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EX-31.2 - EXHIBIT 31.2 - West End Indiana Bancshares, Inc.ex31-2.htm
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UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2014
 
OR
 
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from _______________ to _______________
 
Commission File No. 000-54578
 
West End Indiana Bancshares, Inc.
(Exact name of registrant as specified in its charter)
 
Maryland
 
36-4713616
(State or other jurisdiction of
in Company or organization)
 
(I.R.S. Employer
Identification Number)
     
34 South 7th Street, Richmond, Indiana
 
47374
(Address of Principal Executive Offices)
 
Zip Code
 
(765) 962-9587
(Registrant’s telephone number)
 
N/A
(Former name or former address, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
YES x     NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x     NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one)
     
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company x
(Do not check if smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o     NO x
 
As of August 13, 2014, there were 1,378,422 issued and outstanding shares of the Registrant’s Common Stock.
 
 
 

 


West End Indiana Bancshares, Inc.
Form 10-Q
 
Index
         
       
Page
Part I. Financial Information
         
Item 1.
 
Condensed Consolidated Financial Statements
   
         
   
Condensed Consolidated Balance Sheets
 
1
         
   
Condensed Consolidated Statements of Income
 
2
         
   
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
3
         
   
Condensed Consolidated Statements of Cash Flows
 
4
         
   
Condensed Statement of Stockholders’ Equity
 
5
         
   
Notes to Condensed Consolidated Financial Statements (unaudited)
 
6
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
34
         
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
42
         
Item 4.
 
Controls and Procedures
 
42
         
Part II. Other Information
         
Item 1.
 
Legal Proceedings
 
42
         
Item 1A.
 
Risk Factors
 
42
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
42
         
Item 3.
 
Defaults upon Senior Securities
 
43
         
Item 4.
 
 Mine Safety Disclosures
 
43
         
Item 5.
 
Other Information
 
43
         
Item 6.
 
Exhibits
 
43
         
   
Signature Page
 
44
 
 
 

 

 
Part I. – Financial Information
 
Item 1.
Financial Statements
 
West End Indiana Bancshares, Inc.
Condensed Consolidated Balance Sheets
 
   
June 30,
2014
   
December 31,
2013
 
   
(Unaudited)
       
Assets
           
Cash and due from banks
  $ 1,486,120     $ 1,347,060  
Interest-bearing demand deposits
    8,460,545       5,334,141  
Cash and cash equivalents
    9,946,665       6,681,201  
Investment securities available for sale
    49,323,645       59,655,585  
Loans held for sale
    507,625       933,396  
Loans, net of allowance for loan losses of $2,282,143 and $2,398,233
    181,923,285       171,352,984  
Premises and equipment
    3,558,151       3,651,257  
Federal Home Loan Bank stock
    1,722,100       1,722,100  
Interest receivable
    910,186       1,068,383  
Bank-owned life insurance
    5,087,489       5,024,319  
Foreclosed real estate held for sale
    90,845       382,450  
Other assets
    3,225,756       3,894,769  
                 
Total assets
  $ 256,295,747     $ 254,366,444  
                 
Liabilities and Equity
               
                 
Liabilities
               
Deposits
  $ 197,964,538     $ 198,370,291  
Federal Home Loan Bank advances
    27,000,000       26,000,000  
Interest payable
    64,301       71,450  
Other liabilities
    910,773       988,073  
Total liabilities
    225,939,612       225,429,814  
                 
Commitments and Contingencies
               
                 
Stockholders’ Equity
               
Common stock, $.01 par value per share: Issued and outstanding – 1,378,422 and 1,379,548
    13,784       13,795  
Additional paid in capital
    11,799,164       11,657,969  
Retained earnings
    19,842,598       19,399,094  
Unearned employee stock ownership plan (ESOP)
    (980,700 )     (1,008,720 )
Accumulated other comprehensive loss
    (318,711 )     (1,125,508 )
Total stockholders’ equity
    30,356,135       28,936,630  
Total liabilities and stockholders’ equity
  $ 256,295,747     $ 254,366,444  
 
The accompanying notes are an integral part of these financial statements.
 
1
 

 

 

 
West End Indiana Bancshares, Inc.
Condensed Consolidated Statements of Income
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(Unaudited)
 
Interest and Dividend Income
                       
Loans receivable, including fees
  $ 2,666,927     $ 2,471,845     $ 5,184,833     $ 4,911,353  
Investment securities
    255,475       246,124       574,556       548,857  
Other
    18,873       16,117       45,580       33,203  
Total interest income
    2,941,275       2,734,086       5,804,969       5,493,413  
                                 
Interest Expense
                               
Deposits
    306,146       348,505       611,891       733,610  
Federal Home Loan Bank advances
    95,466       141,356       205,686       280,753  
Total interest expense
    401,612       489,861       817,577       1,014,363  
                                 
Net Interest Income
    2,539,663       2,244,225       4,987,392       4,479,050  
Provision for loan losses
    525,000       246,000       869,000       505,000  
Net Interest After Provision for Loan Losses
    2,014,663       1,998,225       4,118,392       3,974,050  
                                 
Other Income
                               
Service charges on deposit accounts
    149,600       138,191       279,020       274,219  
Loan servicing income (loss), net
    14,534       (26,689 )     14,920       24,565  
Debit card income
    72,041       63,069       138,481       119,794  
Gain on sale of loans
    118,555       75,875       151,206       184,256  
Net realized gains on sales of available-for-sale securities (includes $105,596 and $19,839, $105,596 and $19,839, respectively, related to accumulated other comprehensive earnings reclassifications)
    105,596       19,839       105,596       19,839  
Gain on cash surrender value of life insurance
    28,354       37,200       63,169       74,400  
Gain (loss) on sale of other assets
    37,092       1,483       13,156       (61,834 )
Other income
    5,511       2,549       11,219       5,646  
Total other income
    531,283       311,517       776,767       640,885  
                                 
Other Expense
                               
Salaries and employee benefits
    1,167,927       1,016,607       2,276,514       2,014,645  
Net occupancy
    131,368       127,289       269,746       239,720  
Data processing fees
    77,207       86,785       157,793       169,869  
Professional fees
    142,621       104,272       232,029       221,269  
Director expenses
    41,490       59,079       90,492       117,715  
Advertising
    50,343       66,783       94,026       115,812  
ATM charges
    58,004       47,886       107,524       85,813  
Postage and courier
    53,716       48,867       106,730       91,713  
FDIC insurance premiums
    51,700       44,000       101,200       89,401  
Other expenses
    298,732       282,093       584,948       610,693  
Total other expenses
    2,073,108       1,883,661       4,021,002       3,756,650  
                                 
Income Before Income Tax
    472,838       426,081       874,157       858,285  
Income tax expense (includes $41,827 and $7,858, $41,827 and $7,858, respectively, related to income tax expense from reclassification items)
    148,463       132,665       278,556       268,060  
                                 
Net Income
  $ 324,375     $ 293,416     $ 595,601     $ 590,225  
Earnings Per Share
                               
Basic
  $ 0.25     $ 0.23     $ 0.47     $ 0.46  
Diluted
    0.25       0.23       0.47       0.46  
Dividends Per Share
    0.06       0.06       0.12       0.12  
 
The accompanying notes are an integral part of these financial statements.
 
2
 

 

 
West End Indiana Bancshares, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
   
Three Months Ended
June 30
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(Unaudited)
 
Net income
  $ 324,375     $ 293,416     $ 595,601     $ 590,225  
Other comprehensive income (loss), net of tax
                               
Unrealized holding gains (loss) arising during the period, net of tax expense (benefit) of $305,916 and $(784,704), $570,785 and $(922,598)
    466,573       (1,196,877 )     870,566       (1,407,200 )
Less:  Reclassification adjustment for gains included in net income, net of tax expense of $41,827 and $7,858, $41,827 and $7,858
    63,769       11,981       63,769       11,981  
      402,804       (1,208,858 )     806,797       (1,419,181 )
                                 
Comprehensive income (loss)
  $ 727,179     $ (915,442 )   $ 1,402,398     $ (828,956 )
 
The accompanying notes are an integral part of these financial statements.
 
