	)		(1,000,000	)
Proceeds from FHLB advances		8,000,000			7,000,000
Cash dividends		(59,686	)		(71,418	)
Net cash provided by financing activities		3,349,771			3,362,444

Net Change in Cash and Cash Equivalents		2,536,280			(2,763,193	)

Cash and Cash Equivalents, Beginning of Year		6,837,425			9,861,698

Cash and Cash Equivalents, End of Year	$	9,373,705		$	7,098,505

Additional Cash Flows Information
Interest paid	$	472,415		$	392,574
Income tax paid		248,000			260,000
Real estate acquired in settlement of loans		17,500			126,229
Sale and financing of foreclosed real estate		-			47,388

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

West End Indiana Bancshares, Inc.

Condensed Statement of Stockholders’ Equity

For the Three Months Ended March 31, 2016

	Common Stock				Additional					Unearned			Accumulated Other			Total
		Shares Outstanding	Amount		Paid-In Capital		Retained Earnings			ESOP Shares			Comprehensive Income			Stockholders’ Equity
	(Unaudited)
Balances at January 1, 2016		1,106,476	$	11,065	$	6,367,059	$	22,081,030		$	(896,640	)	$	(158,209	)	$	27,404,305
Net income		—		—		—		457,417			—			—			457,417
Other comprehensive income		—		—		—		—			—			151,303			151,303
ESOP shares earned		—		—		17,316		—			14,010			—			31,326
Stock based compensation expense		—		—		71,105		—			—			—			71,105
Cash dividends ($0.06 per share)		—		—		—		(59,686	)		—			—			(59,686	)

Balances at March 31, 2016		1,106,476	$	11,065	$	6,455,480	$	22,478,761		$	(882,630	)	$	(6,906	)	$	28,055,770

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

West End Indiana Bancshares, Inc.

Form 10-Q

Notes to Condensed Consolidated Financial Statements

NOTE 1: Nature of Operations and Conversion

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

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

The Bank reorganized into a mutual holding company structure in 2007. On January 11, 2012, in accordance with a Plan of Conversion and Reorganization ( the “Conversion”), West End Bank, MHC (MHC), the Bank’s former federally chartered mutual holding company completed a mutual-to-stock conversion pursuant to which the Bank became the wholly owned subsidiary of the Company, a Maryland corporation. In connection with the Conversion, the Company sold 1,363,008 shares of common stock, at an offering price of $10 per share, and issued an additional 38,000 shares of its common stock to the West End Bank Charitable Foundation (the “Foundation”), resulting in an aggregate issuance of 1,401,008 shares of common stock. The Company’s stock began being quoted on the OTC Pink Marketplace on January 11, 2012, under the symbol “WEIN.”

The proceeds from the stock offering net of issuance costs of $1,092,000 amounted to $12,537,000.

Also, in connection with the Conversion, the Bank established an employee stock ownership plan (“ESOP”), which purchased 112,080 shares of the Company’s common stock at a price of $10 per share.

In accordance with Federal conversion regulations, at the time of the Conversion from a mutual holding company to a stock holding company, the Company was required to substantially restrict retained earnings by establishing a liquidation account and the Bank established a parallel liquidation account. The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution for the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

The Conversion was accounted for as a change in corporate form with the historical basis of the MHC’s consolidated assets, liabilities and equity unchanged as a result.

NOTE 2: Basis of Presentation

The accompanying unaudited consolidated condensed financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in the Annual Report on Form 10-K for the year ended December 31, 2015. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month period ended March 31, 2016, are not necessarily indicative of the results which may be expected for the entire year. The consolidated condensed balance sheet of the Company as of December 31, 2015 has been derived from the audited consolidated balance sheet of the Company as of that date.

NOTE 3: Principles of Consolidation

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

NOTE 4: Securities

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

	March 31, 2016
	(Unaudited)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value
	(In Thousands)
Available for sale
Municipal bonds	$	6,439	$	90	$	(16	)	$	6,513
Mortgage-backed securities - GSE residential		18,075		36		(121	)		17,990
Total available for sale	$	24,514	$	126	$	(137	)	$	24,503

	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value
	(In Thousands)
Available for sale
Municipal bonds	$	9,168	$	60	$	(57	)	$	9,171
Mortgage-backed securities - GSE residential		19,194		12		(276	)		18,930
Total available for sale	$	28,362	$	72	$	(333	)	$	28,101

The amortized cost and fair value of securities available for sale at March 31, 2016 (unaudited) and December 31, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2016				December 31, 2015
	(Unaudited)
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In Thousands)
One to five years	$	545	$	556	$	547	$	545
Five to ten years		1,265		1,275		2,536		2,545
After ten years		4,629		4,682		6,085		6,081
		6,439		6,513		9,168		9,171
Mortgage-backed securities - GSE residential		18,075		17,990		19,194		18,930
Totals	$	24,514	$	24,503	$	28,362	$	28,101

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $1,137,000 at March 31, 2016 (unaudited). Securities pledged at December 31, 2015 were $1,162,000.

