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Item 8. Financial Statements and Supplementary Data

2021-03-22 compared with 2020-03-16 · 1209 added, 363 removed, 1129 unchanged (58% of the section changed)

2 unchanged sentences

Public Accounting Firm

To the Board of Directors and Stockholders

NorthWest Indiana Bancorp and Subsidiaries

To the Stockholders and Board of Directors 

NorthWest Indiana Bancorp and Subsidiaries

Opinion on the consolidated financial statements

We have audited the accompanying consolidated balance sheets of NorthWest Indiana Bancorp and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited the Company’s internal control over financial reporting as of December 31, 2019, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), based on criteria established in Internal Control‐Integrated Framework (2013) issued by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Our report dated March 13, 2020, expressed an unqualified opinion.

We have audited the accompanying consolidated balance sheets of NorthWest Indiana Bancorp and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

The Company's management is responsible for these consolidated financial statements.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

1 unchanged sentence

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

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Qualitative Factors used in the Allowance for Loan Losses –

Refer to Notes 1 and 4 to the Consolidated Financial Statements

Critical Audit Matter Description

As described in Notes 1 and 4 to the Company’s consolidated financial statements, the Company had a gross loan portfolio of approximately $966.6 million and related allowance for loan losses of approximately $12.5 million as of December 31, 2020.

The allowance for loan losses includes a reserve for loans collectively evaluated for impairment of approximately $10.7 million and loans individually evaluated for impairment of approximately $1.8 million.

The estimate of the collectively evaluated component of the allowance for loan losses considers the Company’s historical loss experience by loan segment, adjusted for qualitative factors based on general economic conditions and other qualitative risk factors.

These qualitative factors include changes in trends in volume and terms of loans, changes in loan concentrations, changes in the trends and severity of problem loans, current local and national economic conditions and trends including unemployment, changes in the banking industry including legal and regulatory requirements, changes in lending staff, policies and procedures, changes in the trends and severity of findings and downgrades from independent loan reviews.

These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in the Company’s historic loss experience.

We identified the qualitative factors used in the allowance for loan losses as a critical audit matter because of the necessary judgement applied by us to evaluate management’s significant estimates and subjective assumptions in determining qualitative adjustments. 

How the Critical Audit Matter was Addressed in the Audit

Our audit procedures related to the qualitative factors used in the allowance for loan losses included the following, among others:

We obtained an understanding of management’s processes for identifying relevant qualitative factors and quantifying related adjustments.

We evaluated the design of controls over management’s evaluation of the allowance related to the qualitative factors used in the allowance for loan losses, including controls addressing management’s review of the qualitative and quantitative analysis related to the qualitative risk factors.

We evaluated the of reasonableness of management’s judgments related to qualitative adjustments in comparison to management’s policies.

We considered whether qualitative factors were consistently applied period over period, where applicable.

We evaluated whether management factors were supported by evidence from internal and external sources and loan portfolio performance.

We analytically evaluated the allowance related to loans collectively evaluated for impairment by loan segment year over year for reasonableness against overall trends in the economy, industry, and loan portfolio performance.

Goodwill Impairment Analysis –

Refer to Notes 1 and 7 to the Consolidated Financial Statements

Critical Audit Matter Description

The Company’s goodwill totaled $11.1 million as of December 31, 2020.

As described in Note 1 and 7 to the Company’s consolidated financial statements, goodwill is evaluated for impairment on an annual basis, or more often if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

During 2020 the Company’s market value fell below book value and the Company performed a quantitative assessment of goodwill for impairment with the assistance of a third-party valuation specialist as of June 30, 2020.

This evaluation resulted in the conclusion that the Company’s fair value exceeded the carrying value and no goodwill impairment was recorded.

With the assistance of another third-party valuation specialist, the Company performed another quantitative assessment as of December 31, 2020, the Company’s annual goodwill impairment evaluation date, which reached the same conclusion.

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We identified the evaluation of goodwill for impairment as a critical audit matter due to the subjective nature of the assumptions used to estimate the Company’s fair value.

