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
--------------------------------------
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended MARCH 31, 1999, 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
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(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 office) (ZIP code)
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 [ ]
There were 2,766,470 shares of the registrant's Common Stock, without par value,
outstanding at March 31, 1999.
NORTHWEST INDIANA BANCORP
INDEX
Page
Number
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PART I. Consolidated Financial Statements
Item 1. Consolidated Financial Statements of NorthWest Indiana Bancorp
Consolidated Balance Sheets, March 31, 1999 and December 31, 1998 1
Consolidated Statements of Income, Three Months Ended March 31, 1999 and 1998 2
Consolidated Statements of Changes in Stockholders' Equity, Three Months
Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows, Three Months March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7 - 14
PART II. Other Information 15
SIGNATURES 16
NorthWest Indiana Bancorp
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
(Dollars in thousands) 1999 1998
----------- -------------
ASSETS
Cash and non-interest bearing balances in financial institutions .................... $ 10,253 $ 12,729
Interest bearing balances in financial institutions ................................. 4,262 10,111
Federal funds sold .................................................................. 2,800 4,500
--------- ---------
Total cash and cash equivalents ................................................. 17,315 27,340
Securities available-for-sale ....................................................... 22,671 20,522
Securities held-to-maturity (fair value: March 31, 1999 - $13,042;
December 31, 1998 - $14,236) ................................................... 13,047 14,133
Loans held for sale ................................................................. 99 598
Loans receivable .................................................................... 284,900 273,433
Less: allowance for loan losses ..................................................... (3,176) (3,132)
--------- ---------
Net loans receivable ............................................................ 281,724 270,301
Federal Home Loan Bank stock ........................................................ 1,695 1,695
Accrued interest receivable ......................................................... 2,287 2,298
Premises and equipment .............................................................. 6,668 6,715
Foreclosed real estate .............................................................. 32 32
Other assets ........................................................................ 1,745 1,783
--------- ---------
Total assets .................................................................... $ 347,283 $ 345,417
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing .............................................................. $ 25,581 $ 22,346
Interest bearing .................................................................. 268,676 270,876
--------- ---------
Total ........................................................................... 294,257 293,222
Borrowed funds ...................................................................... 17,877 17,320
Accrued expenses and other liabilities .............................................. 3,535 3,559
--------- ---------
Total liabilities ............................................................... 315,669 314,101
Commitments and contingencies ....................................................... -- --
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;
issued and outstanding: March 31, 1999 - 2,766,470 shares;
December 31, 1998 - 2,763,156 shares .............................................. 346 345
Additional paid in capital .......................................................... 2,965 2,950
Accumulated other comprehensive income .............................................. 19 114
Retained earnings - substantially restricted ........................................ 28,284 27,907
--------- ---------
Total stockholders' equity ...................................................... 31,614 31,316
--------- ---------
Total liabilities and stockholders' equity ...................................... $ 347,283 $ 345,417
========= =========
See accompanying notes to consolidated financial statements.
1
NorthWest Indiana Bancorp
Consolidated Statements of Income
(unaudited)
Three Months Ended
(Dollars in thousands, except per share data) March 31,
1999 1998
---------- ----------
Interest income:
Loans receivable
Real estate loans ....................................................... $4,792 $5,024
Commercial loans ........................................................ 487 526
Consumer loans .......................................................... 204 134
------ ------
Total loan interest ................................................... 5,483 5,684
Securities ................................................................ 542 453
Other interest earning assets ............................................. 143 127
------ ------
Total interest income ................................................. 6,168 6,264
------ ------
Interest expense:
Deposits .................................................................. 2,569 2,881
Borrowed funds ............................................................ 221 224
------ ------
Total interest expense ................................................ 2,790 3,105
------ ------
Net interest income ......................................................... 3,378 3,159
Provision for loan losses ................................................... 49 25
------ ------
Net interest income after provision for loan losses ......................... 3,329 3,134
------ ------
Noninterest income:
Fees and service charges .................................................. 220 217
Trust operations .......................................................... 88 87
Gain on sale of earning assets, net ....................................... 30 3
Gain on sale of foreclosed real estate .................................... -- 3
------ ------
Total noninterest income .............................................. 338 310
------ ------
Noninterest expense:
Compensation and benefits ................................................. 1,086 1,022
Occupancy and equipment ................................................... 392 354
Data processing ........................................................... 120 102
Advertising ............................................................... 49 50
Federal insurance premium ................................................. 42 41
Other ..................................................................... 388 388
------ ------
Total noninterest expense ............................................. 2,077 1,957
------ ------
Income before income tax expenses ........................................... 1,590 1,487
Income tax expenses ......................................................... 633 593
------ ------
Net income .................................................................. $ 957 $ 894
====== ======
Earnings per common share ................................................... $ 0.35 $ 0.33
====== ======
Earnings per common share, assuming dilution ................................ $ 0.34 $ 0.32
====== ======
Dividend declared per common share .......................................... $ 0.21 $0.185
====== ======
See accompanying notes to consolidated financial statements.
