See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1 - Basis of Presentation
Organization and Description of Business
The consolidated financial statements include the accounts of Finward Bancorp (the “Bancorp” or “FNWD”), its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary) and Peoples Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC; NWIN Funding, Incorporated, 1683 Real Estate LLC, and Columbia Development Company, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are primarily dependent upon the earnings of the Bank. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by U.S. generally accepted accounting principles for complete presentation of consolidated financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of the Bancorp as of September 30, 2022, and December 31, 2021, and the consolidated statements of income, comprehensive income (loss), and changes in stockholders’ equity for the quarter and nine months ended September 30, 2022, and 2021, and consolidated statements of cash flows for the nine months ended September 30, 2022, and 2021. The income reported for the nine month period ended September 30, 2022, is not necessarily indicative of the results to be expected for the full year.
The Notes to the Consolidated Financial Statements appearing in Finward Bancorp’s Annual Report on Form 10-K (2021 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. The Consolidated Balance Sheet at December 31, 2021, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on net income.
Note 2 - Use of Estimates
Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of foreclosed real estate, loan servicing rights, investment securities, deferred tax assets, goodwill, and the status of contingencies are particularly susceptible to material change in the near term.
Note 3 - Acquisition Activity
On January 31, 2022, Finward Bancorp (“Finward”) completed its previously announced acquisition of Royal Financial, Inc., a Delaware corporation (“RYFL”), pursuant to an Agreement and Plan of Merger dated July 28, 2021 (the “Merger Agreement”) between Finward and RYFL. The stockholders of both Finward and RYFL approved the Merger Agreement at the respective stockholder meetings of the companies held on December 13, 2021. Pursuant to the Merger Agreement, RYFL merged with and into Finward, with Finward as the surviving corporation (the “Merger”), and Royal Savings Bank, an Illinois state-chartered savings bank and wholly-owned subsidiary of RYFL, merged with and into Peoples Bank, the wholly-owned Indiana state-chartered commercial bank subsidiary of Finward, with Peoples Bank as the surviving bank.
Under the terms of the merger agreement, RYFL stockholders who owned 101 or more shares of RYFL common stock were permitted to elect to receive either 0.4609 shares of Finward common stock or $20.14 in cash, or a combination of both, for each share of RYFL common stock owned, subject to proration and allocation provisions such that 65% of the shares of RYFL common stock outstanding immediately prior to the closing of the merger were converted into the right to receive shares of Finward common stock and the remaining 35% of the outstanding RYFL shares were converted into the right to receive cash. Stockholders holding less than 101 shares of RYFL common stock received fixed consideration of $20.14 in cash per share and no stock consideration.
As a result of RYFL stockholder stock and cash elections and the related allocation and proration provisions of the merger agreement, Finward issued 795,423 shares of its common stock and paid cash consideration of approximately $18.7 million in the Merger. Based on the January 28, 2022, closing price of $47.75 per share of Finward common stock, the transaction had an implied valuation of approximately $56.7 million. In connection with the acquisition, Robert W. Youman, was appointed to the boards of directors of Finward and Peoples Bank effective as of the closing of the Merger. RYFL had a home office and eight branch offices in Cook County and DuPage County, Illinois. The acquisition has further expanded the Bank’s banking center network in Cook County and DuPage County, Illinois.
Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on the valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the RYFL acquisition is allocated as follows:
ASSETS | | | | | LIABILITIES | | | | |
Cash and due from banks | | $ | 52,524 | | Deposits | | | | |
Investment securities, available for sale | | | - | | Non-interest bearing | | $ | 32,095 | |
Certificate of deposit in other financial institutions | | | 245 | | NOW accounts | | | 63,639 | |
| | | | | Savings and money market | | | 184,149 | |
Total Loans | | | 450,757 | | Certificates of deposits | | | 195,153 | |
| | | | | Total Deposits | | | 475,036 | |
Premises and equipment, net | | | 13,896 | | | | | | |
FHLB stock | | | 1,303 | | Interest payable | | | 75 | |
Goodwill | | | 11,506 | | Other liabilities | | | 11,228 | |
Core deposit intangible | | | 3,220 | | | | | | |
Interest receivable | | | 1,836 | | | | | | |
Other assets | | | 7,758 | | | | | | |
Total assets purchased | | $ | 543,045 | | | | | | |
Common shares issued | | | 37,981 | | | | | | |
Cash paid | | | 18,725 | | | | | | |
Total purchase price | | $ | 56,706 | | Total liabilities assumed | | $ | 486,339 | |
During the second quarter of 2022, an adjustment was made to the carrying value of other assets of $189 thousand, due to the valuation of prepaids brought over in the acquisition, and premises and equipment, net, of $48 thousand, due to a correction in the valuation of buildings, in addition, a correction was made to the valuation of shares issued increasing the value by $79 thousand. The resulting impact of these changes was a decrease to the goodwill balance related to the RYFL acquisition of $158 thousand.
Final estimates of fair value on the date of acquisition have not been finalized yet. Prior to the end of the one-year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods as if the adjustments to the provisional amounts had been recognized as of the acquisition date.
Goodwill of approximately $11.5 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, is expected to be recorded in the RYFL acquisition and is the result of expected operational synergies and other factors. This goodwill is not expected to be deductible for tax purposes. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the RYFL acquisition will change.
Gross loans acquired during the RYFL transaction totaled $456.7 million. As of the nine months ended September 30, 2022, the remaining outstanding principal of loans directly related to the RYFL acquisition total $389.5 million, of which $5.6 million are expected to be uncollectable.
The following pro-forma and earnings (unaudited) of the combined company are presented as if the RYFL merger had occurred on January 1, 2022 and January 1, 2021:
| | For the three months ended | | | For the three months ended | | | For the nine months ended | | | For the nine months ended | |
(in thousands) | | September 30, 2022 | | | September 30, 2021 | | | September 30, 2022 | | | September 30, 2021 | |
Selected Financial Data | | | | | | | | | | | | | | | | |
Interest income | | $ | 18,539 | | | $ | 17,939 | | | $ | 53,868 | | | $ | 52,593 | |
Interest expense | | | (1,032 | ) | | | (838 | ) | | | (1,934 | ) | | | (3,027 | ) |
Recovery of (provision for) loan losses | | | - | | | | (14 | ) | | | - | | | | (1,108 | ) |
Non-interest income | | | 2,630 | | | | 4,376 | | | | 8,809 | | | | 12,794 | |
Non-interest expense (1) | | | (15,010 | ) | | | (15,559 | ) | | | (44,583 | ) | | | (42,335 | ) |
Income before provision for income taxes | | | 5,127 | | | | 5,904 | | | | 16,160 | | | | 18,917 | |
Income tax expense | | | (571 | ) | | | (866 | ) | | | (2,190 | ) | | | (2,678 | ) |
Net income | | $ | 4,556 | | | $ | 5,038 | | | $ | 13,970 | | | $ | 16,239 | |
| | | | | | | | | | | | | | | | |
Earnings per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 1.07 | | | $ | 1.45 | | | $ | 3.36 | | | $ | 4.67 | |
Diluted | | $ | 1.07 | | | $ | 1.45 | | | $ | 3.35 | | | $ | 4.67 | |
(1) Excludes $2.9 million in pre-tax merger expenses for the nine months ended September 30, 2022. |
For the nine months ended September 30, 2022, the Bancorp has recorded $2.9 million in pre-tax one-time merger expenses related to the RYFL acquisition, and these expenses have been allocated to the following non-interest expense line items within the income statement:
(in thousands) | | Nine months ended | |
Noninterest expense: | | September 30, 2022 | |
Compensation and benefits | | $ | 132 | |
Data processing | | | 1,929 | |
Marketing | | | 135 | |
Other | | | 656 | |
| | | | |
Period merger expense | | $ | 2,852 | |
Note 4 - Securities
The estimated fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
| | (Dollars in thousands) | |
| | | | | | Gross | | | Gross | | | Estimated | |
| | Cost | | | Unrealized | | | Unrealized | | | Fair | |
| | Basis | | | Gains | | | Losses | | | Value | |
September 30, 2022 | | | | | | | | | | | | | | | | |
U.S. government sponsored entities | | $ | 8,883 | | | $ | - | | | $ | (1,338 | ) | | $ | 7,545 | |
U.S. treasury securities | | | 394 | | | | - | | | | - | | | | 394 | |
Collateralized mortgage obligations and residential mortgage-backed securities | | | 166,651 | | | | - | | | | (29,370 | ) | | | 137,281 | |
Municipal securities | | | 282,002 | | | | - | | | | (69,214 | ) | | | 212,788 | |
Collateralized debt obligations | | | 2,173 | | | | - | | | | (1,146 | ) | | | 1,027 | |
Total securities available-for-sale | | $ | 460,103 | | | $ | - | | | $ | (101,068 | ) | | $ | 359,035 | |
| | (Dollars in thousands) | |
| | | | | | Gross | | | Gross | | | Estimated | |
| | Cost | | | Unrealized | | | Unrealized | | | Fair | |
| | Basis | | | Gains | | | Losses | | | Value | |
December 31, 2021 | | | | | | | | | | | | | | | | |
U.S. government sponsored entities | | $ | 8,883 | | | $ | - | | | $ | (214 | ) | | $ | 8,669 | |
U.S. treasury securities | | | 400 | | | | - | | | | - | | | | 400 | |
Collateralized mortgage obligations and residential mortgage-backed securities | | | 187,279 | | | | 961 | | | | (3,539 | ) | | | 184,701 | |
Municipal securities | | | 322,750 | | | | 9,904 | | | | (527 | ) | | | 332,127 | |
Collateralized debt obligations | | | 2,173 | | | | - | | | | (1,181 | ) | | | 992 | |
Total securities available-for-sale | | $ | 521,485 | | | $ | 10,865 | | | $ | (5,461 | ) | | $ | 526,889 | |
The cost basis and estimated fair value of available-for-sale debt securities at September 30, 2022, by contractual maturity, were as follows. Securities not due at a single maturity date, primarily collateralized mortgage obligations and residential mortgage-backed securities, are shown separately.
