Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

NorthWest Indiana Bancorp

Registrant’s telephone number, including area code: (219) 836-9690

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act ).
Yes [  ]      No [X]

There were 2,739,089 shares of the registrant’s Common Stock, without par value, outstanding at September 30, 2002.

Table of Contents

NorthWest Indiana Bancorp
Index

Table of Contents

NorthWest Indiana Bancorp
Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

1

Table of Contents

NorthWest Indiana Bancorp
Consolidated Statements of Income
(unaudited)

See accompanying notes to consolidated financial statements.

2

Table of Contents

NorthWest Indiana Bancorp
Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)

See accompanying notes to consolidated financial statements.

3

Table of Contents

NorthWest Indiana Bancorp
Consolidated Statements of Cash Flows
(unaudited)

See accompanying notes to consolidated financial statements.

4

Table of Contents

Northwest Indiana Bancorp

Notes to Consolidated Financial Statements

Note 1 — Basis of Presentation

         The consolidated financial statements include the accounts of NorthWest Indiana Bancorp (the Bancorp), its wholly-owned subsidiary, Peoples Bank SB (the Bank), and the Bank’s wholly-owned subsidiary, Peoples Service Corporation. The Bancorp has no other business activity other than being a holding company for the Bank. The Bancorp’s earnings are dependent upon the earnings of the Bank. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the balance sheets of the Bancorp as of September 30, 2002 and December 31, 2001, and the statements of income and changes in stockholders’ equity for the three and nine months ended September 30, 2002 and 2001, and cash flows for the nine months ended September 30, 2002 and 2001. The income reported for the nine month period ended September 30, 2002 is not necessarily indicative of the results to be expected for the full year.

Note 2 — Use of Estimates

         Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of financial instruments and status of contingencies are particularly susceptible to material change in the near term.

Note 3 — Concentrations of Credit Risk

         The Bancorp grants residential, commercial real estate, commercial business and installment loans to customers in its primary market area of Lake County, in northwest Indiana. Substantially all loans are secured by specific items of collateral including residences, business assets and consumer assets.

Note 4 — Reclassifications

         Certain amounts reported in the December 31, 2001 consolidated financial statements and the September 30, 2001 Form 10-Q have been reclassified to conform to the September 30, 2002 presentation.

Note 5 — Commitments and Contingencies

         The Bancorp is a party to financial instruments in the normal course of business to meet financing needs of its customers and to reduce its own exposure to fluctuating interest rates. These financial instruments include commitments to make loans and standby letters of credit.

         Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bancorp uses the same credit policy to make such commitments as it uses for on-balance-sheet items.

         At September 30, 2002 and December 31, 2001, commitments to make loans totaled $50.6 million and $63.0 million, and standby letters of credit totaled $2.1 million and $716 thousand. At September 30, 2002, $41.5 million (83%) of the commitments were at variable rates.

         Since commitments to make loans may expire without being used, this amount does not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation of the borrower and may include accounts receivable, inventory, property, land and other items.

5

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Summary

         NorthWest Indiana Bancorp (the Bancorp) is a bank holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank SB, an Indiana savings bank (the Bank), is a wholly owned subsidiary of the Bancorp. The Bancorp has no other business activity other than being the holding company for the Bank.

         At September 30, 2002, the Bancorp had total assets of $468.3 million and total deposits of $382.9 million. Stockholders’ equity totaled $38.5 million or 8.2% of total assets, with book value per share at $14.06. Net income for the nine months ended September 30, 2002, was $4.1 million, or $1.49 per common share for basic and $1.48 for diluted calculations. The annualized return on average assets (ROA) was 1.19%, while the annualized return on average stockholders’ equity (ROE) was 14.58%, for the nine months ended September 30, 2002.

Financial Condition

         During the nine months ended September 30, 2002, total assets increased by $27.6 million (6.3%), with interest-earning assets increasing by $29.4 million (7.1%). At September 30, 2002, interest-earning assets totaled $442.5 million and represented 94.5% of total assets.

