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EX-32 - EXHIBIT 32 - West End Indiana Bancshares, Inc.tv493769_ex32.htm
EX-31.2 - EXHIBIT 31.2 - West End Indiana Bancshares, Inc.tv493769_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - West End Indiana Bancshares, Inc.tv493769_ex31-1.htm

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2018

 

OR

 

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

 

For the transition period from _______________ to _______________

 

Commission File No. 000-54578

 

West End Indiana Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland   36-4713616
(State or other jurisdiction of
in Company or organization)
  (I.R.S. Employer
Identification Number)
     
34 South 7th Street, Richmond, Indiana   47374
(Address of Principal Executive Offices)   Zip Code

 

(765) 962-9587

(Registrant’s telephone number)

 

N/A

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

 

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

YES x     NO ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x     NO ¨

 

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

 

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

 

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

 

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

YES ¨     NO x

 

As of May 15, 2018, there were 1,066,858 issued and outstanding shares of the Registrant’s Common Stock.

 

 

 

 

 

 

West End Indiana Bancshares, Inc.

Form 10-Q

 

Index

 

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

 

 

 

 

Part I. – Financial Information

 

Item 1.Financial Statements

 

West End Indiana Bancshares, Inc.

Condensed Consolidated Balance Sheets

 

  March 31,  December 31, 
  2018  2017 
   (Unaudited)     
Assets        
Cash and due from banks $1,628,943  $1,588,203 
Interest-bearing demand deposits  14,689,133   8,757,619 
Cash and cash equivalents  16,318,076   10,345,822 
Investment securities available for sale  23,008,535   20,296,672 
Loans held for sale  1,060,354   2,877,012 
Loans, net of allowance for loan losses of $2,972,069 and $2,744,684  242,679,031   240,858,812 
Premises and equipment  9,038,744   9,127,886 
Federal Home Loan Bank stock  2,435,700   2,435,700 
Interest receivable  980,692   1,103,553 
Bank-owned life insurance  7,003,311   6,959,909 
Foreclosed real estate held for sale  39,375   39,375 
Other assets  6,204,932   5,369,094 
         
Total assets $308,768,750  $299,413,835 
         
Liabilities and Equity        
         
Liabilities        
Deposits $229,379,394  $226,980,788 
Federal Home Loan Bank advances  48,500,000   41,500,000 
Interest payable  128,600   105,709 
Other liabilities  1,561,187   1,797,971 
Total liabilities  279,569,181   270,384,468 
         
Commitments and Contingencies        
         
Redeemable common stock held by Employee Stock Ownership Plan (ESOP)  885,045   854,526 
         
Stockholders’ Equity        
Common stock, $.01 par value per share: Issued and outstanding – 1,066,858 and 1,066,858  10,668   10,668 
Additional paid in capital  6,159,699   6,062,163 
Retained earnings  24,382,970   24,029,397 
Unearned employee stock ownership plan (ESOP)  (770,550)  (784,560)
Accumulated other comprehensive loss  (583,218)  (288,301)
         
Total stockholders’ equity  29,199,569   29,029,367 
         
Less maximum cash obligation related to ESOP shares  (885,045)  (854,526)
         
Total stockholders’ equity less maximum cash obligation related to ESOP shares  28,314,524   28,174,841 
         
Total liabilities and stockholders’ equity $308,768,750  $299,413,835 

 

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

 

 1 

 

 

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements of Income

 

  Three Months Ended March 31, 
  2018   2017 
  (Unaudited) 
Interest and Dividend Income         
Loans receivable, including fees $3,454,656   $3,271,097 
Investment securities  102,671    104,371 
Other  68,121    24,528 
Total interest income  3,625,448    3,399,996 
          
Interest Expense         
Deposits  499,481    384,514 
Federal Home Loan Bank advances  201,150    103,555 
Total interest expense  700,631    488,069 
          
Net Interest Income  2,924,817    2,911,927 
Provision for loan losses  555,045    358,000 
Net Interest After Provision for Loan Losses  2,369,772    2,553,927 
          
Other Income         
Service charges on deposit accounts  172,735    155,615 
Loan servicing income, net  80,681    31,548 
Debit card income  94,062    93,711 
Gain on sale of loans  111,778    109,203 
Gain on cash surrender value of life insurance  43,402    44,463 
Loss on sale of other assets  (7,656)   (21,408)
Other income  11,344    410 
Total other income  506,346    413,542 
          
Other Expense         
Salaries and employee benefits  1,386,618    1,315,919 
Net occupancy  208,459    138,169 
Data processing fees  124,015    103,188 
Professional fees  99,728    79,182 
Director expenses  24,300    32,951 
Advertising  55,778    71,324 
ATM charges  41,608    77,808 
Postage and courier  62,656    61,309 
FDIC insurance premiums  39,000    52,000 
Foreclosed real estate and repossession expense  46,317    34,528 
Other expenses  320,584    333,726 
Total other expenses  2,409,063    2,300,104 
          
Income Before Income Tax  467,055    667,365 
Income tax expense  119,526    229,675 
          
Net Income $347,529   $437,690 
Earnings Per Share         
Basic $0.35   $0.45 
Diluted  0.34    0.42 
Dividends Per Share  0.06    0.06 

 

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

 

 2 

 

 

West End Indiana Bancshares, Inc.

Condensed Consolidated Statements

of Comprehensive Income

 

 

Three Months Ended

March 31,

 
  2018   2017 
  (Unaudited) 
Net income $347,529   $437,690 
Other comprehensive income (loss), net of tax Unrealized holding gains arising during the period, net of tax expense (benefit) of $(81,228) and $11,890  (229,568)   18,215 
          
Comprehensive income $117,961   $455,905 

 

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

 

 3 

 

 

West End Indiana Bancshares, Inc.

