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EX-31.1 - NORTHWEST INDIANA BANCORPv166397_ex31-1.htm

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2009, or

¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from ________ to ________

Commission File Number: 0-26128

NorthWest Indiana Bancorp
(Exact name of registrant as specified in its charter)

Indiana
 
35-1927981
(State or other jurisdiction of incorporation
 
(I.R.S. Employer
or organization)
 
Identification Number)
     
9204 Columbia Avenue
   
Munster, Indiana
 
46321
(Address of principal executive offices)
 
(ZIP code)

Registrant's telephone number, including area code:  (219) 836-4400

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 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                  Yes ¨                No  ¨

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  ¨    Accelerated filer  ¨    Non-accelerated filer  ¨  Smaller Reporting Company x
                                                                                   (Do not check if a 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 ¨  No x

There were 2,816,663 shares of the registrant’s Common Stock, without par value, outstanding at September 30, 2009.

 

 

NorthWest Indiana Bancorp
Index

     
Page
     
Number
PART I.  Financial Information
   
       
 
Item 1.
Unaudited Financial Statements
   
         
   
Consolidated Balance Sheets, September 30, 2009 and December 31, 2008
 
     1
         
   
Consolidated Statements of Income, Three and Nine months Ended
   
   
September 30, 2009 and 2008
 
     2
         
   
Consolidated Statements of Changes in Stockholders' Equity, Three and Nine months
   
   
Ended September 30, 2009 and 2008
 
     3
         
   
Consolidated Statements of Cash Flows, Nine months
   
   
Ended September 30, 2009 and 2008
 
     4
         
   
Notes to Consolidated Financial Statements
 
 5-15
         
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and
   
   
Results of Operations
 
16-26
         
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
     26
         
 
Item 4T.
Controls and Procedures
 
     26
         
PART II.  Other Information
 
     27
       
SIGNATURES
 
     28
       
EXHIBITS
 
 
 
31.1  Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
   
 
31.2  Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
   
 
32.1  Section 1350 Certifications
   
 
 

 

NorthWest Indiana Bancorp
Consolidated Balance Sheets

   
September 30,
   
December 31,
 
   
2009
   
2008
 
(Dollars in thousands)
 
(unaudited)
       
             
ASSETS
           
             
Cash and non-interest bearing balances in financial institutions
  $ 8,981     $ 10,005  
Interest bearing balances in financial institutions
    16,394       -  
Federal funds sold
    3,664       1,291  
Total cash and cash equivalents
    29,039       11,296  
                 
Securities available-for-sale
    122,279       108,207  
Securities held-to-maturity
    21,280       18,515  
Loans held for sale
    906       -  
Loans receivable
    463,143       489,509  
Less: allowance for loan losses
    (5,173 )     (5,830 )
Net loans receivable
    457,970       483,679  
Federal Home Loan Bank stock
    3,650       3,650  
Accrued interest receivable
    2,893       3,160  
Premises and equipment
    19,511       19,083  
Foreclosed real estate
    3,617       527  
Cash value of bank owned life insurance
    11,948       11,641  
Other assets
    5,203       4,974  
                 
Total assets
  $ 678,296     $ 664,732  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Deposits:
               
Non-interest bearing
  $ 52,201     $ 43,367  
Interest bearing
    505,069       484,781  
Total
    557,270       528,148  
Borrowed funds
    61,050       74,795  
Accrued expenses and other liabilities
    6,657       9,016  
                 
Total liabilities
    624,977       611,959  
                 
Stockholders' Equity:
               
Preferred stock, no par or stated value;
               
10,000,000 shares authorized, none outstanding
    -       -  
Common stock, no par or stated value; 10,000,000 shares authorized;
               
shares issued:  September 30, 2009 - 2,889,802
    361       361  
December 31, 2008 - 2,887,452
               
shares outstanding:  September 30, 2009 - 2,816,663
               
December 31, 2008 - 2,809,075
               
Additional paid in capital
    5,095       5,064  
Accumulated other comprehensive income/(loss)
    653       (1,289 )
Retained earnings
    48,799       50,365  
Treasury stock, common shares at cost:  September 30, 2009 - 73,139
               
December 31, 2008 - 78,377
    (1,589 )     (1,728 )
                 
Total stockholders' equity
    53,319       52,773  
                 
Total liabilities and stockholders' equity
  $ 678,296     $ 664,732  

See accompanying notes to consolidated financial statements.

