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EX-32 - EXHIBIT 32 - NORTHWEST INDIANA BANCORPtv485519_ex32.htm
EX-31.2 - EXHIBIT 31.2 - NORTHWEST INDIANA BANCORPtv485519_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - NORTHWEST INDIANA BANCORPtv485519_ex31-1.htm
EX-23.1 - EXHIBIT 23.1 - NORTHWEST INDIANA BANCORPtv485519_ex23-1.htm
EX-21 - EXHIBIT 21 - NORTHWEST INDIANA BANCORPtv485519_ex21.htm
EX-13 - EXHIBIT 13 - NORTHWEST INDIANA BANCORPtv485519_ex13.htm

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-K

(Mark One)

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

OR

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission file number 0-26128

 

NorthWest Indiana Bancorp

(Exact name of registrant as specified in its charter)

 

Indiana   35-1927981
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
9204 Columbia Avenue   46321
Munster, Indiana   (Zip Code)
(Address of principal executive offices)    

 

(219) 836-4400

(Registrant’s telephone number, including area code)

 

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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 (§232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

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

 

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

Smaller Reporting Company x     Emerging growth company ¨

 

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

 

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

 

Based on the average bid and ask prices for the registrant’s Common Stock at June 30, 2017, at that date, the aggregate market value of the registrant’s Common Stock held by nonaffiliates of the registrant (assuming solely for the purposes of this calculation that all directors and executive officers of the registrant are “affiliates”) was $93,491,671.

 

There were 2,868,940 shares of the registrant’s Common Stock, without par value, outstanding at February 16, 2018.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the following documents have been incorporated by reference into this Annual Report on Form 10-K:

 

1. Definitive Proxy Statement for the 2018 Annual Meeting of Shareholders. (Part III)

 

 

 

 

 

 

NorthWest Indiana Bancorp

Index

 

    Page
Number
PART I.    
     
  Item 1. Business 3
     
  Item 1A. Risk Factors 27
     
  Item 1B. Unresolved Staff Comments 27
     
  Item 2. Properties 28
     
  Item 3. Legal Proceedings 29
     
  Item 4. Mine Safety Disclosures 29
     
  Item 4.5 Executive Officers of the Bancorp 29
     
PART II.    
     
  Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 31
     
  Item 6. Selected Financial Data 33
     
  Item 7. Management's Discussion and Analysis of Financial Condition and  Results of Operations 34
     
  Item 7A. Quantitative and Qualitative Disclosures about Market Risk 41
     
  Item 8. Financial Statements 42
     
  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 79
     
  Item 9A. Controls and Procedures 79
     
  Item 9B. Other Information 81
     
PART III.    
     
  Item 10. Directors, Executive Officers and Corporate Governance 82
     
  Item 11. Executive Compensation 82
     
  Item 12. Security Ownership of Certain Beneficial Owners and Management  and Related Stockholder Matters 82
     
  Item 13. Certain Relationships and Related Transactions, and Director  Independence 82
     
  Item 14. Principal Accountant Fees and Services 83
     
PART IV.    
     
  Item 15. Exhibits and Financial Statement Schedules 83
     
SIGNATURES 85
     
EXHIBIT INDEX 86

 

 Page 2 of 86

 

  

PART I

 

Item 1. Business

 

General

 

NorthWest Indiana Bancorp, an Indiana corporation (the “Bancorp”), was incorporated on January 31, 1994, and is the holding company for Peoples Bank SB, an Indiana savings bank (the “Bank”). The Bank is a wholly owned subsidiary of the Bancorp. The Bancorp’s business activities include being a holding company for the Bank and the Bank's wholly owned subsidiaries, as well as a holding company for NWIN Risk Management, Inc., a captive insurance company.

 

The Bank is primarily engaged in the business of attracting deposits from the general public and the origination of loans, mostly upon the security of single family residences and commercial real estate, as well as, construction loans and various types of consumer loans, commercial business loans and municipal loans, within its primary market area of Lake and Porter Counties, in Northwest Indiana. In addition, the Bancorp's Wealth Management Group provides estate and retirement planning, guardianships, land trusts, profit sharing and 401(k) retirement plans, IRA and Keogh accounts, investment agency accounts, and serves as the personal representative of estates and acts as trustee for revocable and irrevocable trusts.

 

The Bank’s deposit accounts are insured up to applicable limits by the Deposit Insurance Fund (“DIF”), which is administered by the Federal Deposit Insurance Corporation (“FDIC”), an agency of the federal government. As the holding company for the Bank, the Bancorp is subject to comprehensive examination, supervision and regulation by the Board of Governors of the Federal Reserve System (“FRB”), while the Bank is subject to comprehensive examination, supervision and regulation by both the FDIC and the Indiana Department of Financial Institutions (“DFI”). The Bank is also subject to regulation by the FRB governing reserves required to be maintained against certain deposits and other matters. The Bank is also a member of the Federal Home Loan Bank (“FHLB”) of Indianapolis, which is one of the eleven regional banks comprising the system of Federal Home Loan Banks.

 

The Bancorp maintains its corporate office at 9204 Columbia Avenue, Munster, Indiana, from which it oversees the operation of its sixteen branch locations. For further information, see “Properties.”

 

Forward-Looking Statements

 

Statements contained in this filing on Form 10-K that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are also intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. The Bancorp cautions readers that forward-looking statements, including without limitation those relating to the Bancorp’s future business prospects, interest income and expense, net income, liquidity, and capital needs are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements due to a number of factors, including those set forth above in “Recent Developments” and below in “Regulation and Supervision” of this Form 10-K.

 

Lending Activities

 

General. The Bancorp’s product offerings include residential mortgage loans, construction loans, commercial real estate loans, consumer loans, commercial business loans and loans to municipalities. The Bancorp’s lending strategy stresses quality growth, product diversification, and competitive and profitable pricing. While lending efforts include both fixed and adjustable rate products, the focus has been on products with adjustable rates and/or shorter terms to maturity. It is management’s goal that all programs are marketed effectively to our primary market area.

 

 Page 3 of 86

 

 

The Bancorp is primarily a portfolio lender. Mortgage banking activities are limited to the sale of fixed rate mortgage loans with contractual maturities generally exceeding fifteen years and greater. These loans are sold, on a case-by-case basis, in the secondary market as part of the Bancorp’s efforts to manage interest rate risk. All loan sales are made to Freddie Mac or to the Federal Home Loan Bank of Indianapolis. All loans held for sale are recorded at the lower of cost or market value.

 

Under Indiana Law, an Indiana stock savings bank generally may not make any loan to a borrower or its related entities if the total of all such loans by the savings bank exceeds 15% of its unimpaired capital and unimpaired surplus (plus up to an additional 10% of unimpaired capital and unimpaired surplus, in the case of loans fully collateralized by readily marketable collateral); provided, however, that certain specified types of loans are exempted from these limitations or subject to different limitations. The maximum amount that the Bank could have loaned to one borrower and the borrower’s related entities at December 31, 2017, under the 15% of capital and surplus limitation was approximately $14,066,000. At December 31, 2017, the Bank had no loans that exceeded the regulatory limitations.

 

At December 31, 2017, there were no concentrations of loans in any type of industry that exceeded 10% of total loans that were not otherwise disclosed as a loan category.

 

Loan Portfolio. The following table sets forth selected data relating to the composition of the Bancorp’s loan portfolio by type of loan and type of collateral at the end of each of the last five years. The amounts are stated in thousands (000’s).

 

   2017   2016   2015   2014   2013 
Type of loan:                         
Conventional real estate loans:                         
Construction and development  $50,746   $38,937   $41,524   $25,733   $21,462 
Loans on existing properties (1)   463,368    437,361    432,020    377,247    336,823 
Consumer (2)   461    524    535    472    350 
Commercial business   76,851    77,299    68,757    58,682    57,716 
Government   28,785    29,529    29,062    26,019    21,470 
Loans receivable (3)  $620,211   $583,650   $571,898   $488,153   $437,821 
Type of collateral:                         
Real estate:                         
1-to-4 family  $208,910   $205,838   $213,756   $189,529   $161,663 
Other dwelling units, land and commercial real estate   305,204    270,461    259,789    213,451    196,622 
Consumer   321    424    461    351    212 
Commercial business   76,666    76,735    68,308    58,145    56,767 
Government   28,785    29,529    29,062    26,019    21,470 
Loans receivable (4)  $619,886   $582,987   $571,376   $488,038   $437,703 
                          
Average loans outstanding during the period (3)  $602,426   $587,119   $522,278   $480,404   $436,430 

 

(1)Includes residential and commercial construction loans converted to permanent term loans and commercial real estate loans.
(2)Includes overdrafts to deposit accounts.
(3)Net of unearned income and net deferred loan fees.
(4)Net of unearned income and net deferred loan fees. Does not include unsecured loans.

 

 Page 4 of 86

 

 

Loan Originations, Purchases and Sales. Set forth on the following table loan originations, purchases and sales activity for each of the last three years are shown. The amounts are stated in thousands (000’s).

 

   2017   2016   2015 
Loans originated:               
Conventional real estate loans:               
Construction and development  $11,510   $7,700   $6,566 
Existing property   78,249    82,539    74,305 
Refinanced   9,138    12,798    11,673 
Total conventional real estate loans originated   98,897    103,037    92,544 
Commercial business   238,667    238,633    228,351 
Consumer   244    358    397 
Total loans originated  $337,808   $342,028   $321,292 
                
Whole loans and participations purchased  $796   $-   $27,978 
Whole loans and participations sold  $42,212   $58,338   $45,987 

 

Loan Maturity Schedule. The following table sets forth certain information at December 31, 2017 regarding the dollar amount of loans in the Bancorp’s portfolio based on their contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Contractual principal repayments of loans do not necessarily reflect the actual term of the loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Bancorp the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the property subject to the mortgage. The amounts are stated in thousands (000’s).

