Finward Bancorp Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Loans Receivable

Loans Receivable

3 Months Ended

Mar. 31, 2018

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 5 - Loans Receivable

Loans receivable are summarized below:

(Dollars in thousands)
	March 31, 2018		December 31, 2017
Loans secured by real estate:
Residential real estate	$	174,053	$	172,780
Home equity		36,606		36,718
Commercial real estate		208,482		211,090
Construction and land development		53,775		50,746
Farmland		248		-
Multifamily		44,612		43,369
Total loans secured by real estate		517,776		514,703
Consumer		489		460
Commercial business		76,546		77,122
Government		30,176		28,785
Subtotal		624,987		621,070
Less:
Net deferred loan origination fees		(124)		(130)
Undisbursed loan funds		(201)		(729)
Loans receivable	$	624,662	$	620,211

(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 March 31, 2018:

Allowance for loan losses:
Residential real estate	$	1,568	$	(68)		-	$	(7)	$	1,493
Home equity		166		(19)		-		12		159
Commercial real estate		3,125		(119)		-		(10)		2,996
Construction and land development		618		-		-		43		661
Multifamily		622		-		-		(7)		615
Farmland		-		-		-		4		4
Consumer		31		(8)		4		8		35
Commercial business		1,298		(526)		10		295		1,077
Government		54		-		-		3		57
Total	$	7,482	$	(740)	$	14	$	341	$	7,097

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended March 31, 2017:

Allowance for loan losses:
Residential real estate	$	2,111	$	(858)	$	-	$	42	$	1,295
Home equity		299		-		-		7		306
Commercial real estate		3,113		-		-		85		3,198
Construction and land development		617		-		-		(24)		593
Multifamily		572		-		-		(11)		561
Farmland		-		-		-		-		-
Consumer		34		(5)		2		(3)		28
Commercial business		896		(245)		8		136		795
Government		56		-		-		2		58
Total	$	7,698	$	(1,108)	$	10	$	234	$	6,834

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 March 31, 2018:

Residential real estate	$	31	$	1,462	$	173,866	$	561	$	712	$	172,593
Home equity		-		159		36,658		69		-		36,589
Commercial real estate		18		2,978		208,482		363		-		208,119
Construction and land development		-		661		53,775		134		-		53,641
Multifamily		-		615		44,612		-		-		44,612
Farmland		-		4		248		-		-		248
Commercial business		10		1,067		76,354		193		-		76,161
Consumer		-		35		491		-		-		491
Government		-		57		30,176		-		-		30,176
Total	$	59	$	7,038	$	624,662	$	1,320	$	712	$	622,630

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2017:

Residential real estate	$	21	$	1,547	$	172,141	$	462	$	690	$	170,989
Home equity		-		166		36,769		-		-		36,769
Commercial real estate		144		2,981		211,090		512		-		210,578
Construction and land development		-		618		50,746		134		-		50,612
Multifamily.		-		622		43,368		-		-		43,368
Farmland		-		-		-		-		-		-
Commercial business		539		759		76,851		724		-		76,127
Consumer		-		31		461		-		-		461
Government		-		54		28,785		-		-		28,785
Total	$	704	$	6,778	$	620,211	$	1,832	$	690	$	617,689

The Bancorp's credit quality indicators are summarized below at March 31, 2018 and December 31, 2017:

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category

	March 31, 2018
(Dollars in thousands)	2		3		4		5		6		7		8
Loan Segment	Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	614	$	14,951	$	92,844	$	8,649	$	48,937	$	4,186	$	3,685	$	173,866
Home equity		67		906		34,929		-		173		271		312		36,658
Commercial real estate		-		2,127		76,593		81,047		42,746		5,606		363		208,482
Construction and land development		-		-		23,208		21,159		9,274		-		134		53,775
Multifamily		-		-		19,887		22,882		1,610		233		-		44,612
Farmland		-		-		248		-		-		-		-		248
Commercial business		7,986		17,545		14,153		22,060		12,275		2,142		193		76,354
Consumer		118		3		361		-		-		-		9		491
Government		-		2,220		21,976		5,980		-		-		-		30,176
Total	$	8,785	$	37,752	$	284,199	$	161,777	$	115,015	$	12,438	$	4,696	$	624,662