 
1

 
 
NorthWest Indiana Bancorp
Consolidated Statements of Income
(unaudited)

   
Three Months Ended
   
Nine Months Ended
 
(Dollars in thousands, except per share data)
 
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Interest income:
                       
Loans receivable
                       
Real estate loans
  $ 5,293     $ 6,285     $ 16,826     $ 19,004  
Commercial loans
    954       941       2,767       2,939  
Consumer loans
    29       40       93       118  
Total loan interest
    6,276       7,266       19,686       22,061  
                                 
Securities
    1,538       1,482       4,632       4,243  
Other interest earning assets
    3       13       14       59  
                                 
Total interest income
    7,817       8,761       24,332       26,363  
                                 
Interest expense:
                               
Deposits
    1,636       2,365       5,687       8,255  
Borrowed funds
    437       607       1,384       1,738  
                                 
Total interest expense
    2,073       2,972       7,071       9,993  
                                 
Net interest income
    5,744       5,789       17,261       16,370  
Provision for loan losses
    4,675       590       6,490       1,540  
                                 
Net interest income after provision for loan losses
    1,069       5,199       10,771       14,830  
                                 
Noninterest income:
                               
Fees and service charges
    694       782       2,004       2,185  
Gain on sale of loans, net
    167       24       1,032       94  
Wealth management operations
    270       201       672       618  
Gain on securities, net
    93       41       437       187  
Increase in cash value of bank owned life insurance
    98       106       306       311  
Other-than-temporary impairment of securities
    138       0       (145 )     0  
Portion of gain/(loss) recognized in other comprehensive income
    (182 )     0       101       0  
Gain/(loss) on foreclosed real estate
    (26 )     (40 )     (58 )     (21 )
Other
    11       11       23       131  
                                 
Total noninterest income
    1,263       1,125       4,372       3,505  
                                 
Noninterest expense:
                               
Compensation and benefits
    2,451       2,243       7,061       6,577  
Occupancy and equipment
    782       733       2,315       2,148  
Federal deposit insurance premiums
    246       27       986       57  
Data processing
    222       213       652       641  
Marketing
    153       85       368       304  
Other
    924       976       2,896       2,764  
                                 
Total noninterest expense
    4,778       4,277       14,278       12,491  
                                 
Income before income tax expenses
    (2,446 )     2,047       865       5,844  
Income tax expenses/(benefit)
    (1,051 )     474       (498 )     1,178  
                                 
Net income/(loss)
  $ (1,395 )   $ 1,573     $ 1,363     $ 4,666  
                                 
Earnings/(loss) per common share:
                               
Basic
  $ (0.50 )   $ 0.56     $ 0.48     $ 1.66  
Diluted
  $ (0.50 )   $ 0.56     $ 0.48     $ 1.65  
                                 
Dividends declared per common share
  $ 0.32     $ 0.36     $ 1.00     $ 1.08  

See accompanying notes to consolidated financial statements.

 
2

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

   
Three Months Ended
   
Nine Months Ended
 
(Dollars in thousands)
 
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Balance at beginning of period
  $ 53,274     $ 52,253     $ 52,773     $ 52,733  
                                 
Comprehensive income:
                               
Net income/(loss)
    (1,395 )     1,573       1,363       4,666  
Net unrealized gain/(loss) on securities
                               
available-for-sale, net of reclassifications and tax effects
    2,283       (1,976 )     1,948       (3,410 )
Amortization of unrecognized gain
    (2 )     (2 )     (6 )     (9 )
Comprehensive income/(loss)
    886       (405 )     3,305       1,247  
                                 
Issuance of common stock,
                               
under stock based compensation plan, including tax effects
    -       60       4       101  
                                 
Stock based compensation expense
    9       14       33       45  
                                 
Sale of treasury stock
    52       25       101       89  
                                 
Stock repurchase
    -       -       -       (226 )
                                 
Adjustment to retained earnings for EITF 06-4
    -       -       (84 )     (20 )
                                 
Cash dividends
    (902 )     (1,011 )     (2,813 )     (3,033 )
                                 
Balance at end of period
  $ 53,319     $ 50,936     $ 53,319     $ 50,936  

See accompanying notes to consolidated financial statements.