 

   Maturing   After one         
   within   but within   After     
   one year   five years   five years   Total 
Real estate  $63,531   $77,238   $373,345   $514,114 
Consumer   15    422    24    461 
Commercial business, and other   40,195    50,423    15,018    105,636 
Total loans receivable  $103,741   $128,083   $388,387   $620,211 

 

The following table sets forth the dollar amount of all loans due after one year from December 31, 2017, which have predetermined interest rates or have floating or adjustable interest rates. The amounts are stated in thousands (000’s).

 

   Predetermined   Floating or     
   rates   adjustable rates   Total 
Real estate  $174,478   $276,105   $450,583 
Consumer   446    -    446 
Commercial business, and other   57,219    8,222    65,441 
Total loans receivable  $232,143   $284,327   $516,470 

 

Lending Area. The primary lending area of the Bancorp encompasses all of Lake and Porter Counties in northwest Indiana, where a majority of loan activity is concentrated. To a lesser extent, the Bancorp also has lending activity in LaPorte, Newton and Jasper counties in Indiana, and Lake, Cook and Will counties in Illinois. The communities of Munster, Crown Point, Dyer, St. John, Merrillville, Schererville, and Cedar Lake have experienced consistent growth and, therefore, have provided the greatest lending opportunities.

 

 Page 5 of 86

 

  

Loan Origination Fees. All loan origination and commitment fees, as well as incremental direct loan origination costs, are deferred and amortized into income as yield adjustments over the contractual lives of the related loans.

 

Loan Origination Procedure. The primary sources for loan originations are referrals from commercial customers, real estate brokers and builders, solicitations by the Bancorp’s lending and retail staff, and advertising of loan programs and rates. The Bancorp employs no staff appraisers. All appraisals are performed by fee appraisers that have been approved by the Board of Directors and who meet all federal guidelines and state licensing and certification requirements.

 

Designated officers have authorities, established by the Board of Directors, to approve loans. Loans up to $2,500,000 are approved by the loan officers’ loan committee. Loans from $2,500,000 to $4,000,000 are approved by the senior officers’ loan committee. All loans in excess of $4,000,000, up to the legal lending limit of the Bank, must be approved by the Bank’s Board of Directors or its Executive Committee. (All members of the Bank’s Board of Directors and Executive Committee are also members of the Bancorp’s Board of Directors and Executive Committee, respectively.) Certain loan renewals and extensions may not require approval by the Board of Directors or the Directors of Executive Committee as long as there is no material change, credit downgrade, significant change in borrower or guarantor status, material release or change in collateral value or the eligible loan renewal or extension is not outside the current concentration limits set by the Board of Directors. In addition, all swap transactions will be subject to the approval of the SOLC and the Board of Directors or Director’s Executive Committee. The maximum in-house legal lending limit as set by the Board of Directors is the lower of 10% of the bank’s risk based capital or $6,000,000. Requests that exceed this amount will be considered on a case-by-case basis, after taking into consideration the legal lending limit, by specific Board action. Peoples Bank will not extend credit to any of its executive officers, directors, or principal shareholders or to any related interest of that person, except in compliance with the insider lending restrictions of Regulation O under the Federal Reserve Act and in an amount that, when aggregated with all other extensions of credit to that person, exceeds $500,000 unless: (1) the extension of credit has been approved in advance by a majority of the entire Board of Directors of the Bank, and (2) the interested party has abstained from participating directly or indirectly in the voting.

 

All loans secured by personal property must be covered by insurance in an amount sufficient to cover the full amount of the loan. All loans secured by real estate must be covered by insurance in an amount sufficient to cover the full amount of the loan or restore the property to its original state. First mortgage loans must be covered by a lender’s title insurance policy in the amount of the loan.

 

The Current Lending Programs

 

Residential Mortgage Loans. The primary lending activity of the Bancorp has been the granting of conventional mortgage loans to enable borrowers to purchase existing homes, refinance existing homes, or construct new homes. Conventional loans are made up to a maximum of 97% of the purchase price or appraised value, whichever is less. For loans made in excess of 80% of value, private mortgage insurance is generally required in an amount sufficient to reduce the Bancorp’s exposure to 80% or less of the appraised value of the property. Loans insured by private mortgage insurance companies can be made for up to 97% of value. During 2017, 76% of mortgage loans closed were conventional loans with borrowers having 20% or more equity in the property. This type of loan does not require private mortgage insurance because of the borrower’s level of equity investment.

 

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

 

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

 

 Page 6 of 86

 

  

The Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice annually or are “Mini-Fixed.” The “Mini-Fixed” mortgage reprices annually after a one, three, five, seven or ten year period. ARM originations totaled $11.1 million for 2017 and $8.0 million for 2016. During 2017, ARMs represented 16.3% of total mortgage loan originations. The ability of the Bancorp to successfully market ARM’s depends upon loan demand, prevailing interest rates, volatility of interest rates, public acceptance of such loans and terms offered by competitors.

 

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

 

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

 

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

 

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

 

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

 

Consumer Loans. The Bancorp offers consumer loans to individuals for personal, household or family purposes. Consumer loans are either secured by adequate collateral, or unsecured. Unsecured loans are based on the strength of the applicant’s financial condition. All borrowers must meet current underwriting standards. The consumer loan program includes both fixed and variable rate products. On a limited basis, the Bancorp purchases indirect dealer paper from various well-established businesses in its immediate banking area.

 

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

 

 Page 7 of 86

 

  

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

 

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

 

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

 

Non-Performing Assets, Asset Classification and Provision for Loan Losses

 

Loans are reviewed on a regular basis and are generally placed on a non-accrual status when, in the opinion of management, serious doubt exists as to the collectability of a loan. Loans are generally placed on non-accrual status when either principal or interest is 90 days or more past due. Consumer non-residential loans are generally charged off when the loan becomes over 120 days delinquent. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance, tax and insurance reserve or recorded as interest income, depending on the assessment of the ultimate collectability of the loan.

 

The Bancorp’s mortgage loan collection procedures provide that, when a mortgage loan is 15 days or more delinquent, the borrower will be contacted by mail and payment requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower. In certain instances, the Bancorp will recast the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his, her or its financial affairs. If the loan continues in a delinquent status for 120 days, the Bancorp will generally initiate foreclosure proceedings. Any property acquired as the result of foreclosure or by voluntary transfer of property made to avoid foreclosure is classified as foreclosed real estate until such time as it is sold or otherwise disposed of by the Bancorp. Foreclosed real estate is recorded at fair value at the date of foreclosure. At foreclosure, any write-down of the property is charged to the allowance for loan losses. Costs relating to improvement of property are capitalized, whereas holding costs are expensed. Valuations are periodically performed by management, and a valuation allowance is established by a charge to operations if the carrying value of a property exceeds its estimated fair value less selling costs. Subsequent gains or losses on disposition, including expenses incurred in connection with the disposition, are charged to operations. Collection procedures for consumer loans provide that when a consumer loan becomes ten days delinquent, the borrower will be contacted by mail and payment requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower. In certain instances, the Bancorp may grant a payment deferral. If a loan continues to be delinquent after 60 days and all collection efforts have been exhausted, the Bancorp will initiate legal proceedings. Collection procedures for commercial business loans provide that when a commercial loan becomes ten days delinquent, the borrower will be contacted by mail and payment requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower pursuant to the commercial loan collection policy. In certain instances, the Bancorp may grant a payment deferral or restructure the loan. Once it has been determined that collection efforts are unsuccessful, the Bancorp will initiate legal proceedings.

 

 Page 8 of 86

 

  

At December 31, 2017, the Bancorp classified five loans totaling $535 thousand as troubled debt restructurings, which involves modifying the terms of a loan to forego a portion of interest or principal or reducing the interest rate on the loan to a rate materially less than market rates, or materially extending the maturity date of a loan. The Bancorp’s troubled debt restructurings include two residential real estate loans totaling $302 thousand for which an extension in maturity and reduction in interest rate was granted, two commercial business loans totaling $52 thousand for which a reduction in principal was granted, and one commercial real estate loan totaling $181 thousand for which a reduction in interest rate and change in amortization was granted with no change to the maturity date. At December 31, 2017, all of the Bancorp’s loans classified as troubled debt restructurings are accruing loans. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

 

The following table sets forth information regarding the Bancorp’s non-performing assets as of December 31 for each period indicated. The amounts are stated in thousands (000’s).

 

   2017   2016   2015   2014   2013 
Loans accounted for on a non-accrual basis:                     
Real estate:                         
Residential  $3,858   $4,521   $4,172   $2,443   $2,526 
Commercial   466    456    1,007    1,918    807 
Commercial business   672    628    22    238    447 
Consumer   -    -    -    -    - 
Total  $4,996   $5,605   $5,201   $4,599   $3,780 
                          
Accruing loans which are contractually past due 90 days or more:                
Real estate:                         
Residential  $227   $500   $377   $941   $174 
Commercial   -    -    -    -    - 
Commercial business   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total  $227   $500   $377   $941   $174 
                          
Loans that qualify as troubled debt restructurings and accruing:                 
Real estate:                         
Residential  $302   $-   $-   $-   $491 
Commercial   181    -    4,419    4,597    7,657 
Commercial business   52    60    74    90    - 
Consumer   -    -    -    -    - 
Total  $535   $60   $4,493   $4,687   $8,148 
                          
Total of non-accrual, 90 days past due and accruing, and restructurings  $5,758   $6,165   $10,071   $10,227   $12,102 
                          
Ratio of non-performing loans to total assets   0.56%   0.67%   0.64%   0.71%   0.57%
Ratio of non-performing loans to total loans   0.84%   1.05%   0.98%   1.10%   0.90%
                          
Foreclosed real estate  $1,618   $2,665   $1,590   $1,745   $1,084 
Ratio of foreclosed real estate to total assets   0.18%   0.29%   0.18%   0.23%   0.16%

 

During 2017, gross interest income of $396 thousand would have been recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the period. Interest on such loans included in income during the period amounted to $80 thousand.