Activities related to the sales of securities available for sale for the three months ended March 31, 2016 and 2015 are summarized as follows:

	2016		2015
	(Unaudited)
Proceeds from sales of available-for sale securities	$	2,739	$	3,008
Gross gains on sales		15		31
Gross losses on sales		1		6

Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2016 (unaudited) and December 31, 2015 was $12,020,000 and $21,008,000 which is approximately 49% and 75% of the Company’s available-for-sale investment portfolio. These declines primarily resulted from changes in market interest rates.

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

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

Securities with unrealized losses at March 31, 2016 (unaudited) were as follows:

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(In Thousands)
Available-for-sale securities
Municipal bonds	$	-	$	-		$	1,720	$	(16	)	$	1,720	$	(16	)
Mortgage-backed securities - GSE residential		2,389		(4	)		7,911		(117	)		10,300		(121	)
	$	2,389	$	(4	)	$	9,631	$	(133	)	$	12,020	$	(137	)

Securities with unrealized losses at December 31, 2015 were as follows:

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(In Thousands)
Available-for-sale securities
Municipal bonds	$	3,239	$	(44	)	$	908	$	(13	)	$	4,147	$	(57	)
Mortgage-backed securities - GSE residential		8,498		(67	)		8,363		(209	)		16,861		(276	)
	$	11,737	$	(111	)	$	9,271	$	(222	)	$	21,008	$	(333	)

Municipal Bonds

The unrealized losses on the Company’s investments in municipal bonds were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2016.

Mortgage-backed Securities – GSE Residential

The unrealized losses on the Company’s investment in mortgage-backed securities were caused by interest rate increases. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not, more likely than not, the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2016.

NOTE 5: Loans and Allowance

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

Loans

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

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

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

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

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

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

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

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

Allowance for Loan Losses

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

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

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

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

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

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

Categories of loans include:

	(Unaudited) March 31, 2016		December 31, 2015
	(In Thousands)
Commercial	$	13,800	$	14,076
Real estate loans
Residential		58,788		60,968
Commercial and multi-family		50,982		47,721
Construction		4,683		3,475
Second mortgages and equity lines of credit		5,673		5,521
Consumer loans
Indirect		73,857		73,166
Other		16,388		15,390
		224,171		220,317
Less
Net deferred loan fees, premiums and discounts		1,112		115
Allowance for loan losses		2,241		2,193
Total loans	$	221,818	$	218,009

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

Commercial

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

Commercial and Multi-Family Real Estate

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

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

Construction

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

Residential, Second mortgages and equity lines of credit and Consumer

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

The following presents by portfolio segment, the activity in the allowance for loan losses for the three months ended March 31, 2016 (unaudited) and 2015 (unaudited).

				(Unaudited)
				Real Estate
	Commercial			Residential			Commercial and Multi-Family		Construction		Seconds and Equity Line			Consumer			Total
	(In Thousands)
Three Months Ended March 31, 2016:
Balance, beginning of year	$	44		$	390		$	749	$	3	$	11		$	996		$	2,193
Provision for losses		(3	)		(12	)		85		1		(4	)		203			270
Recoveries on loans		—			4			—		—		—			36			40
Loans charged off		—			(14	)		—		—		—			(248	)		(262	)
Balance, end of year	$	41		$	368		$	834	$	4	$	7		$	987		$	2,241

Three Months Ended March 31, 2015:
Balance, beginning of year	$	29		$	447		$	694	$	2	$	14		$	758		$	1,944
Provision for losses		(23	)		(64	)		7		—		(1	)		411			330
Recoveries on loans		—			16			—		—		—			20			36
Loans charged off		—			—			—		—		—			(311	)		(311	)
Balance, end of year	$	6		$	399		$	701	$	2	$	13		$	878		$	1,999

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2016 (unaudited) and December 31, 2015:

			(Unaudited) March 31, 2016
			Real Estate
	Commercial		Residential		Commercial and Multi-Family		Construction		Seconds and Equity Line		Consumer		Total
	(In Thousands)
Allowance:
Balance, end of year	$	41	$	368	$	834	$	4	$	7	$	987	$	2,241
Individually evaluated for impairment		—		––		357		—		—		—		357
Collectivity evaluated for impairment		41		368		477		4		7		987		1,884

Loans:
Ending balance		13,800		58,788		50,982		4,683		5,673		90,245		224,171
Individually evaluated for impairment		—		––		2,312		—		—				2,312
Collectivity evaluated for impairment		13,800		58,788		48,670		4,683		5,673		90,245		221,859

			December 31, 2015
			Real Estate
	Commercial		Residential		Commercial and Multi-Family		Construction		Seconds and Equity Line		Consumer		Total
	(In Thousands)
Allowance:
Balance, end of year	$	44	$	390	$	749	$	3	$	11	$	996	$	2,193
Individually evaluated for impairment		—		—		357		—		—		—		357
Collectivity evaluated for impairment		44		390		392		3		11		996		1,836