 
3

 
 
NorthWest Indiana Bancorp
Consolidated Statements of Cash Flows
(unaudited)

   
Nine Months Ended
 
(Dollars in thousands)
 
September 30,
 
   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 1,363     $ 4,666  
Adjustments to reconcile net income to
               
net cash provided by operating activities:
               
Origination of loans for sale
    (44,961 )     (3,940 )
Sale of loans originated for sale
    44,771       3,812  
Depreciation and amortization, net of accretion
    1,095       1,149  
Amortization of mortgage servicing rights
    113       69  
Amortization of investment in real estate limited partnerships
    142       19  
Equity in (gain)/loss of investment in limited partnership,
               
net of interest received
    11       73  
Stock based compensation expense
    33       45  
Net gains on sales and calls of securities
    (437 )     (187 )
Net gains on sale of loans
    (1,032 )     (94 )
Net losses due to other-than-temporary impairment of securities
    44       -  
Net losses on foreclosed real estate
    58       21  
Provision for loan losses
    6,490       1,540  
Net change in:
               
Interest receivable
    267       191  
Other assets
    (1,373 )     (410 )
Cash value of bank owned life insurance
    (307 )     (311 )
Accrued expenses and other liabilities
    (2,442 )     (405 )
Total adjustments
    2,472       1,572  
Net cash from operating activities
    3,835       6,238  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from maturities and pay downs of securities available-for-sale
    17,254       24,343  
Proceeds from sales of securities available-for-sale
    21,023       5,976  
Purchase of securities available-for-sale
    (48,914 )     (39,612 )
Purchase of securities held-to-maturity
    (3,860 )     (2,171 )
Proceeds from maturities and pay downs of securities held-to-maturity
    1,073       1,925  
Proceeds from sale of loans transferred to held-for-sale
    10,651       -  
Loan participations purchased
    -       (200 )
Net change in loans receivable
    5,578       (19,138 )
Purchase of Federal Home Loan Bank Stock
    -       (100 )
Purchase of premises and equipment, net
    (1,566 )     (3,082 )
Proceeds from sale of foreclosed real estate
    -       109  
Net cash from investing activities
    1,239       (31,950 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Change in deposits
    29,122       29,065  
Proceeds from  FHLB advances
    6,000       30,000  
Repayment of FHLB advances
    (13,000 )     (26,000 )
Change in other borrowed funds
    (6,745 )     (3,793 )
Tax effect of nonqualified stock option exercise
    -       6  
Proceeds from issuance of common stock
    4       95  
Proceeds from sale of treasury stock
    101       89  
Dividends paid
    (2,813 )     (3,034 )
Treasury stock purchased
    -       (226 )
Net cash from financing activities
    12,669       26,202  
Net change in cash and cash equivalents
    17,743       490  
Cash and cash equivalents at beginning of period
    11,296       12,111  
Cash and cash equivalents at end of period
  $ 29,039     $ 12,601  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
  $ 7,128     $ 10,379  
Income taxes
  $ 990     $ 1,390  
SUPPLEMENTAL NONCASH INFORMATION:
               
Transfers from loans to foreclosed real estate
  $ 3,529     $ 821  
Transfers from loans to loans held for sale
  $ 10,493     $ -  

See accompanying notes to consolidated financial statements.

 
4

 
 
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 subsidiaries, Peoples Service Corporation, NWIN, LLC and NWIN Funding, Inc.  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 U.S. generally accepted accounting principles for complete presentation of financial statements.  In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of the Bancorp as of September 30, 2009 and December 31, 2008, and the consolidated statements of income and changes in stockholders’ equity for the three and nine months ended September 30, 2009 and 2008, and cash flows for the nine months ended September 30, 2009 and 2008.  The income reported for the nine-month period ended September 30, 2009 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 U.S. generally accepted accounting principles 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 consolidated 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 investment securities and status of contingencies are particularly susceptible to material change in the near term.