2
NorthWest Indiana Bancorp
Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Three Months Ended
(Dollars in thousands, except per share data) March 31,
1999 1998
------------ -----------
Balance at beginning of period ................................................ $ 31,316 $ 29,482
Accumulated other comprehensive income:
Net income ................................................................. 957 894
Net unrealized gain/(loss) on securities
available-for-sale, net of tax effects .................................. (95) (3)
-------- --------
Comprehensive income ................................................. 862 891
Issuance of shares of common stock:
3,314 shares at $4.66 - $10.63 per share and
114 shares at $5.75 - $10.63 per share for the
three months ended March 31, 1999 and 1998 ................................. 17 1
Cash dividends:
$0.21 per share and $0.185 per share for the
three months ended March 31, 1999 and 1998 ................................. (581) (512)
-------- --------
Balance at end of period ...................................................... $ 31,614 $ 29,862
======== ========
See accompanying notes to consolidated financial statements.
3
NorthWest Indiana Bancorp
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
(Dollars in thousands) March 31,
1999 1998
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 957 $ 894
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Origination of loans for sale ................................................... (608) (380)
Sale of loans originated for sale ............................................... 1,110 383
Depreciation and amortization, net of accretion ................................. 223 199
Amortization of mortgage servicing rights ....................................... 2 --
Net gains on sale of loans ...................................................... (22) (3)
Net gains on sale of foreclosed real estate ..................................... -- (3)
Provision for loan losses ....................................................... 49 25
Net change in:
Interest receivable .......................................................... 11 27
Other assets ................................................................. 117 80
Accrued expenses and other liabilities ....................................... (24) 146
-------- --------
Total adjustments .......................................................... 858 474
-------- --------
Net cash from operating activities ......................................... 1,815 1,368
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale ........................... 1,660 --
Purchase of securities available-for-sale ........................................... (3,992) (2,533)
Proceeds from maturities of securities held-to-maturity ............................. 2,500 2,500
Purchase of securities held-to-maturity ............................................. (1,497) (2,158)
Principal collected on mortgage-backed securities ................................... 92 151
Loan participations purchased ....................................................... (300) --
Net change in loans receivable ...................................................... (11,171) (78)
Purchase of premises and equipment, net ............................................. (160) (17)
Proceeds from sale of foreclosed real estate ........................................ -- 118
-------- --------
Net cash from investing activities ............................................... (12,868) (2,017)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits .................................................................. 1,035 6,592
Proceeds from FHLB advances ......................................................... -- 2,000
Change in other borrowed funds ...................................................... 557 352
Proceeds from issuance of capital stock ............................................. 17 1
Dividends paid ...................................................................... (581) (512)
-------- --------
Net cash from financing activities ............................................... 1,028 8,433
-------- --------
Net change in cash and cash equivalents .......................................... (10,025) 7,784
Cash and cash equivalents at beginning of period .................................... 27,340 10,653
-------- --------
Cash and cash equivalents at end of period .......................................... $ 17,315 $ 18,437
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ......................................................................... $ 2,786 $ 3,126
Income taxes ..................................................................... $ 378 $ 261
Transfers from loans to foreclosed real estate ...................................... $ -- $ 129
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 subsidiary. The Bancorp has no other business
activity other than being a holding company for 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 generally accepted accounting principles 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 March 31, 1999 and December 31, 1998, and the statements of income
and changes in stockholders' equity for the three ended March 31, 1999 and 1998,
and cash flows for the three months ended March 31, 1999 and 1998. The income
reported for the three month period ended March 31, 1999 is not necessarily
indicative of the results to be expected for the full year.
NOTE 2 - 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 3 - RECLASSIFICATIONS
Certain amounts reported in the December 31, 1998 consolidated
financial statements have been reclassified to conform to the March 31, 1999
presentation.
NOTE 4 - 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 March 31, 1999 and December 31, 1998, commitments to make loans
totaled $45.9 million and $40.0 million, respectively and standby letters of
credit totaled $1.9 million for both periods. At March 31, 1999, $39.1 million
(85%) of the commitments were at variable rates.
Since commitments to make loans may expire without being used, the
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
NOTE 5 - EARNINGS PER SHARE
The weighted-average number of shares used in the calculation of
earnings per share is presented below:
Three Months Ended
March 31,
1999 1998
---- ----
Basic Earnings Per Common Share:
Weighted-average common shares outstanding ....... 2,763,515 2,762,982
========= =========
Diluted Earnings Per Common Share:
Weighted-average common shares outstanding ....... 2,792,956 2,792,486
========= =========
6
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 (the Bank), an Indiana savings bank, is a wholly owned subsidiary of the
Bancorp. The Bancorp has no other business activity other than being the holding
company for Peoples Bank SB.