         Loans receivable totaled $375.0 million at September 30, 2002, compared to $342.6 million at December 31, 2001. At September 30, 2002, loans receivable represented 84.8% of interest-earning assets, 80.1% of total assets and 97.9% of total deposits. The loan portfolio, which is the Bancorp’s largest asset, is a significant source of both interest and fee income. The Bancorp’s lending strategy stresses quality growth, product diversification, and competitive and profitable pricing. The loan portfolio includes $13.7 million (3.6%) in construction and development loans, $215.5 million (57.5%) in residential mortgage loans, $10.0 million (2.7%) in multifamily loans, $86.6 million (23.1%) in commercial real estate loans, $6.8 million (1.8%) in consumer loans, and $42.5 million (11.3%) in commercial business and other loans. Adjustable rate loans comprised 40% of total loans at September 30, 2002. During the nine months ended September 30, 2002, loans increased by $32.3 million (9.4%), including $14.7 million in commercial real estate and commercial business loan participations purchased. The most significant growth was in residential real estate, commercial real estate and commercial business. Management believes that despite concerns about the pace of economic activity, loan growth will continue to improve during the remaining months of 2002 because of the low interest rate environment and an aggressive marketing and call program effort. Management expects to fund loan growth with a mix of deposits and borrowed funds.

         The Bancorp is primarily a portfolio lender. Mortgage banking activities are limited to the sale of fixed rate mortgage loans with contractual maturities of twenty-five years or longer. These loans are sold, on a case-by-case basis, in the secondary market as part of the Bancorp’s efforts to manage interest rate risk. The Bancorp retains the servicing on all loans sold in the secondary market. During the nine months ended September 30, 2002, the Bancorp sold $5.3 million in fixed rate mortgages compared to $3.8 million during the nine months ended September 30, 2001. Net gains realized from current year sales totaled $121 thousand compared to $59 thousand for the nine months ended September 30, 2001. At September 30, 2002, the Bancorp had $75 thousand classified as loans held for sale.

6

Table of Contents

         The primary objective of the Bancorp’s investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest bearing balances in financial institutions, U.S. government securities and federal agency obligations. Investments are generally for terms ranging from one day to seven years. At September 30, 2002, the investment portfolio totaled $61.9 million and was invested as follows: 0.8% in U.S. government debt securities, 68.1% in U.S. government agency debt securities, and 31.1% in U.S. government agency mortgage-backed securities and collateralized mortgage obligations. At September 30, 2002, securities available-for-sale (AFS) totaled $60.6 million or 97.9% of total securities. AFS securities are those the Bancorp may decide to sell if needed for liquidity, asset-liability management or other reasons. In addition, at September 30, 2002, the Bancorp had $2.7 million in Federal Home Loan Bank (FHLB) stock. During the nine months ended September 30, 2002, securities decreased by $5.4 million (8.0%), as proceeds from maturing securities and the sale of securities with expected calls were used to pay off short-term borrowings and provide funding for loan growth.

         At September 30, 2002, non-performing loans, which include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status, totaled $2.4 million, a decrease of $519 thousand from December 31, 2001. The ratio of non-performing loans to total assets was 0.51% at September 30, 2002, compared to 0.66% at December 31, 2001. The ratio of non-performing loans to total loans was 0.64% at September 30, 2002, compared to 0.85% at December 31, 2001. The September 30, 2002 balance includes $2.1 million in loans accounted for on a non-accrual basis and $292 thousand in accruing loans which were contractually past due 90 days or more. At September 30, 2002, $6.8 million of the Bancorp’s loans were internally classified as substandard compared to $2.9 million at December 31, 2001. There were no loans classified as doubtful or loss. Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues causes management to question the ability of such borrowers to comply with loan covenants or repayment terms.

         The balance for non-performing and substandard loans includes two loans totaling $1.0 million to a commercial customer. These loans have been classified as impaired. The Bancorp also has one loan totaling $3.9 million to a commercial customer that is current and performing but has been classified as substandard due to a breach of various loan covenants. In addition, the Bancorp has two performing loans totaling $771 thousand to one commercial customer that has been classified as substandard due to current cash flow difficulties.