Note 3 – Securities
The fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

   
(Dollars in thousands)
 
         
Gross
   
Gross
       
   
Cost
   
Unrealized
   
Unrealized
   
Fair
 
   
Basis
   
Gains
   
Losses
   
Value
 
9/30/2009
                       
U.S. government sponsored entities
  $ 1,992     $ 73     $ -     $ 2,065  
CMO and residential mortgage-backed securities
    62,670       2,716       -       65,386  
Municipal securities
    33,438       2,007       (59 )     35,386  
Corporate debt securities
    3,026       89       (11 )     3,104  
CMO government sponsored entities
    14,805       270       (11 )     15,064  
Collateralized debt obligations
    5,435       -       (4,161 )     1,274  
Total debt securities
  $ 121,366     $ 5,155     $ (4,242 )   $ 122,279  
                                 
12/31/2008
                               
U.S. government sponsored entities
  $ 5,484     $ 137     $ -     $ 5,621  
CMO and residential mortgage-backed securities
    63,520       1,856       (7 )     65,369  
Municipal securities
    26,952       259       (532 )     26,679  
Corporate debt securities
    5,079       -       (266 )     4,813  
CMO government sponsored entities
    3,756       97       (1 )     3,852  
Collateralized debt obligations
    5,481       -       (3,608 )     1,873  
Total debt securities
  $ 110,272     $ 2,349     $ (4,414 )   $ 108,207  
 
 
5

 

The carrying amount, unrecognized gains and losses, and fair value of securities held-to-maturity were as follows:

   
(Dollars in thousands)
 
         
Gross
   
Gross
       
   
Carrying
   
Unrecognized
   
Unrecognized
   
Fair
 
   
Amount
   
Gains
   
Losses
   
Value
 
9/30/2009
                       
Municipal securities
  $ 20,256     $ 906     $ (4 )   $ 21,158  
Residential mortgage-backed securities
    1,024       34       (4 )     1,054  
Total debt securities
  $ 21,280     $ 940     $ (8 )   $ 22,212  
                                 
12/31/2008
                               
Municipal securities
  $ 18,127     $ 117     $ (263 )   $ 17,981  
Residential mortgage-backed securities
    388       16       -       404  
Total debt securities
  $ 18,515     $ 133     $ (263 )   $ 18,385  
 
The fair value of debt securities and carrying amount, if different, at September 30, 2009 by contractual maturity were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

   
(Dollars in thousands)
 
   
Available-for-sale
   
Held-to-maturity
 
   
Fair
   
Carrying
 
Fair
 
   
Value
   
Amount
 
Value
 
Due in one year or less
  $ 192     $ -     $ -  
Due from one to five years
    6,239       -       -  
Due over five years
    35,398       20,256       21,158  
CMO and residential mortgage-backed securities
    80,450       1,024       1,054  
Total
  $ 122,279     $ 21,280     $ 22,212  
 
Sales of available-for-sale securities were as follows:

   
(Dollars in thousands)
 
   
9/30/2009
   
12/31/2008
 
             
Proceeds
  $ 21,023     $ 11,203  
Gross gains
    437       214  
Gross losses
    (344 )     (5 )

Change in net unrealized gain/(loss) on available-for-sale securities included in other comprehensive income is as follows:
 
   
(Dollars in thousands)
 
   
Unrealized gains
(losses) on
securities available
for sale
 
Beginning balance, June 30, 2009
  $ (1,375 )
Current period change
    1,948  
Ending balance, September 30, 2009
  $ 573  

Securities with carrying values of $30,010,000 and $37,414,000 were pledged as of September 30, 2009 and December 31, 2008, respectively, as collateral for repurchase agreements and public funds and for other purposes as permitted or required by law.

 
6

 

Securities with unrealized losses at September 30, 2009 and December 31, 2008 not recognized in income are as follows:

   
(Dollars in thousands)
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
9/30/2009
                                   
Description of Securities:
                                   
U.S. government
                                   
sponsored entities
  $ -     $ -     $ -     $ -     $ -     $ -  
CMO and residential mortgage-
                                               
backed securities
    4,325       (15 )     39       -       4,365       (15 )
Municipal securities
    -       -       1,882       (63 )     1,882       (63 )
Corporate debt securities
    -       -       3,105       (11 )     3,105       (11 )
Collateralized debt obligations
    -       -       1,274       (4,047 )     1,274       (4,047 )
Total temporarily impaired
  $ 4,325     $ (15 )   $ 6,300     $ (4,121 )   $ 10,626     $ (4,136 )

   
(Dollars in thousands)
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
12/31/2008
                                   
Description of Securities:
                                   
U.S. government
                                   
sponsored entities
  $ -     $ -     $ 104     $ (1 )   $ 104     $ (1 )
CMO and residential mortgage-
                                               
backed securities
    1,368       (3 )     371       (4 )     1,739       (7 )
Municipal securities
    25,924       (795 )     -       -       25,924       (795 )
Corporate debt securities
    4,813       (266 )     -       -       4,813       (266 )
Collateralized debt obligations
    1,409       (2,640 )     464       (968 )     1,873       (3,608 )
Total temporarily impaired
  $ 33,514     $ (3,704 )   $ 939     $ (973 )   $ 34,453     $ (4,677 )
 
      Unrealized losses on securities have not been recognized into income because the securities are of high credit quality or have undisrupted cash flows.  Management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to changes in interest rates.  The fair value is expected to recover as the securities approach maturity.