| | (Dollars in thousands) | |
| | Available-for-sale | |
| | | | | | Estimated | |
| | Cost | | | Fair | |
September 30, 2022 | | Basis | | | Value | |
Due in one year or less | | $ | 190 | | | $ | 190 | |
Due from one to five years | | | 1,978 | | | | 1,972 | |
Due from five to ten years | | | 21,124 | | | | 18,207 | |
Due over ten years | | | 270,160 | | | | 201,385 | |
| | | | | | | | |
Collateralized mortgage obligations and residential mortgage-backed securities | | | 166,651 | | | | 137,281 | |
Total | | $ | 460,103 | | | $ | 359,035 | |
Sales of available-for-sale securities were as follows for the quarter ended:
| | (Dollars in thousands) | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Proceeds | | $ | 10,178 | | | $ | 9,275 | |
Gross gains | | | 41 | | | | 591 | |
Gross losses | | | (18 | ) | | | (1 | ) |
Sales of available-for-sale securities were as follows for the nine months ended:
| | (Dollars in thousands) | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Proceeds | | $ | 53,953 | | | $ | 28,565 | |
Gross gains | | | 733 | | | | 1,297 | |
Gross losses | | | (71 | ) | | | (21 | ) |
Accumulated other comprehensive income/(loss) balances, net of tax, related to available-for-sale securities, were as follows:
| | (Dollars in thousands) | |
| | Unrealized gain/(loss) | |
Ending balance, June 30, 2022 | | $ | (57,781 | ) |
Current period change | | | (22,058 | ) |
Ending balance, September 30, 2022 | | $ | (79,839 | ) |
| | (Dollars in thousands) | |
| | Unrealized gain/(loss) | |
Ending balance, June 30, 2021 | | $ | 8,209 | |
Current period change | | | (5,601 | ) |
Ending balance, September 30, 2021 | | $ | 2,608 | |
| | (Dollars in thousands) | |
| | Unrealized gain/(loss) | |
Ending balance, December 31, 2021 | | $ | 4,276 | |
Current period change | | | (84,115 | ) |
Ending balance, September 30, 2022 | | $ | (79,839 | ) |
| | (Dollars in thousands) | |
| | Unrealized gain/(loss) | |
Ending balance, December 31, 2020 | | $ | 10,441 | |
Current period change | | | (7,833 | ) |
Ending balance, September 30, 2021 | | $ | 2,608 | |
Securities with market values of approximately $208.9 million and $39.5 million were pledged as of September 30, 2022 and December 31, 2021, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.
Securities with gross unrealized losses at September 30, 2022, and December 31, 2021 not recognized in income are as follows:
| | (Dollars in thousands) | | | | | |
| | Less than 12 months | | | 12 months or longer | | | Total | | | | | |
| | Estimated | | | | | | | Estimated | | | | | | | Estimated | | | | | | | Percentage of | |
| | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Total Portfolio | |
| | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | | | in Loss Position | |
September 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government sponsored entities | | $ | - | | | $ | - | | | $ | 7,545 | | | $ | (1,338 | ) | | $ | 7,545 | | | $ | (1,338 | ) | | | 100.0 | % |
Collateralized mortgage obligations and residential mortgage-backed securities | | | 45,306 | | | | (7,593 | ) | | | 91,975 | | | | (21,777 | ) | | | 137,281 | | | | (29,370 | ) | | | 100.0 | % |
Municipal securities | | | 166,907 | | | | (49,241 | ) | | | 45,611 | | | | (19,973 | ) | | | 212,518 | | | | (69,214 | ) | | | 99.9 | % |
Collateralized debt obligations | | | - | | | | - | | | | 1,027 | | | | (1,146 | ) | | | 1,027 | | | | (1,146 | ) | | | 100.0 | % |
Total temporarily impaired | | $ | 212,213 | | | $ | (56,834 | ) | | $ | 146,159 | | | $ | (44,233 | ) | | $ | 358,371 | | | $ | (101,068 | ) | | | 99.8 | % |
Number of securities | | | | | | | 333 | | | | | | | | 120 | | | | | | | | 453 | | | | | |
| | (Dollars in thousands) | | | | | |
| | Less than 12 months | | | 12 months or longer | | | Total | | | | | |
| | Estimated | | | | | | | Estimated | | | | | | | Estimated | | | | | | | Percentage of | |
| | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Total Portfolio | |
| | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | | | in Loss Position | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government sponsored entities | | $ | 8,669 | | | $ | (214 | ) | | $ | - | | | $ | - | | | $ | 8,669 | | | $ | (214 | ) | | | 100.0 | % |
Collateralized mortgage obligations and residential mortgage-backed securities | | | 126,373 | | | | (3,175 | ) | | | 8,109 | | | | (364 | ) | | | 134,482 | | | | (3,539 | ) | | | 72.8 | % |
Municipal securities | | | 70,309 | | | | (527 | ) | | | - | | | | - | | | | 70,309 | | | | (527 | ) | | | 21.2 | % |
Collateralized debt obligations | | | - | | | | - | | | | 992 | | | | (1,181 | ) | | | 992 | | | | (1,181 | ) | | | 100.0 | % |
Total temporarily impaired | | $ | 205,351 | | | $ | (3,916 | ) | | $ | 9,101 | | | $ | (1,545 | ) | | $ | 214,452 | | | $ | (5,461 | ) | | | 40.7 | % |
Number of securities | | | | | | | 133 | | | | | | | | 5 | | | | | | | | 138 | | | | | |
Unrealized losses on securities have not been recognized into income because the securities are of high credit quality or have undisrupted cash flows. Management has the intent and ability to hold those securities for the foreseeable future, and the decline in fair value is largely due to changes in interest rates and volatility in securities markets. The fair values are expected to recover as the securities approach maturity.
Note 5 - Loans Receivable
The Bancorp’s current lending programs are described below:
Residential Real Estate. The primary lending activity of the Bancorp has been the granting of conventional mortgage loans to enable borrowers to purchase existing homes, refinance existing homes, or construct new homes. Conventional loans are made up to a maximum of 97% of the purchase price or appraised value, whichever is less. For loans made in excess of 80% of value, private mortgage insurance is generally required in an amount sufficient to reduce the Bancorp’s exposure to 80% or less of the appraised value of the property. Loans insured by private mortgage insurance companies can be made for up to 97% of value. Loans closed with over 20% of equity do not require private mortgage insurance because of the borrower’s level of equity investment.
Fixed rate loans currently originated generally conform to Freddie Mac guidelines for loans purchased under the one‑to‑four family program. Loan interest rates are determined based on secondary market yield requirements and local market conditions. Fixed rate mortgage loans with contractual maturities generally exceeding fifteen years and greater may be sold and/or classified as held for sale to control exposure to interest rate risk.
The 15 year mortgage loan program has gained wide acceptance in the Bancorp’s primary market area. As a result of the shortened maturity of these loans, this product has been priced below the comparable 20 and 30 year loan offerings. Mortgage applicants for 15 year loans tend to have a larger than normal down payment; this, coupled with the larger principal and interest payment amount, has caused the 15 year mortgage loan portfolio to consist, to a significant extent, of second time home buyers whose underwriting qualifications tend to be above average.
The Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice annually or are “mini-fixed.” The “mini‑fixed” mortgage reprices annually after a one, three, five, seven or ten year period. The ability of the Bancorp to successfully market ARM’s depends upon loan demand, prevailing interest rates, volatility of interest rates, public acceptance of such loans and terms offered by competitors.
Home Equity Line of Credit. The Bancorp offers a fixed and variable rate revolving line of credit secured by the equity in the borrower’s home. Both products offer an interest only option where the borrower pays interest only on the outstanding balance each month. Equity lines will typically require a second mortgage appraisal and a second mortgage lender’s title insurance policy. Loans are generally made up to a maximum of 89% of the appraised value of the property less any outstanding liens.
Fixed term home improvement and equity loans are made up to a maximum of 85% of the appraised value of the improved property, less any outstanding liens. These loans are offered on both a fixed and variable rate basis with a maximum term of 240 months. All home equity loans are made on a direct basis to borrowers.
Commercial Real Estate and Multifamily Loans. Commercial real estate loans are typically made to a maximum of 80% of the appraised value. Such loans are generally made on an adjustable rate basis. These loans are typically made for terms of 15 to 20 years. Loans with an amortizing term exceeding 15 years normally have a balloon feature calling for a full repayment within seven to ten years from the date of the loan. The balloon feature affords the Bancorp the opportunity to restructure the loan if economic conditions so warrant. Commercial real estate loans include loans secured by commercial rental units, apartments, condominium developments, small shopping centers, owner occupied commercial/industrial properties, hospitality units and other retail and commercial developments.