Loans:
Ending balance		14,076		60,968		47,721		3,475		5,521		88,556		220,317
Individually evaluated for impairment		—		—		2,337		—		—		—		2,337
Collectivity evaluated for impairment		14,076		60,968		45,384		3,475		5,521		88,556		217,980

The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of March 31, 2016 (unaudited) and December 31, 2015:

			(Unaudited) March 31, 2016
			Real Estate
	Commercial		Residential		Commercial and Multi-Family		Construction		Seconds and Equity Line		Consumer		Total
	(In Thousands)
Pass	$	13,725	$	58,788	$	43,679	$	4,683	$	5,673	$	90,245	$	216,793
Watch		75		—		1,289		—		—		—		1,364
Special Mention		—		—		3,099		—		—		—		3,099
Substandard		—		––		2,915		—		—		—		2,915
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—
Total	$	13,800	$	58,788	$	50,982	$	4,683	$	5,673	$	90,245	$	224,171

			December 31, 2015
			Real Estate
	Commercial		Residential		Commercial and Multi-Family		Construction		Seconds and Equity Line		Consumer		Total
	(In Thousands)
Pass	$	14,001	$	60,968	$	40,342	$	3,475	$	5,521	$	88,556	$	212,863
Watch		75		––		1,305		—		—		—		1,380
Special Mention		––		––		3,115		—		––		—		3,115
Substandard		––		––		2,959		—		—		––		2,959
Doubtful		––		—		—		—		—		—		––
Loss		—		—		—		—		––		—		––
Total	$	14,076	$	60,968	$	47,721	$	3,475	$	5,521	$	88,556	$	220,317

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

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

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

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

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

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

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

The Company evaluates the loan grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during 2016.

The following table presents the Bank’s loan portfolio aging analysis as of March 31, 2016 (unaudited) and December 31, 2015:

			(Unaudited) March 31, 2016
			Real Estate
	Commercial		Residential		Commercial and Multi-Family		Construction		Seconds and Equity Line		Consumer		Total
	(In Thousands)
30-59 days past due	$	7	$	41	$	––	$	––	$	5	$	834	$	887
60-89 days past due		16		35		—		—		10		348		409
Greater than 90 days and accruing		14		99		—		—		—		688		801
Nonaccrual		—		729		2,312		—		50		—		3,091
Total past due and nonaccrual		37		904		2,312		––		65		1,870		5,188
Current		13,763		57,884		48,670		4,683		5,608		88,375		218,983

Total	$	13,800	$	58,788	$	50,982	$	4,683	$	5,673	$	90,245	$	224,171

			December 31, 2015
			Real Estate
	Commercial		Residential		Commercial and Multi-Family			Construction		Seconds and Equity Line		Consumer		Total
	(In Thousands)
30-59 days past due	$	19	$	55	$	—		$	––	$	8	$	918	$	1,000
60-89 days past due		14		43		––			—		7		219		283
Greater than 90 days and accruing		—		149			__		—		50		899		1,098
Nonaccrual		—		564		2,337			—		30		—		2,931
Total past due and nonaccrual		33		811		2,337			––		95		2,036		5,312
Current		14,043		60,157		45,384			3,475		5,426		86,520		215,005

Total	$	14,076	$	60,968	$	47,721		$	3,475	$	5,521	$	88,556	$	220,317

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

The following table presents impaired loans and specific valuation allowance based on class level at March 31, 2016 (unaudited) and for the year ended December 31, 2015:

(Unaudited)
March 31, 2016

Real Estate

Commercial

Residential

Commercial
and
Multi-Family

Construction

Seconds
and
Equity Line

Consumer

Total

(In Thousands)

Impaired loans without a specific allowance:

Recorded investment

—

122

––

122

Unpaid principal balance

—

122

––

122

Impaired loans with a specific allowance:

Recorded investment

—

––

2,190

––

2,190

Unpaid principal balance

—

––

2,275

––

2,275

Specific allowance

—

––

357

––

357

Total impaired loans:

Recorded investment

—

––

2,312

––

2,312

Unpaid principal balance

—

––

2,397

––

2,397

Specific allowance

—

––

357

––

357

December 31, 2015

Real Estate

Commercial

Residential

Commercial
and
Multi-Family

Construction

Seconds
and
Equity Line

Consumer

Total

(In Thousands)

Impaired loans without a specific allowance:

Recorded investment

––

122

––

122

Unpaid principal balance

––

151

––

151

Impaired loans with a specific allowance:

Recorded investment

––

2,214

––

2,214

Unpaid principal balance

––

2,275

––

2,275

Specific allowance

––

357

––

357

Total impaired loans:

Recorded investment

––

2,337

––

2,337

Unpaid principal balance

––

2,426

––

2,426

Specific allowance

––

357

––

357

The following presents by portfolio segment, information related to the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2016 (unaudited) and 2015 (unaudited):

(Unaudited)

Real Estate

Commercial

Residential

Commercial
and
Multi-Family

Construction

Seconds
and
Equity Line

Consumer

Total

(In Thousands)