 
7

 

Note 4 – Loans Receivable
Non-performing loans at period-end were as follows:

   
(Dollars in thousands)
 
   
9/30/2009
   
12/31/2008
 
Loans past due over 90 days still on accrual
  $ 1,770     $ 1,476  
Non-accrual loans
    17,337       10,937  

Impaired loans at period-end were as follows:

   
(Dollars in thousands)
 
   
9/30/2009
   
12/31/2008
 
Period-end loans with no allocated
           
allowance for loan losses
  $ 14,037     $ 1,748  
Period-end loans with allocated
               
allowance for loan losses
    803       6,819  
Total
  $ 14,840     $ 8,567  
Amount of the allowance for
               
loan losses allocated
  $ 201     $ 1,683  
Average of impaired loans
               
during the period
  $ 11,784     $ 7,393  
Interest income recognized
               
during impairment
    -       -  
Cash-basis interest income
               
recognized during impairment
    -       -  

Note 5 - Concentrations of Credit Risk
The primary lending area of the Bancorp encompasses all of Lake County in northwest Indiana, where a majority of loan activity is concentrated.  The Bancorp is also an active lender in Porter County, and to a lesser extent, LaPorte, Newton and Jasper counties in Indiana, and Lake, Cook and Will counties in Illinois.  Substantially all loans are secured by specific items of collateral including residences, commercial real estate, land development, business assets and consumer assets.

Note 6 – Earnings Per Share
Earnings per common share is computed by dividing net income/(loss) by the weighted average number of common shares outstanding.   A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computation for the three and nine months ended September 30, 2009 and September 30, 2008 are presented below:
 
(Dollars in thousands, except per share data)
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Basic earnings per common share:
                       
Net income as reported
  $ (1,395 )   $ 1,573     $ 1,363     $ 4,666  
Weighted average common shares outstanding:
    2,816,600       2,807,103       2,813,031       2,809,244  
Basic earnings per common share:
  $ (0.50 )   $ 0.56     $ 0.48     $ 1.66  
Diluted earnings per common share:
                               
Net income as reported
  $ (1,395 )   $ 1,573     $ 1,363     $ 4,666  
Weighted average common shares outstanding:
    2,816,600       2,807,103       2,813,031       2,809,244  
Add:  Dilutive effect of assumed stock
                               
option exercises:
    -       17,698       -       17,006  
Weighted average common and dilutive
                               
potential common shares outstanding:
    2,816,600       2,824,801       2,813,031       2,826,250  
Diluted earnings per common share:
  $ (0.50 )   $ 0.56     $ 0.48     $ 1.65  
 
 
8

 

Note 7 – Stock Based Compensation
The Bancorp’s 2004 Stock Option Plan (the Plan), which is stockholder-approved, permits the grant of share options to its employees for up to 250,000 shares of common stock. Awards granted under the Plan may be in the form of incentive stock options, non-incentive stock options, or restricted stock.  As required by the Compensation – Stock Compensation Topic (formerly Financial Accounting Standards No. 123R (FAS 123R,), “Share-Based Payments”), companies are required to record compensation cost for stock options provided to employees in return for employment service.  The cost is measured at the fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options.  Compensation cost will also be recorded for prior option grants that vest after the date of adoption.  For the nine months ended September 30, 2009, stock based compensation expense of $33,000 was recorded, compared to $45,000 for the nine months ended September 30, 2008.  It is anticipated that current outstanding vested and unvested options will result in additional compensation expense of approximately $11,000 in 2009 and $42,000 in 2010.

There were 2,500 shares of restricted stock granted during the first nine months of 2009, compared to 600 shares during the first nine months of 2008.