While commercial real estate lending is generally considered to involve a higher degree of risk than single‑family residential lending due to the concentration of principal in a limited number of loans and the effects of general economic conditions on real estate developers and managers, the Bancorp has endeavored to reduce this risk in several ways. In originating commercial real estate loans, the Bancorp considers the feasibility of the project, the financial strength of the borrowers and lessees, the managerial ability of the borrowers, the location of the project and the economic environment. Management evaluates the debt coverage ratio and analyzes the reliability of cash flows, as well as the quality of earnings. All such loans are made in accordance with well-defined underwriting standards and are generally supported by personal guarantees, which represent a secondary source of repayment.
Loans for the construction of commercial properties are generally located within an area permitting physical inspection and regular review of business records. Projects financed outside of the Bancorp’s primary lending area generally involve borrowers and guarantors who are or were previous customers of the Bancorp or projects that are underwritten according to the Bank’s underwriting standards.
Construction and Land Development. Construction loans on residential properties are made primarily to individuals and contractors who are under contract with individual purchasers. These loans are personally guaranteed by the borrower. The maximum loan-to-value ratio is 89% of either the current appraised value or the cost of construction, whichever is less. Residential construction loans are typically made for periods of six months to one year.
Loans are also made for the construction of commercial properties. All such loans are made in accordance with well-defined underwriting standards. Generally if the loans are not owner occupied, these types of loans require proof of intent to lease and a confirmed end-loan takeout. In general, loans made do not exceed 80% of the appraised value of the property. Commercial construction loans are typically made for periods not to exceed two years or date of occupancy, whichever is less.
Commercial Business and Farmland Loans. Although the Bancorp’s priority in extending various types of commercial business loans changes from time to time, the basic considerations in determining the makeup of the commercial business loan portfolio are economic factors, regulatory requirements and money market conditions. The Bancorp seeks commercial loan relationships from the local business community and from its present customers. Conservative lending policies based upon sound credit analysis governs the extension of commercial credit. The following loans, although not inclusive, are considered preferable for the Bancorp’s commercial loan portfolio: loans collateralized by liquid assets; loans secured by general use machinery and equipment; secured short‑term working capital loans to established businesses secured by business assets; short‑term loans with established sources of repayment and secured by sufficient equity and real estate; and unsecured loans to customers whose character and capacity to repay are firmly established.
Consumer Loans. The Bancorp offers consumer loans to individuals for personal, household or family purposes. Consumer loans are either secured by adequate collateral, or unsecured. Unsecured loans are based on the strength of the applicant’s financial condition. All borrowers must meet current underwriting standards. The consumer loan program includes both fixed and variable rate products.
Manufactured Homes. The Bancorp purchases fixed rate closed loans from a third party that are subject to Bancorp’s underwriting requirements and secured by manufactured homes. The maturity date on these loans can range up to 25 years. In addition, these loans are partially secured by a reserve account held at the Bancorp.
Government Loans. The Bancorp is permitted to purchase non-rated municipal securities, tax anticipation notes and warrants within the local market area.
(Dollars in thousands) | | | | | | | | |
| | September 30, 2022 | | | December 31, 2021 | |
Loans secured by real estate: | | | | | | | | |
Residential real estate | | $ | 471,565 | | | $ | 260,134 | |
Home equity | | | 37,578 | | | | 34,612 | |
Commercial real estate | | | 452,852 | | | | 317,145 | |
Construction and land development | | | 134,301 | | | | 123,822 | |
Multifamily | | | 258,377 | | | | 61,194 | |
Total loans secured by real estate | | | 1,354,673 | | | | 796,907 | |
Commercial business | | | 95,372 | | | | 115,772 | |
Consumer | | | 827 | | | | 582 | |
Manufactured homes | | | 35,866 | | | | 37,887 | |
Government | | | 9,649 | | | | 8,991 | |
Loans receivable | | | 1,496,387 | | | | 960,139 | |
Add (less): | | | | | | | | |
Net deferred loan origination costs | | | 5,767 | | | | 6,810 | |
Undisbursed loan funds and loan clearings | | | 542 | | | | (229 | ) |
Loans receivable, net of deferred fees and costs | | $ | 1,502,696 | | | $ | 966,720 | |
(Dollars in thousands) | | Beginning Balance | | | Charge-offs | | | Recoveries | | | Provisions | | | Ending Balance | |
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended September 30, 2022: |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 2,756 | | | $ | - | | | $ | 8 | | | $ | 246 | | | $ | 3,010 | |
Home equity | | | 373 | | | | - | | | | - | | | | 22 | | | | 395 | |
Commercial real estate | | | 5,527 | | | | - | | | | - | | | | (27 | ) | | | 5,500 | |
Construction and land development | | | 1,744 | | | | - | | | | - | | | | (229 | ) | | | 1,515 | |
Multifamily | | | 1,128 | | | | - | | | | - | | | | 108 | | | | 1,236 | |
Commercial business | | | 1,808 | | | | (57 | ) | | | 50 | | | | (100 | ) | | | 1,701 | |
Consumer | | | 70 | | | | (13 | ) | | | 4 | | | | (20 | ) | | | 41 | |
Manufactured homes | | | - | | | | - | | | | - | | | | - | | | | - | |
Government | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 13,406 | | | $ | (70 | ) | | $ | 62 | | | $ | - | | | $ | 13,398 | |
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended September 30, 2021: |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 2,294 | | | $ | (28 | ) | | $ | 21 | | | $ | 188 | | | $ | 2,475 | |
Home equity | | | 371 | | | | - | | | | - | | | | 3 | | | | 374 | |
Commercial real estate | | | 5,939 | | | | - | | | | - | | | | 413 | | | | 6,352 | |
Construction and land development | | | 1,798 | | | | - | | | | - | | | | 90 | | | | 1,888 | |
Multifamily | | | 740 | | | | - | | | | - | | | | 47 | | | | 787 | |
Commercial business | | | 2,474 | | | | - | | | | 6 | | | | (594 | ) | | | 1,886 | |
Consumer | | | 23 | | | | (4 | ) | | | 1 | | | | (8 | ) | | | 12 | |
Manufactured homes | | | - | | | | - | | | | - | | | | - | | | | - | |
Government | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 13,639 | | | $ | (32 | ) | | $ | 28 | | | $ | 139 | | | $ | 13,774 | |
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the nine months ended September 30, 2022: |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 2,480 | | | $ | - | | | $ | 58 | | | $ | 472 | | | $ | 3,010 | |
Home equity | | | 357 | | | | - | | | | - | | | | 38 | | | | 395 | |
Commercial real estate | | | 5,515 | | | | - | | | | - | | | | (15 | ) | | | 5,500 | |
Construction and land development | | | 2,119 | | | | - | | | | - | | | | (604 | ) | | | 1,515 | |
Multifamily | | | 848 | | | | - | | | | - | | | | 388 | | | | 1,236 | |
Commercial business | | | 2,009 | | | | (57 | ) | | | 88 | | | | (339 | ) | | | 1,701 | |
Consumer | | | 15 | | | | (50 | ) | | | 16 | | | | 60 | | | | 41 | |
Manufactured homes | | | - | | | | - | | | | - | | | | - | | | | - | |
Government | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 13,343 | | | $ | (107 | ) | | $ | 162 | | | $ | - | | | $ | 13,398 | |
The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the nine months ended September 30, 2021: |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 2,211 | | | $ | (32 | ) | | $ | 46 | | | $ | 250 | | | $ | 2,475 | |
Home equity | | | 276 | | | | (1 | ) | | | - | | | | 99 | | | | 374 | |
Commercial real estate | | | 5,406 | | | | - | | | | - | | | | 946 | | | | 6,352 | |
Construction and land development | | | 1,405 | | | | - | | | | - | | | | 483 | | | | 1,888 | |
Multifamily | | | 626 | | | | - | | | | - | | | | 161 | | | | 787 | |
Commercial business | | | 2,508 | | | | - | | | | 25 | | | | (647 | ) | | | 1,886 | |
Consumer | | | 26 | | | | (21 | ) | | | 6 | | | | 1 | | | | 12 | |
Manufactured homes | | | - | | | | - | | | | - | | | | - | | | | - | |
Government | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 12,458 | | | $ | (54 | ) | | $ | 77 | | | $ | 1,293 | | | $ | 13,774 | |
A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased. This reserve is available for use for manufactured home loan nonperformance and costs associated with nonperformance. If the segment performs in line with expectations, the deferred cost reserve is paid as a premium to the third party originator of the loan. The unamortized balance of the deferred cost reserve totaled $5.0 million and $5.8 million as of September 30, 2022, and December 31, 2021, respectively, and is included in net deferred loan origination costs.