Condensed Statement of Cash Flows

 

  Three Months Ended 
  March 31, 
  2018   2017 
  (Unaudited) 
Operating Activities         
Net income $347,529   $437,690 
Items not requiring (providing) cash         
Provision for loan losses  555,045    358,000 
Depreciation and amortization  124,236    65,706 
Investment securities amortization, net  73,760    81,900 
Loan originated for sale  (2,592,065)   (4,077,849)
Proceeds on loan sold  3,744,806    4,126,857 
Gain on loans sold  (111,778)   (109,203)
Loss on other assets  7,656    21,408 
ESOP shares earned  40,171    44,239 
Stock based compensation  71,375    71,468 
Net change in         
Interest receivable  122,861    121,061 
Interest payable  22,891    5,851 
Cash surrender value of life insurance  (43,402)   (44,463)
Other adjustments  (161,509)   (248,441)
Net cash provided by operating activities  2,201,576    854,224 
          
Investing Activities         
Purchases of securities available for sale  (4,126,227)   (1,016,563)
Proceeds from maturities of securities available for sale  1,029,809    1,011,787 
Purchase of FHLB stock  -    (94,600)
Net change in loans  (2,575,534)   2,445,872 
Purchase of premises and equipment  (35,094)   (954,776)
Proceeds from sale of foreclosed real estate and repossessions  138,423    51,822 
Net cash provided by (used in) investing activities  (5,568,623)   1,443,542 
          
Financing Activities         
Net change in demand deposits, money market, NOW, and savings accounts  (1,716,586)   3,834,395 
Net change in certificates of deposit  4,115,192    (1,686,545)
Repayment of FHLB advances  (8,000,000)   (13,000,000)
Proceeds from FHLB advances  15,000,000    14,500,000 
Cash dividends  (59,305)   (58,966)
Net cash provided by financing activities  9,339,301    3,588,884 
          
Net Change in Cash and Cash Equivalents  5,972,254    5,886,650 
          
Cash and Cash Equivalents, Beginning of Period  10,345,822    7,649,356 
          
Cash and Cash Equivalents, End of Period $16,318,076   $13,536,006 
          
Additional Cash Flows Information         
Interest paid $677,740   $482,218 
Real estate acquired in settlement of loans  187,840    140,200 
Sale and financing of foreclosed real estate and repossessions  -    117,293 

 

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

 

 4 

 

 

West End Indiana Bancshares, Inc.

Condensed Statement of Stockholders’ Equity

For the Three Months Ended March 31, 2018

 

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

 

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

 5 

 

 

West End Indiana Bancshares, Inc.

Form 10-Q

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 1: Summary of Significant Accounting Policies

 

Nature of Operations

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 6 

 

 

Basis of Presentation

 

The accompanying unaudited consolidated condensed financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in the Annual Report on Form 10-K for the year ended December 31, 2017. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month period ended March 31, 2018, are not necessarily indicative of the results which may be expected for the entire year. The consolidated condensed balance sheet of the Company as of December 31, 2017 has been derived from the audited consolidated balance sheet of the Company as of that date.

 

Principals of Consolidation and Revenue from Contract with Customers

 

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

 

Revenue from Contracts with Customers

 

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

 

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

 

NOTE 2: Securities

 

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

 

  March 31, 2018 
  (Unaudited) 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Approximate
Fair Value
 
  (In Thousands) 
Available for sale                
Municipal bonds $2,020  $-  $(165) $1,855 
Mortgage-backed securities - GSE residential  21,779   -   (625)  21,154 
Total available for sale $23,799  $-  $(790) $23,009 

 

 7 

 

 

  December 31, 2017 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Approximate
Fair Value
 
  (In Thousands) 
Available for sale                
Municipal bonds $2,019  $-  $(67) $1,952 
Mortgage-backed securities - GSE residential  18,757   2   (414)  18,345 
Total available for sale $20,776  $2  $(481) $20,297 

 

The amortized cost and fair value of securities available for sale at March 31, 2018 (unaudited) and December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

  March 31, 2018   December 31, 2017  
  (Unaudited)      
  Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
 
  (In Thousands)  
After ten years   2,020     1,855     2,019     1,952  
Mortgage-backed securities - GSE residential   21,779     21,154     18,757     18,345  
Totals $ 23,799   $ 23,009   $ 20,776   $ 20,297  

 

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $12,327,000 at March 31, 2018 (unaudited). Securities pledged at December 31, 2017 were $13,473,000.

 

There were no activities related to the sales of securities available for sale for the three months ended March 31, 2018 and 2017.

 

Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2018 (unaudited) and December 31, 2017 was $23,000,000 and $19,627,000 which is approximately 100% and 97% of the Company’s available-for-sale investment portfolio. These declines primarily resulted from changes in market interest rates.

 

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

 

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

 

 8 

 

 

Securities with unrealized losses at March 31, 2018 (unaudited) were as follows:

 

  Less Than 12 Months  12 Months or Longer  Total 
  Fair
Value
  Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
 
  (In Thousands) 
Available-for-sale securities                        
Municipal bonds $-  $-  $1,855  $(165) $1,855  $(165)
Mortgage-backed securities - GSE residential  8,409   (73)  12,745   (552)  21,154   (625)
  $8,409  $(73) $14,600  $(717) $23,009  $(790)

 

Securities with unrealized losses at December 31, 2017 were as follows:

 

  Less Than 12 Months  12 Months or Longer  Total 
  Fair
Value
  Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
 
  (In Thousands) 
Available-for-sale securities                        
Municipal bonds $-  $-  $1,952  $(67) $1,952  $(67)
Mortgage-backed securities - GSE residential  4,644   (40)  13,031   (374)  17,675   (414)
  $4,644  $(40) $14,983  $(441) $19,627  $(481)

 

Municipal Bonds

 

The unrealized losses on the Company’s investments in municipal bonds were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2018.