3
 

 

 
West End Indiana Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows
 
   
Six Months Ended
June 30,
 
   
2014
   
2013
 
   
(Unaudited)
 
Operating Activities
           
Net income
  $ 595,601     $ 590,225  
Items not requiring (providing) cash
               
Provision for loan losses
    869,000       505,000  
Depreciation and amortization
    127,223       114,870  
Investment securities amortization, net
    381,881       560,607  
Investment securities gains
    (105,596 )     (19,839 )
Loan originated for sale
    (4,790,789 )     (6,723,188 )
Proceeds on loan sold
    5,284,526       6,866,878  
Gain on loans sold
    (151,206 )     (184,256 )
Net change in
               
Interest receivable
    158,197       28,294  
Interest payable
    (7,149 )     (4,416 )
Cash surrender value of life insurance
    (63,169 )     (74,400 )
Prepaid FDIC insurance
          207,202  
Other adjustments
    278,404       (717,930 )
Net cash provided by operating activities
    2,576,923       1,149,047  
                 
Investing Activities
               
Purchases of securities available for sale
    (2,736,730 )     (14,170,111 )
Proceeds from maturities of securities available for sale
    4,240,595       6,362,010  
Proceeds from sales of securities available for sale
    9,887,545       471,527  
Net change in loans
    (11,461,560 )     (6,469,598 )
Purchase of premises and equipment
    (34,117 )     (155,363 )
Proceeds from sale of foreclosed real estate
    372,051       25,866  
Net cash provided by (used in) investing activities
    267,784       (13,935,669 )
                 
Financing Activities
               
Net change in demand deposits, money market, NOW, and savings accounts
    2,811,775       7,443,445  
Net change in certificates of deposit
    (3,217,528 )     3,333,557  
Repurchased shares
    (21,393 )     (736,046 )
Repayment of FHLB advances
    (11,000,000 )     (4,000,000 )
Proceeds from FHLB advances
    12,000,000       9,500,000  
Cash dividends
    (152,097 )     (232,007 )
Net cash provided by financing activities
    420,757       15,308,949  
                 
Net Change in Cash and Cash Equivalents
    3,265,464       2,522,327  
                 
Cash and Cash Equivalents, Beginning of Period
    6,681,201       10,708,357  
                 
Cash and Cash Equivalents, End of Period
  $ 9,946,665     $ 13,230,684  
                 
Additional Cash Flows Information
               
Interest paid
  $ 824,726     $ 1,018,780  
Income tax paid
    280,000       760,000  
Real estate acquired in settlement of loans
    370,932       401,981  
Sale and financing of foreclosed real estate
    311,385       395,273  
 
The accompanying notes are an integral part of these financial statements.
 
4
 

 

 
West End Indiana Bancshares, Inc.
Condensed Statement of Changes in Stockholders’ Equity
For the Six Months Ended June 30, 2014
                                           
   
Common Stock
                     
Accumulated
       
   
Shares
Outstanding
     
Amount
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Unearned
ESOP
Shares
   
Other
Comprehensive
Income (Loss)
   
Total
Stockholders’
Equity
 
   
(Unaudited)
 
Balances at January 1, 2014
    1,379,548     $ 13,795     $ 11,657,969     $ 19,399,094     $ (1,008,720 )   $ (1,125,508 )   $ 28,936,630  
Net income
                      595,601                   595,601  
Other comprehensive loss
                                  806,797       806,797  
ESOP shares earned
                22,948             28,020             50,968  
Stock Based Compensation Expense
                139,629                         139,629  
Shares Repurchased
    (1,126 )     (11 )     (21,382 )                       (21,393 )
Cash dividends ($0.12 per share)
                      (152,097 )                 (152,097 )
Balances at June 30, 2014
    1,378,422     $ 13,784     $ 11,799,164     $ 19,842,598     $ (980,700 )   $ (318,711 )   $ 30,356,135  
 
The accompanying notes are an integral part of these financial statements.
 
5
 

 

 
West End Indiana Bancshares, Inc.
Form 10-Q
 
Notes to Condensed Consolidated Financial Statements
 
NOTE 1: Nature of Operations and Conversion
 
West End Bank, S.B. (the “Bank”), is an Indiana-chartered savings bank headquartered in Richmond, Indiana that was organized in 1984 and it is the wholly owned subsidiary of West End Indiana Bancshares, Inc. (the “Company”), a Maryland corporation.
 
The Bank provides financial services to individuals, families and businesses through its four banking offices located in the Indiana counties of Union and Wayne and limited service branches located in the elementary schools and high school in Richmond, Indiana at which the Bank offers more limited banking services and at which it provides banking seminars to students who assist in the branch operations.  Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations, and to a lesser extent, borrowings, in one- to four- family residential real estate loans, indirect automobile loans, commercial and multi-family real estate loans, and to a lesser extent, second mortgages and equity lines of credit, construction loans and commercial business loans.  We also purchase investment securities consisting primarily of SBA loan pools, municipal bonds, and mortgage-backed securities.
 
The Bank reorganized into a mutual holding company structure in 2007.  On January 11, 2012, in accordance with a Plan of Conversion and Reorganization ( the “Conversion”), West End Bank, MHC (MHC), the Bank’s former federally chartered mutual holding company completed a mutual-to-stock conversion pursuant to which the Bank became the wholly owned subsidiary of the Company. In connection with the Conversion, the Company sold 1,363,008 shares of common stock, at an offering price of $10 per share, and issued an additional 38,000 shares of its common stock to the West End Bank Charitable Foundation (the “Foundation”), resulting in an aggregate issuance of 1,401,008 shares of common stock.  The Company’s stock began being quoted on the OTC Bulletin Board on January 11, 2012, under the symbol “WEIN.”
 
The proceeds from the stock offering net of issuance costs of $1,092,000 amounted to $12,537,000.
 
Also, in connection with the Conversion, the Bank established an employee stock ownership plan (“ESOP”), which purchased 112,080 shares of the Company’s common stock at a price of $10 per share.
 
6
 

 

 
In accordance with Federal conversion regulations, at the time of the Conversion from a mutual holding company to a stock holding company, the Company was required to substantially restrict retained earnings by establishing a liquidation account and the Bank established a parallel liquidation account.  The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after conversion.  The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits.  Subsequent increases will not restore an eligible account holder’s interest in the liquidation account.  In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution for the liquidation account in an amount proportionate to the adjusted qualifying account balances then held.  The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.
 
The Conversion was accounted for as a change in corporate form with the historical basis of the MHC’s consolidated assets, liabilities and equity unchanged as a result.
 
NOTE 2: Basis of Presentation
 
The accompanying unaudited consolidated condensed financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.  Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in the Annual Report on Form 10-K for the year ended December 31, 2013.  However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included.  The results of operations for the three-month and six-month periods ended June 30, 2014, are not necessarily indicative of the results which may be expected for the entire year. The consolidated condensed balance sheet of the Company as of December 31, 2013 has been derived from the audited consolidated balance sheet of the Company as of that date.
 
NOTE 3: Principles of Consolidation
 
The consolidated financial statements include the accounts of West End Indiana Bancshares, Inc. and its wholly owned subsidiary, West End Bank, S.B.  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
7
 

 

 
NOTE 4: Securities
 
The amortized cost and approximate fair values of securities are as follows:
 
   
June 30, 2014 (Unaudited)
   
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Approximate
Fair Value
 
 
   
(In Thousands)
   
Available for sale
                     
Municipal bonds
  $ 12,398     $ 52     $ (312 )   $ 12,138  
Mortgage-backed securities - GSE residential
    37,453       176       (443 )     37,186  
Total available for sale
  $ 49,851     $ 228     $ (755 )   $ 49,324  
 
   
December 31, 2013
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Approximate
Fair Value
 
   
(In Thousands)
 
Available for sale
                       
Municipal Bonds
  $ 16,254     $ 3     $ (1,219 )   $ 15,038  
SBA loan pools
    2,787       16       (7 )     2,796  
Mortgage-backed securities – GSE residential
    42,478       187       (843 )     41,822  
Total available for sale
  $ 61,519     $ 206     $ (2,069 )   $ 59,656  
 
The amortized cost and fair value of securities available for sale at June 30, 2014 (unaudited) and December 31, 2013, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
June 30, 2014 (Unaudited)
   
December 31, 2013
 
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
   
(In Thousands)
 
One to five years
  $     $     $     $  
Five to ten years
    4,027       3,983       4,522       4,339  
After ten years
    8,371       8,155       11,732       10,699  
      12,398       12,138       16,254       15,038  
SBA loan pools
                2,787       2,796  
Mortgage-backed securities - GSE residential
    37,453       37,186       42,478       41,822  
Totals
  $ 49,851     $ 49,324     $ 61,519     $ 59,656  
 
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $1,931,000 at June 30, 2014 (unaudited).  Securities pledged at December 31, 2013 were $402,000.
 
8
 

 

 
Activities related to the sales of securities available for sale for the three and six months ended June 30, 2014 (unaudited) and 2013 (unaudited) are summarized as follows:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(In Thousands)
 
Proceeds from sales of available-for sale securities
  $ 9,888     $ 472     $ 9,888     $ 472  
Gross gains on sales
    146       20       146       20  
Gross losses on sales
    40             40        
 
Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost.  Total fair value of these investments at June 30, 2014 (unaudited) and December 31, 2013 was $35,067,000 and $47,669,000, which is approximately 71% and 80% of the Company’s available-for-sale investment portfolio.  These declines primarily resulted from changes in market interest rates.
 
Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.
 
Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
 
Securities with unrealized losses at June 30, 2014 (unaudited) were as follows:
 
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
 
   
(In Thousands)
 
Available-for-sale securities
                                   
Municipal bonds
  $     $     $ 9,609     $ (312 )   $ 9,609     $ (312 )
Mortgage-backed securities - GSE residential
    3,442       (6 )     22,016       (437 )     25,458       (443 )
    $ 3,442     $ (6 )   $ 31,625     $ (749 )   $ 35,067     $ (755 )
 
Securities with unrealized losses at December 31, 2013 were as follows:
 
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
 
   
(In Thousands)
 
Available-for-sale securities
                                   
Municipal bonds
  $ 12,307     $ (995 )   $ 1,954     $ (224 )   $ 14,261     $ (1,219 )
SBA loan pools
    1,247       (7 )                 1,247       (7 )
Mortgage-backed securities - GSE residential
    23,176       (593 )     8,985       (250 )     32,161       (843 )
    $ 36,730     $ (1,595 )   $ 10,939     $ (474 )   $ 47,669     $ (2,069 )
 
9
 

 

 
 
 
Municipal Bonds
 
The unrealized losses on the Company’s investments in municipal bonds were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2014.
 
Mortgage-backed Securities – GSE Residential
 
The unrealized losses on the Company’s investment in mortgage-backed securities were caused by interest rate increases. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2014.
 
NOTE 5: Loans and Allowance
 
The Company’s loan and allowance policies are as follows:
 
Loans
 
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
 
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
 
For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
 
Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.
 
For all loan portfolio segments except residential and consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.
 
10
 

 

 
The Company charges off residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.
 
For all for classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.
 
When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms.
 
Allowance for Loan Losses
 
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
 
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
 
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical charge-off experience by segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years. Management believes the three year historical loss experience methodology is appropriate in the current economic environment. Other adjustments (qualitative/environmental considerations) for each segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
 
11
 

 

 
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due based on the loan’s current payment status and the borrower’s financial condition including available sources of cash flows. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for non-homogenous type loans such as commercial, non-owner residential and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Company utilizes the discounted cash flows to determine the level of impairment, the Company includes the entire change in the present value of cash flows as bad debt expense.
 
The fair values of collateral dependent impaired loans are based on independent appraisals of the collateral. In general, the Company acquires an updated appraisal upon identification of impairment and annually thereafter for commercial, commercial real estate and multi-family loans. If the most recent appraisal is over a year old, and a new appraisal is not performed, due to lack of comparable values or other reasons, the existing appraisal is utilized and discounted 25% - 35% based on the age of the appraisal, condition of the subject property, and overall economic conditions. After determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses. The potential for outdated appraisal values is considered in our determination of the allowance for loan losses through our analysis of various trends and conditions including the local economy, trends in charge-offs and delinquencies, etc. and the related qualitative adjustments assigned by the Company.
 
Segments of loans with similar risk characteristics are collectively evaluated for impairment based on the segment’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
 
12
 

 

 
Categories of loans include:
             
   
(Unaudited)
       
   
June 30,
2014
   
December 31,
2013
 
 
   
(In Thousands)
 
       
Commercial
  $ 11,779     $ 9,114  
Real estate loans
               
Residential
    62,867       60,960  
Commercial and multi-family
    36,442       35,915  
Construction
    1,887       1,475  
Second mortgages and equity lines of credit
    4,562       4,372  
Consumer loans
               
Indirect
    53,398       50,829  
Other
    13,391       11,208  
      184,326       173,873  
Less
               
Net deferred loan fees, premiums and discounts
    121       122  
Allowance for loan losses
    2,282       2,398  
                 
Total loans
  $ 181,923     $ 171,353  
 
 
The risk characteristics of each loan portfolio segment are as follows:
 
Commercial
 
Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
 
Commercial and multi-family real estate
 
These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and multi-family real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.
 
Commercial and multi-family real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial and multi-family real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
 
13
 

 

 
Construction
 
Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
 
Residential, Second mortgages and equity lines of credit and Consumer
 
With respect to residential loans that are secured by 1-4 family residences, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Second mortgages and equity lines of credit loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
 
14
 

 

The following table presents by portfolio segment the activity in the allowance for loan losses for the three and six months ended June 30, 2014 (unaudited) and 2013 (unaudited):
       
   
(Unaudited)
 
         
Real Estate
             
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
Three Months Ended June 30, 2014:
                                         
Balance, beginning of period
  $ 30     $ 451     $ 1,227     $     $ 37     $ 690     $ 2,435  
Provision for losses
    (2 )     228       186             (1 )     114       525  
Recoveries on loans
          5                         36       41  
Loans charged off
          (235 )     (333 )                 (151 )     (719 )
Balance, end of year
  $ 28     $ 449     $ 1,080     $     $ 36     $ 689     $ 2,282  
Six Months Ended June 30, 2014
                                                       
Balance, beginning of year
  $ 36     $ 433     $ 1,238     $     $ 35     $ 656     $ 2,398  
Provision for losses
    (8 )     402       175             1       299       869  
Recoveries on loans
          5                         48       53  
Loans charged off
          (391 )     (333 )                 (314 )     (1,038 )
Balance, end of year
  $ 28     $ 449     $ 1,080     $     $ 36     $ 689     $ 2,282  

               
   
(Unaudited)
 
         
Real Estate
             
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
Three Months Ended June 30, 2013:
                                         
Balance, beginning of period
  $ 56     $ 481     $ 853     $ 5     $ 33     $ 603     $ 2,031  
Provision for losses
    3       60       31       3       3       146       246  
Recoveries on loans
                                  23       23  
Loans charged off
          (55 )     (68 )                 (137 )     (260 )
Balance, end of year
  $ 59     $ 486     $ 816     $ 8     $ 36     $ 635     $ 2,040  
Six Months Ended June 30, 2013:
                                                       
Balance, beginning of year
  $ 54     $ 542     $ 829     $ 4     $ 32     $ 552     $ 2,013  
Provision for losses
    5       32       55       4       15       394       505  
Recoveries on loans
          3                         33       36  
Loans charged off
          (91 )     (68 )           (11 )     (344 )     (514 )
Balance, end of year
  $ 59     $ 486     $ 816     $ 8     $ 36     $ 635     $ 2,040  
 
15
 

 

 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2014 (unaudited) and December 31, 2013:
       
   
(Unaudited)
 
   
June 30, 2014
 
     
Real Estate
       
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
Allowance:
                                         
Balance, end of year
  $ 28     $ 449     $ 1,080     $     $ 36     $ 689     $ 2,282  
Individually evaluated for impairment
                955                         955  
Collectivity evaluated for impairment
    28       449       125             36       689       1,327  
Loans:
                                                       
Ending balance
    11,779       62,867       36,442       1,887       4,562       66,789       184,326  
Individually evaluated for impairment
                3,958                   28       3,986  
Collectivity evaluated for impairment
    11,779       62,867       32,484       1,887       4,562       66,761       180,340  

       
   
December 31, 2013
 
     
Real Estate
       
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
Allowance:
                                         
Balance, end of year
  $ 36     $ 433     $ 1,238     $     $ 35     $ 656     $ 2,398  
Individually evaluated for impairment
                1,087                         1,087  
Collectivity evaluated for impairment
    36       433       151             35       656       1,311  
Loans:
                                                       
Ending balance
    9,114       60,960       35,915       1,475       4,372       62,037       173,873  
Individually evaluated for impairment
                4,301                   37       4,338  
Collectivity evaluated for impairment
    9,114       60,960       31,614       1,475       4,372       62,000       169,535  
 
16
 

 

 
The following table presents the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of June 30, 2014 (unaudited) and December 31, 2013:
       
   
(Unaudited)
 
   
June 30, 2014
 
     
Real Estate
       
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
Pass
  $ 11,719     $ 62,739     $ 28,746     $ 1,887       4,463     $ 66,789     $ 176,343  
Watch
    60       17                               77  
Special Mention
          111       3,405             99             3,615  
Substandard
                2,725                         2,725  
Doubtful
                1,566                         1,566  
Loss
                                        ––  
Total
  $ 11,779     $ 62,867     $ 36,442     $ 1,887     $ 4,562     $ 66,789     $ 184,326  
                                                         

   
December 31, 2013
 
     
Real Estate
       
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
Pass
  $ 8,717     $ 60,830     $ 28,731     $ 1,475     $ 4,273     $ 62,037     $ 166,063  
Watch
    25       130       1,696                         1,851  
Special Mention
                1,187             99             1,286  
Substandard
    372       —–       4,301                         4,673  
Doubtful
                                         
Loss
                                         
Total
  $ 9,114     $ 60,960     $ 35,915     $ 1,475     $ 4,372     $ 62,037     $ 173,873  

17
 

 

 
The Company generally categorizes all classes of loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  Generally, smaller dollar consumer loans are excluded from this grading process and are reflected in the Pass category.  The delinquency trends of these consumer loans are monitored on homogeneous basis and the related delinquent amounts are reflected in the aging analysis table below.  The Company uses the following definitions for risk ratings:
 
The Pass asset quality rating encompasses assets that have generally performed as expected.  With the exception of some smaller consumer and residential loans, these assets generally do not have delinquency.  Loans assigned this rating include loans to borrowers possessing solid credit quality with acceptable risk.  Borrowers in these grades are differentiated from higher grades on the basis of size (capital and/or revenue), leverage, asset quality, stability of the industry or specific market area and quality/coverage of collateral.  These borrowers generally have a history of consistent earnings and reasonable leverage.   
 
