nwin20210228

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2020

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

For the transition period from __________ to __________

Commission file number 0-26128

NorthWest Indiana Bancorp

(Exact name of registrant as specified in its charter)

Indiana	35-1927981
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

9204 Columbia Avenue	46321
Munster, Indiana	(Zip Code)
(Address of principal executive offices)

(219) 836-4400

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

	Large accelerated filer: ☐	Accelerated filer: ☐
	Non-Accelerated filer: ☒	Smaller reporting company ☒
		Emerging growth company ☐

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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

Based on the average bid and ask prices for the registrant’s Common Stock at June 30, 2020, at that date, the aggregate market value of the registrant’s Common Stock held by nonaffiliates of the registrant (assuming solely for the purposes of this calculation that all directors and executive officers of the registrant are “affiliates”) was $91,966,808.

There were 3,478,921 shares of the registrant’s Common Stock, without par value, outstanding at March 22, 2021.

DOCUMENTS INCORPORATED BY REFERENCE

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

1. Definitive Proxy Statement for the 2020 Annual Meeting of Shareholders. (Part III)

Page 1 of 117

NorthWest Indiana Bancorp

Index

		Page Number
PART I.
	Item 1. Business	3
	Item 1A. Risk Factors	34
	Item 1B. Unresolved Staff Comments	45
	Item 2. Properties	46
	Item 3. Legal Proceedings	47
	Item 4. Mine Safety Disclosures	47
	Item 4.5 Executive Officers of the Bancorp	47
PART II.
	Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	49
	Item 6. Selected Financial Data	50
	Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	51
	Item 7A. Quantitative and Qualitative Disclosures about Market Risk	65
	Item 8. Financial Statements	66
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	111
	Item 9A. Controls and Procedures	111
	Item 9B. Other Information	112
PART III.
	Item 10. Directors, Executive Officers and Corporate Governance	113
	Item 11. Executive Compensation	113
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	113
	Item 13. Certain Relationships and Related Transactions, and Director Independence	113
	Item 14. Principal Accountant Fees and Services	113
PART IV.
	Item 15. Exhibits and Financial Statement Schedules	114
SIGNATURES		116
EXHIBIT INDEX		114

Page 2 of 117

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

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

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

On January 24, 2019, the Bancorp completed its previously announced acquisition of AJS Bancorp, Inc., a Maryland corporation (“AJSB”), pursuant to an Agreement and Plan of Merger dated July 30, 2018 between the Bancorp and AJSB (the “AJSB Merger Agreement”). Pursuant to the terms of the AJSB Merger Agreement, AJSB merged with and into the Bancorp, with the Bancorp as the surviving corporation. Simultaneously with the AJSB Merger, A.J. Smith Federal Savings Bank, a federally chartered savings bank and wholly-owned subsidiary of AJSB, merged with and into Peoples Bank, with Peoples Bank as the surviving bank. In connection with the AJSB Merger, each AJSB stockholder holding 100 or more shares of AJSB common stock received fixed consideration of (i) 0.2030 shares of NWIN common stock, and (ii) $7.20 per share in cash for each outstanding share of AJSB’s common stock. Stockholders holding less than 100 shares of AJSB common stock received $16.00 in cash and no stock consideration for each outstanding share of AJSB common stock. Any fractional shares of NWIN common stock that an AJSB stockholder would have otherwise received in the AJSB Merger were cashed out in the amount of such fraction multiplied by $43.01. The Bancorp issued 416,478 shares of Bancorp common stock to the former AJSB stockholders, and paid cash consideration of approximately $15.7 million. Based upon the closing price of NWIN’s common stock on January 23, 2019, the transaction had an implied valuation of approximately $33.2 million, which includes unallocated shares held by the AJSB Employee Stock Ownership Plan (“ESOP”), some of which were cancelled in connection with the closing to satisfy the ESOP’s outstanding loan balance. As a result of the acquisition, the Bank was able to further expand its retail banking network in the South Suburban Chicagoland market, bringing the total number of its full-service banking centers to 22.