 

Mortgage-backed Securities – GSE Residential

 

The unrealized losses on the Company’s investment in mortgage-backed securities were caused by interest rate increases. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not, more likely than not, the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2018.

 

NOTE 3: Loans and Allowance

 

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

 

Loans

 

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

 

 9 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Allowance for Loan Losses

 

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

 

 10 

 

 

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

 

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

 

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

 

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

 

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

 

 11 

 

 

Categories of loans include:

 

  (Unaudited)    
  March 31,  December 31, 
  2018  2017 
  (In Thousands) 
Commercial $12,441  $11,572 
Real estate loans        
Residential  62,039   61,885 
Commercial and multi-family  57,689   57,485 
Construction  2,740   2,093 
Second mortgages and equity lines of credit  6,318   6,594 
Consumer loans        
Indirect  86,291   86,109 
Other  18,241   17,978 
   245,759   243,176 
Less        
Net deferred loan fees, premiums and discounts  108   112 
Allowance for loan losses  2,972   2,745 
Total loans $242,679  $240,859 

 

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

 

Commercial

 

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

 

Commercial and Multi-Family Real Estate

 

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

 

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

 

Construction

 

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

 

 12 

 

 

Residential, Second mortgages and equity lines of credit and Consumer

 

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

 

The following presents by portfolio segment, the activity in the allowance for loan losses for the three months ended March 31, 2018 (unaudited) and 2017 (unaudited).

 

       (Unaudited)     
       Real Estate     
   Commercial   Residential   Commercial
and
Multi-Family
   Construction   Seconds
and
Equity Line
   Consumer   Total 
   (In Thousands) 
Three Months Ended March 31, 2018:                            
Balance, beginning of year  $303   $191   $886   $2   $10   $1,353   $2,745 
Provision for losses   253    19    (10)   1    (1)   293    555 
Recoveries on loans       15                32    47 
Loans charged off       (27)   (1)           (347)   (375)
Balance, end of period  $556   $198   $875   $3   $9   $1,331   $2,972 
                                    
Three Months Ended March 31, 2017:                                   
Balance, beginning of year  $247   $329   $670   $   $   $1,031   $2,277 
Provision for losses   4    10    47    1    2    294    358 
Recoveries on loans       1                60    61 
Loans charged off       (42)   (32)           (300)   (374)
Balance, end of period  $251   $298   $685   $1   $2   $1,085   $2,322 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2018 (unaudited) and December 31, 2017:

 

       March 31, 2018         
       Real Estate         
   Commercial   Residential   Commercial
and
Multi-Family
   Construction   Seconds and
Equity Line
   Consumer   Total 
   (In Thousands) 
Allowance:                            
Balance, end of period  $556   $198   $875   $3   $9   $1,331   $2,972 
Individually evaluated for impairment   461    -    556    -    -    -    1,017 
Collectivity evaluated for impairment   95    198    319    3    9    1,331    1,955 
Loans:                                   
Ending balance  $12,441   $62,039   $57,689   $2,740   $6,318   $104,532   $245,759 
Individually evaluated for impairment   810    -    1,598    -    -    -    2,408 
Collectivity evaluated for impairment   11,631    62,039    56,091    2,740    6,318    104,532    243,351 

 

 13 

 

 

       December 31, 2017         
       Real Estate         
   Commercial   Residential   Commercial
and Multi-Family
   Construction   Seconds and
Equity Line
   Consumer   Total 
   (In Thousands) 
Allowance:                            
Balance, end of year  $303   $191   $886   $2   $10   $1,353   $2,745 
Individually evaluated for impairment   214    -    556    -    -    -    770 
Collectivity evaluated for impairment   89    191    330    2    10    1,353    1,975 
Loans:                                   
Ending balance  $11,572   $61,885   $57,485   $2,093   $6,594   $104,087   $243,716 
Individually evaluated for impairment   814    -    1,605    -    -    -    2,419 
Collectivity evaluated for impairment   10,758    61,885    55,880    2,093    6,594    104,087    241,297 

 

The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of March 31, 2018 (unaudited) and December 31, 2017:

 

     (Unaudited)
March 31, 2018
    
     Real Estate    
  Commercial  Residential  Commercial
and
Multi-Family
  Construction  Seconds
and
Equity Line
  Consumer  Total 
  (In Thousands) 
Pass $11,483  $61,716  $53,096  $2,740  $6,318  $104,532  $239,885 
Watch  148      990            1,138 
Special Mention     323   2,005            2,328 
Substandard  810   ––   1,598            2,408 
Doubtful                     
Loss                     
Total $12,441  $62,039  $57,689  $2,740  $6,318  $104,532  $245,759 

 

     December 31, 2017    
     Real Estate    
  Commercial  Residential  Commercial
and
Multi-Family
  Construction  Seconds
and
Equity Line
  Consumer  Total 
  (In Thousands) 
Pass $10,601  $61,561  $52,873  $2,093  $6,594  $104,087  $237,809 
Watch  157   ––   992            1,149 
Special Mention  ––   324   2,015      ––      2,339 
Substandard  814   ––   1,605         ––   2,419 
Doubtful  ––                  –– 
Loss              ––      –– 
Total $11,572  $61,885  $57,485  $2,093  $6,594  $104,087  $243,716 

 

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

 

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

 

 14 

 

 

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

 

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

 

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

 

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

 

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

 

The Company evaluates the loan grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during 2018.