         At September 30, 2002, the Bancorp had six loans, including the aforementioned impaired loans, to four borrowers totaling $1.4 million classified as impaired, compared to $1.5 million at December 31, 2001. Impaired loans are loans where full payment under the loan terms is not expected. There were no other loans considered to be impaired loans as of, or for the nine months ended September 30, 2002.

         At September 30, 2002, management of the Bancorp is of the opinion that there are no loans, except those discussed above, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as non-accrual, past due or restructured loans. Also, at September 30, 2002, there are no other interest bearing assets that would be required to be disclosed as non-accrual, past due, restructured or potential problem if such assets were loans. Management does not anticipate that any of the non-performing loans or classified loans would materially impact future operations, liquidity or capital resources.

         Because some loans may not be repaid in accordance with contractual agreements an allowance for loan losses (ALL) has been maintained. While management may periodically allocate portions of the allowance for

7

Table of Contents

specific problem loans, the entire allowance is available to absorb all credit losses that arise from the loan portfolio and is not segregated for, or allocated to, any particular loan or group of loans. During the nine months ended September 30, 2002, additions to the ALL account totaled $500 thousand compared to $180 thousand for the nine months ended September 30, 2001. The provision is based on management’s current judgments about the credit quality of the loan portfolio, loan portfolio growth, changes in the portfolio mix and local economic conditions. While the quality of the portfolio remains sound, provisions during the nine months ended September 30, 2002 were warranted because of increased average daily loan balances, apparent weaknesses in the local economy, the inherent risk associated with growth in commercial real estate and commercial business loans, and loan charge-offs. Charge-offs, net of recoveries, totaled $236 thousand for the current nine months compared to $368 thousand for the nine months ended September 30, 2001. The appropriateness of the current year provision and the overall adequacy of the ALL were determined through a disciplined and consistently applied quarterly process that combines a review of current activity with a risk assessment worksheet.

         At September 30, 2002, the ALL to total loans was 0.91% compared to 0.92% at December 31, 2001, while the ALL to nonperforming loans (coverage ratio) was 143.3% compared to 108.6% at December 31, 2001. The September 30, 2002 balance in the ALL account of $3.4 million is considered adequate by management after evaluation of the loan portfolio, past experience and current economic and market conditions.

         The allocation of the ALL reflects performance and growth trends within the various loan categories, as well as, consideration of the facts and circumstances that affect the repayment of individual loans, as well as, loans which have been pooled as of the evaluation date, with particular attention given to non-performing loans and loans which have been classified as substandard, doubtful or loss. Management has allocated reserves to all non-performing loans based on current information available. During the nine months ended September 30, 2002, additions to the ALL were allocated to commercial business loans due to the increase in non-performing balances resulting from three impaired loans.

         Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes. The Bancorp offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships. At September 30, 2002, deposits totaled $382.9 million. During the nine months ended September 30, 2002, deposit growth totaled $27.6 million (7.8%). Checking accounts increased $5.5 million (7.4%), savings accounts increased $12.5 million (24.7%), and certificates of deposit increased $12.2 million (6.7%). During the period, money market deposit accounts (MMDA’s) decreased $2.6 million (5.6%). At September 30, 2002, the deposit base was comprised of 21.1% checking accounts, 11.3% MMDA’s, 16.4% savings accounts and 51.2% certificates of deposit. The growth in deposits was a result of competitive product offerings, an aggressive marketing program, and volatility in the financial markets.

         Borrowings are primarily used to fund asset growth not supported by deposit generation. At September 30, 2002, borrowed funds totaled $41.5 million compared to $45.0 million at December 31, 2001, a decrease of $3.5 million (7.8%). Retail repurchase agreements totaled $12.9 million at September 30, 2002, compared to $15.6 million at December 31, 2001, a decrease of $2.8 million (17.7%). FHLB advances totaled $26 million at September 30, 2002, compared to $17 million at December 31, 2001, an increase of $9 million, as the Bancorp extended the maturity structure of interest-bearing liabilities at cost effective interest rates. Other short-term borrowings totaled $2.6 million at September 30, 2002, compared to $12.4 million at December 31, 2001, a decrease of $9.8 million as the Bancorp paid off short-term funding.