	December 31, 2017
	2		3		4		5		6		7		8
Loan Segment	Moderate		Above average acceptable		Acceptable		Marginally acceptable		Pass/monitor		Special mention		Substandard		Total
Residential real estate	$	887	$	12,317	$	92,241	$	8,759	$	50,075	$	4,130	$	3,732	$	172,141
Home equity		-		1,065		34,871		-		250		233		350		36,769
Commercial real estate		-		2,372		79,847		81,547		40,054		6,758		512		211,090
Construction and land development		-		-		20,719		19,583		10,310		-		134		50,746
Multifamily		-		-		20,159		20,965		2,076		168		-		43,368
Farmland		-		-		-		-		-		-		-		-
Commercial business		7,169		17,202		16,784		21,087		13,041		394		1,174		76,851
Consumer		-		131		330		-		-		-		-		461
Government		-		2,318		20,202		6,265		-		-		-		28,785
Total	$	8,056	$	35,405	$	285,153	$	158,206	$	115,806	$	11,683	$	5,902	$	620,211

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 Minimal Risk

Borrower demonstrates exceptional credit fundamentals, including stable and predictable profit margins, strong liquidity and a conservative balance sheet with superior asset quality. Excellent cash flow coverage of existing and projected debt service. Historic and projected performance indicates borrower is able to meet obligations under almost any economic circumstances.

2 Moderate risk

Borrower consistently internally generates sufficient cash flow to fund debt service, working assets, and some capital expenditures. Risk of default considered low.

3 Above average acceptable risk

Borrower generates sufficient cash flow to fund debt service and some working assets and/or capital expansion needs. Profitability and key balance sheet ratios are at or slightly above peers. Current trends are positive or stable. Earnings may be level or trending down slightly or be erratic; however, positive strengths are offsetting. Risk of default is reasonable but may warrant collateral protection.

4 Acceptable risk

Borrower generates sufficient cash flow to fund debt service, but most working asset and all capital expansion needs are provided from external sources. Profitability ratios and key balance sheet ratios are usually close to peers but one or more ratios (e.g. leverage) may be higher than peer. Earnings may be trending down over the last three years. Borrower may be able to obtain similar financing from other banks with comparable or less favorable terms. Risk of default is acceptable but requires collateral protection.

5 Marginally acceptable risk

Borrower may exhibit excessive growth, declining earnings, strained cash flow, increasing leverage and/or weakening market position that indicate above average risk. Limited additional debt capacity, modest coverage, and average or below average asset quality, margins and market share. Interim losses and/or adverse trends may occur, but not to the level that would affect the Bank’s position. The potential for default is higher than normal but considered marginally acceptable based on prospects for improving financial performance and the strength of the collateral.

6 Pass/monitor

The borrower has significant weaknesses resulting from performance trends or management concerns. The financial condition of the company has taken a negative turn and may be temporarily strained. Cash flow may be weak but cash reserves remain adequate to meet debt service. Management weaknesses are evident. Borrowers in this category will warrant more than the normal level of supervision and more frequent reporting.

7 Special mention (watch)

Special mention credits are considered bankable assets with no apparent loss of principal or interest envisioned but requiring a high level of management attention. Assets in this category are currently protected but are potentially weak. These borrowers are subject to economic, industry, or management factors having an adverse impact upon their prospects for orderly service of debt. The perceived risk in continued lending is considered to have increased beyond the level where such loans would normally be granted. These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of Substandard.

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.