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

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

Certain of the statements made in this report are “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. All statements other than statements of historical fact, including statements regarding our financial position, business strategy, and the plans and objectives of our management for future operations, are forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target,” and other similar words and expressions relating to the future.

Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially, and adversely or positively, from the expectations of the Bancorp that are expressed or implied by any forward-looking statement. Risks, uncertainties, and factors that could cause the Bancorp’s actual results to vary materially from those expressed or implied by any forward-looking statement include but are not limited to:

In addition to the above factors, we also caution that the actual amounts and timing of any future common stock dividends or share repurchases will be subject to various factors, including our capital position, financial performance, capital impacts of strategic initiatives, market conditions, and regulatory and accounting considerations, as well as any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will repurchase shares or pay any dividends to holders of our common stock, or as to the amount of any such repurchases or dividends. Further, statements about the effects of the COVID-19 pandemic on our business, operations, financial performance, and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable, and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties, and us.

Because such forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. The foregoing list of important factors is not exclusive and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of us. The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K lists some of the factors that could cause the Bancorp’s actual results to vary materially from those expressed in or implied by any forward-looking statements. We direct your attention to this discussion. Other risks and uncertainties that could affect the Bancorp’s future performance are set forth below in Item 1A, “Risk Factors.”

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

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

Under Indiana Law, an Indiana bank generally may not make any loan to a borrower or its related entities if the total of all such loans by the bank exceeds 15% of its unimpaired capital and unimpaired surplus (plus up to an additional 10% of unimpaired capital and unimpaired surplus, in the case of loans fully collateralized by readily marketable collateral); provided, however, that certain specified types of loans are exempted from these limitations or subject to different limitations. The maximum amount that the Bank could have loaned to one borrower and the borrower’s related entities at December 31, 2020, under the 15% of capital and surplus limitation was approximately $20,315,000. At December 31, 2020, the Bank had no loans that exceeded the regulatory limitations.

At December 31, 2020, there were no concentrations of loans in any type of industry that exceeded 10% of total loans that were not otherwise disclosed as a loan category.

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

Loan Maturity Schedule. The following table sets forth certain information at December 31, 2020 regarding the dollar amount of loans in the Bancorp’s portfolio based on their contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Contractual principal repayments of loans do not necessarily reflect the actual term of the loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Bancorp the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the property subject to the mortgage. The amounts are stated in thousands (000’s).

The following table sets forth the dollar amount of all loans due after one year from December 31, 2020, which have predetermined interest rates or have floating or adjustable interest rates. The amounts are stated in thousands (000’s).

Lending Area. 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.

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

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

Designated officers have authorities, established by the Board of Directors, to approve loans. Loans up to $2,500,000 are approved by the loan officers’ loan committee. Loans from $2,500,000 to $5,000,000 are approved by the senior officers’ loan committee (SOLC). Loans from $5,000,000 to $10,000,000 are approved the executive officer’s loan committee. All loans in excess of $10,000,000, up to the legal lending limit of the Bank, must be approved by the Bank’s Board of Directors or its Credit Committee. (All members of the Bank’s Board of Directors and Credit Committee are also members of the Bancorp’s Board of Directors and Credit Committee, respectively.) Certain loan renewals and extensions may not require approval by the Board of Directors or the Credit Committee as long as there is no material change, credit downgrade, significant change in borrower or guarantor status, material release or change in collateral value or the eligible loan renewal or extension is not outside the current concentration limits set by the Board of Directors. The maximum in-house legal lending limit as set by the Board of Directors is the lower of 10% of the Bank’s risk based capital or $10,000,000. Requests that exceed this amount will be considered on a case-by-case basis, after taking into consideration the legal lending limit, by specific Board action. The Bank will not extend credit to any of its executive officers, directors, or principal shareholders or to any related interest of that person, except in compliance with the insider lending restrictions of Regulation O under the Federal Reserve Act and in an amount that, when aggregated with all other extensions of credit to that person, exceeds $500,000 unless: (1) the extension of credit has been approved in advance by a majority of the entire Board of Directors of the Bank, and (2) the interested party has abstained from participating directly or indirectly in the voting.