Three Months Ended March 31, 2016:

Total impaired loan:

Average recorded investment

––

2,324

––

2,324

Interest income recognized

—

––

Interest income recognized on a cash basis

—

––

(Unaudited)

Real Estate

Commercial

Residential

Commercial
and
Multi-Family

Construction

Seconds
and
Equity Line

Consumer

Total

(In Thousands)

Three Months Ended March 31, 2015:

Total impaired loan:

Average recorded investment

––

3,100

––

3,100

Interest income recognized

—

––

Interest income recognized on a cash basis

—

––

Troubled Debt Restructurings

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

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

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

During the three months ended March 31, 2016 (unaudited) and 2015 (unaudited), there were no new restructurings classified as TDRs. No loans restructured during the last twelve months defaulted during the three months ended March 31, 2016 and 2015.

At March 31, 2016 and December 31, 2015, the balance of real estate owned included $127,000 and $109,000 respectively of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property.

At March 31, 2016 and December 31, 2015, there were $905,000 and $618,000 respectively of residential real estate loans in process of foreclosure.

NOTE 6: Disclosures About Fair Value of Assets and Liabilities

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

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

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

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

Level 3

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

Recurring Measurements

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

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions. Additionally, matrix pricing is used for certain investment securities and is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Level 2 securities include SBA loan pools, municipal bonds and mortgage-backed securities. At March 31, 2016 (unaudited) and December 31, 2015, all mortgage-backed securities are residential government sponsored enterprises. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Mortgage-Servicing Rights

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

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

The following tables present the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2016 (unaudited) and December 31, 2015:

			(Unaudited) March 31, 2016
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Available-for-sale securities:
Municipal bonds	$	6,513	$	—	$	6,513	$	—
Mortgage-backed securities - GSE residential		17,990		—		17,990		—
Mortgage-servicing rights		628		—		—		628

			December 31, 2015
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Available-for-sale securities:
Municipal bonds	$	9,171	$	—	$	9,171	$	—
Mortgage-backed securities - GSE residential		18,930		—		18,930		—
Mortgage-servicing rights		646		—		—		646

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

	(Unaudited) Mortgage-Servicing Rights
	Months Ended March 31,
	2016			2015
	(In Thousands)
Balances, beginning of period	$	646		$	549
Total unrealized losses included in net income		(28	)		(25	)
Additions (rights recorded on sale of loans)		34			33
Settlements (payments)		(24	)		(22	)
Balances, end of period	$	628		$	535

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

Nonrecurring Measurements

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

Impaired Loans (Collateral Dependent)

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

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

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

			December 31, 2015
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Impaired loans	$	1,857	$	—	$	—	$	1,857

Unobservable (Level 3) Inputs

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

	Fair Value at March 31, 2016		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
	(In Thousands) (unaudited)
Mortgage-servicing rights	$	628	Discounted Cash Flow	Discount rate Conditional prepayment rate Expected loan servicing years	4.8% - 5.8% (5.5%) 9.8% - 14.5% (12.8%) 2.6 – 3.9 (3.6)

	Fair Value at December 31, 2015		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
	(In Thousands)
Impaired loans	$	1,857	Comparative sales based on independent appraisals	Marketability Discount	20.0%

Mortgage-servicing rights	$	646	Discounted Cash Flow	Discount rate Conditional prepayment rate Expected loan servicing years	5.1% -6.0% (5.8%) 9.0% - 13.2% (11.7%) 2.6 – 4.2 (3.8)

Sensitivity of Significant Unobservable Inputs

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

Mortgage –Servicing Rights

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

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

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

The carrying amount approximates fair value.

Loans Held for Sale

Loans held for sale are based on current market prices.

Loans

The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

Deposits

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

Federal Home Loan Bank Advances

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

The following table presents estimated fair values of the Company’s financial instruments at March 31, 2016 (unaudited) and December 31, 2015.

	(Unaudited) March 31,
	2016
			Fair Value
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Financial assets
Cash and cash equivalents	$	9,374	$	9,374	$	––	$	––
Loan held for sale		1,933		––		1,933		––
Loans, net		221,818		––		––		224,843
Federal Home Loan Bank stock		1,323		––		1,323		––
Interest receivable		932		––		932		––

Financial liabilities
Deposits		214,688		109,170		106,192		––
Federal Home Loan Bank advances		31,000		—		30,942		––
Interest payable		83		––		83		––

	December 31,
	2015
			Fair Value
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Financial assets
Cash and cash equivalents	$	6,837	$	6,837	$	––	$	—
Loan held for sale		1,668		––		1,668		—
Loans, net		218,009		—		––		220,493
Federal Home Loan Bank stock		1,323		—		1323		—
Interest receivable		1,080		—		1,080		—

Financial liabilities
Deposits		215,278		106,716		109,123		—
Federal Home Loan Bank advances		27,000		—		26,962		—
Interest payable		75		—		75		—

NOTE 7: Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications. The amendments are effective for annual reporting periods beginning after December 15, 2017 and for interim reporting periods within such annual periods. The Company is currently evaluating the impact of adopting this guidance.