The Bancorp's impairment analysis is summarized below: |
| | Ending Balances | |
| | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Individually evaluated for impairment reserves | | | Collectively evaluated for impairment reserves | | | Loan receivables | | | Individually evaluated for impairment | | | Purchased credit impaired individually evaluated for impairment | | | Collectively evaluated for impairment | |
The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at September 30, 2022: |
Residential real estate | | $ | 27 | | | $ | 2,983 | | | $ | 471,565 | | | $ | 1,545 | | | $ | 1,778 | | | $ | 468,242 | |
Home equity | | | 3 | | | | 392 | | | | 37,578 | | | | 116 | | | | 127 | | | | 37,335 | |
Commercial real estate | | | 456 | | | | 5,044 | | | | 452,852 | | | | 2,264 | | | | 2,965 | | | | 447,623 | |
Construction and land development | | | - | | | | 1,515 | | | | 134,301 | | | | - | | | | - | | | | 134,301 | |
Multifamily | | | - | | | | 1,236 | | | | 258,377 | | | | - | | | | 2,804 | | | | 255,573 | |
Commercial business | | | 263 | | | | 1,438 | | | | 95,372 | | | | 397 | | | | 991 | | | | 93,984 | |
Consumer | | | - | | | | 41 | | | | 827 | | | | - | | | | 19 | | | | 808 | |
Manufactured homes | | | - | | | | - | | | | 35,866 | | | | - | | | | - | | | | 35,866 | |
Government | | | - | | | | - | | | | 9,649 | | | | - | | | | - | | | | 9,649 | |
Total | | $ | 749 | | | $ | 12,649 | | | $ | 1,496,387 | | | $ | 4,322 | | | $ | 8,684 | | | $ | 1,483,381 | |
The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2021: |
Residential real estate | | $ | 17 | | | $ | 2,463 | | | $ | 260,134 | | | $ | 755 | | | $ | 1,016 | | | $ | 258,363 | |
Home equity | | | 4 | | | | 353 | | | | 34,612 | | | | 147 | | | | 137 | | | | 34,328 | |
Commercial real estate | | | 386 | | | | 5,129 | | | | 317,145 | | | | 1,600 | | | | - | | | | 315,545 | |
Construction and land development | | | - | | | | 2,119 | | | | 123,822 | | | | - | | | | - | | | | 123,822 | |
Multifamily | | | - | | | | 848 | | | | 61,194 | | | | - | | | | 556 | | | | 60,638 | |
Commercial business | | | 277 | | | | 1,732 | | | | 115,772 | | | | 524 | | | | 1,073 | | | | 114,175 | |
Consumer | | | - | | | | 15 | | | | 582 | | | | - | | | | - | | | | 582 | |
Manufactured homes | | | - | | | | - | | | | 37,887 | | | | - | | | | - | | | | 37,887 | |
Government | | | - | | | | - | | | | 8,991 | | | | - | | | | - | | | | 8,991 | |
Total | | $ | 684 | | | $ | 12,659 | | | $ | 960,139 | | | $ | 3,026 | | | $ | 2,782 | | | $ | 954,331 | |
The Bancorp's credit quality indicators are summarized below at September 30, 2022 and December 31, 2021: |
| | Credit Exposure - Credit Risk Portfolio By Creditworthiness Category | |
| | September 30, 2022 | |
(Dollars in thousands) | | 1-6 | | | 7 | | | 8 | | | | | |
| | | | | | | | | | | | | | | | |
Loan Segment | | Pass | | | Special mention | | | Substandard | | | Total | |
Residential real estate | | $ | 464,241 | | | $ | 1,297 | | | $ | 6,027 | | | $ | 471,565 | |
Home equity | | | 36,589 | | | | 391 | | | | 598 | | | | 37,578 | |
Commercial real estate | | | 432,797 | | | | 11,754 | | | | 8,301 | | | | 452,852 | |
Construction and land development | | | 132,129 | | | | 2,172 | | | | - | | | | 134,301 | |
Multifamily | | | 253,001 | | | | 2,608 | | | | 2,768 | | | | 258,377 | |
Commercial business | | | 92,213 | | | | 2,931 | | | | 228 | | | | 95,372 | |
Consumer | | | 827 | | | | - | | | | - | | | | 827 | |
Manufactured homes | | | 35,866 | | | | - | | | | - | | | | 35,866 | |
Government | | | 9,649 | | | | - | | | | - | | | | 9,649 | |
Total | | $ | 1,457,312 | | | $ | 21,153 | | | $ | 17,922 | | | $ | 1,496,387 | |
| | December 31, 2021 | |
(Dollars in thousands) | | 1-6 | | | 7 | | | 8 | | | | | |
| | | | | | | | | | | | | | | | |
Loan Segment | | Pass | | | Special mention | | | Substandard | | | Total | |
Residential real estate | | $ | 253,472 | | | $ | 2,940 | | | $ | 3,722 | | | $ | 260,134 | |
Home equity | | | 33,565 | | | | 415 | | | | 632 | | | | 34,612 | |
Commercial real estate | | | 301,572 | | | | 12,011 | | | | 3,562 | | | | 317,145 | |
Construction and land development | | | 120,192 | | | | 3,630 | | | | - | | | | 123,822 | |
Multifamily | | | 60,657 | | | | 153 | | | | 384 | | | | 61,194 | |
Commercial business | | | 113,470 | | | | 1,915 | | | | 387 | | | | 115,772 | |
Consumer | | | 582 | | | | - | | | | - | | | | 582 | |
Manufactured homes | | | 37,828 | | | | 59 | | | | - | | | | 37,887 | |
Government | | | 8,991 | | | | - | | | | - | | | | 8,991 | |
Total | | $ | 930,329 | | | $ | 21,123 | | | $ | 8,687 | | | $ | 960,139 | |
The Bancorp has established a standard loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio. The use and application of these grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system is as follows:
1 – Superior Quality
Loans in this category are substantially risk free. Loans fully collateralized by a Bank certificate of deposit or Bank deposits with a hold are substantially risk free.
2 – Excellent Quality
The borrower generates excellent and consistent cash flow for debt coverage, excellent average credit scores, excellent liquidity and net worth and are reputable operators with over 15 years experience. Current and debt to tangible net worth ratios are excellent. Loan to value is substantially below policy and collateral condition is excellent.
3 – Great Quality
The borrower generates more than sufficient cash flow to fund debt service and cash flow is improving. Average credit scores are very strong. Operators are reputable with significant years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are very strong. Loan to value is significantly below policy and collateral condition is significantly above average.
4 – Above Average Quality
The borrower generates more than sufficient cash flow to fund debt service but cash flow trends may be stable or slightly declining. Average credit scores are strong. The borrower is a reputable operator with many years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are strong. Loan to value is below policy and collateral condition is above average.
5 – Average Quality
Borrowers are considered creditworthy and can repay the debt in the normal course of business, however, cash flow trends may be inconsistent or fluctuating. Average credit scores are satisfactory and years of experience is acceptable. Liquidity and net worth are satisfactory. Current and debt to tangible net worth ratios are average. Loan to value is slightly below policy and the collateral condition is slightly above average.
6 – Pass
Borrowers are considered credit worthy but financial condition may show signs of weakness due to internal or external factors. Cash flow trends may be declining annually. Average credit scores may be low but remain acceptable. Borrower has limited years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are below average. Loan to value is nearing policy limits and collateral condition is average.
7 – Special Mention
A special mention asset has identified weaknesses that deserve Management’s close attention. If left uncorrected, these 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. There is still adequate protection by the current sound worth and paying capacity of the obligor or of the collateral pledged. The Special Mention rating is viewed as transitional and will be monitored closely.
Loans in this category may exhibit some of the following risk factors. Cash flow trends may be consistently declining or may be questionable. Debt coverage ratios may be at or near 1:1. Average credit scores may be very weak or the borrower may have minimal years of experience. Liquidity, net worth, current and debt to tangible net worth ratios may be very weak. Loan to value may be at policy limits or may exceed policy limits. Collateral condition may be below average.
8 – Substandard
This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit, some loss could be incurred in collection if the deficiencies are not corrected.
9 – Doubtful
Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.
10 – Loss
Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.
Performing loans are loans that are paying as agreed and are approximately less than ninety days past due on payments of interest and principal.
During the nine months ending September 30, 2022, nine residential real estate loans totaling $1.5 million, one commercial real estate loan totaling 1.4 million, and one home equity loan totaling $5 thousand, were modified to include deferral of principal resulting in troubled debt restructuring classification. No trouble debt restructuring loans had subsequently defaulted during the nine months ending September 30, 2022. During the nine months ending September 30, 2021, two residential real estate loans to one customer totaling $148 thousand were modified to include deferral of principal and interest resulting in troubled debt restructuring classification. One commercial real estate loan totaling $835 thousand was restructured with a reduced interest rate and extended amortization resulting in troubled debt restructuring classification. One commercial business loan totaling $601 thousand was provided a short-term renewal and a pending long term restructure resulting in troubled debt restructuring classification. One residential real estate trouble debt restructuring loan totaling $37 thousand had subsequently defaulted during the nine months ending September 30, 2021. All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.
The Bancorp’s individually evaluated impaired loans are summarized below.