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

Residential Mortgage Loans. The primary lending activity of the Bancorp has been the granting of conventional mortgage loans to enable borrowers to purchase existing homes, refinance existing homes, or construct new homes. Conventional loans are made up to a maximum of 97% of the purchase price or appraised value, whichever is less. For loans made in excess of 80% of value, private mortgage insurance is generally required in an amount sufficient to reduce the Bancorp’s exposure to 80% or less of the appraised value of the property. Loans insured by private mortgage insurance companies can be made for up to 97% of value. During 2020, 80% of mortgage loans closed were conventional loans with borrowers having 20% or more equity in the property. This type of loan does not require private mortgage insurance because of the borrower’s level of equity investment.

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

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

The Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice annually or are “Mini-Fixed.” The “Mini-Fixed” mortgage reprices annually after a one, three, five, seven or ten year period. ARM originations totaled $9.9 million for 2020 and $17.0 million for 2019. During 2020, ARMs represented 3.2% of total mortgage loan originations. The ability of the Bancorp to successfully market ARM’s depends upon loan demand, prevailing interest rates, volatility of interest rates, public acceptance of such loans and terms offered by competitors.

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

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

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

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

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

Consumer Loans. The Bancorp offers consumer loans to individuals for personal, household or family purposes. Consumer loans are either secured by adequate collateral, or unsecured. Unsecured loans are based on the strength of the applicant’s financial condition. All borrowers must meet current underwriting standards. The consumer loan program includes both fixed and variable rate products.

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.

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

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 have partial recourse secured by a reserve account held at the Bancorp, further detail regarding this reserve can be found in Note 4 – Loans Receivable.

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

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

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

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

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

* non-performing loans include non-accrual loans and accruing loans which are contractually past due 90 days or more

During 2020, gross interest income of $817 thousand would have been recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the period. Interest on such loans included in income during the period amounted to $67 thousand.

Federal regulations require banks to classify their own loans and to establish appropriate general and specific allowances, subject to regulatory review. These regulations are designed to encourage management to evaluate loans on a case-by-case basis and to discourage automatic classifications. Loans classified as substandard or doubtful must be evaluated by management to determine loan loss reserves. Loans classified as loss must either be written off or reserved for by a specific allowance. Amounts reported in the general loan loss reserve are included in the calculation of the Bancorp’s total risk-based capital requirement (to the extent that the amount does not exceed 1.25% of total risk-based assets), but are not included in Tier 1 leverage ratio calculations and Tier 1 risk-based capital requirements.

Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. No loans were internally classified as doubtful or loss at December 31, 2020 or December 31, 2019.

In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of special mention loans. Special mention loans represent loans management is closely monitoring due to one or more factors that may cause the loan to become classified as substandard.

A loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. Typically, management does not individually classify smaller-balance homogeneous loans, such as residential mortgages or consumer loans, as impaired, unless they are troubled debt restructurings.

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. Purchased loans with evidence of credit quality deterioration since origination are considered purchased credit impaired loans. Expected future cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable (“accretable yield”). The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and represents probable losses in the portfolio. In determining the acquisition date fair value of purchased credit impaired loans, and in subsequent accounting, the Bancorp aggregates these purchased loans into pools of loans by common risk characteristics, such as credit risk rating and loan type. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.

At times, the Bancorp will modify the terms of a loan to forego a portion of interest or principal or reduce the interest rate on the loan to a rate materially less than market rates, or materially extend the maturity date of a loan as part of a troubled debt restructuring. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of expected future cash flows; unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

One commercial real estate customer with loans totaling $5.3 million and residential real estate loans totaling $3.0 million contributed to the December 31, 2020, increase in nonperforming loans. One commercial real estate customer with loans totaling $5.3 million, residential real estate loans totaling $2.8 million and one commercial real estate customer with loans totaling $1.3 million contributed to the December 31, 2020, increase in substandard loans. One commercial real estate relationship with loans totaling $8.6 million, one commercial real estate relationship with loans totaling $4.1 million, and one commercial real estate customer with loans totaling $1.1 million contributed to the December 31, 2020, increase in special mention loans, which was offset by the movement of one commercial real estate customer with loans totaling $1.3 million to substandard and a $2.1 million decline in residential real estate loans. One commercial real estate customer with loans totaling $5.3 million, one commercial business relationship with loans totaling $360 thousand, and two commercial business customers with loans totaling $303 thousand contributed to the December 31, 2020, increase in impaired loans.