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of the Company to its carrying value.

The Company, with the assistance of its third-party valuation specialists, determines its fair value using a blend of the income approach (discounted cash flow model) and market approach (guideline public company method or guideline transaction method).

The determination of the fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasts of future income, provision for credit losses, and discount rates, which are sensitive to changes in expectations about future market or economic conditions, including uncertainty resulting from the COVID-19 pandemic.

The determination of the fair value using the guideline public company method requires management to make significant assumptions related to price to tangible book value multiples and price to earnings multiples, as well as significant assumptions related to control premiums.

The determination of the fair value using the guideline transaction method requires management to review the value of the business based on pricing multiples derived from the sale of companies that are similar to the Company.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the estimated fair value of the Company, with the support of our internal valuation specialists, included the following, among others:

We obtained an understanding of the controls over management’s goodwill impairment evaluation

We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) external information.

We assessed the appropriateness of methodologies selected by management and tested the reasonableness of significant assumptions by comparing to external sources.

We performed sensitivity analysis of significant assumptions to evaluate changes in the fair value estimate of the Company resulting from changes in the related assumptions.

/s/ Plante & Moran, PLLC

Plante & Moran, PLLC

We have served as the Company’s auditor since 2010.

We have served as the Company’s auditor since 2009.

Chicago, Illinois

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Cash and non-interest bearing deposits in other financial institutions

$ 14,014  

$ 20,964  

Interest bearing deposits in other financial institutions

10,750  

Federal funds sold

15,544  

Total cash and cash equivalents

19,922  

47,258  

Certificates of deposit in other financial institutions

Securities available-for-sale

410,669  

277,219  

Loans held-for-sale

11,329  

Loans receivable

966,578  

906,869  

allowance for loan losses

( 12,458 )  

Net loans receivable

954,120  

897,870  

Federal Home Loan Bank stock

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Premises and equipment

30,785  

29,407  

Foreclosed real estate

Cash value of bank owned life insurance

30,725  

30,017  

11,109  

17,800  

18,557  

$ 1,497,525  

$ 1,328,722  

LIABILITIES AND STOCKHOLDERS' EQUITY

Non-interest bearing

$ 241,620  

$ 172,094  

Interest bearing

1,060,719  

982,276  

1,302,339  

1,154,370  

Repurchase agreements

13,711  

11,499  

Borrowed funds

14,000  

Accrued expenses and other liabilities

22,404  

14,750  

Total liabilities

1,344,603  

1,194,619  

Stockholders' Equity:

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Additional paid-in capital

Accumulated other comprehensive (loss) income

29,987  

29,657  

Accumulated other comprehensive income

10,441  

Retained earnings

112,494  

100,185  

Total stockholders' equity

152,922  

134,103  

Total liabilities and stockholders' equity

$ 1,497,525  

$ 1,328,722  

See accompanying notes to consolidated financial statements.

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Real estate loans

$ 35,875  

$ 37,574  

Commercial loans

1 unchanged sentence

Total loan interest

44,867  

44,455  

Other interest earning assets

Total interest income

51,621  

52,250  

Interest expense:

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Net interest income

45,881  

43,158  

Provision for loan losses

Net interest income after provision for loan losses

42,194  

40,574  

Noninterest income:

Gain on sale of loans held-for-sale, net

Fees and service charges

Gain on sale of securities, net

Wealth management operations

Gain on sale of loans held-for-sale, net

Increase in cash value of bank owned life insurance

Gain on sale of securities, net

Benefit from bank owned life insurance

Gain on sale of foreclosed real estate

Benefit from bank owned life insurance

Total noninterest income

18,148  

10,670  

Noninterest expense:

Compensation and benefits

22,065  

19,617  

Occupancy and equipment

Data processing

Professional services

Federal deposit insurance premiums

Professional services

Total noninterest expense

40,846  

37,388  

Income before income tax expenses

19,496  

13,856  

Income tax expenses

$ 16,604  

$ 12,097  

Earnings per common share:

$ 4.80  

$ 3.53  

$ 4.80  

$ 3.53  

Dividends declared per common share

$ 1.24  

$ 1.23  

See accompanying notes to consolidated financial statements.