 

 Page 9 of 86

 

  

Federal regulations require savings banks to classify their own loans and to establish appropriate general and specific allowances, subject to regulatory review. These regulations are designed to encourage management to evaluate loans on a case-by-case basis and to discourage automatic classifications. Loans classified as substandard or doubtful must be evaluated by management to determine loan loss reserves. Loans classified as loss must either be written off or reserved for by a specific allowance. Amounts reported in the general loan loss reserve are included in the calculation of the Bancorp’s total risk-based capital requirement (to the extent that the amount does not exceed 1.25% of total risk-based assets), but are not included in Tier 1 leverage ratio calculations and Tier 1 risk-based capital requirements. Loans internally classified as substandard totaled $5.9 million at December 31, 2017, compared to $6.1 million at December 31, 2016. No loans are internally classified as doubtful at December 31, 2017 or 2016. No loans were classified as loss at either December 31, 2017 or 2016. Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of watch loans. Watch loans represent loans management is closely monitoring due to one or more factors that may cause the loan to become classified. Watch loans totaled $11.7 million at December 31, 2017, compared to $10.6 million at December 31, 2016.

 

A loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. At December 31, 2017, impaired loans totaled $2.5 million compared to $3.5 million at December 31, 2016. The December 31, 2017, impaired loan balances consist of fourteen commercial real estate, construction & land development, and commercial business loans totaling $1.4 million that are secured by business assets and real estate, and are personally guaranteed by the owners of the businesses. In addition, twenty-one mortgage loans totaling $462 thousand, along with forty-five purchased credit impaired mortgage loans totaling $690 thousand, have also been classified as impaired. The December 31, 2017 allowance for loan losses (“ALL”) contained $704 thousand in specific allowances for collateral deficiencies, compared to $1.2 million at December 31, 2016. The decrease in the specific allowance was primarily due to charge-off activity. Typically, management does not individually classify smaller-balance homogeneous loans, such as residential mortgages or consumer loans, as impaired, unless they are troubled debt restructurings.

 

At December 31, 2017, management is of the opinion that there are no loans, except those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in disclosure of such loans as non-accrual, past due or restructured loans. Management does not presently anticipate that any of the non-performing loans or classified loans would materially impact future operations, liquidity or capital resources.

 

For 2017, $1.2 million in provisions to the ALL were required, compared to $1.3 million for 2016 a decrease of $68 thousand or 5.4%. The ALL provision decrease is primarily a result of overall non-performing and impaired loans declining for the period. For 2017, net loan charge-offs, totaled $1.4 million, compared to $523 thousand for 2016. The net loan charge-offs for 2017 were comprised of $956 thousand in residential real estate loans, $347 thousand in commercial business loans, $60 thousand in home equity loans, and $53 thousand in consumer loans. The ALL provisions take into consideration management’s current judgments about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio mix and local economic conditions. In determining the provision for loan losses for the current period, management has given consideration to historically elevated risks associated with the local economy, changes in loan balances and mix, and asset quality.

 

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The ALL to total loans was 1.21% at December 31, 2017, compared to 1.32% at December 31, 2016. The decrease in the ratio was related to the overall decrease in non-performing loans and management’s current opinion on the strength of the portfolio. ALL to non-performing loans (coverage ratio) was 143.26% at December 31, 2017, compared to 126.10% at December 31, 2016. The December 31, 2017 balance in the ALL account of $7.5 million is considered adequate by management after evaluation of the loan portfolio, past experience and current economic and market conditions. While management may periodically allocate portions of the allowance for specific problem loans, the whole allowance is available for any loan charge offs that occur. The allocation of the ALL reflects performance and growth trends within the various loan categories, as well as consideration of the facts and circumstances that affect the repayment of individual loans, and loans which have been pooled as of the evaluation date, with particular attention given to non-performing loans and loans which have been classified as substandard, doubtful or loss. Management has allocated reserves to both performing and non-performing loans based on current information available.

 

The table that follows sets forth the allowance for loan losses and related ratios for the periods indicated. The amounts are stated in thousands (000’s).

 

   2017   2016   2015   2014   2013 
Balance at beginning of period  $7,698   $6,953   $6,361   $7,189   $8,421 
Loans charged-off:                         
Real estate residential   (1,019)   (529)   (239)   (311)   (153)
Commercial real estate   -    -    (59)   (1,421)   (788)
Commercial real estate participations   -    -    -    -    (333)
Commercial business   (386)   -    (77)   -    (567)
Consumer   (71)   (33)   (30)   (32)   (16)
Total charge-offs   (1,476)   (562)   (405)   (1,764)   (1,857)
Recoveries:                         
Residential real estate   3    2    9    20    1 
Commercial real estate   -    -    22    17    9 
Commercial real estate participations   -    -    -    2    137 
Commercial business   39    28    10    21    23 
Consumer   18    9    2    1    5 
Total recoveries   60    39    43    61    175 
Net (charge-offs) / recoveries   (1,416)   (523)   (362)   (1,703)   (1,682)
Provision for loan losses   1,200    1,268    954    875    450 
Balance at end of period  $7,482   $7,698   $6,953   $6,361   $7,189 
                          
ALL to loans outstanding   1.21%   1.32%   1.22%   1.30%   1.64%
ALL to nonperforming loans   143.26%   126.10%   124.66%   114.83%   181.81%
Net charge-offs / recoveries to average loans outstanding during the period   -0.23%   -0.09%   -0.07%   -0.35%   -0.39%

 

The following table shows the allocation of the allowance for loan losses at December 31, for the dates indicated. The dollar amounts are stated in thousands (000’s). The percent columns represent the percentage of loans in each category to total loans.

 

   2017   2016   2015   2014   2013 
   $   %   $   %   $   %   $   %   $   % 
Real estate loans:                                                  
Residential   1,734    33.7    2,410    35.3    1,711    37.4    1,877    38.8    1,444    36.9 
Commercial and other dwelling   4,365    49.2    4,302    46.3    4,436    45.4    3,658    43.7    4,820    44.9 
Consumer loans   31    0.1    34    0.1    38    0.1    18    0.1    12    0.1 
Commercial business and other   1,352    17.0    952    18.3    768    17.1    808    17.4    913    18.1 
Total   7,482    100.0    7,698    100.0    6,953    100.0    6,361    100.0    7,189    100.0 

 

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Investment Activities

 

The primary objective of the investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings. Securities can be classified as either held-to-maturity (HTM) or available-for-sale (AFS) at the time of purchase. No securities are classified as trading or as held-to-maturity. AFS securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. During 2017, the Bancorp did not hold as investments any derivative instruments and was not involved in hedging activities as defined by Accounting Standards Codification Topic 815 Derivatives and Hedging. It has been the policy of the Bancorp to invest its excess cash in U.S. government agency securities, mortgage-backed securities, collateralized mortgage obligations and municipal securities. In addition, short-term funds are generally invested as interest bearing balances in financial institutions and federal funds. At December 31, 2017, the Bancorp’s investment portfolio totaled $244.5 million. In addition, the Bancorp had $357 thousand of federal funds sold, and $3.0 million in FHLB stock.

 

The table below shows the carrying values of the components of the investment securities portfolio at December 31, on the dates indicated. The amounts are stated in thousands (000’s).

 

   2017   2016   2015 
Money market fund  $476   $222   $525 
U.S. government agencies:            
Available-for-sale   3,890    16,274    17,431 
Mortgage-backed securities (1):            
Available-for-sale   47,314    67,533    58,259 
Collateralized Mortgage Obligations (1):            
Available-for-sale   85,624    50,442    60,914 
Municipal Securities:            
Available-for-sale   103,747    96,745    93,487 
Trust Preferred Securities:            
Available-for-sale   3,439    2,409    2,734 
Totals  $244,490   $233,625   $233,350 

 

 

(1) Mortgage-backed securities and Collateralized Mortgage Obligations are U.S. government agency and sponsored securities.

 

The contractual maturities and weighted average yields for the U.S. government securities, agency securities, municipal securities, and trust preferred securities at December 31, 2017, are summarized in the table below. Securities not due at a single maturity date, such as mortgage-backed securities and collateralized mortgage obligations are not included in the following table. The carrying values are stated in thousands (000’s).

 

Yields presented are not on a tax-equivalent basis.

 

   Within 1 Year   1 - 5 Years   5 - 10 Years   After 10 Years 
   Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield 
Money market fund:  $476    0.24%  $-    0.00%  $-    0.00%  $-    0.00%
U.S. government Agencies:                                        
AFS   -    0.00%   1,951    1.75%   1,940    1.86%   -    0.00%
Municipal Securities:                                        
AFS   281    4.96%   4,199    4.13%   26,591    3.62%   72,675    3.24%
Trust Preferred Securities:                                        
AFS   -    0.00%   -    0.00%   -    0.00%   3,439    2.18%
Totals  $757    5.37%  $6,150    3.37%  $28,531    3.50%  $76,114    3.19%

 

 Page 12 of 86

 

  

The Bancorp currently holds four trust preferred securities of which three of the securities’ quarterly interest payments have been placed in “payment in kind” status. Payment in kind status results in a temporary delay in the payment of interest. As a result of a delay in the collection of the interest payments, management placed these securities in non-accrual status. At December 31, 2017, the cost basis of the three trust preferred securities on non-accrual status totaled $3.5 million. One trust preferred security with a cost basis of $1.3 million remains on accrual status.