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

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

The primary objective of the investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings. Securities can be classified as either held-to-maturity (HTM) or available-for-sale (AFS) at the time of purchase. No securities are classified as trading or as held-to-maturity. AFS securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. During 2020, the Bancorp did not hold as investments any derivative instruments and was not involved in hedging activities as defined by Accounting Standards Codification Topic 815 Derivatives and Hedging. It has been the policy of the Bancorp to invest its excess cash in U.S. government agency securities, mortgage-backed securities, collateralized mortgage obligations, and municipal securities. In addition, short-term funds are generally invested as interest bearing balances in financial institutions and federal funds. At December 31, 2020, the Bancorp’s investment portfolio totaled $410.7 million. In addition, the Bancorp had $3.9 million in FHLB stock.

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

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

The contractual maturities and weighted average yields for the U.S. government securities, agency securities, municipal securities, and trust preferred securities at December 31, 2020, are summarized in the table below. Securities not due at a single maturity date, such as mortgage-backed securities and collateralized mortgage obligations are not included in the following table. The carrying values are stated in thousands (000’s).

The Bancorp currently holds two trust preferred securities and the securities’ quarterly interest payments have been placed in “payment in kind” status. Payment in kind status results in a temporary delay in the payment of interest. As a result of a delay in the collection of the interest payments, management placed these securities in non-accrual status. At December 31, 2020, the cost basis of the two trust preferred securities on non-accrual status totaled $2.2 million.

General. Deposits are the major source of the Bancorp’s funds for lending and other investment purposes. In addition to deposits, the Bancorp derives funds from maturing investment securities and certificates of deposit, dividend receipts from the investment portfolio, loan principal repayments, repurchase agreements, advances from the Federal Home Loan Bank of Indianapolis (FHLB) and other borrowings. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of other sources of funds. They may also be used on a longer-term basis for general business purposes. The Bancorp uses repurchase agreements, as well as a line-of-credit and advances from the FHLB for borrowings. At December 31, 2020, the Bancorp had $13.7 million in repurchase agreements. Other borrowings totaled $6.1 million, which consisted of $6.0 million in FHLB advances and $149 thousand of federal funds purchased.

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

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

Maturities of time certificates of deposit and other time deposits of $100 thousand or more at December 31, 2020, are summarized as follows. The amounts are stated in thousands (000’s).

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

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

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

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

The Bancorp's Wealth Management Group provides estate and retirement planning, guardianships, land trusts, profit sharing and 401(k) retirement plans, IRA and Keogh accounts, investment agency accounts, and serves as personal representative of estates and acts as trustee for revocable and irrevocable trusts. At December 31, 2020, the market value of the Wealth Management Group’s assets totaled $351.0 million, an increase of $8.1 million, compared to December 31, 2019.

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

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

The following table presents the weighted average yields on loans and securities, the weighted average cost of interest bearing deposits and other borrowings, and the interest rate spread for the year ended December 31, 2020.