Page 70 of 117

Consolidated Statements of Comprehensive Income

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

Year Ended December 31,

$ 16,604  

$ 12,097  

Net change in net unrealized gains and losses on securities available-for-sale:

Unrealized gain/(loss) arising during the period

Unrealized gain arising during the period

10,169  

reclassification adjustment for gains included in net income

Net securities gain/(loss) during the period

( 2,348 )  

Net securities gain during the period

( 1,641 )  

Net of tax amount

Comprehensive income, net of tax

$ 22,784  

$ 19,154  

See accompanying notes to consolidated financial statements.

Consolidated Statements of Changes in Stockholders’ Equity

Consolidated Statements of Changes in Stockholders’

Comprehensive

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Balance at January 1, 2019

$ 11,927  

$ ( 2,796 )  

$ 92,333  

$ 101,464  

Comprehensive income:

12,097  

Net unrealized loss on securities available-for- sale, net of reclassification and tax effects

Comprehensive income

19,154  

Net surrender value of 1,245 restricted stock awards

( 63 )  

Stock-based compensation expense

Issuance of 161,875 shares at $42.80 per share, for acquisition of First Personal Financial Corporation

Issuance of 416,478 shares at $42.00 per share, for acquisition of AJS Bancorp, Inc

17,492  

Cash dividends, $1.23 per share

( 4,245 )  

Balance at December 31, 2019

$ 29,657  

$ 4,261  

$ 100,185  

$ 134,103  

Comprehensive income:

16,604  

Net unrealized gain on securities available-for- sale, net of reclassification and tax effects

Comprehensive income

22,784  

Net surrender value of 1,904 restricted stock awards

( 85 )  

Stock-based compensation expense

Issuance of 416,478 shares at $42.00 per share, for acquisition of AJS Bancorp, Inc

Cash dividends, $1.24 per share

( 4,295 )  

Balance at December 31, 2020

$ 29,987  

$ 10,441  

$ 112,494  

$ 152,922  

See accompanying notes to consolidated financial statements.

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CASH FLOWS FROM OPERATING ACTIVITIES:

$ 16,604  

$ 12,097  

Adjustments to reconcile net income to net cash provided by operating activities:

Origination of loans for sale

( 224,945 )  

Sale of loans originated for sale

226,447  

77,018  

Depreciation and amortization, net of accretion

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Net surrender value of restricted stock awards

( 85 )  

Gain on sale of securities, net

( 2,348 )  

Gain on sale of loans held-for-sale, net

( 7,400 )  

Gain on sale of premises and equipment, net

Gain on sale of foreclosed real estate

( 78 )  

Gain on derivatives

( 188 )  

Benefit from bank owned life insurance

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Interest receivable

( 684 )  

( 1,817 )  

Accrued expenses and other liabilities

1 unchanged sentence

Net cash - operating activities

21,149  

10,957  

CASH FLOWS FROM INVESTING ACTIVITIES:

1 unchanged sentence

Purchase of certificates of deposit in other financial institutions

( 522 )  

Proceeds from maturities and pay downs of securities available-for-sale

67,014  

31,595  

Proceeds from sales of securities available-for-sale

51,350  

37,939  

Purchase of securities available-for-sale

( 243,351 )  

Loan participations purchased

( 9,054 )  

Net change in loans receivable

Sale (purchase) of Federal Home Loan Bank Stock

( 49,196 )  

Purchase of Federal Home Loan Bank Stock

Purchase of premises and equipment, net

( 3,735 )  

Proceeds from sale of premises and equipment

2 unchanged sentences

Cash and cash equivalents from acquisition activity, net

52,560  

Change in cash value of bank owned life insurance

( 708 )  