(Dollars in thousands) | | | | | | | | | | | | | | For the nine months ended | | | For the three months ended | |
(unaudited) | | As of September 30, 2022 | | | September 30, 2022 | | | September 30, 2022 | |
| | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 3,069 | | | $ | 4,559 | | | $ | - | | | $ | 2,596 | | | $ | 206 | | | $ | 2,563 | | | $ | 51 | |
Home equity | | | 222 | | | | 238 | | | | - | | | | 216 | | | | 14 | | | | 178 | | | | 1 | |
Commercial real estate | | | 4,384 | | | | 4,572 | | | | - | | | | 2,932 | | | | 196 | | | | 3,677 | | | | (24 | ) |
Construction and land development | | | - | | | | - | | | | - | | | | 430 | | | | 13 | | | | 400 | | | | 13 | |
Multifamily | | | 2,804 | | | | 3,253 | | | | - | | | | 2,454 | | | | 86 | | | | 2,872 | | | | 24 | |
Commercial business | | | 1,072 | | | | 1,181 | | | | - | | | | 1,137 | | | | 79 | | | | 1,048 | | | | 3 | |
Consumer | | | 19 | | | | 19 | | | | - | | | | 15 | | | | 1 | | | | 20 | | | | 1 | |
Manufactured homes | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Government | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | - | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | - | |
Residential real estate | | $ | 254 | | | $ | 278 | | | $ | 27 | | | $ | 179 | | | $ | 5 | | | $ | 272 | | | $ | (4 | ) |
Home equity | | | 21 | | | | 21 | | | | 3 | | | | 21 | | | | 1 | | | | 21 | | | | - | |
Commercial real estate | | | 845 | | | | 845 | | | | 456 | | | | 844 | | | | - | | | | 846 | | | | - | |
Construction and land development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Multifamily | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial business | | | 316 | | | | 321 | | | | 263 | | | | 332 | | | | 14 | | | | 311 | | | | (2 | ) |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Manufactured homes | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Government | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 3,323 | | | $ | 4,837 | | | $ | 27 | | | $ | 2,775 | | | $ | 211 | | | $ | 2,835 | | | $ | 47 | |
Home equity | | $ | 243 | | | $ | 259 | | | $ | 3 | | | $ | 237 | | | $ | 15 | | | $ | 199 | | | $ | 1 | |
Commercial real estate | | $ | 5,229 | | | $ | 5,417 | | | $ | 456 | | | $ | 3,776 | | | $ | 196 | | | $ | 4,523 | | | $ | (24 | ) |
Construction & land development | | $ | - | | | $ | - | | | $ | - | | | $ | 430 | | | $ | 13 | | | $ | 400 | | | $ | 13 | |
Multifamily | | $ | 2,804 | | | $ | 3,253 | | | $ | - | | | $ | 2,454 | | | $ | 86 | | | $ | 2,872 | | | $ | 24 | |
Commercial business | | $ | 1,388 | | | $ | 1,502 | | | $ | 263 | | | $ | 1,469 | | | $ | 93 | | | $ | 1,359 | | | $ | 1 | |
Consumer | | $ | 19 | | | $ | 19 | | | $ | - | | | $ | 15 | | | $ | 1 | | | $ | 20 | | | $ | 1 | |
Manufactured homes | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Government | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | For the nine months ended | | | For the three months ended | |
| | As of December 31, 2021 | | | September 30, 2021 | | | September 30, 2021 | |
(Dollars in thousands) | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 1,683 | | | $ | 3,017 | | | $ | - | | | $ | 1,691 | | | $ | 83 | | | $ | 1,565 | | | $ | 41 | |
Home equity | | | 262 | | | | 275 | | | | - | | | | 307 | | | | 7 | | | | 273 | | | | 2 | |
Commercial real estate | | | 765 | | | | 765 | | | | - | | | | 1,268 | | | | 39 | | | | 1,362 | | | | 13 | |
Construction & land development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Multifamily | | | 556 | | | | 647 | | | | - | | | | 647 | | | | 20 | | | | 587 | | | | 9 | |
Commercial business | | | 1,205 | | | | 1,324 | | | | - | | | | 1,410 | | | | 33 | | | | 1,354 | | | | (3 | ) |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Manufactured homes | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Government | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 88 | | | $ | 88 | | | $ | 17 | | | $ | 159 | | | $ | 1 | | | $ | 102 | | | $ | (4 | ) |
Home equity | | | 22 | | | | 22 | | | | 4 | | | | 17 | | | | 1 | | | | 22 | | | | 1 | |
Commercial real estate | | | 835 | | | | 835 | | | | 386 | | | | 5,700 | | | | 145 | | | | 5,852 | | | | 32 | |
Construction & land development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Multifamily | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial business | | | 392 | | | | 392 | | | | 277 | | | | 698 | | | | 15 | | | | 659 | | | | (7 | ) |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Manufactured homes | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Government | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 1,771 | | | $ | 3,105 | | | $ | 17 | | | $ | 1,850 | | | $ | 84 | | | $ | 1,667 | | | $ | 37 | |
Home equity | | $ | 284 | | | $ | 297 | | | $ | 4 | | | $ | 324 | | | $ | 8 | | | $ | 295 | | | $ | 3 | |
Commercial real estate | | $ | 1,600 | | | $ | 1,600 | | | $ | 386 | | | $ | 6,968 | | | $ | 184 | | | $ | 7,214 | | | $ | 45 | |
Construction & land development | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Multifamily | | $ | 556 | | | $ | 647 | | | $ | - | | | $ | 647 | | | $ | 20 | | | $ | 587 | | | $ | 9 | |
Commercial business | | $ | 1,597 | | | $ | 1,716 | | | $ | 277 | | | $ | 2,108 | | | $ | 48 | | | $ | 2,012 | | | $ | (10 | ) |
Consumer | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Manufactured homes | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Government | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
The Bancorp's age analysis of past due loans is summarized below: |
(Dollars in thousands) | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | Greater Than 90 Days Past Due | | | Total Past Due | | | Current | | | Total Loans | | | Recorded Investments Greater than 90 Days Past Due and Accruing | |
September 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 2,266 | | | $ | 1,929 | | | $ | 2,539 | | | $ | 6,734 | | | $ | 464,831 | | | $ | 471,565 | | | $ | 348 | |
Home equity | | | 193 | | | | - | | | | 521 | | | | 714 | | | | 36,864 | | | | 37,578 | | | | - | |
Commercial real estate | | | 1,004 | | | | 162 | | | | 3,350 | | | | 4,516 | | | | 448,336 | | | | 452,852 | | | | 1,071 | |
Construction and land development | | | 46 | | | | - | | | | - | | | | 46 | | | | 134,255 | | | | 134,301 | | | | - | |
Multifamily | | | 474 | | | | 908 | | | | 288 | | | | 1,670 | | | | 256,707 | | | | 258,377 | | | | 181 | |
Commercial business | | | 1,662 | | | | 1,466 | | | | 532 | | | | 3,660 | | | | 91,712 | | | | 95,372 | | | | 342 | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | 827 | | | | 827 | | | | - | |
Manufactured homes | | | 572 | | | | 313 | | | | 41 | | | | 926 | | | | 34,940 | | | | 35,866 | | | | 40 | |
Government | | | - | | | | - | | | | - | | | | - | | | | 9,649 | | | | 9,649 | | | | - | |
Total | | $ | 6,217 | | | $ | 4,778 | | | $ | 7,271 | | | $ | 18,266 | | | $ | 1,478,121 | | | $ | 1,496,387 | | | $ | 1,982 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 2,507 | | | $ | 824 | | | $ | 2,142 | | | $ | 5,473 | | | $ | 254,661 | | | $ | 260,134 | | | $ | 31 | |
Home equity | | | 169 | | | | 67 | | | | 565 | | | | 801 | | | | 33,811 | | | | 34,612 | | | | 34 | |
Commercial real estate | | | 231 | | | | 1,960 | | | | 944 | | | | 3,135 | | | | 314,010 | | | | 317,145 | | | | 91 | |
Construction and land development | | | 5,148 | | | | 283 | | | | - | | | | 5,431 | | | | 118,391 | | | | 123,822 | | | | - | |
Multifamily | | | - | | | | - | | | | 109 | | | | 109 | | | | 61,085 | | | | 61,194 | | | | - | |
Commercial business | | | 573 | | | | 1,594 | | | | 242 | | | | 2,409 | | | | 113,363 | | | | 115,772 | | | | 49 | |
Consumer | | | - | | | | 3 | | | | - | | | | 3 | | | | 579 | | | | 582 | | | | - | |
Manufactured homes | | | 633 | | | | 171 | | | | - | | | | 804 | | | | 37,083 | | | | 37,887 | | | | - | |
Government | | | - | | | | - | | | | - | | | | - | | | | 8,991 | | | | 8,991 | | | | - | |
Total | | $ | 9,261 | | | $ | 4,902 | | | $ | 4,002 | | | $ | 18,165 | | | $ | 941,974 | | | $ | 960,139 | | | $ | 205 | |
The Bancorp's loans on nonaccrual status are summarized below: |
(Dollars in thousands) | | | | | | | | |
| | September 30, 2022 | | | December 31, 2021 | |
Residential real estate | | $ | 4,965 | | | $ | 4,651 | |
Home equity | | | 585 | | | | 623 | |
Commercial real estate | | | 2,807 | | | | 940 | |
Construction and land development | | | - | | | | - | |
Multifamily | | | 367 | | | | 455 | |
Commercial business | | | 219 | | | | 387 | |
Consumer | | | - | | | | - | |
Manufactured homes | | | - | | | | - | |
Government | | | - | | | | - | |
Total | | $ | 8,943 | | | $ | 7,056 | |
As a result of acquisition activity, the Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At September 30, 2022, total purchased credit impaired loans with unpaid principal balances totaled $10.6 million with a recorded investment of $8.7 million. At December 31, 2021, purchased credit impaired loans with unpaid principal balances totaled $4.2 million with a recorded investment of $2.8 million.
As part of the fair value of loans receivable, there was a net fair value discount for loans acquired of $5.8 million at September 30, 2022, compared to $1.1 million at December 31, 2021.