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

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

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

	2020		2019		2018		2017		2016
Type of loan:
Conventional real estate loans:
Construction and development	$	93,562	$	87,710	$	64,433	$	50,746	$	38,937
Loans on existing properties (1)		673,980		683,135		569,384		463,368		437,361
Consumer (2)		31,929		17,132		6,043		461		524
Commercial business		156,965		103,088		103,439		76,851		77,299
Government		10,142		15,804		21,101		28,785		29,529
Loans receivable (3)	$	966,578	$	906,869	$	764,400	$	620,211	$	583,650
Type of collateral:
Real estate:
1-to-4 family	$	324,937	$	348,513	$	268,805	$	208,910	$	205,838
Other dwelling units, land and commercial real estate		442,604		422,332		365,012		305,204		270,461
Consumer		29,961		16,366		5,813		321		424
Commercial business		156,838		102,879		103,012		76,666		76,735
Government		10,142		15,804		21,101		28,785		29,529
Loans receivable (4)	$	964,482	$	905,894	$	763,743	$	619,886	$	582,987

Average loans outstanding during the period (3)	$	961,187	$	876,611	$	684,159	$	602,426	$	587,119

	Maturing		After one
	within		but within		After
	one year		five years		five years		Total
Real estate	$	52,403	$	125,320	$	589,819	$	767,542
Consumer		135		7,578		24,216		31,929
Commercial business, and other		41,626		105,973		19,508		167,107
Total loans receivable	$	94,164	$	238,871	$	633,543	$	966,578

	Predetermined		Floating or
	rates		adjustable rates		Total
Real estate	$	301,246	$	413,893	$	715,139
Consumer		31,794		-		31,794
Commercial business, and other		111,728		13,753		125,481
Total loans receivable	$	444,768	$	427,646	$	872,414

	2020			2019			2018			2017			2016
Loans accounted for on a non-accrual basis:
Real estate:
Residential	$	7,370		$	5,267		$	5,405		$	3,858		$	4,521
Commercial		5,390			658			695			466			456
Commercial business		1,039			582			495			672			628
Total	$	13,799		$	6,507		$	6,595		$	4,996		$	5,605

Accruing loans which are contractually past due 90 days or more:
Real estate:
Commercial	$	457		$	61		$	-		$	-		$	-
Residential		109			471			172			227			500
Commercial business		-			288			149			-			-
Consumer		-			46			-			-			-
Total	$	566		$	866		$	321		$	227		$	500

Loans that qualify as troubled debt restructurings and accruing:
Real estate:
Commercial	$	872		$	823		$	1,074		$	181		$	-
Residential		542			494			598			302			-
Commercial business		61			459			234			52			60
Consumer		-			-			-			-			-
Total	$	1,475		$	1,776		$	1,906		$	535		$	60

Total of non-accrual, 90 days past due and accruing, and restructurings	$	15,840		$	9,149		$	8,822		$	5,758		$	6,165

Ratio of non-performing loans to total assets		0.96	%		0.56	%		0.63	%		0.56	%		0.67	%
Ratio of non-performing loans to total loans		1.49	%		0.81	%		0.90	%		0.84	%		1.05	%

Foreclosed real estate		$	538			$	1,083			$	1,627			$	1,699			$	2,665
Ratio of foreclosed real estate to total assets			0.04	%			0.08	%			0.15	%			0.18	%			0.29	%

The Bancorp's substandard loans are summarized below:
(Dollars in thousands)
Loan Segment	December 31, 2020		December 31, 2019
Residential real estate	$	6,387	$	4,491
Home equity		495		507
Commercial real estate		8,180		1,565
Construction and land development		-		-
Multifamily		504		802
Farmland		-		-
Commercial business		1,061		727
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	16,627	$	8,092

The Bancorp's special mention loans are summarized below:
(Dollars in thousands)
Loan Segment	December 31, 2020		December 31, 2019
Residential real estate	$	3,539	$	4,203
Home equity		761		813
Commercial real estate		11,983		5,380
Construction and land development		3,652		-
Multifamily		1,408		-
Farmland		-		-
Commercial business		1,341		2,228
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	22,684	$	12,624

The Bancorp’s impaired loans, including purchased credit impaired loans, are summarized below:
(Dollars in thousands)
Loan Segment	December 31, 2020		December 31, 2019
Residential real estate	$	2,165	$	2,223
Home equity		353		437
Commercial real estate		6,341		1,565
Construction and land development		-		-
Multifamily		716		802
Farmland		-		-
Commercial business		2,246		2,191
Consumer		-		-
Manufactured homes		-		-
Government		-		-
Total	$	11,821	$	7,218