In September 2014, FASB, issued ASU 2014-12, Compensation – Stock Compensation. This update defines the accounting treatment for share-based payments and “resolves the diverse accounting treatment of those awards in practice.” The new requirement mandates that “a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.” Compensation cost will now be recognized in the period in which it becomes likely that the performance target will be met. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Adoption of the ASU did not have a significant effect on the Company’s consolidated financial statements.

In August 2014, FASB, issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. The update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a Company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a Company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in this update are effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

In January 2015, FASB issued ASU, 2015-1, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”. The Board issued this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements.

This Update eliminates from GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement—Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. Paragraph 225-20-45-2 contains the following criteria that must both be met for extraordinary classification:

Unusual nature. The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates.

Infrequency of occurrence. The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates.

If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item.

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The effective date is the same for both public business entities and all other entities.

For an entity that prospectively applies the guidance, the only required transition disclosure will be to disclose, if applicable, both the nature and the amount of an item included in income from continuing operations after adoption that adjusts an extraordinary item previously classified and presented before the date of adoption. An entity retrospectively applying the guidance should provide the disclosures in paragraphs 250-10-50-1 through 50-2. The company adopted the methodologies prescribed by this ASU by the date required, adoption of the ASU did not a have a significant effect on the Company’s consolidated financial statements.

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods therein. Early adoption is permitted. We are currently evaluating the impact of adopting the new guidance on the Company’s consolidated financial statements.

In March 2016, as part of its Simplification Initiative, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, (“ASU 2016-09”) which finalizes Proposed ASU No. 2015-270 of the same name, and seeks to reduce complexity in accounting standards. The areas for simplification in ASU No. 2016-09, involve several aspects of the accounting for share-based payment transactions, including (1) accounting for income taxes, (2) classification of excess tax benefits on the statement of cash flow, (3) forfeitures, (4) minimum statutory tax withholding requirements, (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, (6) the practical expedient for estimating the expected term, and (7) intrinsic value. Application is effective for annual periods beginning after December 15, 2016, and for interim periods within those annual periods. The Company is currently evaluating the impact of adopting this guidance.

NOTE 8: Earnings per Share

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

	(Unaudited)
	Three Months Ended March 31,
	2016			2015

Net Income	$	457		$	419
Allocated to participating securities		(15	)		(16	)
Net income allocated to common stockholders	$	442		$	403

Weighted average common shares outstanding, gross		1,106,476			1,308,602
Less: Average unearned ESOP shares and participating securities		(122,806	)		(139,617	)
Weighted average common shares outstanding, net		983,670			1,168,985
Effect of diluted based awards		12,138			180
Weighted average shares and common stock equivalents		995,808			1,169,165

Income per common share:
Basic	$	0.45		$	0.34
Diluted	$	0.44		$	0.34

Options excluded from the calculation due to their anti-dilutive effect on earnings per share		11,000			105,300

NOTE 9: Reclassifications

Certain reclassifications have been made to the 2015 condensed consolidated financial statements to conform to the March 31, 2016 presentation.

NOTE 10: Share Based Compensation (Unaudited)

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

Until such time as awards of stock are granted and vest or options are exercised, shares of the Company’s common stock under the Plan shall be authorized but unissued shares. The maximum number of shares authorized under the plan is 196,140. Total share-based compensation expense for the three months ended March 31, 2016 and 2015 was $71,000 and $70,000, respectively.

Stock Options

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

	Options		Weighted average exercise price		Remaining contractual life (years)
Options outstanding at January 1, 2016		125,550	$	18.77		7.3
Granted		11,000		21.50		9.9
Exercised		—		—		—
Forfeited		—		—		—
Expired		—		—		—
Options outstanding at March 31, 2016		136,550	$	18.99		7.3

Exercisable options outstanding at March 31, 2016		48,370	$	18.76		7.3

	Options		Weighted average exercise price		Remaining contractual life (years)
Options outstanding at January 1, 2015		125,300	$	18.75		8.5
Granted		2,500		20.00		9.9
Exercised		—		—		—
Forfeited		—		—		—
Expired		—		—		—
Options outstanding at March 31, 2015		127,800	$	18.77		8.3

Exercisable options outstanding at March 31, 2015		25,060	$	18.75		8.3

As of March 31, 2016 and December 31, 2015, the Company had $195,000 and $182,000 of unrecognized compensation expense related to stock options. Exercisable options vesting in the three months ended March 31, 2016 and March 31, 2015 were 500 and 0 respectively. The cost of stock options will be amortized in monthly installments over the five-year vesting period. Stock option expense for the three months ended March 31, 2016 and 2015 was $19,000 and $18,000, respectively. The aggregate grant date fair value of the stock options granted in 2016 was $32,000. The total intrinsic value of options as of March 31, 2016 and 2015 were $547,000 and $182,000, respectively. The total intrinsic value of exercisable options as of March 31, 2016 and March 31, 2015 was $205,000 and $36,000, respectively.