Accretable yield, or income recorded for the three months ended September 30, is as follows: |
(dollars in thousands) | | Total | |
2021 | | $ | 188 | |
2022 | | | 176 | |
Accretable yield, or income recorded for the nine months ended September 30, is as follows: |
(dollars in thousands) | | Total | |
2021 | | $ | 793 | |
2022 | | | 723 | |
Accretable yield, or income expected to be recorded in the future is as follows: |
(dollars in thousands) | | Total | |
Remainder 2022 | | $ | 164 | |
2023 | | | 665 | |
2024 | | | 649 | |
2025 | | | 507 | |
2026 | | | 332 | |
2027 and thereafter | | | 3,464 | |
Total | | $ | 5,781 | |
Note 6 – Intangibles and Acquisition Related Accounting
The Bancorp established a goodwill balance totaling $11.5 million with the acquisition of RYFL, and also maintains goodwill balances totaling $11.1 million from prior acquisitions. Goodwill totaled $22.6 million and $11.1 million as of September 30, 2022 and December 31, 2021, respectively. During the quarter ended June 30, 2022, there was remeasurement of goodwill reducing the balance by $158 thousand, see Note 3 – Acquisition Activity for more detail on the remeasurement. Goodwill is tested annually for impairment. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Bancorp’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Bancorp to provide quality, cost effective banking services in a competitive marketplace. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. There has not been any impairment of goodwill identified or recorded.
In addition to goodwill, a core deposit intangible was established with the acquisition of RYFL and from previous acquisitions. The Bancorp had core deposit intangible balances of $5.2 million and $3.1 million as of September 30, 2022, and December 31, 2021, respectively. The table below summarizes the annual amortization:
The amortization recorded for the nine months ended September 30, is as follows: |
(dollars in thousands) | | Total | |
2021 | | $ | 745 | |
2022 | | $ | 1,157 | |
The amortization recorded for the three months ended September 30, is as follows: |
(dollars in thousands) | | Total | |
2021 | | $ | 248 | |
2022 | | $ | 400 | |
Amortization to be recorded in future periods, is as follows: |
(dollars in thousands) | | Total | |
Current year | | | 396 | |
2023 | | | 1,522 | |
2024 | | | 1,411 | |
2025 | | | 688 | |
2026 | | | 360 | |
5 years and thereafter | | | 812 | |
Total | | $ | 5,189 | |
For the RYFL acquisition, as part of the fair value of certificates of deposit, a fair value premium was established of $1.0 million. Approximately $134 thousand and $438 thousand of amortization was taken as income during the quarter and nine months ended September 30, 2022, respectively. It is estimated amortization to be recorded in future periods is as follows; an additional $103 thousand in 2022, $217 thousand in 2023, $124 thousand in 2024, $72 thousand in 2025, and $55 thousand thereafter.
Note 7 - Concentrations of Credit Risk
The primary lending area of the Bancorp encompasses Lake County in northwest Indiana and Cook County in northeast Illinois, where collectively a majority of loan activity is concentrated. The Bancorp is also an active lender in Porter County, and to a lesser extent, LaPorte, Newton and Jasper counties in Indiana; and DuPage, Lake, and Will counties in Illinois. Substantially all loans are secured by specific items of collateral including residences, commercial real estate, land development, business assets and consumer assets.
Note 8 - Earnings per Share
Earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding. A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations for the quarter and nine months ended September 30, 2022, and 2021, are as follows:
(dollars in thousands except per share data) | | Three months ended September 30, | | | Nine months ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Basic earnings per common share: | | | | | | | | | | | | | | | | |
Net income as reported | | $ | 4,556 | | | $ | 3,538 | | | $ | 11,122 | | | $ | 11,652 | |
Weighted average common shares outstanding | | | 4,242,568 | | | | 3,479,139 | | | | 4,153,733 | | | | 3,476,406 | |
Basic earnings per common share | | $ | 1.07 | | | $ | 1.02 | | | $ | 2.68 | | | $ | 3.35 | |
| | | | | | | | | | | | | | | | |
Diluted earnings per common share: | | | | | | | | | | | | | | | | |
Net income as reported | | $ | 4,556 | | | $ | 3,538 | | | $ | 11,122 | | | $ | 11,652 | |
Weighted average common shares outstanding | | | 4,242,568 | | | | 3,479,139 | | | | 4,153,733 | | | | 3,476,406 | |
Add: Dilutive effect of unvested restricted stock awards | | | 18,028 | | | | - | | | | 16,804 | | | | - | |
Weighted average common and dilutive potential common shares outstanding | | | 4,260,596 | | | | 3,479,139 | | | | 4,170,537 | | | | 3,476,406 | |
Diluted earnings per common share | | $ | 1.07 | | | $ | 1.02 | | | $ | 2.67 | | | $ | 3.35 | |
Note 9 - Stock Based Compensation
The Bancorp’s 2015 Stock Option and Incentive Plan (the “Plan”), which was adopted by the Bancorp’s Board of Directors on February 27, 2015, and approved by the Bancorp’s shareholders on April 24, 2015, permits the grant of equity awards for up to 250,000 shares of common stock. Awards granted under the Plan may be in the form of incentive stock options, non-qualified stock options, restricted stock, unrestricted stock, performance shares, or performance units.
As required by the Stock Compensation Topic, companies are required to record compensation cost for stock options and awards provided to employees in return for employment service. For the quarter ended September 30, 2022, stock based compensation expense of $203 thousand was recorded, compared to $143 thousand for the quarter ended September 30, 2021. For the nine months ended September 30, 2022, stock based compensation expense of $535 thousand was recorded, compared to $428 thousand for the nine months ended September 30, 2021. It is anticipated that current outstanding unvested awards will result in additional compensation expense of approximately $1.4 million through 2025 with an weighted average life of 2.3 years.
Restricted stock awards are issued with an award price equal to the market price of the Bancorp’s common stock on the award date and vest between three and five years after the grant date. Forfeiture provisions exist for personnel that separate employment before the vesting period expires. A summary of restricted stock activity under the Bancorp’s Plan described above for the nine months ended September 30, 2022, follows:
Non-vested Shares | | Shares | | | Weighted Average Grant Date Fair Value | |
Non-vested at January 1, 2022 | | | 44,235 | | | $ | 42.33 | |
Granted | | | 23,842 | | | | 46.06 | |
Vested | | | (11,158 | ) | | | 41.63 | |
Forfeited | | | (1,587 | ) | | | 44.17 | |
Non-vested at September 30, 2022 | | | 55,332 | | | $ | 44.03 | |
Note 10 – Change in Accounting Principles
In December 2019, the FASB issued ASU 2019-12 which remove specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences where there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. It also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacts changes in tax laws in interim periods. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Bancorp adopted ASU 2019-12 on January 1, 2021 and it did not have a material impact on its accounting and disclosures.
Note 11 - Upcoming Accounting Standards
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU includes increased disclosures and various changes to the accounting and measurement of financial assets including the Bancorp’s loans and available-for-sale debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. In October 2019, the FASB voted and approved proposed changes to the effective date of this ASU for smaller reporting companies, such as the Bancorp, and other non-SEC reporting entities. The approval changed the effective date of the ASU to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. The new credit loss guidance will be effective for the Bancorp as of January 1, 2023. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Early adoption for all institutions is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is in the process of evaluating the impact adoption of this update will have on the Bancorp’s consolidated financial statements. This process of evaluation has engaged multiple areas of the Bancorp’s management in discussing loss estimation methods and the application of these methods to specific segments of the loans receivable portfolio. Management has been actively monitoring developments and evaluating the use of different methods allowed. Due to continuing development of understanding of application, additional time is required to understand how this ASU will affect the Bancorp’s financial statements. Management plans on running parallel calculations and finalizing a method or methods of adoption in time for the effective date.
In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020, through December 31, 2022. The Bancorp is implementing a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Bancorp believes the adoption of this guidance on activities after December 31, 2020, through December 31, 2022, will not have a material impact on the consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08 related to accounting for acquired revenue contracts with customers in a business combination. The amendments in this update address diversity in practice and inconsistency related to recognition of an acquired contract liability and the effect of payment terms on subsequent revenue recognition for the acquirer. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We plan to adopt this pronouncement for our fiscal year beginning January 1, 2023, and we do not expect it to have a material effect on our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-01 related to the portfolio layer method of hedge accounting. The amendments in this update clarify the accounting and promote consistency in reporting for hedges where the portfolio layer method is applied. This update is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. As we currently do not have items accounted for under the portfolio layer method of hedge accounting, we do not expect the update to have an effect on our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which addresses and amends areas identified by the FASB as part of its post-implementation review of the accounting standard that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by companies that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross writeoffs for financing receivables and net investment in leases by year of origination in the vintage disclosures. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for entities that have adopted the CECL accounting standard. Early adoption, however, is permitted if an entity has adopted the CECL accounting standard. The Bancorp is assessing ASU 2022-02 and its impact on its accounting and disclosures.
In June 2022, the FASB issued ASU No. 2022-03 “Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This guidance is effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Bancorp has assessed ASU 2022-03 and does not expect it to have a material impact on its accounting and disclosures.
In September 2022, the FASB issued ASU No. 2022-04 “Liabilities - Supplier Finance Programs (Subtopic 405-50)” enhancing the transparency of supplier finance programs and the related financial statement disclosures. The amendments require that a buyer in a supplier finance program disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. ASU 2022-04 is effective January 1, 2023, except for the disclosure of rollforward information, which is effective January 1, 2024, and is not expected to have an impact on the Bancorp’s consolidated financial statements.
Note 12 – Derivative Financial Instruments
The Bancorp uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Bancorp has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Bancorp to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Bancorp enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Bancorp agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Bancorp agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Bancorp’s results of operations.
The Bancorp enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (i.e., interest rate lock commitment). The interest rate lock commitments are considered derivatives and are recorded on the accompanying consolidated balance sheets at fair value in accordance with FASB ASC 815, Derivatives and Hedging.