 

Sources of Funds

 

General. Deposits are the major source of the Bancorp’s funds for lending and other investment purposes. In addition to deposits, the Bancorp derives funds from maturing investment securities and certificates of deposit, dividend receipts from the investment portfolio, loan principal repayments, repurchase agreements, advances from the Federal Home Loan Bank of Indianapolis (FHLB) and other borrowings. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of other sources of funds. They may also be used on a longer-term basis for general business purposes. The Bancorp uses repurchase agreements, as well as a line-of-credit and advances from the FHLB for borrowings. At December 31, 2017, the Bancorp had $11.3 million in repurchase agreements. Other borrowings totaled $20.9 million, of which $20.3 million represents FHLB advances.

 

Deposits. Retail and commercial deposits are attracted principally from within the Bancorp’s primary market area. The Bancorp offers a broad selection of deposit instruments including non-interest bearing demand accounts, interest bearing demand accounts, savings accounts, money market deposit accounts, certificate accounts and retirement savings plans. Deposit accounts vary as to terms, with the principal differences being the minimum balance required, the time period the funds must remain on deposit and the interest rate. Certificate account offerings typically range in maturity from ten days to 42 months. The deregulation of federal controls on insured deposits has allowed the Bancorp to be more competitive in obtaining funds and to be flexible in meeting the threat of net deposit outflows. The Bancorp does not obtain funds through brokers.

 

The following table presents the average daily amount of deposits and average rates paid on such deposits for the years indicated. The amounts are stated in thousands (000’s).

 

   2017   2016   2015 
   Amount   Rate %   Amount   Rate %   Amount   Rate % 
Noninterest bearing demand deposits  $117,656    -   $104,672    -   $91,737    - 
Interest bearing demand deposits   169,980    0.08    145,347    0.07    138,006    0.07 
MMDA accounts   170,211    0.26    167,684    0.21    150,288    0.18 
Savings accounts   131,908    0.08    124,214    0.09    105,557    0.07 
Certificates of deposit   180,413    0.77    192,991    0.62    190,858    0.55 
Total deposits  $770,168    0.27   $734,908    0.24   $676,446    0.22 

 

Maturities of time certificates of deposit and other time deposits of $100 thousand or more at December 31, 2017 are summarized as follows. The amounts are stated in thousands (000’s).

 

3 months or less  $19,851 
Over 3 months through 6 months   18,324 
Over 6 months through 12 months   30,218 
Over 12 months   22,654 
Total  $91,047 

 

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Borrowings. Borrowed money is used on a short-term basis to compensate for reductions in the availability of other sources of funds and is generally accomplished through repurchase agreements, as well as, through a line of credit and advances from the FHLB. Repurchase agreements generally mature within one year and are generally secured by U.S. government securities or U.S. agency securities, under the Bancorp’s control. FHLB advances with maturities ranging from one year to five years are used to fund securities and loans of comparable duration, as well as to reduce the impact that movements in short-term interest rates have on the Bancorp’s overall cost of funds. Fixed rate advances are payable at maturity, with a prepayment penalty.

 

The following tables set forth certain information regarding borrowing and repurchase agreements by the Bancorp at the end of and during the periods indicated. The amounts are stated in thousands (000’s).

 

   At December 31, 
   2017   2016   2015 
Repurchase agreements:               
Balance  $11,300   $13,998   $18,508 
Securities underlying the agreements:               
Ending carrying amount   18,053    23,571    23,479 
Ending fair value   18,053    23,571    23,479 
Weighted average rate (1)   0.91%   0.56%   0.45%

 

   For year ended December 31, 
   2017   2016   2015 
Highest month-end balance  $17,720   $23,308   $22,020 
Average outstanding balance   13,734    17,755    18,003 
Weighted average rate on securities sold under agreements to repurchase (2)   0.82%   0.55%   0.38%

 

   At December 31, 
   2017   2016   2015 
Fixed rate short-term advances from the FHLB  $6,100   $12,000   $10,000 
Fixed rate long-term advances from the FHLB   11,000    13,100    24,100 
Variable advances from the FHLB   -    -    5,000 
FHLB line-of-credit   3,181    28    - 
Overdrawn due from other financial institutions   600    700    393 
Total borrowings  $20,881   $25,828   $39,493 

 

 

(1) The weighted average rate for each period is calculated by weighting the principal balances outstanding for the various interest rates.

(2) The weighted average rate is calculated by dividing the interest expense for the period by the average daily balances of securities sold under agreements to repurchase for the period.

 

Wealth Management Group

 

The activities of the Bancorp's Wealth Management Group provides estate and retirement planning, guardianships, land trusts, profit sharing and 401(k) retirement plans, IRA and Keogh accounts, investment agency accounts, and serves as personal representative of estates and acts as trustee for revocable and irrevocable trusts. At December 31, 2017, the market value of the Wealth Management Group’s assets totaled $306.0 million, a decrease of $13.4 million, compared to December 31, 2016.

 

Analysis of Profitability and Key Operating Ratios

 

Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential.

 

The net earnings of the Bancorp depend primarily upon the “spread” (difference) between (a) the income it receives from its loan portfolio and other investments, and (b) its cost of money, consisting principally of the interest paid on deposit accounts and on other borrowings.

 

 Page 14 of 86

 

  

The following table presents the weighted average yields on loans and securities, the weighted average cost of interest bearing deposits and other borrowings, and the interest rate spread for the year ended December 31, 2017.

 

Weighted average yield:     
Securities   2.66%
Loans receivable   4.45%
Federal Home Loan Bank stock   4.25%
Total interest-earning assets   3.91%
      
Weighted average cost:     
Deposit accounts   0.27%
Borrowed funds   1.27%
Total interest-bearing liabilities   0.32%
      
Interest rate spread:     
Weighted average yield on interest-earning
assets minus the weighted average cost of
interest-bearing funds
 
 
 
 
 
 
 
 
3.59
 
 
%

 

Financial Ratios and the Analysis of Changes in Net Interest Income.

 

The tables below set forth certain financial ratios of the Bancorp for the periods indicated:

 

   Year ended December 31, 
   2017   2016   2015 
Return on average assets   0.98%   1.03%   0.96%
Return on average equity   9.90%   10.65%   9.90%
Average equity-to-average assets ratio   9.94%   9.67%   9.70%
Dividend payout ratio   36.76%   34.69%   38.50%

 

   At December 31, 
   2017   2016   2015 
Total stockholders’ equity to
 total assets
   9.93%   9.21%   9.35%

 

 Page 15 of 86

 

  

The average balance sheet amounts, the related interest income or expense, and average rates earned or paid are presented in the following table.

 

The amounts are stated in thousands (000's).

 

   Year ended December 31, 2017   Year ended December 31, 2016   Year ended December 31, 2015 
       Interest           Interest           Interest     
   Average   Income/   Average   Average   Income/   Average   Average   Income/   Average 
   Balance   Expense   Rate   Balance   Expense   Rate   Balance   Expense   Rate 
Assets:                                             
                                              
Interest bearing balances in financial institutions  $5,114   $54    1.06%  $5,149   $31    0.60%  $11,022   $28    0.25%
Federal funds sold   960    4    0.42    409    1    0.24    435    -    0.10 
Securities   242,502    6,441    2.66    240,262    6,097    2.54    231,366    6,151    2.66 
Total investments   248,576    6,499    2.61    245,820    6,129    2.49    242,823    6,179    2.54 
Loans:*                                             
Real estate mortgage loans   495,448    22,697    4.58    485,778    22,474    4.63    429,724    19,766    4.60 
Commercial business loans   108,083    4,143    3.83    100,861    3,771    3.74    92,047    3,418    3.71 
Consumer loans   382    19    4.97    480    24    5.00    507    19    3.75 
Total loans   603,913    26,859    4.45    587,119    26,269    4.47    522,278    23,203    4.44 
Total interest-earning assets   852,489    33,358    3.91    832,939    32,398    3.89    765,101    29,382    3.84 
Allowance for loan losses   (7,239)             (7,364)             (6,625)          
Cash and due from banks   12,171              11,868              11,963           
Premises and equipment   19,621              18,955              18,140           
Other assets   34,036              31,617              28,782           
Total assets  $911,078             $888,015             $817,361           
                                              
Liabilities:                                             
                                              
Demand deposit  $117,656   $-    -%  $101,835   $-    -%  $91,737   $-    -%
NOW accounts   169,980    129    0.08    148,184    101    0.07    138,006    101    0.07 
Money market demand accounts   170,211    437    0.26    167,684    360    0.21    150,288    273    0.18 
Savings accounts   131,908    110    0.08    124,214    107    0.09    105,557    77    0.07 
Certificates of deposit   180,413    1,384    0.77    192,991    1,202    0.62    190,858    1,058    0.55 
Total interest-bearing deposits   770,168    2,060    0.27    734,908    1,770    0.24    676,446    1,509    0.22 
Borrowed funds   42,060    533    1.27    56,990    575    1.01    52,803    504    0.95 
Total interest-bearing liabilities   812,228    2,593    0.32    791,898    2,345    0.30    729,249    2,013    0.28 
                                              
Other liabilities   8,312              10,275              8,813           
Total liabilities   820,540              802,173              738,062           
                                              
Stockholders' equity   90,538              85,842              79,299           
Total liabilities and stockholders' equity  $911,078             $888,015             $817,361           
  Net interest income       $30,765             $30,053             $27,369      
  Net interest spread             3.59%             3.59%             3.56%
  Net interest margin**             3.61%             3.61%             3.58%

 

* Non-accruing loans have been included in the average balances.