The Bancorp’s troubled debt restructured loans are summarized below:
(Dollars in thousands)
	December 31, 2020				December 31, 2019
Loan Segment	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Residential real estate		8	$	614		6	$	480
Home equity		7		187		6		176
Commercial real estate		4		872		3		822
Construction and land development		-		-		-		-
Multifamily		-		-		-		-
Farmland		-		-		-		-
Commercial business		6		448		7		622
Consumer		-		-		-		-
Manufactured homes		-		-		-		-
Government		-		-		-		-
Total	$	25	$	2,121	$	22	$	2,100

	Within 1 Year					1 - 5 Years					5 - 10 Years					After 10 Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Money market fund:	$	52,941		0.03	%	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%
U.S. government Agencies:
AFS		-		0.00	%		-		0.00	%		7,860		1.00	%		-		0.00	%
Municipal Securities:
AFS		-		0.00	%		3,779		4.20	%		15,483		3.39	%		174,941		3.40	%
Trust Preferred Securities:
AFS		-		0.00	%		-		0.00	%		-		0.00	%		929		0.96	%
Totals	$	52,941		0.03	%	$	3,779		4.20	%	$	23,343		2.59	%	$	175,870		3.39	%

3 months or less	$	47,206
Over 3 months through 6 months		23,586
Over 6 months through 12 months		66,621
Over 12 months		12,986
Total	$	150,399

	At December 31,
Repurchase agreements:	2020			2019			2018
Balance	$	13,711		$	11,499		$	11,628
Securities underlying the agreements:
Ending carrying amount		8,950			16,961			16,262
Ending fair value		8,950			16,961			16,262
Weighted average rate (1)		0.32	%		1.51	%		1.44	%

	For year ended December 31,
	2020			2019			2018
Highest month-end balance	$	21,100		$	20,628		$	16,672
Average outstanding balance		16,975			12,928			12,754
Weighted average rate on securities sold under agreements to repurchase (2)		0.58	%		1.80	%		1.38	%

Weighted average yield:
Securities	2.03	%
Loans receivable	4.67	%
Federal Home Loan Bank stock	3.06	%
Total interest-earning assets	3.91	%

Weighted average cost:
Deposit accounts	0.43	%
Borrowed funds	2.70	%
Total interest-bearing liabilities	0.45	%

Interest rate spread:
Weighted average yield on interest-earning assets minus the weighted average cost of interest-bearing funds	3.46	%

	Year ended December 31,
	2020			2019			2018
Return on average assets		1.16	%		0.94	%		0.93	%
Return on average equity		11.51	%		9.54	%		9.88	%
Average equity-to-average assets ratio		10.11	%		9.86	%		9.43	%
Dividend payout ratio		25.87	%		35.10	%		37.62	%

	2020			2019			2018			2017			2016
Balance at beginning of period	$	8,999		$	7,962		$	7,482		$	7,698		$	6,953
Loans charged-off:
Real estate residential		(2	)		(160	)		(242	)		(1,019	)		(529	)
Commercial real estate		(97	)		(229	)		(119	)		-			-
Commercial business		(158	)		(1,178	)		(592	)		(386	)		-
Consumer		(29	)		(54	)		(58	)		(71	)		(33	)
Total charge-offs		(286	)		(1,621	)		(1,011	)		(1,476	)		(562	)
Recoveries:
Residential real estate		27			29			1			3			2
Commercial real estate		-			-			24			-			-
Commercial business		17			25			134			39			28
Consumer		14			20			24			18			9
Total recoveries		58			74			183			60			39
Net (charge-offs) / recoveries		(228	)		(1,547	)		(828	)		(1,416	)		(523	)
Provision for loan losses		3,687			2,584			1,308			1,200			1,268
Balance at end of period	$	12,458		$	8,999		$	7,962		$	7,482		$	7,698

ALL to loans outstanding		1.29	%		0.99	%		1.04	%		1.21	%		1.32	%
ALL to nonperforming loans		86.72	%		122.05	%		115.12	%		143.26	%		126.10	%
Net charge-offs / recoveries to average loans outstanding during the period		-0.02	%		-0.18	%		-0.12	%		-0.23	%		-0.09	%