On February 28, 1999, he Bancorp effected a two-for-one common stock split
as a share dividend. Earnings and dividends per share and other share related
information is restated for the stock split.
At March 31, 1999, the Bancorp had total assets of $347.3 million and total
deposits of $294.3 million. Stockholders' equity totaled $31.6 million or 9.1%
of total assets, with book value per share at $11.43. The annualized return on
average assets (ROA) was 1.12%, while the annualized return on average
stockholders' equity (ROE) was 12.11%, for the three months ended
March 31, 1999.
FINANCIAL CONDITION
During the three months ended March 31, 1999, total assets increased by
$1.9 million (0.5%), with interest-earning assets increasing by $4.5 million
(1.4%). At March 31, 1999, interest-earning assets totaled $329.5 million and
represented 94.9% of total assets.
Loans receivable totaled $284.9 million which represented 86.5% of
interest-earning assets, 82.0% of total assets and 96.8% of total deposits. The
loan portfolio includes $17.0 million (6.0%) in construction and development
loans, $155.4 million (54.5%) in residential mortgage loans, $77.6 million
(27.3%) in commercial and multifamily real estate loans, $10.0 million (3.5%) in
consumer loans, and $24.9 million (8.7%) in commercial business and other loans.
Adjustable rate loans comprised 54% of the total investment in loans at March
31, 1999. During the three months ended March 31, 1999, loans increased by
$11.5 million (4.2%). The growth is a result of a strong local economy,
favorable interest rates and aggressive marketing and call programs.
The Bancorp is primarily a portfolio lender. Mortgage banking activities
are limited to the sale of fixed rate mortgage loans with contractual maturities
of thirty years. 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 three months ended March 31, 1999, the Bancorp sold $1.1 million in fixed
rate mortgage loans. The amount includes 9 loans. Net gains realized from the
sales totaled $22 thousand. Mortgage loan servicing income totaled $4 thousand.
At March 31, 1999, the Bancorp had one loan for $99 thousand classified as held
for sale.
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. Interest-bearing balances
in financial institutions include overnight
7
deposits at the Federal Home Loan Bank of Indianapolis (FHLB). Investments are
generally for terms ranging from one day to five years. At March 31, 1999, the
investment portfolio totaled $35.7 million and was invested as follows: 76.0% in
U.S. government agency debt securities, 21.3% in U.S. government debt
securities, and 2.7% in U.S. government agency mortgage-backed securities. At
March 31, 1999, securities available-for-sale totaled $22.7 million or 63.6% of
total securities. The available-for-sale portfolio permits the active management
of the Bancorp's liquidity position. During the three months ended March 31,
1999, investment securities increased by $1.1 million (3.1%). At March 31, 1999,
the Bancorp had $4.3 million in interest-bearing balances at the FHLB and $2.8
million in federal funds sold.
Management believes that the credit risk profile of the earning asset
portfolio is relatively low. The table which follows sets forth information with
respect to the number (#) and balances (Amount) of non-performing assets and
related ratios for the periods indicated. The amounts are stated in thousands
(000's).
March 31, 1999 December 31, 1998
# Amount # Amount
--- ------ --- ------
Loans accounted for on a non-accrual basis:
Real estate loans:
Residential 19 $ 784 15 $ 636
Commercial 2 130 2 131
Commercial business loans 3 461 1
69
Consumer loans 1 13 1 18
--- ------ --- ------
Total 25 $1,388 19 $ 854
=== ====== == ======
Accruing loans which are contractually past due 90 days or more:
Real estate loans:
Residential 11 $ 368 11 $ 429
Commercial 1 57 -- --
Commercial business loans 0 -- 1
188
Consumer loans 0 -- -- --
--- ------ --- ------
Total 12 $ 425 5 $ 617
=== ====== === ======
Total of non-accrual and accruing loans 90 days or more
past due loans 37 $1,813 31 $1,471
=== ====== === ======
Foreclosed real estate 1 $ 32 1 $ 32
=== ====== === ======
Ratio of non-performing loans to total assets 0.52% 0.43%
Ratio of non-performing loans to total loans 0.64% 0.54%
Ratio of foreclosed real estate to total assets 0.01% 0.01%
Ratio of non-performing assets to total assets 0.53% 0.44%
8
At March 31, 1999, $1.3 million of the Bancorp's loans were classified as
substandard. The total represents 29 loans. No loans were classified as doubtful
or loss. Management does not anticipate that any of the non-performing loans or
classified loans will materially impact future operations, liquidity or capital
resources. At March 31, 1999, there were no material credits that would cause
management to have serious doubts as to the ability of such borrowers to comply
with loan repayment terms.