The fair value of the Company’s stock options granted in 2016 was determined using the Black-Scholes option pricing formula. The following assumptions were used in the formula:

Expected volatility		12.34	%
Risk-free interest rate		1.56	%
Expected dividend yield		1.12	%
Expected life (in years)		7.5
Exercise price for the stock options	$	21.50

Expected volatility - Based on the historical volatility of share price for similar companies.

Risk-free interest rate - Based on the U.S. Treasury yield curve and expected life of the options at the time of grant.

Dividend yield - West End Indiana Bancshares, Inc. pays a regular quarterly dividend of $0.06 per share.

Expected life – Based on average of the five year vesting period and the ten year contractual term of the stock option plan.

Exercise price for the stock options - Based on the closing price of the Company’s stock on the date of grant.

Restricted Stock Awards

Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of the grant. Unvested restricted stock awards may not be disposed of or transferred during the vesting period. Restricted stock awards carry with them the right to receive dividends.

The table below presents the restricted stock award activity for the period shown:

	Service-Based Restricted stock awards		Weighted average grant date fair value
Non-vested at January 1, 2016		44,832	$	18.75
Granted		—		—
Vested		—		—
Forfeited		—		—
Non-vested at March 31, 2016		44,832	$	18.75

As of March 31, 2016 and December 31, 2015, the Company had $465,000 and $517,000 of unrecognized compensation expense related to restricted stock awards. The cost of the restricted stock awards are amortized in monthly installments over the five-year vesting period. Restricted stock expense for the three months ended March 31, 2016 and 2015 was $52,000 and $52,000, respectively.

NOTE 11: Employee Stock Ownership Plan (Unaudited)

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

ESOP expense for the three months ended March 31, 2016 and 2015 was $31,000 and $28,000, respectively.

	Three Months Ended
	March 31,
	2016		2015

Allocated shares		21,583		16,812
Unreleased shares		89,664		95,268
Total ESOP shares		111,247		112,080

Fair value of unreleased shares at March 31 (in thousands)	$	2,062	$	1,924

At March 31, 2016 and 2015 the fair value of the 21,583 and 16,812 allocated shares held by the ESOP was $496,000 and $340,000, respectively.

NOTE 12: Subsequent Events

On April 15, 2016 West End Bank, S.B. entered into a contract for the construction of a new facility to be located on existing bank-owned property located on 7^th Street in Richmond, Indiana directly across the street from the Bank’s main office and administration building. This facility will replace the existing operations center located on the property. The construction costs are expected to be approximately $4.2 million.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Management’s discussion and analysis of the financial condition and results of operations at March 31, 2016 and for the three months ended March 31, 2016 and 2015 is intended to assist in understanding the financial condition and results of operations of the Company on a consolidated basis. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

statements of our goals, intentions and expectations;

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

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

estimates of our risks and future costs and benefits.

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

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

general economic conditions, either nationally or in our market areas, that are worse than expected;

competition among depository and other financial institutions;

our success in continuing to emphasize consumer lending, including indirect automobile lending;

our ability to improve our asset quality even as we increase our non-residential lending;

our success in maintaining our commercial and multi-family real estate and our non-owner occupied one- to four-family residential real estate and commercial business lending;

changes in the interest rate environment that reduce our margins or reduce the fair value of our financial instruments;

adverse changes in the securities markets;

changes in laws or government regulations or policies affecting financial institutions, including changes in deposit insurance premiums, regulatory fees and capital requirements, which increase our compliance costs;

our ability to enter new markets successfully and capitalize on growth opportunities;

changes in consumer spending, borrowing and savings habits;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

changes in our organization, compensation and benefit plans;

loan delinquencies and changes in the underlying cash flows of our borrowers;

changes in our financial condition or results of operations that reduce capital available to pay dividends; and

changes in the financial condition or future prospects of issuers of securities that we own.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in West End Indiana Bancshares, Inc.’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 30, 2016.

Comparison of Financial Condition at March 31, 2016 and December 31, 2015

Total assets increased $4.0 million, or 1.5%, to $275.0 million at March 31, 2016 from $271.0 million at December 31, 2015. The increase was the result of increases in cash and cash equivalents, net loans, and bank-owned life insurance, offset in part by a decrease in investment securities available for sale.

Total cash and cash equivalents increased $2.5 million, or 37.1%, to $9.4 million at March 31, 2016. The increase in total cash and cash equivalents reflected increases in FHLB advances of $4.0 million, and proceeds in sales of securities of $2.7 million, offset by net loan originations of $4.1 million and normal fluctuations.

Securities classified as available for sale decreased $3.6 million, or 12.8%, to $24.5 million at March 31, 2016 from $28.1 million at December 31, 2015. The decrease is primarily the result of $2.7 million of securities sold and $1.0 million in normal cash flow from maturities and pay downs on mortgage backed securities. At March 31, 2016, securities classified as available for sale consisted of mortgage-backed securities, and municipal obligations.