** Net interest income divided by average interest-earning assets.

 

 Page 16 of 86

 

  

The table below sets forth certain information regarding changes in interest income and interest expense of the Bancorp for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (1) changes in volume (change in volume multiplied by old rate) and (2) changes in rate (change in rate multiplied by old volume). Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate. The amounts are stated in thousands (000's).

 

   Year Ended December 31,   Year Ended December 31, 
   2017   vs.   2016   2016   vs.   2015 
   Increase / (Decrease)   Increase / (Decrease) 
   Due To   Due To 
   Volume   Rate   Total   Volume   Rate   Total 
                         
Interest income:                              
Loans receivable  $748   $(159)  $589   $2,900   $166   $3,066 
Securities   57    280    337    232    (286)   (54)
Other interest-earning assets   3    30    33    (20)   24    4 
Total interest-earning assets   808    151    959    3,112    (96)   3,016 
                               
Interest Expense:                              
Deposits   88    201    289    136    125    261 
                               
Borrowed Funds   (170)   128    (42)   41    30    71 
Total interest-bearing liabilities   (82)   329    247    177    155    332 
                               
Net change in net interest income/(expense)  $890   $(178)  $712   $2,935   $(251)  $2,684 

 

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Bank Subsidiary Activities

 

NWIN Risk Management, Inc. is a wholly owned subsidiary of the Bancorp. The subsidiary provides captive insurance for the subsidiaries of the Bancorp. At December 31, 2017, the Bancorp had an investment balance of $1.7 million in NWIN Risk Management, Inc.

 

Peoples Service Corporation, a wholly owned subsidiary of the Bank was incorporated under the laws of the State of Indiana. The subsidiary currently provides insurance and annuity investments to the Bank’s wealth management customers. At December 31, 2017, the Bank had an investment balance of $172 thousand in Peoples Service Corporation.

 

NWIN, LLC is a wholly owned subsidiary of the Bank. NWIN, LLC was incorporated under the laws of the State of Nevada as an investment subsidiary. The investment subsidiary currently holds Bank security investments, which are managed by a professional portfolio manager. In addition, the investment subsidiary is the parent of a real estate investment trust, NWIN Funding, Inc., that invests in real estate loans originated by the Bank. At December 31, 2017, the Bank had an investment balance of $330.8 million in NWIN, LLC.

 

NWIN Funding, Inc. is a subsidiary of NWIN, LLC, and was formed as an Indiana Real Estate Investment Trust (REIT). The formation of NWIN Funding, Inc. provides the Bancorp with a vehicle that may be used to raise capital utilizing portfolio mortgages as collateral, without diluting stock ownership. In addition, NWIN Funding, Inc. will receive favorable state tax treatment for income generated by its operations. At December 31, 2017, the REIT held assets of $77.4 million in real estate loans.

 

Columbia Development Company, LLC is a wholly owned subsidiary of the Bank and was incorporated under the laws of the State of Indiana. The subsidiary holds real estate properties that the Bank has acquired through the foreclosure process. At December 31, 2017, the Bank had an investment balance of $4.0 million in Columbia Development Company, LLC.

 

The consolidated financial statements include NorthWest Indiana Bancorp (the Bancorp), its wholly owned subsidiaries, Peoples Bank SB (the Bank), NWIN Risk Management, Inc, and the Bank’s wholly owned subsidiaries, Peoples Service Corporation, NWIN, LLC and Columbia Development Company, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are dependent upon the earnings of the Bank. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

Competition

 

The Bancorp’s primary market area for deposits, loans and financial services encompasses Lake and Porter Counties, in Northwest Indiana, where all of its offices are located. Approximately ninety-two percent of the Bancorp’s business activities are within this area.

 

The Bancorp faces strong competition in its primary market area for the attraction and retention of deposits and in the origination of loans. The Bancorp’s most direct competition for deposits has historically come from commercial banks, savings associations, and credit unions located in its primary market area. Particularly in times of high interest rates, the Bancorp has had significant competition from mutual funds and other firms offering financial services. The Bancorp’s competition for loans comes principally from savings associations, commercial banks, mortgage banking companies, credit unions, insurance companies, and other institutional lenders.

 

The Bancorp competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of the services it provides borrowers and other third-party sources. It competes for deposits by offering depositors a wide variety of savings accounts, checking accounts, competitive interest rates, convenient banking center locations, drive-up facilities, automatic teller machines, tax deferred retirement programs, electronic banking, and other miscellaneous services.

 

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The activities of the Bancorp and the Bank in the geographic market served involve competition with other banks as well as with other financial institutions and enterprises, many of which have substantially greater resources than those available to the Bancorp. In addition, non-bank financial services companies with which the Bancorp and Bank compete, while subject to regulation by the CFPB, are generally not subject to the same type of extensive regulation by the federal and state banking agencies applicable to the Bancorp and the Bank.

 

Personnel

 

As of December 31, 2017, the Bank had 185 full-time and 32 part-time employees. The employees are not represented by a collective bargaining agreement. Management believes its employee relations are good. The Bancorp has seven executive officers and has no other employees. The Bancorp’s officers also are full-time employees of the Bank, and are compensated by the Bank.

 

Regulation and Supervision

 

Bank Holding Company Regulation. As a registered bank holding company for the Bank, the Bancorp is subject to the regulation and supervision of the FRB under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Bank holding companies are required to file periodic reports with and are subject to periodic examination by the FRB.

 

Under the BHCA, without the prior approval of the FRB, the Bancorp may not acquire direct or indirect control of more than 5% of the voting stock or substantially all of the assets of any company, including a bank, and may not merge or consolidate with another bank holding company. In addition, the Bancorp is generally prohibited by the BHCA from engaging in any nonbanking business unless such business is determined by the FRB to be so closely related to banking as to be a proper incident thereto. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the FRB's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

 

Under the Dodd-Frank Act, a bank holding company is expected to serve as a source of financial and managerial strength to its subsidiary banks. Pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. This support may be required by the FRB at times when the Bancorp may not have the resources to provide it or, for other reasons, would not be inclined to provide it. Additionally, under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is required to provide limited guarantee of the compliance by any insured depository institution subsidiary that may become "undercapitalized" (as defined in the statute) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency.

 

Savings Bank Regulation. As an Indiana stock savings bank, the Bank is subject to federal regulation and supervision by the FDIC and to state regulation and supervision by the DFI. The Bank's deposit accounts are insured by DIF, which is administered by the FDIC. The Bank is not a member of the Federal Reserve System.

 

Both federal and Indiana law extensively regulate various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Current federal law also requires savings banks, among other things, to make deposited funds available within specified time periods.

 

Under FDICIA, insured state chartered banks are prohibited from engaging as principal in activities that are not permitted for national banks, unless: (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund, and (ii) the bank is, and continues to be, in compliance with all applicable capital standards.

 

Branches and Acquisitions. Branching by the Bank requires the approval of the Federal Reserve and the DFI. Under current law, Indiana chartered banks may establish branches throughout the state and in other states, subject to certain limitations. Congress authorized interstate branching, with certain limitations, beginning in 1997. Indiana law authorizes an Indiana bank to establish one or more branches in states other than Indiana through interstate merger transactions and to establish one or more interstate branches through de novo branching or the acquisition of a branch. The Dodd-Frank Act permits the establishment of de novo branches in states where such branches could be opened by a state bank chartered by that state. The consent of the state is no longer required.

 

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Transactions with Affiliates. Under Indiana law, the Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies, such as the Bancorp. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate.

 

Capital Requirements. Federal regulations require FDIC insured depository institutions, including state chartered FRB member banks, to meet several minimum capital standards: (i) a common equity Tier 1 capital to risk-based assets ratio of 4.5%; (ii) a Tier 1 capital to risk-based assets ratio of 6.0%; (iii) a total capital to risk-based assets ratio of 8%; and (iv) a 4% Tier 1 capital to total assets leverage ratio. These capital requirements were effective January 1, 2015 and are the result of a final rule implementing the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

 

As noted, the capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1 capital is generally defined as common shareholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock, and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

 

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, and residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

 

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

 

The FRB has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular risks or circumstances. As of December 31, 2017, the Bank met all applicable capital adequacy requirements.

 

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Bank holding companies are generally subject to consolidated capital requirements established by the FRB. The Dodd-Frank Act required the FRB to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries. However, under the FRB’s “Small Bank Holding Company” exemption from consolidated bank holding company capital requirements, bank holding companies and savings and loan holding companies with less than $1 billion in consolidated assets, such as the Bancorp, are exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases.

 

Federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. The law requires that certain supervisory actions be taken against undercapitalized institutions, the severity of which depends on the degree of undercapitalization. The FRB has adopted regulations to implement the prompt corrective action legislation as to state member banks. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater, and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater, and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0%, or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0%, or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

 

Subject to a narrow exception, a receiver or conservator is required to be appointed for an institution that is “critically undercapitalized” within specified time frames. The regulations also provide that a capital restoration plan must be filed with the FRB within 45 days of the date an institution is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company up to the lesser of 5% of the institution’s total assets when it was deemed to be undercapitalized or the amount necessary to achieve compliance with applicable capital requirements. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The FRB could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.

 

The following table shows that, at December 31, 2017, and December 31, 2016, the Bancorp’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.