 

 15 

 

 

The following table presents the Bank’s loan portfolio aging analysis as of March 31, 2018 (unaudited) and December 31, 2017:

 

     March 31, 2018       
     Real Estate       
  Commercial  Residential  Commercial
and Multi-Family
  Construction  Seconds
and
Equity
Line
  Consumer  Total 
  (In Thousands) 
30-59 days past due $11  $374  $39  $-  $2  $1,272  $1,698 
60-89 days past due  -   70   -   -   20   630   720 
Greater than 90 days past due  3   275   -   -   -   531   809 
Total past due  14   719   39   -   22   2,433   3,227 
Current  12,427   61,320   57,650   2,740   6,296   102,099   242,532 
Total loans $12,441  $62,039  $57,689  $2,740  $6,318  $104,532  $245,759 
                             
Nonaccrual loans $-  $114  $-  $-  $-  $-  $114 
Past due 90 days and accruing  3   161   -   -   -   531   695 
Total $3  $275  $-  $-  $-  $531  $809 

 

     December 31, 2017       
     Real Estate       
  Commercial  Residential  Commercial
and Multi-Family
  Construction  Seconds
and
Equity
Line
  Consumer  Total 
    
30-59 days past due $10  $378  $-  $-  $57  $1,536  $1,981 
60-89 days past due  -   18   39   -       472   529 
Greater than 90 days and accruing  -   149   8   -       666   823 
Total past due  10   545   47   -   57   2,674   3,333 
Current  11,562   61,340   57,438   2,093   6,537   101,413   240,383 
Total loans $11,572  $61,885  $57,485  $2,093  $6,594  $104,087  $243,716 
                             
Nonaccrual loans $-  $115  $8  $-  $-  $-  $123 
Past due 90 days and accruing  -   34   -   -   -   666   700 
Total $-  $149  $8  $-  $-  $666  $823 

 

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

 

 16 

 

 

The following table presents impaired loans and specific valuation allowance based on class level at March 31, 2018 (unaudited) and for the year ended December 31, 2017:

 

     March 31, 2018       
     Real Estate       
  Commercial  Residential  Commercial and
Multi-Family
  Construction  Seconds and
Equity Line
  Consumer  Total 
  (In Thousands) 
Impaired loans without a specific allowance:                            
Recorded investment $72  $-  $810  $-  $-  $-  $882 
Unpaid principal balance  72   -   810   -   -   -   882 
Impaired loans with a specific allowance:                            
Recorded investment  738   -   788   -   -   -   1,526 
Unpaid principal balance  738   -   788   -   -   -   1,526 
Specific allowance  461   -   556   -   -   -   1,017 
Total impaired loans:                            
Recorded investment  810   -   1,598   -   -   -   2,408 
Unpaid principal balance  810   -   1,598   -   -   -   2,408 
Specific allowance  461   -   556   -   -   -   1,017 

 

     December 31, 2017       
     Real Estate       
  Commercial  Residential  Commercial and
Multi-Family
  Construction  Seconds and
Equity Line
  Consumer  Total 
  (In Thousands) 
Impaired loans without a specific allowance:                            
Recorded investment $76  $-  $812  $-  $-  $-  $888 
Unpaid principal balance  76   -   812   -   -   -   888 
Impaired loans with a specific allowance:                            
Recorded investment  738   -   793   -   -   -   1,531 
Unpaid principal balance  738   -   793   -   -   -   1,531 
Specific allowance  214   -   556   -   -   -   770 
Total impaired loans:                            
Recorded investment  814   -   1,605   -   -   -   2,419 
Unpaid principal balance  814   -   1,605   -   -   -   2,419 
Specific allowance  214   -   556   -   -   -   770 

 

 17 

 

 

The following presents by portfolio segment, information related to the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2018 (unaudited) and 2017 (unaudited):

 

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

 

     (Unaudited)    
     Real Estate    
  Commercial  Residential   Commercial
and
Multi-Family
   Construction   Seconds
and
Equity Line
  Consumer   Total 
  (In Thousands) 
Three Months Ended March 31, 2017:                         
Total impaired loan:                                
Average recorded investment $2,287  $––   $1,787   $––   $––  $––   $4,074 
Interest income recognized  52       20    ––    ––   ––    72 
Interest income recognized on a cash basis         ––    ––    ––   ––    –– 

 

 

Troubled Debt Restructurings

 

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

 

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

 

 18 

 

 

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

 

During the three months ended March 31, 2018 (unaudited) and 2017 (unaudited), there were no new restructurings classified as TDRs. No loans restructured during the last twelve months defaulted during the three months ended March 31, 2018 and 2017.

 

At March 31, 2018 and December 31, 2017, there were $230,000 and $126,000 respectively of residential real estate loans in process of foreclosure.

 

NOTE 4: Disclosures About Fair Value of Assets and Liabilities

 

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

 

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

 

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

 

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

 

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

 

Recurring Measurements

 

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

 

Available-for-Sale Securities

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions. Additionally, matrix pricing is used for certain investment securities and is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Level 2 securities include SBA loan pools, municipal bonds and mortgage-backed securities. At March 31, 2018 (unaudited) and December 31, 2017, all mortgage-backed securities are residential government sponsored enterprises. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

 

 19 

 

 

Mortgage-Servicing Rights

 

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

 

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

 

The following tables present the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2018 (unaudited) and December 31, 2017:

 

     (Unaudited)
March 31, 2018
 
     Fair Value Measurements Using 
  Fair
Value
  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
  (In Thousands) 
Available-for-sale securities:                
Municipal bonds $1,855  $  $1,855  $ 
Mortgage-backed securities - GSE residential  21,154      21,154    
Mortgage-servicing rights  805         805 

 

     December 31, 2017 
     Fair Value Measurements Using 
  Fair
Value
  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
  (In Thousands) 
Available-for-sale securities:                
Municipal bonds $1,952  $  $1,952  $ 
Mortgage-backed securities - GSE residential  18,345      18,345    
Mortgage-servicing rights  731         731 

 

 20 

 

 

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

 

  (Unaudited)
Mortgage-Servicing Rights
 
  Month’s Ended March 31, 
  2018  2017 
  (In Thousands) 
Balances, beginning of period $731  $719 
Total unrealized gains (losses) included in net income  58   7 
Additions (rights recorded on sale of loans)  39   18 
Settlements (payments)  (23)  (18)
Balances, end of period $805  $726 