Net cash - investing activities

( 186,558 )  

CASH FLOWS FROM FINANCING ACTIVITIES:

Change in deposits

148,003  

80,550  

Proceeds from FHLB advances

Repayment of FHLB advances

( 8,000 )  

Repayment of trust preferred security related to First Personal Merger

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Dividends paid

( 4,291 )  

Net cash - financing activities

138,073  

47,336  

Net change in cash and cash equivalents

( 27,336 )  

30,119  

Cash and cash equivalents at beginning of period

47,258  

17,139  

Cash and cash equivalents at end of period

$ 19,922  

$ 47,258  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for:

$ 5,865  

$ 9,099  

Acquisition activity:

Fair value of assets acquired, including cash and cash equivalents

$ 172,925  

Value of goodwill and other intangible assets

Fair value of liabilities assumed

145,546  

Cash paid for acquisition

15,743  

Issuance of common stock for acquisition

17,492  

Noncash activities:

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NOTE 1 - Summary of Significant Accounting Policies

Principles of Consolidation – The consolidated financial statements include NorthWest Indiana Bancorp (the “Bancorp” or “NWIN”), its wholly-owned subsidiaries NWIN Risk Management, Inc.

(a captive insurance subsidiary) and Peoples Bank SB (the “Bank”), and the Bank’s wholly owned subsidiaries, Peoples Service Corporation, NWIN, LLC, NWIN Funding, Incorporated, and Columbia Development Company, LLC.

The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc.

The Bancorp’s earnings are dependent upon the earnings of the Bank.

Peoples Service Corporation provides insurance and annuity investments to the Bank’s wealth management customers.

NWIN, LLC is located in Las Vegas, Nevada and serves as the Bank’s investment subsidiary and parent of a real estate investment trust, NWIN Funding, Inc.

Principles of Consolidation –

The consolidated financial statements include NorthWest Indiana Bancorp (the “Bancorp”

or “NWIN”), 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, and Columbia Development Company, LLC.

The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc.

The Bancorp’s earnings are dependent upon the earnings of the Bank.

Peoples Service Corporation provides insurance and annuity investments to the Bank’s wealth management customers.

NWIN, LLC is located in Las Vegas, Nevada and serves as the Bank’s investment subsidiary and parent of a real estate investment trust, NWIN Funding, Inc.

NWIN Funding, Inc.

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All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates – Preparing financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided.

Use of Estimates –

Preparing financial statements in conformity with accounting principles generally accepted in the United States of America 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 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.

Concentrations of Credit Risk – The Bancorp grants residential, commercial real estate, commercial business and installment loans to customers primarily in Lake County, in northwest Indiana, and Cook County, in northeast Illinois.

The Bancorp is also an active lender in Porter County, and to a lesser extent, LaPorte, Newton, and Jasper counties in Indiana, and Lake and Will counties in Illinois.

Substantially all loans are secured by specific items of collateral including residences, commercial real estate, business assets, and consumer assets.

Cash Flow Reporting – For purposes of the statements of cash flows, the Bancorp considers cash on hand, noninterest bearing deposits in other financial institutions, all interest bearing deposits in other financial institutions with original maturities of 90 days or less, and federal funds sold to be cash and cash equivalents.

Concentrations of Credit Risk –

The Bancorp grants residential, commercial real estate, commercial business and installment loans to customers primarily in Lake County, in northwest Indiana, and Cook County, in northeast Illinois.

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.

Cash Flow Reporting –

For purposes of the statements of cash flows, the Bancorp considers cash on hand, noninterest bearing deposits in other financial institutions, all interest bearing deposits in other financial institutions with original maturities of 90 days or less, and federal funds sold to be cash and cash equivalents.

The Bancorp reports net cash flows for customer loan and deposit transactions and short-term borrowings with maturities of 90 days or less.

Certificates of deposits in other financial institutions – Certificates of deposits in other financial institutions generally mature within 5 years and are carried at cost.