The Watch asset quality rating encompasses assets that have been brought to the attention of management and may, if not corrected, warrant a more serious quality rating by management. These assets are usually in the first phase of a deficiency situation and may possess similar criteria as Special Mention assets.  This grade includes “pass grade” loans to borrowers which require special monitoring because of deteriorating financial results, declining credit ratings, decreasing cash flow, increasing leverage, marginal collateral coverage or industry stress that has resulted or may result in a changing overall risk profile.
 
The Special Mention asset quality rating encompasses assets that have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.  This grade is intended to include loans to borrowers whose credit quality has clearly deteriorated and where risk of further decline is possible unless active measures are taken to correct the situation.  Weaknesses are considered potential at this state and are not yet fully defined.
 
The Substandard asset quality rating encompasses assets that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; assets having a well-defined weakness(es) based upon objective evidence; assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected; or the possibility that liquidation will not be timely.  Loans categorized in this grade possess a well-defined credit weakness and the likelihood of repayment from the primary source is uncertain.  Significant financial deterioration has occurred and very close attention is warranted to ensure the full repayment without loss.  Collateral coverage may be marginal and the accrual of interest has been suspended.
 
The Doubtful asset quality rating encompasses assets that have all of the weaknesses of those classified as Substandard.  In addition, these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
 
The Loss asset quality rating encompasses assets that are considered uncollectible and of such little value that their continuance as assets of the bank is not warranted.  A loss classification does not mean that an asset has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be realized in the future.
 
The Company evaluates the loan grading system definitions and allowance for loan loss methodology on an ongoing basis.  No significant changes were made to either during 2013 or 2014.
 
18
 

 

 
The following table presents the Bank’s loan portfolio aging analysis as of June 30, 2014 (unaudited) and December 31, 2013:
       
   
(Unaudited)
 
   
June 30, 2014
 
     
Real Estate
       
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
30-59 days past due
  $ 7     $ 151     $     $     $ 10     $ 948     $ 1,116  
60-89 days past due
          238                         457       695  
Greater than 90 days and accruing
          87                   8       356       451  
Nonaccrual
          764       1,683                         2,447  
Total past due and nonaccrual
    7       1,240       1,683             18       1,761       4,709  
Current
    11,772       61,627       34,759       1,887       4,544       65,028       179,617  
                                                         
Total
  $ 11,779     $ 62,867     $ 36,442     $ 1,887     $ 4,562     $ 66,789     $ 184,326  

       
   
December 31, 2013
 
     
Real Estate
       
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
30-59 days past due
  $ 16     $ 303     $     $     $     $ 1,383     $ 1,702  
60-89 days past due
          340       6             14       314       674  
Greater than 90 days and accruing
          248                         337       585  
Nonaccrual
          978       2,016                         2,994  
Total past due and nonaccrual
    16       1,869       2,022             14       2,034       5,955  
Current
    9,098       59,091       33,893       1,475       4,358       60,003       167,918  
                                                         
Total
  $ 9,114     $ 60,960     $ 35,915     $ 1,475     $ 4,372     $ 62,037     $ 173,873  
 
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
 
19
 

 

The following table presents impaired loans and specific valuation allowance based on class level at June 30, 2014 (unaudited) and for the year ended December 31, 2013:
 
   
(Unaudited)
 
   
June 30, 2014
 
     
Real Estate
       
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
Impaired loans without a specific allowance:
                                         
Recorded investment
  $     $     $ 450     $     $     $ 28     $ 478  
Unpaid principal balance
                594                   28       622  
                                                         
Impaired loans with a specific allowance:
                                                       
Recorded investment
                3,508                         3,508  
Unpaid principal balance
                3,508                         3,508  
Specific allowance
                955                         955  
                                                         
Total impaired loans:
                                                       
Recorded investment
                3,958                   28       3,986  
Unpaid principal balance
                4,102                   28       4,130  
Specific allowance
                955                         955  

   
December 31, 2013
 
     
Real Estate
       
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
Impaired loans without a specific allowance:
                                         
Recorded investment
  $     $     $ 450     $     $     $ 37     $ 487  
Unpaid principal balance
                594                   37       631  
                                                         
Impaired loans with a specific allowance:
                                                       
Recorded investment
                3,851                         3,851  
Unpaid principal balance
                3,851                         3,851  
Specific allowance
                1,087                         1,087  
                                                         
Total impaired loans:
                                                       
Recorded investment
                4,301                   37       4,338  
Unpaid principal balance
                4,445                   37       4,482  
Specific allowance
                1,087                         1,087  

20
 

 

 
The following table present by portfolio segment information related to the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2014 (unaudited) and 2013 (unaudited):
 
   
(Unaudited)
 
         
Real Estate
             
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
Three Months Ended June 30, 2014:
                                         
Total impaired loan:
                                         
Average recorded investment
  $     $     $ 4,124     $     $     $ 30     $ 4,154  
Interest income recognized
                32                         32  
Interest income recognized on a cash basis
                                         

   
(Unaudited)
 
         
Real Estate
             
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
Six Months Ended June 30, 2014:
                                         
Total impaired loan:
                                         
Average recorded investment
  $     $     $ 4,183     $     $     $ 32     $ 4,215  
Interest income recognized
                63                         63  
Interest income recognized on a cash basis
                                         

   
(Unaudited)
 
         
Real Estate
           
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
Three Months Ended June 30, 2013:
                                         
Total impaired loan:
                                         
Average recorded investment
  $     $     $ 4,352     $     $     $     $ 4,352  
Interest income recognized
                43                         43  
Interest income recognized on a cash basis
                                         

   
(Unaudited)
 
         
Real Estate
             
   
Commercial
   
Residential
   
Commercial
and
Multi-Family
   
Construction
   
Seconds
and
Equity Line
   
Consumer
   
Total
 
   
(In Thousands)
 
Six Months Ended June 30, 2013:
                                         
Total impaired loan:
                                         
Average recorded investment
  $     $     $ 4,367     $     $     $     $ 4,367  
Interest income recognized
                94                         94  
Interest income recognized on a cash basis
                                         
 
21
 

 

 
Troubled Debt Restructurings
 
In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans.  In restructuring the loan, the Company attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified, whether through a new agreement replacing the old or via changes to an existing loan agreement, are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred.  A troubled debt restructuring occurs when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider.  Terms may be modified to fit the ability of the borrower to repay in line with its current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.  If such efforts by the Company do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated.  At any time prior to a sale of the property at foreclosure, the Company may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.
 
Nonaccrual loans, including TDRs that have not met the six month minimum performance criterion, are reported in this report as non-performing loans.  For all loan classes, it is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status.  A loan is generally classified as nonaccrual when the Company believes that receipt of principal and interest is questionable under the terms of the loan agreement.  Most generally, this is at 90 or more days past due.  If the restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status.  Loans that are considered TDR are classified as performing, unless they are on nonaccrual status or greater than 90 days past due, as of the end of the most recent quarter.
 
With regard to determination of the amount of the allowance for credit losses, all accruing restructured loans are considered to be impaired.  As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously above.
 
During the three and six months ended June 30, 2014 (unaudited) and 2013 (unaudited), there were no new restructurings classified as TDRs.  No loans restructured during the last twelve months defaulted during the three and six months ended June 30, 2014 (unaudited) and 2013.
 
22
 

 


NOTE 6:  Disclosures About Fair Value of Assets and Liabilities

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes six levels of inputs that may be used to measure fair value:
 
The standard describes six levels of inputs that may be used to measure fair value:
 
 
Level 1
Quoted prices in active markets for identical assets or liabilities
 
 
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
 
Recurring Measurements
 
The following is a description of the valuation methodologies and inputs used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
 
Available-for-Sale Securities
 
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions.  Additionally, matrix pricing is used for certain investment securities and is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities.  Level 2 securities include federal agencies, municipal bonds and mortgage-backed securities.  At June 30, 2014 (unaudited) and December 31, 2013, all mortgage-backed securities are residential government sponsored enterprises.  In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
 
Mortgage-Servicing Rights
 
Mortgage-servicing rights do not trade in an active, open market with readily observable prices.  Accordingly, fair value is estimated using discounted cash flow models having significant inputs of actual and expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions.  Due to the nature of the valuation inputs, mortgage-servicing rights are classified within Level 3 of the hierarchy.  Significant changes in any of the inputs could significantly impact the fair value measurement.
 