 

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

 

Nonrecurring Measurements

 

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

 

Impaired Loans (Collateral Dependent)

 

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

 

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

 

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

 

 21 

 

 

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

 

     March 31, 2018 
     Fair Value Measurements Using 
  Fair
Value
  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
  (In Thousands) (unaudited) 
Impaired loans $277  $  $  $277 

 

     December 31, 2017 
     Fair Value Measurements Using 
  Fair
Value
  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
  (In Thousands) 
Impaired loans $761  $  $  $761 

 

Unobservable (Level 3) Inputs

 

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

 

 

  Fair Value at
March 31, 2018
  Valuation
Technique
  Unobservable
Inputs
  Range (Weighted Average) 
  (In Thousands) (unaudited) 
Impaired loans $277   Comparative sales based on
independent appraisals
   Marketability Discount   50.0%
                 
Mortgage-servicing rights $805   Discounted Cash Flow   Discount rate   5.9% -6.4% (6.3%) 
           Conditional prepayment rate   8.7% - 11.7% (9.1%) 
           Expected loan servicing years   1.9 – 4.9 (4.4) 

 

  Fair Value at
December 31, 2017
  Valuation
Technique
  Unobservable
Inputs
  Range (Weighted Average) 
  (In Thousands) 
Impaired loans $761   Comparative sales based on independent appraisals   Marketability Discount   

12.0% - 50.0%

 
                 
Mortgage-servicing rights $731   Discounted Cash Flow   Discount rate   5.3% -6.0% (5.8%) 
           Conditional prepayment rate   10.7% - 12.3% (10.8%) 
           Expected loan servicing years   1.9 – 4.5 (4.1) 

 

 22 

 

 

Sensitivity of Significant Unobservable Inputs

 

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

 

Mortgage –Servicing Rights

 

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

 

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

 

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

 

The carrying amount approximates fair value.

 

Loans Held for Sale

 

Loans held for sale are based on current market prices.

 

Loans

 

For March 31, 2018, fair value of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. This is not comparable with the fair values disclosed for December 31, 2017, which were based on an entrance price basis. For that date, the fair value of loans were estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

 

Deposits

 

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

 

Federal Home Loan Bank Advances

 

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

 

 23 

 

 

The following table presents estimated fair values of the Company’s financial instruments at March 31, 2018 (unaudited) and December 31, 2017.

 

  (Unaudited)
March 31,
 
  2018 
     Fair Value 
  Carrying
Amount
  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
  (In Thousands) 
Financial assets                
Cash and cash equivalents $16,318  $16,318  $––  $–– 
Loan held for sale  1,060   ––   1,060   –– 
Loans, net  242,679   ––   ––   239,937 
Federal Home Loan Bank stock  2,436   ––   2,436   –– 
Interest receivable  981   ––   981   –– 
Financial liabilities                
Deposits  229,379   118,345   111,436   –– 
Federal Home Loan Bank advances  48,500      48,260   –– 
Interest payable  129   ––   129   –– 

 

  December 31, 
  2017 
     Fair Value 
  Carrying
Amount
  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
  (In Thousands) 
Financial assets                
Cash and cash equivalents $10,346  $10,346  $––  $ 
Loan held for sale  2,877   ––   2,877    
Loans, net  240,859      ––   242,133 
Federal Home Loan Bank stock  2,436      2,436    
Interest receivable  1,103      1,103    
Financial liabilities                
Deposits  226,981   120,061   106,999    
Federal Home Loan Bank advances  41,500      41,553    
Interest payable  106      106    

 

 24 

 

 

NOTE 5: Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaced most existing revenue recognition guidance in U.S. GAAP when it became effective. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications.

 

These amendments were effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods with that reporting period, as deferred by ASU 2015-14. Early application was permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within the reporting period. The Company utilized a 5 step model to analyze and review the appropriate actions within this ASU and it was determined the ASU did not have a significant effect on the Company’s consolidated financial statements.

 

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

 

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

 

 25 

 

 

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

 

In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The amendments in this Update provide guidance on eight cash flow issues where current Generally Accepted Accounting Principles is either unclear or does not include specific guidance. The eight cash flow issues are as follows:

 

1.Debt prepayment or debt extinguishment costs

 

2.Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing

 

3.Contingent consideration payments made after a business combination

 

4.Proceeds from the settlement of insurance claims

 

5.Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies

 

6.Distribution received from equity method investees

 

7.Beneficial interest in securitization transactions

 

8.Separately identifiable cash flows and application of the predominance principle

 

The amendments were effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this ASU did not have a significant effect on the Company’s consolidated financial statements.

 

 26 

 

 

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

 

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

 

NOTE 6: Earnings per Share

 

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

 

  (Unaudited) 
  Three Months Ended
March 31,
 
  2018  2017 
    
Net Income $347  $438 
Allocated to participating securities  (4)  (10)
Net income allocated to common stockholders $343  $428 
         
Weighted average common shares outstanding, gross  1,066,858   1,065,930 
Less:  Average unearned ESOP shares and participating securities  (89,181)  (105,993)
Weighted average common shares outstanding, net  977,677   959,937 
Effect of diluted based awards  41,613   48,973 
Weighted average shares and common stock equivalents  1,019,290   1,008,910 
         
Income per common share:        
Basic $0.35  $0.45 
Diluted $0.34  $0.42 
         
Options excluded from the calculation due to their anti-dilutive effect on earnings per share  -   - 

 

 27 

 

 

NOTE 7: Share Based Compensation

 

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

 

Until such time as awards of stock are granted and vest or options are exercised, shares of the Company’s common stock under the Plan shall be authorized but unissued shares. The maximum number of shares authorized under the plan is 196,140. Total share-based compensation expense for the three months ended March 31, 2018 and 2017 (unaudited) was $71,000 respectively.