Securities – The Bancorp classifies securities into held-to-maturity, available-for-sale, or trading categories.

Certificates of deposits in other financial institutions –

Certificates of deposits in other financial institutions generally mature within 5 years and are carried at cost.

Securities –

The Bancorp classifies securities into held-to-maturity, available-for-sale, or trading categories.

Held-to-maturity securities are those which management has the positive intent and the Bancorp has the ability to hold to maturity, and are reported at amortized cost.

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Available-for-sale securities are reported at fair value, with unrealized gains and losses reported in other comprehensive income, net of tax.

At December 31, 2019, and 2018, all of the Bancorp’s securities were classified as available-for-sale.

At December 31, 2020, and 2019, all of the Bancorp’s securities were classified as available-for-sale.

The Bancorp does not have a held to maturity or trading portfolio.

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If either of these conditions are 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 credit loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.

Page 56 of 100

Loans Held-for-Sale – Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair market value, as determined by outstanding commitments from investors.

Loans Held-for-Sale –

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair market value, as determined by outstanding commitments from investors.

Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

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Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Loans and Loan Interest Income – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, and net deferred loan fees and costs.

Loans and Loan Interest Income –

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, and net deferred loan fees and costs.

Interest income is accrued on the unpaid principal balance.

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Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses – The allowance for loan losses (allowance) is a valuation allowance for probable incurred credit losses.

Allowance for Loan Losses –

The allowance for loan losses (“allowance”) is a valuation allowance for probable incurred credit losses.

Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

1 unchanged sentence

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

A loan is considered impaired when, based on current information and events, it is probable that the Bancorp will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

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Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.

Accordingly, the Bancorp does not separately identify individual consumer and residential loans for impairment disclosures.

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Troubled Debt Restructures – A troubled debt restructuring of a loan is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule.

Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are normally collectively evaluated for impairment, unless part of a larger relationship or a trouble debt restructuring.

Troubled Debt Restructures –

A troubled debt restructuring of a loan is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule.

All modified loans are evaluated to determine whether the loan should be reported as a troubled debt restructure (TDR).

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An overall general decline in the economy or some level of deterioration in a borrower's financial condition does not inherently mean the borrower is experiencing financial difficulties.

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides entities with optional temporary relief from certain accounting and financial reporting requirements under U.S.

Section 4013 of the CARES Act allows financial institutions to suspend application of certain TDR accounting guidance for loan and lease modifications related to the COVID- 19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID- 19 national emergency, provided certain criteria are met.

Section 4013 of the CARES Act was amended on December 27, 2020 to extend this relief until January 1, 2022.

The relief can be applied to loan and lease modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan and lease modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan.

The Company chose to apply this relief to eligible loan and lease modifications.

At December 31, 2020, loan and lease modification balances related to the COVID- 19 pandemic were $ 14.9 million.

Some of the factors considered by management when determining whether a borrower is experiencing financial difficulties are:

( 1 ) is the borrower currently in default on any of its debts, ( 2 ) has the borrower declared or is the borrower in the process of declaring bankruptcy, and ( 3 ) absent the current modification, the borrower would likely default.

Federal Home Loan Bank Stock – The Bank is a member of the FHLB system.

Federal Home Loan Bank Stock –

The Bank is a member of the FHLB system.

Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.

1 unchanged sentence

Both cash and stock dividends are reported as income.

Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.

Transfers of Financial Assets –

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.

Control over transferred assets is deemed to be surrendered when ( 1 ) the assets have been isolated from the Bancorp, ( 2 ) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and ( 3 ) the Bancorp does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and Equipment – Land is carried at cost.

Premises and Equipment –

Land is carried at cost.

Premises and equipment are carried at cost less accumulated depreciation.

1 unchanged sentence

Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 2 to 10 years.

Foreclosed Real Estate – Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis.

Foreclosed Real Estate –

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis.

If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense.

Operating costs after acquisition are expensed.

Long-term Assets – Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows.

Long-term Assets –

Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows.

If impaired, the assets are recorded at fair value.