Net loans increased $3.8 million, or 1.7%, to $221.8 million at March 31, 2016 from $218.0 million at December 31, 2015, due primarily to increases to consumer loans of $1.7 million, commercial and multi-family loans of $3.2 million, and construction loans of $1.2 million. These increases were offset by a decrease in residential loans of $2.2 million, or 3.6%, to $58.8 million at March 31, 2016 from $61.0 million at December 31, 2015. Total non-performing loans decreased $137,000 to $3.9 million at March 31, 2016 from $4.0 million at December 31, 2015.

Deposits decreased $591,000, or 0.3%, to $214.7 million at March 31, 2016 from $215.3 million at December 31, 2015. The decrease was primarily a result of a decline in certificate of deposit accounts of $3.0 million due to a single public fund certificate of deposit of $5.0 million that matured and closed, offset by an increase in other certificates of deposit within the local market. Offsetting this decline was an increase in non-interest bearing accounts of $1.6 million up to $21.0 million at March 31, 2016, along with an increase in savings accounts of $1.3 million up to $19.6 million at March 31, 2016.

Federal Home Loan Bank advances increased $4.0 million to $31.0 million at March 31, 2016 from $27.0 million at December 31, 2015. These advances were used to fund loan growth.

Total equity increased $651,000, or 2.4%, to $28.1 million at March 31, 2016 from $27.4 million at December 31, 2015. The increase is primarily a reflection of net income of $457,000 for the quarter ended 2016 and a change to accumulated other comprehensive income of $151,000 to an unrecognized loss of $7,000 at March 31, 2016 from an unrecognized loss of $158,000 at December 31, 2015.

Comparison of Operating Results for the Three Months Ended March 31, 2016 and 2015

General. We recorded net income of $457,000 for the quarter ended March 31, 2016 compared to net income of $419,000 for the quarter ended March 31, 2015. The increase to net income resulted primarily from increased net interest income, and a decrease in the provision for loan losses, offset by increases in total other expenses and income tax expense.

Interest Income. Interest income increased $190,000, or 6.2%, to $3.3 million for the quarter ended March 31, 2016 from $3.1 million for the quarter ended March 31, 2015. The average balance of total interest-earning assets increased $10.8 million, or 4.3%, to $260.6 million for the quarter ended March 31, 2016 from $249.8 million for the quarter ended March 31, 2015. The average rate earned on these assets also increased to 5.03% for the period ended March 31, 2016 from 4.98% for the period ended March 31, 2015.

Interest income on loans increased $279,000, or 9.8%, to $3.1 million for the quarter ended March 31, 2016 from $2.8 million for the quarter ended March 31, 2015, as the increase in the average balance of loans was offset in part by a decrease in the average yield on our loans. The average balance of net loans increased $22.9 million, or 11.4%, to $222.9 million for the quarter ended March 31, 2016 from $200.0 million for the quarter ended March 31, 2015. However, the average yield on our loan portfolio decreased 13 basis points to 5.63% for the quarter ended March 31, 2016 from 5.76% for the quarter ended March 31, 2015.

Interest income on investment securities decreased $87,000 to $118,000 for the quarter ended March 31, 2016 from $205,000 for the quarter ended on March 31, 2015. The average balance of our securities available for sale decreased $14.9 million, or 35.8%, to $26.9 million for the quarter ended March 31, 2016 from $41.8 million for the quarter ended March 31, 2015. The average yield on the securities portfolio decreased to 1.77% for the three months ended March 31, 2016 from 1.99% for the three months ended March 31, 2015

Interest Expense. Interest expense increased $82,000, or 20.7%, to $480,000 for the quarter ended March 31, 2016 from $398,000 for the quarter ended March 31, 2015. The average rate paid on deposits increased 10 basis points to 0.74% for the quarter ended March 31, 2016 from 0.64% for the quarter ended March 31, 2015. The average balance of interest-bearing deposits increased $11.0 million, or 6.0%, to $196.0 million for the quarter ended March 31, 2016 from $185.0 million for the quarter ended March 31, 2015. The increase in the average balance of deposits was comprised of an increase in interest-bearing checking and savings accounts of $2.6 million, and an increase in the average balance of certificate of deposits of $12.0 million, offset by a decrease in money market accounts of $3.6 million. Interest expense increased primarily due to an increase in interest expense on certificates of deposit of $71,000, or 30.2%, to $306,000 for the quarter ended March 31, 2016 from $235,000 for the year-earlier period. The rate paid on certificate of deposits increased 14 basis points to 1.13% for the 2016 period from 0.99% for the 2015 period. This rate increase was due to management’s decision to utilize lower cost financial institution certificates of deposit compared to other wholesale funding to fund loan growth.

Interest expense on borrowed funds, consisting entirely of Federal Home Loan Bank advances, increased $13,000, or 12.3%, to $122,000 for the quarter ended March 31, 2016 from $108,000 for the quarter ended March 31, 2015, reflecting an increase of 14 basis points in the rate to 1.68% for the quarter ended March 31, 2016 from 1.54% for the quarter ended March 31, 2015.