 

Stock Options

 

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

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

 

   Options   Weighted
average exercise
price
   Remaining
contractual
life (years)
 
Options outstanding at January 1, 2017   136,550   $18.99      
Granted   -           
Exercised   (5,700)   19.04      
Forfeited   -    -      
Expired   -    -      
Options outstanding at March 31, 2017   130,850   $18.99    6.4 
Exercisable options outstanding at March 31, 2017   70,430   $18.83    6.2 

 

As of March 31, 2018 (unaudited) and December 31, 2017, the Company had $37,000 and $56,000 of unrecognized compensation expense related to stock options. Exercisable options vesting in the three months ended March 31, 2018 and March 31, 2017 (unaudited) were 2,700 and 2,700 respectively. The cost of stock options will be amortized in monthly installments over the five-year vesting period. Stock option expense for the three months ended March 31, 2018 and 2017 (unaudited) was $19,000 and $19,000, respectively. The total intrinsic value of options as of March 31, 2018 and 2017 (unaudited) were $1,256,000 and $1,506,000, respectively. The total intrinsic value of exercisable options as of March 31, 2018 and March 31, 2017 (unaudited) was $947,000 and $822,000, respectively. There were no options exercised during the three months ended March 31, 2018 (unaudited). The intrinsic value of options exercised during the three months ended March 31, 2017 (unaudited) was $73,000

 

 28 

 

 

Restricted Stock Awards

 

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

 

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

 

   Service-Based
Restricted
stock
awards
   Weighted
average
grant date
fair value
 
Non-vested at January 1, 2018   11,208   $18.75 
Granted        
Vested        
Forfeited        
Non-vested at March 31, 2018   11,208   $18.75 

 

As of March 31, 2018 (unaudited) and December 31, 2017, the Company had $45,000 and $97,000 of unrecognized compensation expense related to restricted stock awards. The cost of the restricted stock awards are amortized in monthly installments over the five-year vesting period. Restricted stock expense for the three months ended March 31, 2018 and 2017 (unaudited) was $52,000 and $52,000, respectively.

 

NOTE 8: Employee Stock Ownership Plan

 

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

 

ESOP expense for the three months ended March 31, 2018 and 2017 (unaudited) was $40,000 and $44,000, respectively.

 

   March 31,   December 31, 
   2018   2017 
   (Unaudited)     
Allocated shares   30,326    30,326 
Unreleased shares   78,456    78,456 
Total ESOP shares   108,782    108,782 
           
Fair value of unreleased shares at March 31, 2018, and December 31, 2017 (in thousands)  $2,260   $2,267 

 

At March 31, 2018 (unaudited) and December 31, 2017 the fair value of the 30,326 and 30,326 allocated shares held by the ESOP was $873,000 and $876,000, respectively, based on the quoted per share price of $28.80 and $28.89 at March 31, 2018 (unaudited) and December 31, 2017 respectively.

 

In the event the ESOP is unable to satisfy the obligation to repurchase the shares held by each beneficiary upon the beneficiary’s termination or retirement, the Company is obligated to purchase such shares at their fair market value based on the most recent valuation report any time within 60 days of the distribution date. If this right is not exercised, an additional 60-day exercise period is available in the year following the year in which the distribution is made and begins after a new valuation of the stock has been determined and communicated to the participant or beneficiary. The allocated shares held by the ESOP and the outstanding shares held by former employees subject to the repurchase option totaled 30,519 at both March 31, 2018 (unaudited) and December 31, 2017. At March 31, 2018 (unaudited), and December 31, 2017 the 30,519 shares had a fair value of $885,000 ($29.00 per share based on the most recent valuation report and $855,000 ($28.00 per share) respectively, and have been classified as mezzanine capital.

 

 29 

 

 

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

 

General

 

Management’s discussion and analysis of the financial condition and results of operations at March 31, 2018 and for the three months ended March 31, 2018 and 2017 is intended to assist in understanding the financial condition and results of operations of the Company on a consolidated basis. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

statements of our goals, intentions and expectations;

 

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

 

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

 

estimates of our risks and future costs and benefits.

 

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

 

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

 

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

 

·competition among depository and other financial institutions;

 

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

 

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

 

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

 

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

 

·adverse changes in the securities markets;

 

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

 

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

 

·changes in consumer spending, borrowing and savings habits;

 

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

 

·changes in our organization, compensation and benefit plans;

 

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

 

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

 

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

 

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in West End Indiana Bancshares, Inc.’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 30, 2018.

 

Comparison of Financial Condition at March 31, 2018 and December 31, 2017

 

Total assets increased $9.4 million, or 3.1%, to $308.8 million at March 31, 2018 from $299.4 million at December 31, 2017. The increase was primarily the result of increases to cash and cash equivalents, investment securities available for sale, net loans, and other assets, offset by a decrease in loans held for sale.

 

Total cash and cash equivalents increased $6.0 million, or 57.7%, to $16.3 million at March 31, 2018. The increase in total cash and cash equivalents reflected normal fluctuation from operations.

 

Securities classified as available for sale increased $2.7 million, or 13.4%, to $23.0 million at March 31, 2018 from $20.3 million at December 31, 2017. At March 31, 2018, securities classified as available for sale consisted of mortgage-backed securities, and municipal obligations.

 

Net loans increased $1.8 million, or 0.8%, to $242.7 million at March 31, 2018 from $240.9 million at December 31, 2017, due primarily to increases in commercial business of $869,000, construction loans of $647,000, consumer loans of $445,000, commercial and multifamily loans of $204,000 and residential loans of $154,000, offset by a decrease in second mortgages and home equity lines of credit of $276,000. Total non-performing loans decreased $12,000 to $809,000 at March 31, 2018 from $823,000 at December 31, 2017.