23
 

 


Fair value determinations for Level 3 measurements are the responsibility of the Finance Department.  The Finance Department contracts with a pricing specialist to generate fair value estimates on a quarterly basis.  The Finance Department challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States.  Using the data from the quarterly valuation, the Finance Department adjusts to fair value on a monthly basis
 
The following tables present the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2014 (unaudited) and December 31, 2013:
 
   
(Unaudited)
 
   
June 30, 2014
 
         
Fair Value Measurements Using
 
   
Fair
Value
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
   
(In Thousands)
 
Available-for-sale securities:
                       
Municipal bonds
  $ 12,138     $     $ 12,138     $  
Mortgage-backed securities - GSE residential
    37,186             37,186        
Mortgage-servicing rights
    564                   564  

   
December 31, 2013
 
         
Fair Value Measurements Using
 
   
Fair
Value
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
   
(In Thousands)
 
Available-for-sale securities:
                       
Municipal bonds
  $ 15,038     $     $ 15,038     $  
SBA loan pools
    2,796             2,796        
Mortgage-backed securities - GSE residential
    41,822             41,822        
Mortgage-servicing rights
    578                   578  

24
 

 

 
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs:
 
   
(Unaudited)
   
Mortgage-Servicing Rights
   
Three Months Ended
June 30
   
Six Months Ended
June 30
   
2014
   
2013
      2014      
2013
 
 
   
(In Thousands)
Balances, beginning of period
  $ 560     $ 549     $ 578     $ 497  
Total unrealized gains (losses) included in net income
    (6 )     (50 )     (24 )     (3 )
Additions (rights recorded on sale of loans)
    27       18       46       57  
Settlements (payments)
    (17 )     (17 )     (36 )     (51 )
Balances, end of period
  $ 564     $ 500     $ 564     $ 500  

Total unrealized gains and losses included in net income reflected in the table above are included in other income.
 
Nonrecurring Measurements
 
The following is a description of the valuation methodologies used for instruments measured at fair value on a nonrecurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.
 
Impaired Loans (Collateral Dependent)
 
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, are measured for impairment.  Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.
 
The fair values of collateral dependent impaired loans are based on independent appraisals of the collateral.  In general, the Company acquires an updated appraisal upon identification of impairment and annually thereafter for commercial, commercial real estate and multi-family loans.  If the most recent appraisal is over a year old, and a new appraisal is not performed, due to lack of comparable values or other reasons, the existing appraisal is utilized and discounted 25% - 35% based on the age of the appraisal, condition of the subject property, and overall economic conditions.  After determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses.
 
Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
 
25
 

 

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

            (Unaudited)
 
 
            June 30, 2014
 
 
         
Fair Value Measurements Using
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
   
Fair
   
Assets
   
Inputs
   
Inputs
 
   
Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
    (In Thousands)  
       
Impaired loans
  $ 875     $     $     $ 875  
 
       December 31, 2013  
           
 Fair Value Measurements Using
 
           
Quoted Prices
                 
           
in Active
   
Significant
         
           
Markets for
   
Other
   
Significant
 
           
Identical
   
Observable
   
Unobservable
 
   
Fair
   
Assets
   
Inputs
   
Inputs
 
   
Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
      (In Thousands)  
                                 
Impaired loans
  $ 2,762     $     $ —      $ 2,762  
 
Unobservable (Level 3) Inputs
 
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.
 
   
Fair Value at
 
Valuation
 
Unobservable
 
Range (Weighted
 
   
June 30, 2014
 
Technique
 
Inputs
 
Average)
 
    (In Thousands)              
Impaired loans
  $ 875  
Comparative
 
Marketability Discount
    25.0% - 35.0% (30.0%)
         
sales based on
           
         
independent
           
         
appraisals
           
                       
Mortgage-servicing rights
  $ 564  
Discounted Cash
 
Discount rate
    5.2% -6.1% (5.9%)
         
Flow
 
Conditional prepayment rate
    8.9% - 14.4% (13.3%)
             
Expected loan servicing years
    3.0-3.8 (3.6)
 
   
Fair Value at
December 31,
2013
 
Valuation
Technique
 
Unobservable
Inputs
 
Range (Weighted
Average)
    (In Thousands)              
Impaired loans
  $ 2,762  
Comparative
 
Marketability Discount
    25.0% - 35.0% (30.0%)
         
sales based on
           
         
independent
           
         
appraisals
           
                       
Mortgage-servicing rights
  $ 578  
Discounted Cash
 
Discount rate
   
5.5% -6.4% (6.2%)
         
Flow
 
Conditional prepayment rate
   
8.2% - 13.3% (12.5%)
             
Expected loan servicing years
   
3.3 – 4.0 (3.8)
 
26
 

 

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

Mortgage –Servicing Rights

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

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.
 
Cash and Cash Equivalents, Federal Home Loan Bank Stock, Interest Receivable and Interest Payable
 
The carrying amount approximates fair value.
 
Loans Held for Sale
 
Loans held for sale are based on current market prices.
 
Loans
 
The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  Loans with similar characteristics were aggregated for purposes of the calculations.  The carrying amount of accrued interest approximates its fair value.
 
Deposits
 
Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits.  The carrying amount approximates fair value.  The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.
 
Federal Home Loan Bank Advances
 
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.  Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market.  If a quoted market price is not available, an expected present value technique is used to estimate fair value.
 
27
 

 

 
The following table presents estimated fair values of the Company’s financial instruments at June 30, 2014 (unaudited) and December 31, 2013:
 
   
(Unaudited)
June 30, 2014
 
         
Fair Value
 
   
Carrying
Amount
   
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
   
(In Thousands)
 
Financial assets
                       
Cash and cash equivalents
  $ 9,947     $ 9,947     $     $  
Loans held for sale
    508             508        
Loans, net
    181,923                   184,054  
Federal Home Loan Bank stock
    1,722             1,722        
Interest receivable
    910             910        
               
Financial liabilities
             
Deposits
    197,965       105,127       93,118        
Federal Home Loan Bank advances
    27,000             26,951        
Interest payable
    64             64        

   
December 31, 2013
 
         
Fair Value
 
   
Carrying
Amount
   
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
   
(In Thousands)
 
Financial assets
                       
Cash and cash equivalents
  $ 6,681     $ 6,681     $     $  
Loans held for sale
    933             933        
Loans, net
    171,353                   173,438  
Federal Home Loan Bank stock
    1,722             1,722        
Interest receivable
    1,068             1,068        
               
Financial liabilities
             
Deposits
    198,370       102,314       96,345        
Federal Home Loan Bank advances
    26,000             25,964        
Interest payable
    71             71        
 
28
 

 

 
NOTE 7:  Recent Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” to require presentation in the financial statements of an unrecognized tax benefit or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward, except as follows. When an  NOL carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or when the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.  Adoption of the ASU did not have a significant effect on the Company’s consolidated financial statements.
 
In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.  Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
 
In January 2014, the FASB issued ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects,” to permit entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met.  The ASU modifies the conditions that an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.  Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
 
In April 2014, FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  This update seeks to better define the groups of assets which qualify for discontinued operations, in order to ease the burden and cost for prepares and stakeholders. This issue changed “the criteria for reporting discontinued operations” and related reporting requirements, including the provision for disclosures about the “disposal of and individually significant component of an entity that does not qualify for discontinued operations presentation.” The amendments in this Update are effective for fiscal years beginning after December 15, 2014. Early adoption is permitted only for disposals or classifications as held for sale. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
 
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In May 2014, FASB, in joint cooperation with IASB, issued ASU 2014-09, Revenue from Contracts with Customers. The topic of Revenue Recognition had become broad, with several other regulatory agencies issuing standards which lacked cohesion.  The new guidance establishes a “common framework” and “reduces the number of requirements to which an entity must consider in recognizing revenue” and yet provides improved disclosures to assist stakeholders reviewing financial statements.  The amendments in this Update are effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

 In June 2014, FASB, issued ASU 2014-11, Transfers and Servicing. This update addresses the concerns of stakeholders’ by changing the accounting practices surrounding repurchase agreements.  The new guidance changes the “accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements.” The amendments in this Update are effective for annual reporting periods beginning after December 15, 2014. Early adoption is prohibited. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In June 2014, FASB, issued ASU 2014-12, Compensation – Stock Compensation. This update defines the accounting treatment for share-based payments and “resolves the diverse accounting treatment of those awards in practice.” The new requirement mandates that “a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.”  Compensation cost will now be recognized in the period in which it becomes likely that the performance target will be met.  The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
 
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NOTE 8:  Earnings per Share

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

     
(Unaudited)
 
     
Three Months Ended
June 30
   
Six Months Ended
June 30
 
     
2014
   
2013
   
2014
   
2013
 
 
Net Income
  $ 324     $ 293     $ 596     $ 590  
 
Allocated to participating securities
    (14 )     (1 )     (26 )     (1 )
 
Net income allocated to common stockholders
  $ 310     $ 292     $ 570     $ 589  
                                   
 
Weighted average common shares outstanding, gross
    1,379,400       1,400,556       1,379,473       1,400,781  
 
Less:  Average unearned ESOP shares and participating securities
    (153,551 )     (111,983 )     (154,990 )     (108,988 )
 
Weighted average common shares outstanding, net
    1,225,849       1,288,573       1,224,483       1,291,793  
 
Effect of diluted based awards
                       
 
Weighted average shares and common stock equivalents
    1,225,849       1,288,573       1,224,483       1,291,793  
                                   
 
Income per common share:
                               
 
Basic
  $ 0.25     $ 0.23     $ 0.47     $ 0.46  
 
Diluted
  $ 0.25     $ 0.23     $ 0.47     $ 0.46  
                                   
 
Options excluded from the calculation due to their anti-dilutive effect on earnings per share
    125,300       125,300       125,300       125,300  

NOTE 9:  Reclassifications

Certain reclassifications have been made to the 2013 condensed consolidated financial statements to conform to the June 30, 2014 presentation.
 