A summary of option activity under the Bancorp’s incentive stock option plan for the three and nine months ended September 30, 2009 is presented below:

             
Weighted-
     
         
Weighted-
 
Average
     
         
Average
 
Remaining
 
Aggregate
 
         
Exercise
 
Contractual
 
Intrinsic
 
Options
 
Shares
   
Price
 
Term
 
Value
 
Outstanding at January 1, 2009
    70,597     $ 23.56          
Granted
    -     $ -          
Exercised
    (200 )   $ 20.50          
Forfeited or expired
    (3,650 )   $ 22.00          
Outstanding at September 30, 2009
    66,747     $ 23.65  
               2.5
 
                -
 
Exercisable at September 30, 2009
    65,746     $ 23.58  
               2.4
 
                -
 

There were no options granted during the first nine months of 2009. The total intrinsic value of options exercised during the nine months ended September 30, 2009 and 2008, was $700 and $30,388.

Note 8 – Adoption of New Accounting Standards
Effective for periods on or after September 15, 2009, references to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, which is sometimes referred to as the Codification or ASC.  The Codification does not change how NorthWest Indiana Bancorp accounts for its transactions or the nature of related disclosures made.  However, when referring to GAAP, the Bancorp refers to topics in the ASC. We have updated references to GAAP to reflect the guidance in the Codification.

The Fair Value Measurements Topic of the ASC (formerly known as FAS No. 157), establishes a framework for measuring fair value and expands disclosures about fair value measurements.  This Topic establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset.  The Topic was effective for fiscal years beginning after November 15, 2007.  In February 2008, this Topic was updated (formerly FSP 157-2) to delay the effective date of  the Standard for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. In October 2008, the Topic was updated (formerly FSP 157-3) to clarify the application of the Topic in a market that is not active.  In April 2009, the Topic was updated  (formerly FSP 157-4)  to provide additional guidance for estimating fair value in accordance with the Topic when the volume and level of activity for the asset or liability being measured have significantly decreased.  This update also included guidance on identifying circumstances that indicate a transaction is not orderly.  This update was effective for reporting periods ending after June 15, 2009.

The Compensation – Retirement Benefits Aspects Topic (formerly known as EITF No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”) requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement.  The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement.  This issue was effective for fiscal years beginning after December 15, 2007.  A liability of $104,000 has been recorded and reflected as an adjustment to retained earnings since adoption.

 
9

 

The Financial Instruments Topic was updated (formerly FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”) to require disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements.  This update was effective for the Bancorp’s interim period ending on June 30, 2009 and has been included as part of Note 9, Fair Value.
 
The Investments – Debt and Equity Securities Topic was updated (formerly FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”) to amend current other-than-temporary impairment guidance in the Topic for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.  This update does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.  The Topic is effective for the Bancorp’s interim period ending on June 30, 2009.

The Subsequent Events Topic (formerly FAS No. 165, “Subsequent Events”) establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, this Topic sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  In accordance with this Topic, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009.

The Transfers and Servicing Topic was updated (formerly FAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140”) to remove the concept of a qualifying special-purpose entity from the Topic and removes the exception from applying the Consolidations Topic (formerly FASB Interpretation No. 46R)  The objective in issuing this update is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.  This update must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.  The impact of adoption is not expected to be material.

The Consolidations Topic was amended (formerly FAS No. 167, “Amendments to FASB Interpretation No. 46(R)”) to improve financial reporting by enterprises involved with variable interest entities.  The amendment addresses (1) the effects on certain provisions of the Topic as they relate to the elimination of the qualifying special-purpose entity concept in the Transfers and Servicing Topic and (2) constituent concerns about the application of certain key provisions of the Topic including those in which the accounting and disclosures under the Topic do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity.  This amendment shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.  The impact of adoption is not expected to be material.

Note 9 – Fair Value
The Fair Value Measurements Topic establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Topic describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other 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.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.

 
10

 

The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.  Different judgment and assumptions used in pricing could result in different estimates of value.  In certain cases where market data is not readily available because of lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy.

      At the end of each reporting period securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with the Investments – Debt and Equity Securities Topic.  An impairment is other-than-temporary if the decline in the fair value of the security is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received.  Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates.  We consider the following factors when determining an other-than-temporary impairment for a security: the length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; an assessment of whether the Bancorp has (1) the intent to sell the debt securities or (2) more likely than not will be required to sell the debt securities before its anticipated market recovery.  If either of these conditions is met, management will recognize other-than-temporary impairment.  If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.