 

Deposits increased $2.4 million, or 1.1%, to $229.4 million at March 31, 2018 from $227.0 million at December 31, 2017. The increase was due to increases in time deposits of $4.1 million and saving accounts of $415,000, offset by decreases in money market accounts of $1.1 million, interest checking accounts of $565,000, and non-interest bearing checking accounts of $509,000 as core deposits have begun to move to higher interest paying certificates of deposit.

 

Federal Home Loan Bank advances increased $7.0 million to $48.5 million at March 31, 2018 from $41.5 million at December 31, 2017.

 

Total stockholders’ equity increased $170,000, or 0.6%, to $29.2 million at March 31, 2018 from $29.0 million at December 31, 2017. The increase was primarily a result of year to date net income of $348,000, stock-based compensation expense of $71,000, and ESOP shares earned of $40,000, offset in part by decreases to accumulated other comprehensive income of $230,000 and dividends of $59,000.

 

Comparison of Operating Results for the Three Months Ended March 31, 2018 and 2017

 

General. We recorded net income of $348,000 for the quarter ended March 31, 2018 compared to net income of $438,000 for the quarter ended March 31, 2017. The decrease in net income resulted primarily from increases to the provision for loan losses of $197,000, and to total other expense of $109,000, offset by increases to total other income of $92,000, net interest income of $13,000, and a decrease in the provision for income taxes of $111,000.

 

Interest Income. Interest income increased $225,000, or 6.6%, to $3.6 million for the quarter ended March 31, 2018 from $3.4 million for the quarter ended March 31, 2017. The average balance of total interest-earning assets increased $11.9 million, or 4.5%, to $277.4 million for the quarter ended March 31, 2018 from $265.5 million for the quarter ended March 31, 2017. The average rate earned on these assets also increased to 5.30% for the period ended March 31, 2018 from 5.19% for the period ended March 31, 2017.

 

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Interest income on loans increased $184,000, or 5.6%, to $3.5 million for the 2018 quarter from $3.3 million for 2017 quarter, as the average balance of net loans increased $11.2 million, or 4.8%, to $243.7 million for the quarter ended March 31, 2018 from $232.5 million for the quarter ended March 31, 2017. Additionally, the average yield on our loan portfolio increased four basis points to 5.75% for the quarter ended March 31, 2018 from 5.71% for the quarter ended March 31, 2017.

 

Interest income on investment securities decreased $1,000 to $103,000 for the quarter ended March 31, 2018 from $104,000 for the quarter ended on March 31, 2017. The average balance of our securities available for sale decreased $3.0 million, or 12.4%, to $20.9 million for the quarter ended March 31, 2018. The average yield on the securities portfolio increased 23 basis points, to 2.00% for the three months ended March 31, 2018 from 1.77% for the three months ended March 31, 2017.

 

Interest Expense. Interest expense increased $212,000, or 43.6%, to $701,000 for the quarter ended March 31, 2018 from $488,000 for the quarter ended March 31, 2017. While the total average balance of interest-bearing liabilities increased $12.1 million to $248.2 million for the quarter ended March 31, 2018 from $236.1 million for the quarter ended March 31, 2017, the cost of funding increased to 1.14% for the 2018 quarter from 0.84% for the 2017 quarter for the prior year.

 

The average rate paid on deposits increased 23 basis points to 1.00% for the quarter ended March 31, 2018 from 0.77% for the quarter ended March 31, 2017. The average balance of interest-bearing deposits increased $397,000, or 0.2%, to $202.7 million for the quarter ended March 31, 2018 from $202.3 million for the quarter ended March 31, 2017. The increase in the average balance of deposits was comprised of an increase in certificates of deposit of $1.3 million, an increase in money market accounts of $841,000, offset by offset by a decrease in interest-bearing checking and savings accounts of $1.7 million. Interest expense increased due to the rising rate environment. The weighted average rate paid on checking, money market and savings combined increased five basis points. The rate paid on certificate of deposits increased thirty-seven basis points to 1.57% for the 2018 period from 1.20% for the 2017 period.

 

Interest expense on borrowed funds, consisting entirely of Federal Home Loan Bank advances, increased $98,000, or 95.1%, to $201,000 for the quarter ended March 31, 2018 from $103,000 for the quarter ended March 31, 2017, reflecting an increase of 55 basis points in the rate to 1.79% for the quarter ended March 31, 2018 from 1.24% for the quarter ended March 31, 201. The increase was due to the increased average balance of advances $11.7 million from the prior quarter and the rising rate environment.

 

Net Interest Income. Net interest income remained steady at $2.9 million for the quarter ended March 31, 2018 and the quarter ended March 31, 2017. Our net interest rate spread decreased to 4.16% from 4.35%, and our net interest margin decreased to 4.22% for the quarter ended March 31, 2018 from 4.39% for the quarter ended March 31, 2017 as the cost of deposits repriced faster than loans.

 

The following table summarize average balances and yields, costs of interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2018 and 2017.

 

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   Three months ended March 31, 
   2018   2017 
   Average
Balance
   Interest
and
Dividends
   Yield/Cost   Average
Balance
   Interest
and
Dividends
   Yield/Cost 
Assets:                        
Interest-earning assets:                              
Loans  $243,679   $3,454    5.75%  $232,518   $3,271    5.71%
Investment Securities   20,863    103    2.00%   23,813    104    1.77%
Other interest-earning assets   12,838    68    2.15%   9,121    25    1.11%
    277,380    3,625    5.30%   265,452    3,400    5.19%
Noninterest-earning assets   24,261              23,151           
Total assets  $301,641             $288,603           
                               