NOTE 10:  Share Based Compensation (Unaudited)

In May 2013, the Company’s stockholders approved the West End Indiana Bancshares, Inc. 2013 Equity Incentive Plan (“Plan”) which provides for awards of stock options and restricted stock to key officers and outside directors.  The cost of the Plan is based on the fair value of the awards on the grant date.  The fair value of restricted stock awards is based on the closing price of the Company’s stock on the grant date.  The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate, and option term.  These assumptions are based on management’s judgments regarding future events, are subjective in nature, and contain uncertainties inherent in an estimate.  The cost of the awards are being recognized on a straight-line basis over the five-year vesting period during which participants are required to provide services in exchange for the awards.
 
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Until such time as awards of stock are granted and vest or options are exercised, shares of the Company’s common stock under the Plan shall be authorized but unissued shares.  The maximum number of shares authorized under the plan is 196,140.  Total share-based compensation expense for the three and six months ended June 30, 2014 was $71,000 and $140,000.

Stock Options
 
The table below represents the stock option activity for the period shown:

     
Options
   
Weighted
average
exercise price
   
Remaining
contractual
life (years)
 
 
Options outstanding at January 1, 2014
    125,300     $ 18.75       9.5  
 
Granted
                 
 
Exercised
                 
 
Forfeited
                 
 
Expired
                 
 
Options outstanding at June 30, 2014
    125,300             9.0  
                           
 
Exercisable at June 30, 2014
    25,060       18.75       9.0  


Stock options of 125,300 were granted on June 19, 2013.  No stock options were granted in 2014.

As of June 30, 2014, the Company had $283,000 of unrecognized compensation expense related to stock options.  The cost of stock options will be amortized in monthly installments over the five-year vesting period.  Stock option expense for the three and six months ended June 30, 2014 was $18,000 and $36,000.  The aggregate grant date fair value of the stock options was $357,000.  The total intrinsic value of options as of June 30, 2014 was $31,000.  The total intrinic value of options excercisable at June 30, 2014 was $6,000.
 
The fair value of the Company’s stock options was determined using the Black-Scholes option pricing formula.  The following assumptions were used in the formula:

Expected volatility
 13.67%
Risk-free interest rate
 1.86%
Expected dividend yield
 1.28%
Expected life (in years)
 7.5
Exercise price for the stock options
 $18.75
 
Expected volatility - Based on the historical volatility of share price for similar companies.

Risk-free interest rate - Based on the U.S. Treasury yield curve and expected life of the options at the time of grant.

Dividend yield - West End Indiana Bancshares, Inc. pays a regular quarterly dividend of $0.06 per share.

Expected life – Based on average of the five year vesting period and the ten year contractual term of the stock option plan.
 
Exercise price for the stock options - Based on the closing price of the Company’s stock on the date of grant.
 
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Restricted Stock Awards
 
Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of the grant.  Unvested restricted stock awards may not be disposed of or transferred during the vesting period.  Restricted stock awards carry with them the right to receive dividends.
 
The table below presents the restricted stock award activity for the period shown:
 
     
Service-Based
Restricted
stock
 awards
   
Weighted
average
grant date
fair value
 
 
Non-vested at January 1, 2014
    56,040     $ 18.75  
 
Granted
           
 
Vested
    11,208       18.75  
 
Forfeited
           
 
Non-vested at June 30, 2014
    44,832     $ 18.75  

Restricted stock awards of 56,040 were granted on June 19, 2013.  No restricted stock awards were granted during 2014.
 
As of June 30, 2014, the Company had $833,000 of unrecognized compensation expense related to restricted stock awards.  The cost of the restricted stock awards will be amortized in monthly installments over the five-year vesting period.  Restricted stock expense for the three and six months ended June 30, 2014 was $53,000 and $104,000.
 
NOTE 11:  Employee Stock Ownership Plan
 
As part of the conversion, the Bank established an Employee Stock Ownership Plan (ESOP) covering substantially all employees.  The ESOP acquired 112,080 shares of Company common stock at $10 per share in the conversion with funds provided by a loan from the Company.  Accordingly, $1,121,000 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity.  Shares are released to participants proportionately as the loan is repaid.  Dividends on allocated shares are recorded as dividends and charged to retained earnings.  Dividends on unallocated shares are used to repay the loan and are treated as compensation expense.  Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors, are made to the ESOP.
 
ESOP expense for the three and six months ended June 30, 2014 was $25,000 and $51,000.
             
   
June 30,
 
   
2014
   
2013
 
       
Allocated shares
    11,208       5,604  
Unreleased shares
    100,872       106,476  
Total ESOP shares
    112,080       112,080  
                 
Fair value of unreleased shares at June 30 (in thousands)
  $ 1,917     $ 1,779  
 
At June 30, 2014 and 2013 the fair value of the 11,208 and 5,604 allocated shares held by the ESOP was $213,000 and $106,000, respectively.
 
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
General
 
Management’s discussion and analysis of the financial condition and results of operations at and for three and six months ended June 30, 2014 and 2013 is intended to assist in understanding the financial condition and results of operations of the Company on a consolidated basis.  The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning.  These forward-looking statements include, but are not limited to:
 
 
statements of our goals, intentions and expectations;
 
 
statements regarding our business plans, prospects, growth and operating strategies;
 
 
statements regarding the asset quality of our loan and investment portfolios; and
 
 
estimates of our risks and future costs and benefits.
 
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report.
 
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
 
 
general economic conditions, either nationally or in our market areas, that are worse than expected;
 
 
competition among depository and other financial institutions;
 
 
our success in continuing to emphasize consumer lending, including indirect automobile lending;
 
 
our ability to improve our asset quality even as we increase our non-residential lending;
 
 
our success in maintaining our commercial and multi-family real estate and our non-owner occupied one- to four-family residential real estate and commercial business lending;
 
 
changes in the interest rate environment that reduce our margins or reduce the fair value of our financial instruments;
 
 
adverse changes in the securities markets;
 
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changes in laws or government regulations or policies affecting financial institutions, including changes in deposit insurance premiums, regulatory fees and capital requirements, which increase our compliance costs;
 
 
our ability to enter new markets successfully and capitalize on growth opportunities;
 
 
changes in consumer spending, borrowing and savings habits;
 
 
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;
 
 
changes in our organization, compensation and benefit plans;
 
 
loan delinquencies and changes in the underlying cash flows of our borrowers;
 
 
changes in our financial condition or results of operations that reduce capital available to pay dividends; and
 
 
changes in the financial condition or future prospects of issuers of securities that we own.
 
Critical Accounting Policies
 
There are no material changes to the critical accounting policies disclosed in West End Indiana Bancshares, Inc.’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 29, 2014.
 
Comparison of Financial Condition at June 30, 2014 and December 31, 2013
 
Total assets increased $1.9 million, or 0.75%, to $256.3 million at June 30, 2014 from $254.4 million at December 31, 2013.  The increase was primarily the result of an increase in net loans, including loans held for sale, and cash and cash equivalents offset by a decrease in investment securities and other assets.
 
Net loans, including loans held for sale, increased $10.1 million, or 5.9%, to $182.4 million at June 30, 2014 from $172.3 million at December 31, 2013 due to increases in consumer loans of $4.8 million, commercial loans and commercial and multi-family loans of $3.2 million and residential real estate loans of $1.9 million.  Total non-performing loans decreased $680,000 at June 30, 2014 to $2.9 million from $3.6 million at December 31, 2013.
 
Total cash and cash equivalents increased $3.2 million, or 47.8%, to $9.9 million at June 30, 2014 from $6.7 million at December 31, 2013.  The increase in total cash and cash equivalents reflected cash flow from investments and normal fluctuations from operations.
 
Securities classified as available for sale decreased $10.4 million, or 17.4%, to $49.3 million at June 30, 2014 from $59.7 million at December 31, 2013.  SBA loan pools, municipal and mortgage-backed security sales decreased the investment portfolio as funds were not re-invested but used to fund loan growth and security sales.   At June 30, 2014, securities classified as available for sale consisted of mortgage-backed securities and municipal obligations.
 
Deposits decreased $405,000, or 0.20%, to $198.0 million at June 30, 2014 from $198.4 million at December 31, 2013.  Our core interest bearing deposits increased $2.8 million but were offset by a decrease in certificates of deposit of $3.2 million.
 