For the quarter ended September 30, 2009, the Bancorp’s management performed an other-than-temporary impairment analysis for each of its four pooled trust preferred securities.  The analysis utilizes analytical models used to project future cash flows for the pooled trust preferred securities based on current assumptions for prepayments, default and deferral rates, and recoveries.  The projected cash flows are than tested for impairment consistent with the Investments – Other Topic (formerly FSP EITF 99-20-1) and the Investments – Debt and Equity Securities Topic (formerly FSP FAS 115-2 and FAS 124-2).  The other-than-temporary impairment testing compares the present value of the cash flows from quarter to quarter to determine if there is a “favorable” or “adverse” change.  Other-than-temporary impairment is recorded if the projected present value is lower than the book value of the security.  To perform the quarterly other-than-temporary impairment analysis, management utilizes current reports issued by the trustee, which contains principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled trust preferred security.  In addition, for the performing collateral, management monitors the level of non-performing assets and capital adequacy to determine trends of future defaults or deferrals.  The other-than-temporary impairment analysis indicated that one of the trust preferred securities has other-than-temporary impairment in the amount of $44 thousand.  The unrealized loss for the remaining three trust preferred securities represents a decline in value that is considered a temporary impairment.  These investments are collateralized by underlying investments in trust preferred securities issued by many different banks and insurance companies.  We believe the increase in the net unrealized loss is the result of the current economic decline, the low trade volume of the security, and the lack of confidence in the financial services industry.

The table below shows the credit loss roll forward for the Bancorp’s trust preferred securities that have been classified with other-than-temporary impairment:

(Dollars in thousands)
 
 
 
   
Collateralized debt
obligations other-
than-temporarily
impaired
 
Beginning balance, June 30, 2009
  $ -  
Additions not previously recongnized
    44  
Ending balance, September 30, 2009
  $ 44  

 
11

 

Below is a table containing information regarding the Bancorp’s pooled trust preferred securities as of September 30, 2009:

Deal name
 
PreTSL XXIV
   
PreTSL XXVII
   
Alesco IX
   
Alesco XVII
 
Class
    B-1       C-1       A-2A       B  
Book value
    1,272,986       1,427,774       1,322,816       1,411,090  
Fair value
    394,483       360,208       330,000       188,821  
Unrealized gains/(losses)
    (878,503 )     (1,067,566 )     (992,816 )     (1,222,269 )
Lowest credit rating assigned
 
Caa3
   
Ca
   
BB
   
Ca
 
Number of performing banks
    57       31       52       42  
Number of performing insurance companies
    13       7       11       n/a  
Number of issuers in deferral or default
    23       11       7       13  
Defaults & deferrals as a % of performing collateral
    28.50 %     20.00 %     16.55 %     31.51 %
Excess subordination:
                               
As a % of performing collateral
    -8.57 %     -10.88 %     29.60 %     3.80 %
As a % of performing collateral - adjusted for projected future defaults
    -16.78 %     -12.60 %     24.66 %     -1.20 %
Other-than-temporary impairment model assumptions:
                               
Defaults:
                               
Year 1
    4.00 %     2.00 %     5.00 %     0.25 %
Year 2
    0.25 %     0.25 %     0.25 %     0.25 %
Year 3
    3.50 %     0.25 %     2.00 %     0.25 %
> 3 Years
    0.25 %     0.25 %     0.25 %     0.25 %
Discount rate
    1.58 %     1.24 %     1.29 %     1.46 %
Recovery assumptions
 
25% - 5 year lag
   
25% - 5 year lag
   
12% - 5 year lag
      0 %
Prepayments
    1.00 %     1.00 %     1.00 %     1.00 %
Other-than-temporary impairment
    25,086       0       15,884       2,563  
 
In the table above, the Bancorp’s excess subordination for each trust preferred security is calculated by taking the total performing collateral and subtracting the sum of the total collateral within the Bancorp’s class and the total collateral within all senior classes, and then stating this result as a percentage of the total performing collateral.  This measure is an indicator of the level of collateral that can default before potential cash flow disruptions may occur.  In addition, management calculates excess subordination assuming future collateral defaults by utilizing the default/deferral assumptions in the Bancorp’s OTTI analysis.  Excess subordination assuming future default/deferral assumptions is calculated by deducting future defaults from the current performing collateral.  At September 30, 2009, management reviewed the excess subordination levels for each security in context of the level of current collateral defaults and deferrals within each security; the potential for additional defaults and deferrals within each security; the length of time that the security has been in “payment in kind” status; and the Bancorp’s class position within each security.