Liabilities and stockholder's equity                              
Interest-bearing liabilities:                              
Now accounts  $32,542    16    0.20%  $34,182    13    0.15%
Money market accounts   40,279    49    0.49%   39,438    44    0.45%
Savings accounts   21,388    14    0.27%   21,485    12    0.23%
Certificates of deposit   108,455    420    1.57%   107,162    316    1.20%
Total interest-bearing deposits   202,664    499    1.00%   202,267    385    0.77%
FHLB advances   45,533    201    1.79%   33,800    103    1.24%
Total interest-bearing liabilities   248,197    700    1.14%   236,067    488    0.84%
Noninterest-bearing deposits   22,889              22,490           
Other noninterest-bearing liabilities   1,502              1646           
Total liabilities   272,588              260,203           
Total stockholders' equity   29,053              28,400           
Total liabilities and  stockholders' equity  $301,641             $288,603           
Net interest income       $2,925             $2,912      
Interest rate spread             4.16%             4.35%
Net interest margin (annualized)             4.22%             4.39%
Average interest-earning assets to average interest-bearing liabilities             111.76%             112.45%

 

Provision for Loan Losses.  Based on our analysis of the factors described in “Critical Accounting Policies — Allowance for Loan Losses,” in our annual report on Form 10-K filed on March 30, 2018, we recorded a provision for loan losses of $555,000 for the quarter ended March 31, 2018, an increase of $197,000 from $358,000 allocated for the quarter ended March 31, 2017. The increase to the provision was based on management’s quarterly analysis of the loan portfolio and credit quality indicators including charge off trends and qualitative factors and due to the change in our loan mix, with continued growth in the higher risk commercial and indirect installments. The allowance for loan losses increased $45,000 to $2.3 million at March 31, 2018 from $2.2 million at March 31, 2017. The allowance for loan losses to total loans was 1.2% at March 31, 2018, and 1.0% at March 31, 2017. Non-performing loans including nonaccrual loans and accruing loans past due 90 of more days decreased to $809,000 at March 31, 2018 from $1.0 million at March 31, 2017. The allowance for loan losses as a percentage of non-performing loans including nonaccrual loans and accruing loans past due 90 of more days was 367.37% at March 31, 2018 compared to 226.32% at March 31, 2017. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at March 31, 2018 and 2017.

 

Noninterest Income. Noninterest income increased $92,000, or 22.2%, to $506,000 for the quarter ended March 31, 2018, from $414,000 for the quarter ended March 31, 2017. In the 2018 quarter, we recorded increases in loan servicing income of $49,000, service charges on deposit accounts of $17,000, and other income of $11,000, and a decrease in loss on sale of other assets of $14,000.

 

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Noninterest Expense. Noninterest expense increased $109,000, or 4.7%, to $2.4 million, from $2.3 million for the quarter ended March 31, 2017. The increase was due to increases in salaries and employee benefits of $71,000, net occupancy expense of $70,000, data processing fees of $21,000, professional fees of $20,000, and foreclosed real estate and repossession expenses of $12,000, offset by decreases in ATM charges of $36,000, advertising expense of $16,000, FDIC premiums of $13,000, other expenses of $13,000 and director expenses of $9,000. Salaries and employee benefits increased due to normal cost of living and merit increases, and other employee benefit programs. Net occupancy expense increased due to the completion of the administrative and operations building late in 2017 and affixed depreciation on the building and furniture fixtures and equipment. The savings in ATM charges are due to the transition to a new servicer.

 

Income Tax Expense. We recorded income tax expense of $120,000 for the quarter ended March 31, 2018 compared to a tax expense of $230,000 for the 2017 period, reflecting pre-tax income of $467,000 during the 2018 quarter versus a pre-tax income of $667,000 for the quarter ended March 31, 2017. Our effective tax rate was 25.6% for the quarter ended March 31, 2018 compared to 34.4% for the quarter ended March 31, 2017, reflecting the decrease in pretax income and the reduced corporate federal income tax rate.

 

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

 

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $2.2 million and $854,000 for the three months ended March 31, 2018 and 2017, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs on mortgage-backed securities, was ($5.6 million) and $1.4 million for the three months ended March 31, 2018 and 2017, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and Federal Home Loan Bank advances, was $9.3 million and $3.6 million for the three months ended March 31, 2018 and 2017, respectively.

 

At March 31, 2018, we exceeded all of our regulatory capital requirements with a Tier 1 (core) capital level of $29.0 million, or 9.7% of adjusted total assets, which is above the required level of $12.0 million, or 4%; and total risk-based capital of $32.0 million, or 13.2% of risk-weighted assets, which is above the required level of $19.4 million, or 8%. Accordingly West End Bank, S.B. was categorized as well capitalized at March 31, 2018. Management is not aware of any conditions or events since the most recent notification that would change our category. Basel III regulatory capital requirements were effective for the quarter ending March 31, 2018. There were no significant impacts on capital ratios.

 

At March 31, 2018, we had outstanding commitments to originate loans of $19.2 million and stand-by letters of credit of $45,000. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2018 totaled $43.6 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

 

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4.Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2018. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended March 31, 2018, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 1.Legal Proceedings

 

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

 

Item 1A.Risk Factors

 

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

 

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

 

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

 

(b)Not applicable.

 

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

 

Item 3.Defaults Upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosures

 

None.

 

Item 5.Other Information

 

None.

 

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Item 6.Exhibits

 

31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INSXBRL Instance Document.

 

101.SCHXBRL Schema Document.

 

101.CALXBRL Calculation Linkbase Document.

 

101.DEFXBRL Definition Linkbase Document.

 

101.LABXBRL Label Linkbase Document.

 

101.PREPresentation Linkbase Document

 

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SIGNATURES

 

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

 

  WEST END INDIANA BANCSHARES, INC.
   
Date:  May 15, 2018 /s/ Timothy R. Frame
  Timothy R. Frame
  President/Chief Executive Officer
   
Date:  May 15, 2018 /s/ Shelley D. Miller
  Shelley D. Miller
  Executive Vice President and Chief Financial Officer

 

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