Federal Home Loan Bank advances increased $1.0 million at June 30, 2014 to $27.0 million, from $26.0 million at December 31, 2013.  These advances were used to fund loan growth.
 
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Total equity increased $1.5 million, or 5.2%, to $30.4 million at June 30, 2014, from $28.9 million at December 31, 2013, due primarily to net income for the 2014 year to date of $596,000 and an increase of other accumulated comprehensive income of $807,000, which was a reflection of appreciation of available for sale securities.
 
Comparison of Operating Results for the Three Months Ended June 30, 2014 and 2013
 
General.  We recorded net income of $324,000 for the quarter ended June 30, 2014 compared to net income of $293,000 for the quarter ended June 30, 2013.  Increases to net interest income of $295,000 and noninterest income of $220,000 quarter to quarter, along with an interest expense decrease of $88,000, were offset by increases in provision for loan losses of $279,000 and noninterest expense of $189,000.
 
Interest and Dividend Income.  Interest and dividend income increased $207,000, or 7.6%, to $2.94 million for the quarter ended June 30, 2014 from $2.73 million for the quarter ended June 30, 2013.  The average balance of total interest-earning assets increased $4.7 million, or 1.9%, to $246.6 million for the quarter ended June 30, 2014 from $241.9 million for the quarter ended June 30, 2013.   The average yield on interest-earning assets increased 25 basis points to 4.78% for the 2014 period from 4.53% for the 2013 period.
 
Interest income on loans increased $195,000, or 7.9%, to $2.67 million for the quarter ended June 30, 2014 from $2.47 million for the quarter ended June 30, 2013, as the increase in the average balance of loans was more than offset by a decrease in the average yield on our loans.  The average balance of net loans increased $16.9 million, or 10.3%, to $181.2 million for the quarter ended June 30, 2014 from $164.3 million for the quarter ended June 30, 2013. However, the average yield on our loan portfolio decreased 13 basis points to 5.91% for the quarter ended June 30, 2014 from 6.04% for the quarter ended June 30, 2013, reflecting the lower market interest rate environment.
 
Interest income on investment securities increased $9,000 to $255,000 for the 2014 quarter from $246,000 for the 2013 quarter. The average balance of our securities available for sale decreased $12.2 million, or 17.7%, to $56.7 million for the quarter ended June 30, 2014 from $68.9 million for the quarter ended June 30, 2013, as management deployed funds from sales of securities to fund loans. The average yield on our securities portfolio increased by 37 basis points, to 1.80% for the quarter ended June 30, 2014 from 1.43% for the quarter ended June 30, 2013.  Sale instruments primarily included SBA loan pools and municipal bonds.
 
Interest Expense.  Interest expense decreased $88,000, or 18.0%, to $402,000 for the quarter ended June 30, 2014 from $490,000 for the quarter ended June 30, 2013.  The average rate paid on deposits decreased 11 basis points to 0.67% for the quarter ended June 30, 2014 from 0.78% for the quarter ended June 30, 2013, as the Bank repriced its deposit rates.  The average balance of interest-bearing deposits increased $4.1 million, or 2.3%, to $184.0 million for the quarter ended June 30, 2014 from $180.0 million for the quarter ended June 30, 2013.  The increase in the average balance of interest-bearing checking accounts by $941,000, savings accounts by $1.0 million and certificates of deposits by $2.8 million were partially offset by a decrease of $641,000 in the average balance of money market accounts.
 
The average balance of our certificates of deposit increased $2.8 million, or 3.0%, to $96.5 million for the quarter ended June 30, 2014, from $93.7 million for the quarter ended June 30, 2013, as customers with maturing deposits elected to renew.  In addition, the interest expense on certificates of deposit declined from $295,000 to $252,000 due to the decrease in the cost of these deposits to 1.05% in the 2014 quarter from 1.26% in 2013.  Other interest bearing account expense remained consistent with 2013.
 
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Interest expense on borrowed funds, consisting entirely of Federal Home Loan Bank advances, decreased by $46,000, or 32.6%, to $95,000 for the quarter ended June 30, 2014 from $141,000 for the quarter ended June 30, 2013.
 
Net Interest Income.  Net interest income increased $295,000, or 13.1%, to $2.5 million for the quarter ended June 30, 2014 from $2.2 million for the quarter ended June 30, 2013.  Our net interest rate spread increased to 4.02% from 3.59%, and our net interest margin increased to 4.12% from 3.71% quarter to quarter.
 
Provision for Loan Losses.  Based on our analysis of the factors described in “Critical Accounting Policies — Allowance for Loan Losses,” in our annual report on Form 10-K filed on March 28, 2014, we recorded a provision for loan losses of $525,000 for the quarter ended June 30, 2014, an increase of $279,000 from $246,000 allocated for the quarter ended June 30, 2013.  At June 30, 2014, non-performing loans including troubled debt restructurings, totaled $5.2 million, or 2.8% of total loans, as compared to $5.9 million, or 3.4% of total loans, at December 31, 2013 and $3.3 million, or 2.0% of total loans, at June 30, 2013.  The decrease in non-performing loans was due to a single commercial credit previously identified as impaired and provided with a specific reserve allocated in the allowance for loan losses that has now been charged off.  The allowance for loan losses to total loans was 1.24% at June 30, 2014, 1.38% at December 31, 2013 and 1.22% at June 30, 2013.  The allowance for loan losses as a percentage of non-performing loans was 78.74% at June 30, 2014 compared to 61.65% at June 30, 2013.  It was determined that no additional provision is required.  To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at June 30, 2014 and 2013.
 
Other Income.   Other income increased $220,000, or 70.5%, to $531,000 for the quarter ended June 30, 2014 from $312,000 for the quarter ended June 30, 2013.  The increase was primarily due to the increase in gains on sales of available for sale securities of $86,000 to $106,000 for the 2014 quarter from $20,000 for the 2013 quarter.  This was part of a strategy to use the funds from sales to fund loans instead of reinvesting in these securities.   Gain on sale of loans increased $43,000 to $119,000 for the quarter ended June 30, 2014 as compared to $76,000 for the quarter ended June 30, 2013 due to increased mortgage production and commercial SBA loan. For quarter ended June 30, 2014, gains on sales of SBA loans were $37,000 as compared to $10,000 for the quarter ended June 30, 2013.  As a result of normal principal payments and payoffs, additional servicing rights sold, and fair value adjustments, loan servicing income also increased $41,000 to $15,000 in 2014 from $(27,000) in 2013.  Other increases include $36,000 in the gain on the sale of assets, as the Bank reduced foreclosed real estate held for sale balance during the June 2014 quarter.
 
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Other Expense.  Other expense increased $189,000, or 10.0%, to $2.07 million for the quarter ended June 30, 2014 from $1.88 million for the quarter ended June 30, 2013.  Notable changes included an increase in salaries and employee benefits of $151,000 and an increase in professional fee expense of $38,000.  Salaries and employee benefits increased due to normal cost of living adjustments, increased medical insurance premiums, addition of internal auditor and ESOP and stock award plans.   Professional fees increase was due to upgrades in information technology.
 
Income Tax Expense.  We recorded a $148,000 income tax expense for the quarter ended June 30, 2014 compared to a $133,000 income tax expense for the 2013 period, reflecting income of $473,000 before income tax expense during the 2014 quarter versus income before income tax expense of $426,000 for the quarter ended June 30, 2013.  Our effective tax rate was 31.4% for the quarter ended June 30, 2014 compared to 31.2% for the quarter ended June 30, 2013.
 
Comparison of Operating Results for the Six Months Ended June 30, 2014 and 2013
 
General.  Net income increased to $596,000 for the six months ended June 30, 2014 compared to net income of $590,000 for the six months ended June 30, 2013.  A $364,000 increase in provision for loan losses, and $264,000 increase in other expense offset an increase of net interest income of $508,000 and other income of $136,000 for the June 30, 2014 period.
 
Interest and Dividend.  Interest and dividend income increased $312,000, or 5.7%, to $5.80 million for the six months ended June 30, 2014 from $5.49 million for the six months ended June 30, 2013.  The average balance of total interest-earning assets increased $6.1 million, or 2.6%, to $245.3 million for the six months ended June 30, 2014 from $239.2 million for the six months ended June 30, 2013, and the rate earned on these assets also increased to 4.77% for the period ended June 30, 2014 from 4.63% for the period ended June 30, 2013.
 
Interest income and fees on loans increased $274,000, or 5.6%, to $5.2 million for the six months ended June 30, 2014 from $4.9 million for the six months ended June 30, 2013, as the increase in the average balance of loans was partially offset by a decrease in the average yield on loans.  The average balance of loans increased $14.7 million, or 9.0%, to $178.0 million for the six months ended June 30, 2014 from $163.3 million for the six months ended June 30, 2013. However, the average yield on the loan portfolio decreased 18 basis points to 5.88% for the six months ended June 30, 2013 from 6.06% for the six months ended June 30, 2013, reflecting the lower market interest rate environment.
 