The following table shows the amounts of non-hedging derivative financial instruments:
September 30, 2022 | | | | | |
| | Notational or contractual amount | | Asset derivatives | | | Liability derivatives | |
(Dollars in thousands) | | | Statement of Financial Condition classification | | Fair value | | | Statement of Financial Condition classification | | | Fair value | |
Interest rate swap contracts | | $ | 90,181 | | Other assets | | $ | 9,819 | | | Other liabilties | | | $ | 9,819 | |
Interest rate lock commitments | | | 2,097 | | Other assets | | | 31 | | | | N/A | | | | - | |
Total | | $ | 92,278 | | | | $ | 9,850 | | | | | | | $ | 9,819 | |
December 31, 2021 | | | | | |
| | Notational or contractual amount | | Asset derivatives | | | Liability derivatives | |
(Dollars in thousands) | | | Statement of Financial Condition classification | | Fair value | | | Statement of Financial Condition classification | | | Fair value | |
Interest rate swap contracts | | $ | 94,154 | | Other assets | | $ | 2,686 | | | Other liabilties | | | $ | 2,686 | |
Interest rate lock commitments | | | 7,837 | | Other assets | | | 141 | | | | N/A | | | | - | |
Total | | $ | 101,991 | | | | $ | 2,827 | | | | | | | $ | 2,686 | |
The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments:
| | | Nine Months Ended | |
| | | September 30, | |
(Dollars in thousands) | Statement of Income Classification | | 2022 | | | 2021 | |
Interest rate swap contracts | Fees and service charges | | $ | 3 | | | $ | 379 | |
Interest rate lock commitments | Gain on sale of loans held-for-sale, net | | | (110 | ) | | | (152 | ) |
Total | | $ | (107 | ) | | $ | 227 | |
| | | Three Months Ended | |
| | | September 30, | |
(Dollars in thousands) | Statement of Income Classification | | 2022 | | | 2021 | |
Interest rate swap contracts | Fees and service charges | | $ | 3 | | | $ | 161 | |
Interest rate lock commitments | Gain on sale of loans held-for-sale, net | | | (42 | ) | | | (24 | ) |
Total | | $ | (39 | ) | | $ | 137 | |
The following table shows the offsetting of financial assets and derivative assets:
| | | | | | | | | | | | | | Gross Amounts not Offset in the | | | | | |
| | | | | | | | | | | | | | Statement of Financial Condition | | | | | |
| | Gross Amounts of | | | Gross Amounts Offset in the | | | Net Amounts of Assets Presented | | | | | | | Cash Collateral Received | | | | | |
(Dollars in thousands) | | Recognized Assets | | | Statement of Financial Condition | | | in the Statement of Financial Condition | | | Financial Instruments | | | | | Net Amount | |
September 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap contracts | | $ | 9,819 | | | $ | - | | | $ | 9,819 | | | $ | - | | | $ | - | | | $ | 9,819 | |
Interest rate lock commitments | | | 31 | | | | - | | | | 31 | | | | - | | | | - | | | | 31 | |
Total | | $ | 9,850 | | | $ | - | | | $ | 9,850 | | | $ | - | | | $ | - | | | $ | 9,850 | |
| | | | | | | | | | | | | | Gross Amounts not Offset in the | | | | | |
| | | | | | | | | | | | | | Statement of Financial Condition | | | | | |
| | Gross Amounts of | | | Gross Amounts Offset in the | | | Net Amounts of Liabilities Presented | | | | | | | Cash Collateral Received | | | | | |
(Dollars in thousands) | | Recognized Liabilities | | | Statement of Financial Condition | | | in the Statement of Financial Condition | | | Financial Instruments | | | | | Net Amount | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap contracts | | $ | 2,686 | | | $ | - | | | $ | 2,686 | | | $ | - | | | $ | - | | | $ | 2,686 | |
Interest rate lock commitments | | | 141 | | | | - | | | | 141 | | | | - | | | | - | | | | 141 | |
Total | | $ | 2,827 | | | $ | - | | | $ | 2,827 | | | $ | - | | | $ | - | | | $ | 2,827 | |
The following table shows the offsetting of financial liabilities and derivative liabilities:
| | | | | | | | | | | | | | Gross Amounts not Offset in the | | | | | |
| | | | | | | | | | | | | | Statement of Financial Condition | | | | | |
| | Gross Amounts of | | | Gross Amounts Offset in the | | | Net Amounts of Liabilities Presented | | | | | | | Cash Collateral Pledged | | | | | |
(Dollars in thousands) | | Recognized Liabilities | | | Statement of Financial Condition | | | in the Statement of Financial Condition | | | Financial Instruments | | | | | Net Amount | |
September 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap contracts | | $ | 9,819 | | | $ | - | | | $ | 9,819 | | | $ | - | | | $ | 3,930 | | | $ | 5,889 | |
Total | | $ | 9,819 | | | $ | - | | | $ | 9,819 | | | $ | - | | | $ | 3,930 | | | $ | 5,889 | |
| | | | | | | | | | | | | | Gross Amounts not Offset in the | | | | | |
| | | | | | | | | | | | | | Statement of Financial Condition | | | | | |
| | Gross Amounts of | | | Gross Amounts Offset in the | | | Net Amounts of Liabilities Presented | | | | | | | Cash Collateral Pledged | | | | | |
(Dollars in thousands) | | Recognized Liabilities | | | Statement of Financial Condition | | | in the Statement of Financial Condition | | | Financial Instruments | | | | | Net Amount | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap contracts | | $ | 2,686 | | | $ | - | | | $ | 2,686 | | | $ | - | | | $ | 3,930 | | | $ | (1,244 | ) |
Total | | $ | 2,686 | | | $ | - | | | $ | 2,686 | | | $ | - | | | $ | 3,930 | | | $ | (1,244 | ) |
Note 13 - Fair Value
The Fair Value Measurements Topic establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Topic describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgments and assumptions used in pricing could result in different estimates of value. In certain cases where market data is not readily available because of a lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy.
At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with GAAP. Impairment is other-than-temporary if the decline in the fair value is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received. Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates. The Bancorp considers the following factors when determining an other-than-temporary impairment for a security: the length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; an assessment of whether the Bancorp (1) has the intent to sell the debt securities before recovery or (2) identified credit impairment indicating it is unlikely the Bancorp will recover its amortized cost basis. If any of these conditions is met, management will recognize other-than-temporary impairment. If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.
In addition to the impairment evaluation noted above, the Bancorp’s management utilizes a specialist to perform an other-than-temporary impairment analysis for each of its pooled collateralized debt obligations. The specialist analysis is performed annually in December, or when management deems necessary, and utilizes analytical models used to project future cash flows for the pooled collateralized debt obligations based on current assumptions for prepayments, default and deferral rates, and recoveries. The projected cash flows are then tested for impairment consistent with GAAP. The other-than-temporary impairment testing compares the present value of the cash flows from quarter to quarter to determine if there is a “favorable” or “adverse” change. Other-than-temporary impairment is recorded if the projected present value of cash flows is lower than the book value of the security. To perform the other-than-temporary impairment analysis, management utilizes current reports issued by the trustee, which contain principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled collateralized debt obligation. In addition, a detailed review of the performing collateral was performed. Based on current market conditions and a review of the trustee reports, management performed an analysis of the pooled collateralized debt obligations and no additional impairment was taken at December 31, 2021. In addition, the collateralized debt obligation portfolio was reviewed in accordance with our quarterly impairment evaluation, as described in the preceding paragraph, noting no additional impairment was taken at September 30, 2022.