 

(Dollars in millions)                  Minimum Required To Be 
           Minimum Required For   Well Capitalized Under Prompt 
   Actual   Capital Adequacy Purposes   Corrective Action Regulations 
At December 31, 2017  Amount   Ratio   Amount   Ratio   Amount   Ratio 
Common equity tier 1 capital to risk-weighted assets  $88.4    12.9%  $30.9    4.5%   N/A    N/A 
Tier 1 capital to risk-weighted assets  $88.4    12.9%  $41.2    6.0%   N/A    N/A 
Total capital to risk-weighted assets  $96.0    14.0%  $55.0    8.0%   N/A    N/A 
Tier 1 capital to adjusted average assets  $88.4    9.6%  $36.8    4.0%   N/A    N/A 

 

(Dollars in millions)                  Minimum Required To Be 
           Minimum Required For   Well Capitalized Under Prompt 
   Actual   Capital Adequacy Purposes   Corrective Action Regulations 
At December 31, 2016  Amount   Ratio   Amount   Ratio   Amount   Ratio 
Common equity tier 1 capital to risk-weighted assets  $82.4    13.1%  $28.3    4.5%   N/A    N/A 
Tier 1 capital to risk-weighted assets  $82.4    13.1%  $37.8    6.0%   N/A    N/A 
Total capital to risk-weighted assets  $90.1    14.3%  $50.4    8.0%   N/A    N/A 
Tier 1 capital to adjusted average assets  $82.4    9.2%  $36.0    4.0%   N/A    N/A 

 

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In addition, the following table shows that, at December 31, 2017, and December 31, 2016, the Bank’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.

 

(Dollars in millions)                  Minimum Required To Be 
           Minimum Required For   Well Capitalized Under Prompt 
   Actual   Capital Adequacy Purposes   Corrective Action Regulations 
At December 31, 2017  Amount   Ratio   Amount   Ratio   Amount   Ratio 
Common equity tier 1 capital to risk-weighted assets  $86.3    12.6%  $30.9    4.5%  $44.6    6.5%
Tier 1 capital to risk-weighted assets  $86.3    12.6%  $41.2    6.0%  $54.9    8.0%
Total capital to risk-weighted assets  $93.8    13.7%  $54.9    8.0%  $68.7    10.0%
Tier 1 capital to adjusted average assets  $86.3    9.4%  $36.7    4.0%  $45.8    5.0%

 

(Dollars in millions)                  Minimum Required To Be 
           Minimum Required For   Well Capitalized Under Prompt 
   Actual   Capital Adequacy Purposes   Corrective Action Regulations 
At December 31, 2016  Amount   Ratio   Amount   Ratio   Amount   Ratio 
Common equity tier 1 capital to risk-weighted assets  $81.2    12.9%  $28.4    4.5%  $41.0    6.5%
Tier 1 capital to risk-weighted assets  $81.2    12.9%  $37.9    6.0%  $50.5    8.0%
Total capital to risk-weighted assets  $88.9    14.1%  $50.5    8.0%  $63.1    10.0%
Tier 1 capital to adjusted average assets  $81.2    9.0%  $35.9    4.0%  $44.9    5.0%

 

Banking regulators may change these capital requirements from time to time, depending on the economic outlook generally and the outlook for the banking industry. The Bancorp is unable to predict whether and when any such further capital requirements would be imposed and, if so, to what levels and on what schedule.

 

Dividend Limitations. The Bancorp is a legal entity separate and distinct from the Bank. The primary source of the Bancorp’s cash flow, including cash flow to pay dividends on the Bancorp’s Common Stock, is the payment of dividends to the Bancorp by the Bank. Under Indiana law, the Bank may pay dividends of so much of its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the DFI for the payment of a dividend if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement.

 

The FDIC has the authority to prohibit the Bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. In addition, under FRB supervisory policy, a bank holding company generally should not maintain its existing rate of cash dividends on common shares unless (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization’s capital needs, assets, quality, and overall financial condition. The FRB issued a letter dated February 24, 2009, to bank holding companies providing that it expects banks holding companies to consult with it in advance of declaring dividends that could raise safety and soundness concerns (i.e., such as when the dividend is not supported by earnings or involves a material increase in the dividend rate) and in advance of repurchasing shares of common preferred stock.

 

Federal Deposit Insurance. Deposits in the Bank are insured by the Deposit Insurance Fund of the FDIC up to a maximum amount, which is generally $250,000 per depositor, subject to aggregation rules. There is no unlimited insurance coverage for noninterest bearing transaction accounts. Rather, deposits held in noninterest bearing transaction accounts are aggregated with interest bearing deposits the owner may hold in the same ownership category, and the combined insured up to at least $250,000. The Bank is subject to deposit insurance assessments by the FDIC pursuant to its regulations establishing a risk-related deposit insurance assessment system, based on the institution’s capital levels and risk profile. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk-weighted categories based on supervisory evaluations, regulatory capital levels, and certain other factors with less risky institutions paying lower assessments. An institution’s initial assessment rate depends upon the category to which it is assigned. There are also adjustments to a bank’s initial assessment rates based on levels of long-term unsecured debt, secured liabilities in excess of 25% of domestic deposits and, for certain institutions, brokered deposit levels. Pursuant to FDIC rules adopted under the Dodd-Frank Act (described below), initial assessments ranged from 5 to 35 basis points of the institution’s total assets minus its tangible equity. The Bank paid deposit insurance assessments of $293 thousand during the year ended December 31, 2017. For 2017, the deposit insurance assessment rate before applying one time credits was approximately 0.039% of insured deposits. No institution may pay a dividend if it is in default of the federal deposit insurance assessment.

 

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The Bank is also subject to assessment for the Financing Corporation (FICO) to service the interest on its bond obligations. The amount assessed on individual institutions, including the Bank, by FICO is in addition to the amount paid for deposit insurance according to the risk-related assessment rate schedule. These assessments will continue until the FICO bonds are repaid between 2017 and 2019. During 2017, the FICO assessment rate was 0.52 basis points for each $100 of insured deposits. The Bank paid interest payment assessments of approximately $43 thousand during the year ended December 31, 2017. Future increases in deposit insurance premiums or changes in risk classification would increase the Bank’s deposit related costs.

 

Under the Dodd-Frank Act, the FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund at no less than 1.35%, and must achieve the 1.35% designated reserve ratio by September 30, 2020. The FDIC must offset the effect of the increase in the minimum designated reserve ratio from 1.15% to 1.35% on insured depository institutions of less than $10 billion, and may declare dividends to depository institutions when the reserve ratio at the end of a calendar quarter is at least 1.5%, although the FDIC has the authority to suspend or limit such permitted dividend declarations. The FDIC has set the designated reserve ratio for the deposit insurance fund at 2% of estimated insured deposits, which the FDIC has established as a long-term goal.

 

Under the Dodd-Frank Act, the assessment base for deposit insurance premiums changed from adjusted domestic deposits to average consolidated total assets minus average tangible equity. Tangible equity for this purpose means Tier 1 capital. These changes went into effect in April 2011. The rate schedules set forth in the rule are scaled to the increase in the assessment base, including schedules that will go into effect when the reserve ratio reaches 1.15%, 2%, and 2.5%.

 

The schedules reduce the initial base assessment rate in each of the four risk-based pricing categories.

·For small Risk category I banks, the rates range from 5-9 basis points.
·The rates for small institutions in Risk Categories II, III and IV are 14, 23 and 35 basis points, respectively.
·For large institutions and large, highly complex institutions, the rate schedule ranges from 5 to 35 basis points.

 

There are also adjustments made to the initial assessment rates based on long-term unsecured debt, depository institution debt, and brokered deposits. The FDIC also revised the assessment system for large depository institutions with over $10 billion in assets.

 

The FDIC has the authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

 

The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe and unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital.

 

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Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Indianapolis, which is one of eleven regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of trustees of the Federal Home Loan Bank. As a member, the Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Indianapolis in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of our outstanding advances from the Federal Home Loan Bank. At December 31, 2017, the Bank was in compliance with this requirement.

 

At December 31, 2017, the Bancorp owned $3.0 million of stock of the Federal Home Loan Bank of Indianapolis (“FHLBI”) and had outstanding borrowings of $20.3 million from the FHLBI. The FHLBI stock entitles the Bancorp to dividends from the FHLBI. The Bancorp recognized dividend income of approximately $127 thousand in 2017. At December 31, 2017, the Bancorp’s excess borrowing capacity based on collateral from the FHLBI was $115.4 million. Generally, the loan terms from the FHLBI are better than the terms the Bancorp can receive from other sources making it cheaper to borrow money from the FHLBI.

 

Federal Reserve System. Under regulations of the FRB, the Bank is required to maintain reserves against its transaction accounts (primarily checking accounts) and non-personal money market deposit accounts. The effect of these reserve requirements is to increase the Bank’s cost of funds. The Bank is in compliance with its reserve requirements.

 

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC in connection with its examination of the Bank, to assess its record of meeting the credit needs of its community and to take that record into account in its evaluation of certain applications by the Bank. For example, the regulations specify that a bank’s CRA performance will be considered in its expansion (e.g., branching) proposals and may be the basis for approving, denying or conditioning the approval of an application. As of the date of its most recent regulatory examination, the Bank was rated “satisfactory” with respect to its CRA compliance.

 

Gramm-Leach-Bliley Act. Under the Gramm-Leach-Bliley Act ("Gramm-Leach"), bank holding companies are permitted to offer their customers virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. In order to engage in these new financial activities, a bank holding company must qualify and register with the FRB as a "financial holding company" by demonstrating that each of its bank subsidiaries is well capitalized, well managed and has at least a satisfactory rating under the CRA. The Bancorp has no current intention to elect to become a financial holding company under Gramm-Leach.

 

Gramm-Leach established a system of functional regulation, under which the federal banking agencies regulate the banking activities of financial holding companies, the U.S. Securities and Exchange Commission regulates their securities activities and state insurance regulators regulate their insurance activities.