8

Table of Contents

Liquidity and Capital Resources

         For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet savings deposit withdrawals, and pay dividends and operating expenses. Because the Bancorp is subject to legal reserve requirements under Federal Reserve Regulation D, liquidity is managed to ensure that the Bancorp maintains an adequate level of legal reserves. In addition, liquidity is managed to meet the cash demands of depositors and its loan customers. Because profitability and liquidity are often conflicting objectives, management attempts to maximize the Bancorp’s net interest margin by making adequate, but not excessive, liquidity provisions.

         Changes in the liquidity position result from operating, investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. The primary investing activities include loan originations, loan repayments, investments in interest bearing balances in financial institutions, and the purchase, sale, and maturity of investment securities. Financing activities focus almost entirely on the generation of customer deposits. In addition, the Bancorp utilizes borrowings (i.e., retail repurchase agreements and advances from the FHLB) as a source of funds.

         During the nine months ended September 30, 2002, cash and cash equivalents increased $525 thousand compared to a $3.6 million increase for the nine months ended September 30, 2001, principally due to loan growth during 2002. The primary sources of cash were deposit growth, proceeds from maturities and sales of securities, loan sales and cash provided by operating activities. The primary uses of cash were loan originations, loan participations purchased, purchase of securities, the repayment of short-term borrowings and the payment of common stock dividends. During the current nine months cash provided by operating activities totaled $6.1 million compared to $5.3 million for the nine months ended September 30, 2001. The increase during the current nine months was due primarily to net income and the sale of loans originated for sale. Cash outflows from investing activities totaled $27.6 million compared to $23.8 million for the nine months ended September 30, 2001. The increase for the current period reflects loan growth. Cash flows from financing activities totaled $22.0 million during the current period compared to $22.2 million for the nine months ended September 30, 2001. These amounts are primarily a result of deposit growth. The Bancorp paid dividends on common stock of $2.2 million during the current nine months compared to $2.1 million for the nine months ended September 30, 2001.

         At September 30, 2002, outstanding commitments to fund loans totaled $50.6 million. Approximately 83% of the commitments were at variable rates. Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and to maintain proper levels of liquidity.

         During the current quarter, the Bancorp began construction of a $5.3 million, state-of-the-art corporate center in Munster, Indiana. The new facility will afford the Bancorp the opportunity to continue offering superior customer service, while providing for future growth and operating efficiencies. The facility will not have a material impact on noninterest expense during 2002.

         Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the nine months ended September 30, 2002, stockholders’ equity increased by $2.6 million (7.3%). The increase resulted primarily from earnings of $4.1 million during the period. In addition, $144 thousand

9

Table of Contents

represents proceeds from the exercise of 10,817 stock options. For the first nine months of 2002, the Bancorp declared $2.3 million in cash dividends. The net unrealized gain on available-for-sale securities, net of tax was $702 thousand for the period.

         The Bancorp is subject to risk-based capital guidelines adopted by the Board of Governors of the Federal Reserve System (the FRB), and the Bank is subject to risk-based capital guidelines adopted by the FDIC. As applied to the Bancorp and the Bank, the FRB and FDIC capital requirements are substantially identical. The Bancorp and the Bank are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. In addition, the FRB and FDIC regulations provide for a minimum Tier 1 leverage ratio (Tier 1 capital to adjusted average assets) of 3% for financial institutions that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or anticipating significant growth. All other financial institutions are required to maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at least one to two percent.

         The following table shows that, at September 30, 2002, and December 31, 2001, the Bancorp’s capital exceeded all regulatory capital requirements. The Bancorp’s and the Bank’s regulatory capital ratios were substantially the same at both dates. The dollar amounts are in millions.