Bank Owned Life Insurance – The Bancorp has purchased life insurance policies on certain key executives.

Bank Owned Life Insurance –

The Bancorp has purchased life insurance policies on certain key executives.

In accordance with accounting for split-dollar life insurance, Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Goodwill and Intangibles – The Bancorp records the assets acquired, including identified intangible assets, and the liabilities assumed in acquisitions at their fair values.

Goodwill and Intangibles –

The Bancorp records the assets acquired, including identified intangible assets, and the liabilities assumed in acquisitions at their fair values.

These fair values often involve estimates based on third -party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates or other relevant factors.

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An impairment loss is recognized for any excess of carrying value over fair value of the goodwill or the indefinite-lived intangible asset.

Repurchase Agreements – Substantially, all repurchase agreement liabilities represent amounts advanced by various customers that are not covered by federal deposit insurance and are secured by securities owned by the Bancorp.

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Income Taxes – Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

Repurchase Agreements –

Substantially, all repurchase agreement liabilities represent amounts advanced by various customers that are not covered by federal deposit insurance and are secured by securities owned by the Bancorp.

Income Taxes –

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates.

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Accordingly, the Bancorp has not recorded any reserves or related accruals for interest and penalties for uncertain tax positions at December 31, 2020 and 2019.

Loan Commitments and Related Financial Instruments – Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs.

Loan Commitments and Related Financial Instruments –

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs.

The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.

Such financial instruments are recorded when they are funded.

Earnings Per Common Share – Basic earnings per common share is net income divided by the weighted-average number of common shares outstanding during the period.

As part of mortgage banking operations, the Company enters into commitments to originate loans whereby the interest rate on these loans is determined prior to funding (“interest rate lock commitments”).

Similar to loans held for sale, the fair value of rate lock commitments is subject to change primarily due to changes in interest rates.

The interest rate lock commitments on mortgage loans intended to be sold are recorded at fair value with changes in fair value recorded in current earnings as part of gain on sale of loans held-for-sale, net.

Earnings Per Common Share –

Basic earnings per common share is net income divided by the weighted-average number of common shares outstanding during the period.

The restricted shares issued provide for dividend and voting rights and are therefore considered participating securities.

Accordingly, all restricted stock is included in basic earnings per share.

Comprehensive Income – Comprehensive income consists of net income and other comprehensive income.

Comprehensive Income –

Comprehensive income consists of net income and other comprehensive income.

Other comprehensive income includes unrealized gains and losses on securities available-for-sale and the unrecognized gains and losses on postretirement benefits.

Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Loss Contingencies –

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Management does not believe such matters currently exist that will have a material effect on the financial statements.

Restrictions on Cash ––ative contracts entered into by the Bancorp, $2.3 million was pledged as collateral at December 31, 2019, no funds were pledged at December 31, 2018.

Restrictions on Cash ––

Cash on hand or on deposit with the Federal Reserve Bank of $2.2 million was required to meet regulatory reserve and clearing requirements at December 31, 2019.

As of March 26, 2020, the Federal Reserve Bank eliminated reserve requirements for certain depository institutions, including the Bank.

As such, there was no reserve requirement at December 31, 2020.

These balances do not earn interest.

As part of derivative contracts entered into by the Bancorp, $ 3.9 million and $ 2.3 million was pledged as collateral at December 31, 2020 and 2019, respectively.

These balances are included in interest bearing deposits.

Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note.

Fair Value of Financial Instruments –

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note.

Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular instruments.

Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments – While the Bancorp's executive management monitors the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a company-wide basis.

Operating Segments –

While the Bancorp's executive management monitors the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a company-wide basis.

Accordingly, all of the Bancorp's financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassification – Certain amounts appearing in the consolidated financial statements and notes thereto for the year ended December 31, 2018, may have been reclassified to conform to the December 31, 2019 presentation.

Trust Assets – Assets of the Bancorp’s wealth management department, other than cash on deposit at the Bancorp, are not included in these consolidated financial statements because they are not assets of the Bancorp.