 

Under Gramm-Leach, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of Gramm-Leach affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.

 

The Bancorp does not disclose any nonpublic information about any current or former customers to anyone except as permitted by law and subject to contractual confidentiality provisions which restrict the release and use of such information.

 

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Consumer Financial Protection Bureau. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) within the Federal Reserve, which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of Gramm-Leach and certain other statutes. Many of the consumer financial protection functions formerly assigned to the federal banking and other designated agencies are now performed by the CFPB. The CFPB has a large budget and staff, and has the authority to implement regulations under federal consumer protection laws and enforce those laws against, and examine, financial institutions. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and supervised by the federal banking regulators for consumer compliance purposes. The CFPB has the authority to prevent unfair, deceptive or abusive practice in connection with the offering of consumer financial products. Additionally, this bureau is authorized to collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to underserved consumers and communities.

 

Moreover, the Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, the CFPB has published several final regulations impacting the mortgage industry, including rules related to ability-to-pay, mortgage servicing, and mortgage loan originator compensation. The ability-to-repay rule makes lenders liable if they fail to assess ability to repay under a prescribed test, but also creates a safe harbor for so-called “qualified mortgages.” Failure to comply with the ability-to-repay rule may result in possible CFPB enforcement action and special statutory damages plus actual, class action, and attorneys’ fees damages, all of which a borrower may claim in defense of a foreclosure action at any time. The Dodd-Frank Act also permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. Federal preemption of state consumer protection law requirements, traditionally an attribute of the federal savings association charter, has also been modified by the Dodd-Frank Act and now requires a case-by-case determination of preemption by the OCC and eliminates preemption for subsidiaries of a bank. Depending on the implementation of this revised federal preemption standard, the operations of the Bank could become subject to additional compliance burdens in the states in which it operates.

 

Mortgage Reform and Anti-Predatory Lending. Title XIV of the Dodd-Frank Act, the Mortgage Reform and Anti-Predatory Lending Act, includes a series of amendments to the Truth In Lending Act with respect to mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards and pre-payments. With respect to mortgage loan originator compensation, except in limited circumstances, an originator is prohibited from receiving compensation that varies based on the terms of the loan (other than the principal amount). The amendments to the Truth In Lending Act also prohibit a creditor from making a residential mortgage loan unless it determines, based on verified and documented information of the consumer’s financial resources, that the consumer has a reasonable ability to repay the loan. The amendments also prohibit certain pre-payment penalties and require creditors offering a consumer a mortgage loan with a pre-payment penalty to offer the consumer the option of a mortgage loan without such a penalty. In addition, the Dodd-Frank Act expands the definition of a “high-cost mortgage” under the Truth In Lending Act, and imposes new requirements on high-cost mortgages and new disclosure, reporting and notice requirements for residential mortgage loans, as well as new requirements with respect to escrows and appraisal practices.

 

Interchange Fees for Debit Cards. Under the Dodd-Frank Act, interchange fees for debit card transactions must be reasonable and proportional to the issuer’s incremental cost incurred with respect to the transaction plus certain fraud related costs. Although institutions with total assets of less than $10 billion are exempt from this requirement, competitive pressures have required smaller depository institutions to reduce fees with respect to these debit card transactions.

 

Federal Securities Law. The shares of Common Stock of the Bancorp have been registered with the SEC under the Securities Exchange Act (the “1934 Act”). The Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC there under. If the Bancorp has fewer than 300 shareholders, it may deregister its shares under the 1934 Act and cease to be subject to the foregoing requirements.

 

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Shares of Common Stock held by persons who are affiliates of the Bancorp may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the Securities Act of 1933. If the Bancorp meets the current public information requirements under Rule 144, each affiliate of the Bancorp who complies with the other conditions of Rule 144 (including those that require the affiliate’s sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Bancorp or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks.

 

Under the Dodd-Frank Act, the Bancorp is required to provide its shareholders an opportunity to vote on the executive compensation payable to its named executive officers and on golden parachute payments in connection with mergers and acquisitions. These votes are non-binding and advisory. At least once every six years, the Bancorp must also permit shareholders to determine on an advisory basis whether such votes should be held every one, two, or three years.

 

Other Future Legislation and Change in Regulations. Various other legislation, including proposals to expand or contract the powers of banking institutions and bank holding companies, is from time to time introduced. This legislation may change banking statutes and the operating environment of the Bancorp and the Bank in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. The Bancorp cannot accurately predict whether any of this potential legislation will ultimately be enacted, and, if enacted, the ultimate effect that it, or implementing regulations, would have upon the financial condition or results of operations of the Bancorp or the Bank.

 

Federal Taxation

 

For federal income tax purposes, the Bank reports its income and expenses on the accrual method of accounting. The Bancorp and the Bank file a consolidated federal income tax return for each fiscal year ending December 31.

 

State Taxation

 

The Bank is subject to Indiana’s Financial Institutions Tax (“FIT”), which is imposed at a flat rate of 7.0% on “adjusted gross income” for the taxable year beginning January 1, 2016. This rate is scheduled to decrease over the succeeding years as follows: to 6.5% for 2017 and 2018, to 6.25% for 2019, to 6.0% for 2020, to 5.5% for 2021, to 5.0% for 2022, and to 4.9% for 2023 and thereafter. “Adjusted gross income,” for purposes of FIT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes.

 

Accounting for Income Taxes

 

At December 31, 2017, the Bancorp’s consolidated total deferred tax assets were $3.1 million and the consolidated total deferred tax liabilities were $1.5 million, resulting in a consolidated net deferred tax asset of $1.6 million, net of an $80 thousand valuation allowance. The valuation allowance of $80 thousand was provided for the state tax credit, as management does not believe these amounts will be fully utilized before statutory expiration.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law. Among other changes, the Act reduces the corporate federal income tax rate from 34% to 21% effective January 1, 2018. As a result of these changes made by the Act, the Bancorp made the determination to revalue its net deferred tax asset, as deferred tax assets and liabilities are to be measured using enacted rates expected to apply in years in which the deferred tax assets and liabilities are expected to be recovered or settled. See Note 7 – Income Taxes for additional detail related to the Act.

 

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Item 1A. Risk Factors

 

Not applicable.

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

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Item 2. Properties

 

The Bancorp maintains its corporate office at 9204 Columbia Avenue, Munster, Indiana, from which it oversees the operation of the Bank’s sixteen banking locations. The Bancorp owns all of its office properties.

 

The following table sets forth additional information with respect to the Bank’s offices as of December 31, 2017. Net book value and total investment figures are for land, buildings, furniture and fixtures.

 

   Year       Approximate     
   facility   Net book   square   Total 
Office location  opened   value   footage   cost 
9204 Columbia Avenue                    
Munster, IN 46321-3517   1985   $533,799    11,640   $3,312,298 
141 W. Lincoln Highway                    
Schererville, IN 46375-1851   1990    555,669    9,444    2,300,457 
7120 Indianapolis Blvd.                    
Hammond, IN 46324-2221   1979    86,366    2,600    1,005,922 
1300 Sheffield                    
Dyer, IN 46311-1548   1976    172,824    2,100    1,018,166 
7915 Taft                    
Merrillville, IN 46410-5242   1968    113,046    2,750    958,987 
8600 Broadway                    
Merrillville, IN 46410-7034   1996    948,971    4,400    2,601,589 
4901 Indianapolis Blvd.                    
East Chicago, IN 46312-3604   1995    689,087    4,300    1,808,790 
1501 Lake Park Avenue                    
Hobart, IN 46342-6637   2000    1,722,928    6,992    3,389,661 
9204 Columbia Avenue                    
Corporate Center Building                    
Munster, IN 46321-3517   2003    4,791,632    36,685    13,581,321 
855 Stillwater Parkway                    
Crown Point, IN 46307-5361   2007    1,609,475    3,945    2,485,936 
1801 W. 25th Avenue                    
Gary, IN 46404-3546   2008    1,419,875    2,700    2,041,453 
2905 Calumet Avenue                    
Valparaiso, IN 46383-2645   2009    1,818,286    2,790    2,358,101 
9903 Wicker Avenue                    
Saint John, IN 46373-9402   2010    1,415,875    2,980    2,231,357 
130 Rimbach Street                    
Hammond, IN 46320-1710   2014    811,211    5,230    1,187,099 
1900 Indianapolis Blvd.                    
Whiting, IN 46394-1510   2015    499,439    9,922    793,384 
10688 Randolph Street                    
Crown Point, IN 46307-9424   2015    643,609    2,032    944,615 
3927 Ridge Road                    
Highland, IN 46322-2258   2017    1,727,291    2,282    1,777,680 

 

The Bank outsources its core processing activities to Fidelity National Information Services, Inc., or FIS Corporation located in Jacksonville, Florida. FIS provides real time services for loans, deposits, retail delivery systems, card solutions and electronic banking. Additionally, the Bank utilizes Accutech in Muncie, Indiana for its Wealth Management operations.

 

The net book value of the Bank’s property, premises and equipment totaled $19.6 million at December 31, 2017.