Net Interest Income. Net interest income increased $108,000, or 4.1%, to $2.8 million for the quarter ended March 31, 2016 from $2.7 million for the quarter ended March 31, 2015. The increase was due primarily to the increase in the average balance of loans to $222.9 million for the quarter ended March 31, 2016 from $200.0 million from the quarter ended March 31, 2015. Our net interest rate spread decreased to 4.17% from 4.22%, and our net interest margin decreased to 4.26% from 4.27%, quarter to quarter.

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies — Allowance for Loan Losses,” in our annual report on Form 10-K filed on March 30, 2016, we recorded a provision for loan losses of $270,000 for the quarter ended March 31, 2016, a decrease of $60,000 from $330,000 allocated for the quarter ended March 31, 2015. The decrease to the provision was based on management’s quarterly analysis of the loan portfolio and credit quality indicators including charge off trends and qualitative factors. The allowance for loan losses increased $243,000 to $2.2 million at March 31, 2016 from $2.0 million at March 31, 2015. This increase was due primarily to increased balances in our loan portfolio of $19.0 million. The allowance for loan losses to total loans was 1.0% at March 31, 2016, and 0.97% at March 31, 2015. Non-performing loans including troubled debt restructurings decreased to $3.9 million at March 31, 2016 from $4.5 million at March 31, 2015. The allowance for loan losses as a percentage of non-performing loans including troubled debt restructurings was 57.58% at March 31, 2016 compared to 44.43% at March 31, 2015. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at March 31, 2016 and 2015.

Other Income. Noninterest income remained steady at $363,000 for the quarters ended March 31, 2016 and 2015. We recorded increases in service charges on deposit accounts of $22,000, gain on sale of loans of $12,000 and debit card income of $9,000. These increases were offset by decreases in gains on available-for-sale securities of $10,000, other income of $11,000 and sale of other assets of $24,000.

Other Expense. Other expense increased $107,000, or 5.2%, to $2.2 million for the quarter ended March 31, 2016 from $2.1 million for the quarter ended March 31, 2015. The increase was due primarily to a one-time implementation expense of $87,000 for new product software to improve efficiencies related to the processing of indirect loans and maintenance expenses related to foreclosed real estate held for sale. Additionally, net occupancy increased $12,000 and salaries and employee benefits increased $46,000, while retirement costs decreased $18,000 and professional fees decreased $24,000 for the quarter ended March 2016. Salaries and employee benefits increased due to normal annual salary increases and payouts under our benefits plans.

Income Tax Expense. We recorded income tax expense of $250,000 for the quarter ended March 31, 2016 compared to a tax expense of $227,000 for the 2015 period, reflecting pre-tax income of $707,000 during the 2016 quarter versus a pre-tax income of $646,000 for the quarter ended March 31, 2015. Our effective tax rate was 35.3% for the quarter ended March 31, 2016 compared to 35.2% for the quarter ended March 31, 2015.

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 $911,000 and $653,000 for the three months ended March 31, 2016 and 2015, 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 of loans and securities and proceeds from maturing securities and pay downs on mortgage-backed securities, was $1.7 million and $6.8 million for the three months ended March 31, 2016 and 2015, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and Federal Home Loan Bank advances, was $3.3 million and $3.4 million for the three months ended March 31, 2016 and 2015, respectively, resulting from our strategy to fund loan growth, with an additional $4.0 million in FHLB advances, with a modest decline in deposits.

At March 31, 2016, we exceeded all of our regulatory capital requirements with a Tier 1 (core) capital level of $27.5 million, or 10.1% of adjusted total assets, which is above the required level of $10.9 million, or 4%; and total risk-based capital of $29.8 million, or 13.7% of risk-weighted assets, which is above the required level of $15.8 million, or 8%. Accordingly West End Bank, S.B. was categorized as well capitalized at March 31, 2016. Management is not aware of any conditions or events since the most recent notification that would change our category. Basel III regulatory capital requirements were effective for the quarter ending March 31, 2016. There were no significant impacts on capital ratios.

At March 31, 2016, we had outstanding commitments to originate loans of $17.8 million and stand-by letters of credit of $500,000. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2016 totaled $38.2 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.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2016. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2016, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

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

(b)

Not applicable.

(c)

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

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document.

101.SCH

XBRL Schema Document.

101.CAL

XBRL Calculation Linkbase Document.

101.DEF

XBRL Definition Linkbase Document.

101.LAB

XBRL Label Linkbase Document.

101.PRE

Presentation Linkbase Document

SIGNATURES

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

		WEST END INDIANA BANCSHARES, INC.

Date: May 16, 2016		/s/ Timothy R. Frame
		Timothy R. Frame
		President/Chief Executive Officer

Date: May 16, 2016		/s/ Shelley D. Miller
		Shelley D. Miller
		Executive Vice President and Chief Financial Officer

West End Indiana Bancshares, Inc. - FORM 10-Q - May 16, 2016

Attached files

West End Indiana Bancshares, Inc. Reports