	2020				2019				2018				2017				2016
		$	%			$	%			$	%			$	%			$	%
Real estate loans:
Residential		2,487		33.8		2,035		38.4		1,917		35.2		1,734		33.7		2,410		35.3
Commercial and other dwelling		7,437		45.6		5,400		46.6		4,563		47.7		4,365		49.2		4,302		46.3
Consumer loans		26		3.3		43		1.9		82		0.7		31		0.1		34		0.1
Commercial business and other		2,508		17.3		1,521		13.1		1,400		16.4		1,352		17.0		952		18.3
Total		12,458		100.0		8,999		100.0		7,962		100.0		7,482		100.0		7,698		100.0

	Year ended December 31, 2020								Year ended December 31, 2019								Year ended December 31, 2018
				Interest								Interest								Interest
	Average			Income/		Average			Average			Income/		Average			Average			Income/		Average
	Balance			Expense		Rate			Balance			Expense		Rate			Balance			Expense		Rate
Assets:

Interest bearing balances in financial institutions	$	39,451		$	227		0.58	%	$	35,656		$	768		2.15	%	$	5,996		$	167		2.79	%
Federal funds sold		2,307			15		0.65			5,170			79		1.53			901			10		1.11
Nontaxable Securities		137,779			3,828		2.78			91,489			2,856		3.12			91,458			3,043		3.33
Taxable Securities		180,435			2,684		1.49			169,413			4,092		2.42			150,048			3,838		2.56
Total investments		359,972			6,754		1.88			301,728			7,795		2.58			248,403			7,058		2.84
Loans:*
Real estate mortgage loans		768,071			35,875		4.67			739,360			37,574		5.08			567,949			27,091		4.77
Commercial business loans		173,480			8,162		4.70			126,719			6,451		5.09			113,545			5,079		4.47
Consumer loans		19,636			830		4.23			10,532			430		4.08			2,665			222		8.33
Total loans		961,187			44,867		4.67			876,611			44,455		5.07			684,159			32,392		4.73
Total interest-earning assets		1,321,159			51,621		3.91			1,178,339			52,250		4.43			932,562			39,450		4.23
Allowance for loan losses		(9,881	)							(8,660	)							(7,512	)
Cash and due from banks		16,879								23,237								10,813
Premises and equipment		29,391								28,355								21,835
Other assets		69,628								64,693								44,210
Total assets	$	1,427,176							$	1,285,964							$	1,001,908

Liabilities:

Demand deposit	$	236,400		$	-		-	%	$	169,781		$	-		-	%	$	124,866		$	-		-	%
NOW accounts		240,028			301		0.13			217,222			476		0.22			190,372			288		0.15
Money market demand accounts		233,904			846		0.36			193,915			1,924		0.99			157,228			705		0.45
Savings accounts		230,579			167		0.07			211,492			354		0.17			144,746			118		0.08
Certificates of deposit		298,403			4,007		1.34			316,277			5,605		1.77			222,267			2,688		1.21
Total interest-bearing deposits		1,239,314			5,321		0.43			1,108,687			8,359		0.75			839,479			3,799		0.45
Repurchase Agreements		14,956			87		0.58			12,928			233		1.80			12,754			176		1.38
Borrowed funds		12,298			332		2.70			18,702			500		2.67			44,628			1,116		2.50
Total interest-bearing liabilities		1,266,568			5,740		0.45			1,140,317			9,092		0.80			896,861			5,091		0.57

Other liabilities		16,333								18,802								10,587
Total liabilities		1,282,901								1,159,119								907,448

Stockholders' equity		144,275								126,845								94,460
Total liabilities and stockholders' equity	$	1,427,176							$	1,285,964							$	1,001,908
Net interest income				$	45,881							$	43,158							$	34,359
Net interest spread							3.46	%							3.63	%							3.66	%
Net interest margin**							3.47	%							3.66	%							3.68	%