Interest income on investment securities, other interest earning assets and FHLB of Indianapolis stock increased $38,000, or 6.5%, to $620,000 for the six months ended June 30, 2014 from $582,000 for the six months ended June 30, 2013. This was due to the sale of investment securities at a gain, which decreased the average balance of securities available for sale by $7.6 million, or 11.5%, to $58.7 million for the six months ended June 30, 2014 from $66.3 million for the 2013 period, as funds from these securities were used to fund loans. The average yield on the securities portfolio increased to 1.97% for the six months ended June 30, 2014 from 1.67% for the six months ended June 30, 2013.
 
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Interest Expense.  Interest expense decreased $197,000, or 19.4%, to $818,000 for the six months ended June 30, 2014 from $1.0 million for the six months ended June 30, 2013, as the decrease in the average cost of deposits more than offset the increase in the average balance of deposits.  The average rate on deposits decreased 16 basis points to 0.67% for the six months ended June 30, 2014 from 0.83% for six months ended June 30, 2013 as the Bank repriced its deposit rates for this period. The average balance of interest-bearing deposits increased $5.1 million, or 2.9%, to $183.1 million for the six months ended June 30, 2014 from $178.0 million for the six months ended June 30, 2013. The increase in the average balance of our deposits resulted from increases in interest bearing checking and money market accounts of $1.7, savings of $1.0 million and certificates of deposit of $2.4 million.
 
The average balance of our certificates of deposit increased $2.4 million, or 2.6%, to $95.9 million for the six months ended June 30, 2014, from $93.5 million for the six months ended June 30, 2013, as customers with maturing deposits elected to renew.  In addition, the interest expense on certificates of deposit declined from $620,000 to $505,000 due to the decrease in the cost of these deposits to 1.06% in the period ending June 30, 2014 from 1.34% in the period ending June 30, 2013.  Other interest bearing accounts expense rates and cost remained consistent with 2013 as average balances increased in each category.
 
           Interest expense on borrowed funds, consisting entirely of Federal Home Loan Bank advances, decreased $75,000, or 26.7%, to $206,000 for the six months ended June 30, 2014 from $281,000 for the six months ended June 30, 2013, reflecting a decrease of 46 basis points in the rate to 1.55% for period ending June 30, 2014 from 2.01% for the period ending June 30, 2013.
 
Net Interest Income.  Net interest income increased $508,000, or 11.3%, to $4.5 million for the six months ended June 30, 2014 from $4.5 million for the six months ended June 30, 2013.  Our net interest rate spread increased to 3.98% for the six months ended June 30, 2014 from 3.64% for the six months ended June 30, 2013, and an increase in net interest margin to 4.07% for the six months ended June 30, 2014 from 3.74% for six months ended June 30, 2013.
 
Provision for Loan Losses.  A provision for loan losses of $869,000 was recorded for the six months ended June 30, 2014 and $505,000 for the six months ended June 30, 2013.  The allowance for loan losses was $2.3 million, or 1.24% of total loans, at June 30, 2014, compared to $2.0 million, or 1.22% of total loans, at June 30, 2013.  Total nonperforming loans were $2.9 million at June 30, 2014, compared with $3.3 million at June 30, 2013.
 
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The allowance for loan losses as a percentage of non-performing loans increased to 78.74% at June 30, 2014 from 61.65% at June 30, 2013.  The decrease in non-performing loans was due to a single commercial credit previously identified as impaired and provided with a specific reserve allocated in the allowance for loan losses that has now been charged off.  To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at June 30, 2014 and 2013.
 
Other Income.   Other income increased $136,000, or 21.2%, to $777,000 for the six months ended June 30, 2014 from $641,000 for the six months ended June 30, 2013.  The increase was primarily due to an increase in gains on sales of available for sale securities of $86,000 for the period ending June 30, 2014 to $106,000 from $20,000 for the period ending June 30, 2013.  Additionally we recorded a gain on the sale other assets of $13,000 during the six months ended 2014 as compared to a loss of $62,000 additonally during the same period in 2013.  The gain recorded during the six months ended June 30, 2014 was primarily related to gains on foreclosed real estate held for sale.  Gain on sale of loans decreased $33,000 to $151,000 for the six months ended June 30, 2014 from $184,000 for the six months ended June 30, 2013.
 
Other Expense.  Other expense increased $264,000, or 7.1%, to $4.0 million for the six months ended June 30, 2014 from $3.8 million for the six months ended June 30, 2013.  Salaries and employee benefits increased $261,000 to $2.28 million for the 2014 period from $2.02 million for the 2013 period as a result of increased medical insurance premiums, addition of an internal auditor and incentive stock plans. Other increases include occupancy expense of $30,000 offset by decreases in advertising of $22,000 and various miscellaneous operating expenses decreased by a net of $20,000.
 
Income Tax Expense.  A $279,000 income tax expense was recorded for the six months ended June 30, 2014 compared to a $268,000 income tax expense for the 2013 period, reflecting income of $874,000 before income tax expense for the six months ended June 30, 2014, compared to income before income tax expense of $858,000 for the six months ended June 30, 2013.  Our effective tax rate was 31.9% for the six months ended June 30, 2014, compared to 31.2% for the six months ended June 30, 2013.
 
Liquidity and Capital Resources.  Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from sale of loans, proceeds from maturities and calls of securities, and Federal Home Loan Bank advances.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition.  Our most liquid assets are cash and short-term investments including interest-bearing demand deposits.  The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
 
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities.  Net cash provided by operating activities was $2.6 million and $1.1 million for the six months ended June 30, 2014 and 2013, respectively.  Net cash provided by (used in) investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from the sale of loans and securities and proceeds from maturing securities and pay downs on mortgage-backed securities, was $268,000 and $(14.0) million for the six months ended June 30, 2014 and 2013, respectively.  Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and Federal Home Loan Bank advances, was $421,000 and $15.3 million for the six months ended June 30, 2014 and 2013.
 
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At June 30, 2014, we exceeded all of our regulatory capital requirements with a Tier 1 (core) capital level of $27.2 million, or 10.6% of adjusted total assets, which is above the required level of $10.2 million, or 4%; and total risk-based capital of $29.4 million, or 16.3% of risk-weighted assets, which is above the required level of $14.4 million, or 8%.  Accordingly West End Bank, S.B. was categorized as well capitalized at June 30, 2014.  Management is not aware of any conditions or events since the most recent notification that would change our category.
 
At June 30, 2014, we had outstanding commitments to originate loans of $16.3 million and stand-by letters of credit of $1.1 million.  We anticipate that we will have sufficient funds available to meet our current loan origination commitments.  Certificates of deposit that are scheduled to mature in less than one year from June 30, 2014 totaled $34.0 million.  Management expects that a substantial portion of the maturing certificates of deposit will be renewed.  However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
 
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Not applicable, as the Registrant is a smaller reporting company.
 
Item 4.
Controls and Procedures
 
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2014. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
 
During the quarter ended June 30, 2014 there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Part II – Other Information
 
Item 1.
Legal Proceedings
 
The Bank is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Bank’s or the Registrant’s financial condition or results of operations.
 
Item 1A.
Risk Factors
 
Not applicable, as the Registrant is a smaller reporting company.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
 
     (a)
There were no sales of unregistered securities during the period covered by this Report.
     
 
     (b)
Not applicable.
 
 
     (c)

On May 27, 2014, the Board of Directors authorized a continuation of its stock repurchase program pursuant to which the Company may purchase 10% of its common stock outstanding as of March 31, 2014, or approximately 138,000 shares.

The following table presents for the period indicated a summary of the purchases made by or on behalf of the Company of shares of its common stock.

 
 
Period
 
Total
Number of
Shares
Purchased
   
Average Price
Paid
per Share
   
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
   
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or
Programs (1)(2)
 
April 1, 2014 through April 30, 2014
    –      $ –        –        138,000  
May 1, 2014 through May 31, 2014
    –      $ –        –        138,000  
June 1 , 2014 through June 30, 2014     –      $ –        –        138,000  
 
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Item 3.
Defaults Upon Senior Securities
 
None.
 
Item 4.
Mine Safety Disclosures
 
Not applicable.
 
Item 5.
Other Information
 
None.
 
Item 6.  Exhibits
     
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS
 
XBRL Instance Document.
     
101.SCH
 
XBRL Schema Document.
     
101.CAL
 
XBRL Calculation Linkbase Document.
     
101.DEF
 
XBRL Definition Linkbase Document.
     
101.LAB
 
XBRL Label Linkbase Document.
     
101.PRE
 
Presentation Linkbase Document
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   
WEST END INDIANA BANCSHARES, INC.
     
Date:  August 13, 2014
 
/s/ John P. McBride
 
   
John P. McBride
   
President/Chief Executive Officer and Chairman of the Board
     
     
Date:  August 13, 2014
  /s/ Shelley D. Miller  
   
Shelley D. Miller
   
Executive Vice President and Chief Financial Officer
 
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