 

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Item 3. Legal Proceedings

 

Not applicable

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

Item 4.5 Executive Officers of the Bancorp

 

Pursuant to General Instruction G(3) of Form 10-K, the following information is included as an unnumbered item in this Part I in lieu of being included in the Bancorp’s Proxy Statement for the 2018 Annual Meeting of Shareholders:

 

The executive officers of the Bancorp are as follows:

 

Executive Officer   Age at
December 31,
2017
  Position
David A. Bochnowski   72   Executive Chairman
Benjamin J. Bochnowski   37   President, Chief Executive Officer
Robert T. Lowry   56   Executive Vice President, Chief Financial Officer and Treasurer
Leane E. Cerven   59   Executive Vice President, General Counsel, Corporate Secretary
Tanya A. Leetz   47   Executive Vice President, Chief Information and Technology Officer
Todd Scheub   50   Executive Vice President, Chief Banking Officer

 

The following is a description of the principal occupation and employment of the executive officers of the Bancorp during at least the past five years:

 

David A. Bochnowski, is the Executive Chairman of the Bancorp and Bank. His duties include assisting his successor in the transition into the role of Chief Executive Officer of the Company and Bank, assisting the Company and Bank with their strategic goals and budgeting process, and engaging in community and banking activities supporting the mission of the Company and Bank. He formerly served as the Chief Executive Officer for thirty-five years retiring from that position in April of 2016. He has been Chairman of the Company and Bank since 1995. He has been a director since 1977 and was the Bank’s legal counsel from 1977 to 1981. Mr. Bochnowski is the past Chairman of America’s Community Bankers, now merged with the American Bankers Association. He is a past Chairman of the American Banker Association’s Government Relations Council. He was selected by the Securities and Exchange Commission to serve on the Commission’s Advisory Council on Small and Emerging Companies. He is a former Chairman of the Indiana Department of Financial Institutions; former director of the Federal Home Loan Bank of Indianapolis, and, a former member of the Federal Reserve Thrift Advisory Council. He is a trustee and treasurer of the Munster Community Hospital, a director of the Community Health Care System, serves as Vice-Chairman of Calumet College, and serves on the board of Trustees of Valparaiso University. He is a former Chairman of the Legacy Foundation of Lake County, a former Director of One Region, a former Director of Habitat for Humanity, and a former director of the Local Initiatives Support Corporation (LISC), among others. Before joining the Bank, Mr. Bochnowski was an attorney in private practice. He holds an undergraduate Bachelor of Science and Juris Doctor degrees from Georgetown University and a Master’s Degree from Howard University. He served as an officer in the United States Army and received a Bronze Star for his service in the Vietnam conflict. Mr. Bochnowski is the father of Benjamin Bochnowski, the President and Chief Executive Officer of the Bancorp and Bank.

 

Benjamin J. Bochnowski has served as President and Chief Executive Officer of Northwest Indiana Bancorp and Peoples Bank, SB (“Peoples”) since April 2016, and has served as a director of both companies since 2014. Since joining Peoples in 2010, Mr. Bochnowski also held the position of Executive Vice President, Chief Operating Officer; prior to that, he held positions overseeing risk management and strategic planning. He earned a bachelor’s degree from the University of Michigan, followed by an MBA from ESADE business school in Barcelona, Spain. He speaks Spanish, and is a graduate of the American Bankers Association’s Stonier Graduate School of Banking with a Leadership Certificate from the Wharton School at the University of Pennsylvania. Mr. Bochnowski volunteers with the Volunteer Income Tax Assistance (VITA) Program for low-income individuals. He is a Board Member at the Legacy Foundation, One Region, and the Indiana Bankers Association; he has also been a mentor for the Entrepreneurship Bootcamp for Veterans at Purdue University. Mr. Bochnowski is the son of David A. Bochnowski, the Chairman, Chief Executive Officer of the Bancorp and the Bank.

 

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Robert T. Lowry is Executive Vice President, Chief Financial Officer and Treasurer of the Bancorp and the Bank. He is responsible for finance, accounting, financial reporting, and risk management activities. Mr. Lowry has been with the Bank since 1985 and has previously served as the Bank’s Assistant Controller, Internal Auditor and Controller. Mr. Lowry is a Certified Public Accountant (CPA) and a Chartered Global Management Accountant (CGMA). Mr. Lowry holds a Master’s of Business Administration Degree from Indiana University and is a graduate of America’s Community Bankers National School of Banking. Mr. Lowry has taught online courses for the American Bankers Association that focused on capital and liquidity management, interest rate risk and investments. Mr. Lowry is currently serving on the board of the Food Bank of Northwest Indiana as board treasurer and chairman of the finance committee. In addition, Mr. Lowry is a volunteer for the IRS Volunteer Income Tax Assistance (VITA) program. He is a member of the American Institute of Certified Public Accountants, the Indiana CPA Society and the Financial Managers Society.

 

Leane English Cerven is Executive Vice President, General Counsel, and Corporate Secretary of the Bancorp and Bank. Ms. Cerven joined the Bancorp and the Bank in May of 2010. Prior to joining the Bancorp and the Bank, she practiced law for sixteen years in Chicago, first as an Associate Attorney with Mayer, Brown & Platt where she practiced primarily in the banking area, which included transactions involving the Resolution Trust Corporation/FDIC, corporate, international, bankruptcy, and litigation practice areas, and then as Vice President and Legal Counsel for Bank One where she practiced primarily in the commercial finance area, including secured and unsecured transactions, mergers and acquisitions, workouts, purchase of assets out of bankruptcy, international and multicurrency transactions, syndications, ESOP financings, and capital regulations. She is licensed to practice law in Indiana and Illinois. Ms. Cerven holds a Juris Doctorate degree from Valparaiso University School of Law and a Bachelor of Arts degree from the University of Minnesota, Minneapolis. She is a 2014 graduate of the American Bankers Association Stonier Graduate School of Banking, a member of the Stonier Graduate School of Banking Advisory Board, and a Stonier Capstone Advisor. She is also a member of the ABA’s Regional Banks General Counsels Group and the Society of Corporate Secretaries & Governance Professionals. Ms. Cerven is actively involved in community service and serves on the Board of Directors of South Shore Arts, the Bioethics Committees for St. Catherine’s Hospital and St. Mary’s Hospital, the Investment Committee for the Catholic Foundation of Northwest Indiana, and the Finance Council for St. Thomas More Church.

 

Tanya A. Leetz is Executive Vice President, Chief Information and Technology Officer of the Bancorp and the Bank. She is responsible for operational and technology activities. Ms. Leetz joined the Bank in 1994 and has previously served as trust administrator, management development, information systems manager, and chief operating officer. She is a Certified Information Security Manager (CISM) and Certified in Risk and Information Systems Control (CRISC). Ms. Leetz holds a Master’s Degree in Business Administration and a Bachelor of Science Degree in Financial Planning from Purdue University. She also graduated from America’s Community Bankers National School of Banking. Ms. Leetz currently serves on the Executive Committee on the Board of the Boys and Girls Clubs of Greater Northwest Indiana and is involved in other community activities. She is a member of the Information Systems Audit and Control Association and serves as an advisory member of a technology committee.

 

Todd M. Scheub is Executive Vice President, Chief Banking Officer of the Bancorp and the Bank. He is responsible for the Bank’s Wealth Management group, Retail Banking group, Marketing, Commercial, and Retail lending groups as well as the management of asset quality in the loan portfolio. Mr. Scheub joined the Bank in 1996 and has previously held positions in the commercial lending group. He provides oversight to the sales group in wealth management, retail banking, business and retail lending as well as chairing the Senior Officer’s Loan Committee. Additionally he provides oversight to the Bank’s Marketing group. He is the liaison to the operations and technology group, risk management, executive management, and the Board of Directors on all items related to the Bank’s sales groups. Mr. Scheub holds a Bachelor of Science Degree in Business and a Master’s Degree in Business Administration from Indiana University Northwest. He also graduated from America’s Community Bankers National School of Banking. Mr. Scheub is a Board Member at Campagna Academy, Frontline Foundations, and the Northwest Indiana Regional Development Company.

 

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PART II

 

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The Bancorp’s Common Stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board. The Bancorp’s stock is not actively traded. As of February 16, 2018, the Bancorp had 2,868,940 shares of common stock outstanding and 413 stockholders of record. This does not reflect the number of persons or entities who may hold their stock in nominee or “street” name through brokerage firms. Set forth below are the high and low bid prices during each quarter for the years ended December 31, 2017 and December 31, 2016. The bid prices reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Also set forth is information concerning the dividends declared by the Bancorp during the periods reported. Note 11 to the Financial Statements describes regulatory limits on the Bancorp’s ability to pay dividends.

 

          Dividends 
      Per Share Prices   Declared Per 
      High   Low   Common Share 
Year Ended               
December 31, 2017  1st Quarter  $40.50   $38.40   $0.28 
   2nd Quarter   41.00    39.50    0.29 
   3rd Quarter   42.50    40.50    0.29 
   4th Quarter   44.50    41.50    0.29 
                   
Year Ended                  
December 31, 2016  1st Quarter  $31.05   $29.30   $0.27 
   2nd Quarter   30.00    28.35    0.28 
   3rd Quarter   32.50    29.00    0.28 
   4th Quarter   39.87    33.00    0.28 

 

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On April 24, 2014 the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased during the twelve months ended December 31, 2017 under the stock repurchase program.

 

          Total Number of Shares   Maximum Number of 
          Purchased as Part of   Shares That May Yet 
   Total Number   Average Price  Publicly Announced   Be Purchased Under 
Period  of Shares Purchased   Paid per Share  Plans or Programs   the Program(1) 
January 1, 2017 – January 31, 2017   -   N/A   -    48,828 
February 1, 2017 – February 28, 2017   -   N/A   -    48,828 
March 1, 2017 – March 31, 2017   -   N/A   -    48,828 
April 1, 2017 – April 30, 2017   -   N/A   -    48,828 
May 1, 2017 – May 31, 2017   -   N/A   -    48,828 
June 1, 2017 – June 30, 2017   -   N/A   -    48,828 
July 1, 2017 – July 31, 2017   -   N/A   -    48,828 
August 1, 2017 – August 31, 2017   -   N/A   -    48,828 
September 1, 2017 – September 30, 2017   -   N/A   -