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Adoption of New Accounting Pronouncements –

In May 2014, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2014-09 and ASU 2015-14, Revenue from Contracts with Customers (Topic 606), superseding the current revenue recognition requirements in Topic 605, Revenue Recognition.

The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.

The new guidance was effective for the Bancorp's year ending December 31, 2018 and has been adopted as of January 1, 2018.

The use of the modified retrospective approach has been used for implementing this standard.

Interest income is outside of the scope of the new standard and was not impacted by the adoption of the standard.

Management mapped noninterest income accounts to their associated income streams and applied the five step model to identify the contract, identify the performance obligations in the contract, determine the total transaction price, allocate the transaction price to each performance obligation, and ensure revenue is recognized when the performance obligation is satisfied.

A review of the Bancorp’s noninterest income has not resulted in a change in revenue recognition since adoption.

In January 2016, FASB issued ASU No.

2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.

The ASU covers various changes to the accounting, measurement, and disclosures related to certain financial instruments, including requiring equity investments to be accounted for at fair value with changes recorded through earnings, the use of the exit price when measuring fair value, and disaggregation of financial assets and liabilities by category for disclosure purposes.

The new guidance was effective for the Bancorp's year ending December 31, 2018 and was adopted on January 1, 2018.

The adoption of this ASU has not had a material impact on the consolidated financial statements, as the Bancorp does not hold any equity securities with unrealized gains or losses.

The new reporting requirements have been incorporated into the fair value of financial instruments table and disclosures.

In February 2016, FASB issued ASU No.

2016-02, Leases, which superseded the lease requirements in ASC 840.

The ASU requires lessees to recognize a right-of-use asset and related lease liability for all leases, with a limited exception for short-term leases.

Leases are classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations.

Prior to this ASU, leases were classified as either capital or operating, with only capital leases recognized on the balance sheet.

The reporting of lease-related expenses in the statements of operations and cash flows under the new guidance is generally consistent with the prior guidance.

The new guidance is effective for the Bancorp's year ending December 31, 2019 and was adopted on January 1, 2019.

The adoption of this ASU has not had a material impact on the consolidated financial statements, as the Bancorp does not engage in the leasing of property or in leasing of any significant furniture, fixtures, equipment, or software.

Upcoming Accounting Pronouncements -

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 and held-to-maturity 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's year ending December 31, 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 during the year and finalizing a method or methods of adoption in time for the effective date.

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In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350):

Reclassification –

Certain amounts appearing in the consolidated financial statements and notes thereto for the year ended December 31, 2019, may have been reclassified to conform to the December 31, 2020 presentation.

Trust Assets –

Assets of the Bancorp’s wealth management department, other than cash on deposit at the Bancorp, are not included in these consolidated financial statements because they are not assets of the Bancorp.

Adoption of New Accounting Pronouncements –

In January 2017, the FASB issued ASU 2017 - 04, Intangibles –

Goodwill and Other (Topic 350 ):

Simplifying the Test for Goodwill Impairment.

This Standard simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.

Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.

In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU No.

2017 - 04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.

However, under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

However, under the amendments in this ASU, an entity should ( 1 ) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and ( 2 ) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Additionally, ASU No.

2017 - 04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test.

Finally, this ASU amends the Overview and Background sections of the Accounting Standards Codification as part of the FASB’s initiative to unify and improve such sections across Topics and Subtopics.

The new guidance will be effective for the Company’s year ending December 31, 2020.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20):

The new guidance is effective for the Company’s year ending December 31, 2020, and was adopted on January 1, 2020.

The adoption of this ASU has not had a material impact on the consolidated financial statements, and the Bancorp has not recorded goodwill impairment to date related to their acquisition activity.

In March 2017, the FASB issued ASU 2017 - 08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310 - 20 ):

Premium Amortization on Purchased Callable Debt Securities.