The table below shows the credit loss roll forward on a year-to-date basis for the Bancorp’s pooled collateralized debt obligations that have been classified with other-than-temporary impairment:
| | (Dollars in thousands) | |
| | Collateralized debt obligations | |
| | other-than-temporary impairment | |
Ending balance, December 31, 2021 | | $ | 173 | |
Additions not previously recognized | | | - | |
Ending balance, September 30, 2022 | | $ | 173 | |
At September 30, 2022, collateralized debt obligations with a cost basis of $2.2 million continue to be in “payment in kind” status. These collateralized debt obligations classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For these collateralized debt obligations in “payment in kind” status, management anticipates to receive the unpaid contractual interest payments from the issuer, because of the self-correcting cash flow waterfall provisions within the structure of the securities. When a tranche senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest cash flows are paid to the senior tranche and recorded as a reduction of principal. The coverage test represents an over collateralization target by stating the balance of the performing collateral as a percentage of the balance of the Bancorp’s tranche, plus the balance of all senior tranches. The principal reduction in the senior tranche continues until the appropriate coverage test is passed. As a result of the principal reduction in the senior tranche, more cash is available for future payments to the Bancorp’s tranche. Consistent with GAAP, management considered the failure of the issuer of the security to make scheduled interest payments in determining whether a credit loss existed. Management will not capitalize the “payment in kind” interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume on a consistent basis.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
There were no transfers to or from Levels 1 and 2 during the nine months ended September 30, 2022. Assets measured at fair value on a recurring basis are summarized below:
| | | | | | (Dollars in thousands) | |
| | | | | | Fair Value Measurements at September 30, 2022 Using | |
(Dollars in thousands) | | Estimated Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | | | | | |
Interest rate swap contracts | | $ | 9,819 | | | $ | - | | | $ | 9,819 | | | $ | - | |
Interest rate lock commitments | | | 31 | | | | - | | | | 31 | | | | - | |
Available-for-sale debt securities: | | | | | | | | | | | | | | | | |
U.S. government sponsored entities | | | 7,545 | | | | - | | | | 7,545 | | | | - | |
U.S. treasury securities | | | 394 | | | | - | | | | 394 | | | | - | |
Collateralized mortgage obligations and residential mortgage-backed securities | | | 137,281 | | | | - | | | | 137,281 | | | | - | |
Municipal securities | | | 212,788 | | | | - | | | | 212,788 | | | | - | |
Collateralized debt obligations | | | 1,027 | | | | - | | | | - | | | | 1,027 | |
Total securities available-for-sale | | $ | 359,035 | | | $ | - | | | $ | 358,008 | | | $ | 1,027 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Interest rate swap contracts | | $ | 9,819 | | | $ | - | | | $ | 9,819 | | | $ | - | |
| | | | | | (Dollars in thousands) | |
| | | | | | Fair Value Measurements at December 31, 2021 Using | |
(Dollars in thousands) | | Estimated Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Assets: | | | | | | | | | | | | | | | | |
Interest rate swap contracts | | $ | 2,686 | | | $ | - | | | $ | 2,686 | | | $ | - | |
Interest rate lock commitments | | | 141 | | | | - | | | | 141 | | | | - | |
Available-for-sale debt securities: | | | | | | | | | | | | | | | | |
U.S. government sponsored entities | | | 8,669 | | | | - | | | | 8,669 | | | | - | |
U.S. treasury securities | | | 400 | | | | - | | | | 400 | | | | - | |
Collateralized mortgage obligations and residential mortgage-backed securities | | | 184,701 | | | | - | | | | 184,701 | | | | - | |
Municipal securities | | | 332,127 | | | | - | | | | 332,127 | | | | - | |
Collateralized debt obligations | | | 992 | | | | - | | | | - | | | | 992 | |
Total securities available-for-sale | | $ | 526,889 | | | $ | - | | | $ | 525,897 | | | $ | 992 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Interest rate swap contracts | | $ | 2,686 | | | $ | - | | | $ | 2,686 | | | $ | - | |
A roll forward of available-for-sale securities, which require significant adjustment based on unobservable data, are presented in the following table:
| | (Dollars in thousands) | |
| | Estimated Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | Available-for- sale securities | |
Beginning balance, January 1, 2021 | | $ | 929 | |
Principal payments | | | (9 | ) |
Total unrealized gains, included in other comprehensive income | | | 91 | |
Ending balance, September 30, 2021 | | $ | 1,011 | |
| | | | |
Beginning balance, January 1, 2022 | | $ | 992 | |
Principal payments | | | - | |
Total unrealized gains, included in other comprehensive income | | | 35 | |
Ending balance, September 30, 2022 | | $ | 1,027 | |
Assets measured at fair value on a non-recurring basis are summarized below:
| | | | | | (Dollars in thousands) | |
| | | | | | Fair Value Measurements at September 30, 2022 Using | |
(Dollars in thousands) | | Estimated Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Impaired loans | | $ | 1,743 | | | $ | - | | | $ | - | | | $ | 1,743 | |
| | | | | | (Dollars in thousands) | |
| | | | | | Fair Value Measurements at December 31, 2021 Using | |
(Dollars in thousands) | | Estimated Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Impaired loans | | $ | 896 | | | $ | - | | | $ | - | | | $ | 896 | |
Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. The fair value of foreclosed real estate is similarly determined by using the results of recent real estate appraisals. The numerical range of unobservable inputs for these valuation assumptions is not meaningful to this presentation.
The following table shows carrying values and related estimated fair values of financial instruments as of the dates indicated. Estimated fair values are further categorized by the inputs used to measure fair value. Items that are not financial instruments are not included.
| | September 30, 2022 | | | Estimated Fair Value Measurements at September 30, 2022 Using | |
(Dollars in thousands) | | Carrying Value | | | Estimated Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Financial assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 38,296 | | | $ | 38,296 | | | $ | 38,296 | | | $ | - | | | $ | - | |
Certificates of deposit in other financial institutions | | | 2,214 | | | | 2,187 | | | | - | | | | 2,187 | | | | - | |
Loans held-for-sale | | | 997 | | | | 1,006 | | | | - | | | | 1,006 | | | | - | |
Loans receivable, net | | | 1,489,298 | | | | 1,430,158 | | | | - | | | | - | | | | 1,430,158 | |
Federal Home Loan Bank stock | | | 3,038 | | | | 3,038 | | | | - | | | | 3,038 | | | | - | |
Accrued interest receivable | | | 6,849 | | | | 6,849 | | | | - | | | | 6,849 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Non-interest bearing deposits | | | 386,137 | | | | 386,137 | | | | 386,137 | | | | - | | | | - | |
Interest bearing deposits | | | 1,446,827 | | | | 1,446,800 | | | | 1,119,174 | | | | 327,626 | | | | - | |
Repurchase agreements | | | 21,966 | | | | 21,803 | | | | 14,253 | | | | 7,550 | | | | - | |
Borrowed funds | | | 56,174 | | | | 56,170 | | | | 19,174 | | | | 36,996 | | | | - | |
Accrued interest payable | | | 106 | | | | 106 | | | | - | | | | 106 | | | | - | |
| | December 31, 2021 | | | Estimated Fair Value Measurements at December 31, 2021 Using | |
(Dollars in thousands) | | Carrying Value | | | Estimated Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Financial assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 33,176 | | | $ | 33,176 | | | $ | 33,176 | | | $ | - | | | $ | - | |
Certificates of deposit in other financial institutions | | | 1,709 | | | | 1,737 | | | | - | | | | 1,737 | | | | - | |
Loans held-for-sale | | | 4,987 | | | | 5,065 | | | | - | | | | 5,065 | | | | - | |
Loans receivable, net | | | 953,377 | | | | 951,744 | | | | - | | | | - | | | | 951,744 | |
Federal Home Loan Bank stock | | | 3,247 | | | | 3,247 | | | | - | | | | 3,247 | | | | - | |
Accrued interest receivable | | | 5,444 | | | | 5,444 | | | | - | | | | 5,444 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Non-interest bearing deposits | | | 295,294 | | | | 295,294 | | | | 295,294 | | | | - | | | | - | |
Interest bearing deposits | | | 1,138,907 | | | | 1,139,126 | | | | 899,690 | | | | 239,436 | | | | - | |
Repurchase agreements | | | 14,581 | | | | 14,579 | | | | 12,842 | | | | 1,737 | | | | - | |
Accrued interest payable | | | 22 | | | | 22 | | | | - | | | | 22 | | | | - | |
The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended September 30, 2022 and December 31, 2021:
Cash and cash equivalent carrying amounts approximate fair value. Certificates of deposits in other financial institutions carrying amounts approximate fair value (Level 2). The fair values of securities available-for-sale are obtained from broker pricing (Level 2), with the exception of collateralized debt obligations, which are valued by a third-party specialist (Level 3). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 1). The estimated fair value for net loans receivable is based on the exit price notion which is the exchange price that would be received to transfer the loans at the most advantageous market price in an orderly transaction between market participants on the measurement date (Level 3). Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer of the security. Interest rate swap agreements, both assets and liabilities, are valued by a third-party pricing agent using an income approach (Level 2). Fair values of accrued interest receivable and payable approximate book value, as the carrying values are determined using the observable interest rate, balance, and last payment date.
Non-interest and interest bearing deposits, which include checking, savings, and money market deposits, are estimated to have fair values based on the amount payable as of the reporting date (Level 1). The fair value of fixed-maturity certificates of deposit (included in interest bearing deposits) are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Estimated fair values for short-term repurchase agreements, which represent sweeps from demand deposits to accounts secured by pledged securities, are estimated based on the amount payable as of the reporting date (Level 1). Longer-term repurchase agreements, with contractual maturity dates of three months or more, are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Short-term borrowings are generally only held overnight, therefore, their carrying amount is a reasonable estimate of fair value (Level 1). The fair value of FHLB Advances are estimated by discounting the future cash flows using quoted rates from the FHLB for similar advances with similar maturities (Level 2). The estimated fair value of other financial instruments, and off-balance sheet loan commitments, approximate cost and are not considered significant to this presentation.
Note 14 - Borrowings
At September 30, 2022, and December 31, 2021, borrowed funds are summarized below:
| | (Dollars in thousands) | |
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
Variable rate advances from the FHLB. | | | 37,000 | | | | - | |
Line of credit at FHLB | | | 19,174 | | | | - | |
Total | | $ | 56,174 | | | $ | - | |
At September 30, 2022, scheduled maturities of borrowed funds were as follows:
| | | (Dollars in thousands) | |
Remainder 2022 | | | $ | - | |
2023 | | | | 37,000 | |
Total | | | $ | 37,000 | |
At September 30, 2022 and December 31, 2021 advances from the Federal Home Loan Bank were as follows:
| | (Dollars in thousands) | |
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
Variable rate advances, as of September 30, 2022, average rate: 3.45%, none outstanding as of December 31, 2021 | | $ | 37,000 | | | $ | - | |
Variable rate advances are payable at maturity. The advances were collateralized by loans with a carrying value totaling approximately $877 million at September 30, 2022. In addition to the variable rate advances, the Bancorp maintains a $25.0 million line of credit with the Federal Home Loan Bank of Indianapolis. The Bancorp carried a balance of $19.2 million at an average rate of 3.47% at September 30, 2022, and did not have a balance on the line of credit at December 31, 2021. The Bancorp did not have other borrowings at September 30, 2022, or as of December 31, 2021.