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 first quarter of 2018, two residential real estate loans totaling $115 thousand and two home equity loans totaling $69 thousand were modified as a troubled debt restructuring. No troubled debt restructurings have subsequently defaulted during the periods presented. 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:

							For the three months ended
	As of March 31, 2018						March 31, 2018
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,141	$	2,871	$	-	$	1,103	$	6
Home equity		69		69		-		35
Commercial real estate		250		250		-		252		-
Construction and land development		134		134		-		134		-
Commercial business		183		183		-		184		1

With an allowance recorded:
Residential real estate		132		132		31		106		5
Home equity		-		-		-		-		-
Commercial real estate		113		113		18		186		4
Construction and land development		-		-		-		-		-
Commercial business		10		10		10		275		-

Total:
Residential real estate	$	1,273	$	3,003	$	31	$	1,209	$	11
Home equity	$	69	$	69	$	-	$	35	$	-
Commercial real estate	$	363	$	364	$	18	$	438	$	4
Construction & land development	$	134	$	134	$	-	$	134	$	-
Commercial business	$	193	$	193	$	10	$	459	$	1

							For the three months ended
	As of December 31, 2017						March 31, 2017
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,072	$	3,351	$	-	$	1,350	$	11
Home equity		-		-		-		-		-
Commercial real estate		253		253		-		363		1
Construction and land development		134		134		-		134		-
Commercial business		184		184		-		209		1

With an allowance recorded:
Residential real estate		80		270		21		533		-
Home equity		-		-		-		-		-
Commercial real estate		259		259		144		79		-
Construction & land development		-		-		-		-		-
Commercial business		540		540		539		327		-

Total:
Residential real estate	$	1,152	$	3,621	$	21	$	1,883	$	11
Home equity	$	-	$	-	$	-	$	-	$	-
Commercial real estate	$	512	$	512	$	144	$	442	$	1
Construction & land development	$	134	$	134	$	-	$	134	$	-
Commercial business	$	724	$	724	$	539	$	536	$	1

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 March 31, 2018, total purchased credit impaired loans with unpaid principal balances totaled $2.4 million with a recorded investment of $712 thousand. At December 31, 2017, purchased credit impaired loans with unpaid principal balances totaled $2.6 million with a recorded investment of $690 thousand.

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
March 31, 2018
Residential real estate	$	2,858	$	1,222	$	2,789	$	6,869	$	166,997	$	173,866	$	46
Home equity		361		-		218		579		36,079		36,658		5
Commercial real estate		1,367		-		183		1,550		206,932		208,482		-
Construction and land development		-		-		134		134		53,641		53,775		-
Multifamily		-		165		-		165		44,447		44,612		-
Farmland		-		-		-		-		248		248		-
Commercial business		228		275		142		645		75,709		76,354		-
Consumer		9		-		-		9		482		491		-
Government		-		-		-		-		30,176		30,176		-
Total	$	4,823	$	1,662	$	3,466	$	9,951	$	614,711	$	624,662	$	51

December 31, 2017
Residential real estate	$	4,921	$	1,751	$	3,092	$	9,764	$	162,377	$	172,141	$	225
Home equity		295		18		234		547		36,222		36,769		2
Commercial real estate		951		96		332		1,379		209,711		211,090		-
Construction and land development		-		-		133		133		50,613		50,746		-
Multifamily		319		-		-		319		43,049		43,368		-
Farmland		-		-		-		-		-		-		-
Commercial business		285		162		539		986		75,865		76,851		-
Consumer		1		-		-		1		460		461		-
Government		-		-		-		-		28,785		28,785		-
Total	$	6,772	$	2,027	$	4,330	$	13,129	$	607,082	$	620,211	$	227

The Bancorp's loans on nonaccrual status are summarized below:

(Dollars in thousands)
	March 31, 2018		December 31, 2017
Residential real estate	$	3,221	$	3,509
Home equity		307		350
Commercial real estate		183		332
Construction and land development		134		133
Multifamily		-		-
Farmland		-		-
Commercial business		142		672
Consumer		9		-
Government		-		-
Total	$	3,996	$	4,996

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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