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In fact, in most cases, market participants price securities to the call date that produces the worst yield when the coupon is above current market rates (i.e., the security is trading at a premium), and price securities to maturity when the coupon is below market rates (i.e., the security is trading at a discount), in anticipation that the borrower will act in its economic best interest.

The new guidance will be effective for the Company’s year ending December 31, 2020.

Management will recognize amortization expense as dictated by the amount of premiums and the differences between maturity and call dates at the time of adoption.

NOTE 2 – Acquisition Activity

On July 26, 2018, the Bancorp completed its acquisition of First Personal Financial Corp., a Delaware corporation (“First Personal”), pursuant to an Agreement and Plan of Merger dated February 20, 2018 between the Bancorp and First Personal (the “First Personal Merger Agreement”).

Pursuant to the terms of the First Personal Merger Agreement, First Personal merged with and into the Bancorp, with the Bancorp as the surviving corporation.

Simultaneous with the First Personal Merger, First Personal Bank, an Illinois state chartered commercial bank and wholly-owned subsidiary of First Personal, merged with and into the Bank, with the Bank as the surviving institution.

In connection with the First Personal Merger, each First Personal stockholder holding 100 or more shares of First Personal common stock received fixed consideration of (i) 0.1246 shares of Bancorp common stock, and (ii) $6.67 per share in cash for each outstanding share of First Personal common stock.

Stockholders holding less than 100 shares of First Personal common stock received $12.12 in cash and no stock consideration for each outstanding share of First Personal common stock.

Any fractional shares of Bancorp common stock that a First Personal stockholder would have otherwise received in the First Personal Merger were cashed out in the amount of such fraction multiplied by $42.95.

The Bancorp issued a total of approximately 161,875 shares of Bancorp common stock to the former First Personal stockholders, and paid cash consideration of approximately $8.7 million.

Based upon the closing price of Bancorp’s common stock on July 25, 2018, the transaction had an implied valuation of approximately $15.6 million.

The acquisition costs related to the First Personal Merger equaled approximately $1.8 million.

The acquisition represented the Bank’s first expansion into the South Suburban Chicagoland market, and expanded the Bank’s full-service retail banking network to 19 banking centers.

Additionally, upon the closing of the merger the three former First Personal Bank branches in Cook County, Illinois became branches of Peoples Bank, thereby expanding the Peoples Bank branch network into Illinois.

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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, the final purchase price for the First Personal acquisition is allocated as follows:

Cash and due from banks

Certificates of deposit in other financial institutions

Investment securities, available for sale

Residential mortgage

Premises and equipment, net

Core deposit intangible

Interest receivable

Total assets purchased

Common shares issued

Total purchase price

Non-interest bearing

Savings and money market

Certificates of deposits

Total Deposits

Interest payable

Other liabilities

Total liabilities assumed

As part of the First Personal merger, the Bancorp acquired First Personal Statutory Trust I.

NWIN guaranteed the payment of distributions on the trust preferred securities issued by First Personal Statutory Trust I.

First Personal Statutory Trust I issued $4.124 million in trust preferred securities in May 2004.

The trust preferred securities carried a variable rate of interest priced at the three-month LIBOR plus 275 basis points, payable quarterly and due to mature on June 17, 2034.

Management of the Bancorp determined that the continued maintenance of the trust preferred securities issued by First Personal Statutory Trust I and the corresponding junior subordinated debentures was unnecessary to the Bancorp’s ongoing operations.

As a result, the Bancorp’s board of directors approved the redemption of the junior subordinated debentures, which resulted in the trustee of the First Personal Statutory Trust I redeeming all $4.124 million of the trust preferred securities as of December 17, 2018.

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 NWIN, with NWIN as the surviving corporation.

The new guidance was effective for the Company’s year ending December 31, 2019, and was adopted on January 1, 2019.

The adoption of this ASU has not had a material impact on the consolidated financial statements, management has recognized amortization expense as dictated by the amount of premiums and the differences between maturity and call dates at the time of adoption.

Upcoming Accounting Pronouncements -

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.