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 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 three months ended March 31,
1999, additions to the ALL account totaled $49 thousand compared to $25 thousand
for the three months ended March 31, 1998. Charge-offs net of recoveries totaled
$5 thousand during the three months ended March 31, 1999. The amount provided
during the current three months was based on loan activity, changes within the
loan portfolio mix, and resulting changes in management's assessment of
portfolio risk. At March 31, 1999, the balance in the ALL account totaled $3.2
million, which is considered adequate by management after evaluation of the loan
portfolio, past experience and current economic and market conditions.
The table below sets forth the allocation of the ALL and related ratios on
the dates indicated. The amounts are in thousands (000's). The percent columns
represent the percentage of loans in each category to total loans.
March 31, 1999 December 31, 1998
------------------ ---------------------
Real estate loans:
Residential $ 302 54.5% $ 302 56.3%
Commercial and other dwelling 1,063 27.3 953 24.5
Construction and development 275 6.0 268 7.0
Consumer loans 200 3.5 196 3.7
Commercial business loans and other loans 860 8.7 630 8.5
Unallocated 476 783
------ ------ ------ ------
Total $3,176 100.0% $3,132 100.0%
====== ====== ====== ======
Ratio of ALL to loans outstanding 1.11% 1.14%
Ratio of ALL to non-performing loans 175.2% 212.9%
At March 31, 1999, no portion of the ALL was allocated to impaired loan
balances as the Bancorp had no individual loans considered to be impaired loans
as of, or for the three months ended March 31, 1999. 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 evaluated on a pooled
basis. During the three months ended March 31, 1999, additions to the ALL were
allocated to the commercial real estate loans and commercial business loans due
to the growth in these portfolios and the additional risk related to these
products.
9
Deposits are the major source of funds for lending and other investment
purposes. At March 31, 1999, deposits totaled $294.3 million. During the three
months ended March 31, 1999, deposit growth totaled $1.0 million (0.4%).
Savings accounts increased $322 thousand (0.7%), checking accounts increased
$3.5 million (7.1%), money market deposit accounts (MMDA's) decreased $644
thousand (1.9%) while certificates of deposit decreased by $2.2 million (1.4%).
The growth in core deposits (checking and savings accounts) was a result of
competitive product offerings and an aggressive marketing program. The decrease
in certificates of deposit was caused by management's decision to let high
dollar, high cost funds mature. At March 31, 1999, the deposit base was
comprised of 16.8% savings accounts, 11.1% MMDA's, 18.4% checking accounts and
53.7% certificates of deposit. At March 31, 1999, repurchase agreements totaled
$3.9 million. Other short-term borrowings totaled $2.0 million. The Bancorp had
$12 million in FHLB advances with a weighted-average maturity of 3.6 years.
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. The Bancorp's primary goal for
liquidity management is to ensure that at all times it can meet the cash demands
of its depositors and its loan customers. A secondary purpose of liquidity
management is profit management. Because profit and liquidity are often
conflicting objectives, management attempts to maximize the Bancorp's net
interest margin by making adequate, but not excessive, liquidity provisions.
Finally, because the Bank is subject to legal reserve requirements under Federal
Reserve Regulation D, liquidity is managed to ensure that the Bank maintains an
adequate level of legal reserves.
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 and maturity of investment securities. Financing activities
focus almost entirely on the generation of customer deposits. In addition, the
Bancorp utilizes borrowings (i.e., repurchase agreements and advances from the
FHLB) as a source of funds.
During the three months ended March 31, 1999, cash and cash equivalents
decreased by $10.0 million compared to a $7.8 million increase for the three
months ended March 31, 1998. The decrease reflects the reduction of interest
bearing balances in financial institutions, as funds were used for loan
originations. The primary sources of cash were deposit growth, proceeds from
maturities of securities and cash provided by operating activities. The primary
uses of cash were the loan originations, purchase of securities and the payment
of common stock dividends. During the current three months cash provided by
operating activities totaled $1.8 million compared to $1.4 million for the three
months ended March 31, 1998. The increase was due to increased earnings and cash
flows from loan sales. Cash outflows from investing activities reflect strong
loan demand during the three months ended March 31, 1999. The net change in
loans receivable totaled $11.2 million compared to $78 thousand for the three
months ended March 31, 1998. Cash flows from financing activities totaled $1.0
million during the current period compared to $8.4 million for the three months
ended March 31, 1998. During the current period the Bancorp paid dividends on
common stock of $581 thousand. Deposit growth totaled $1.0 million compared to
$6.6 million for the three months ended March 31, 1998, while borrowed funds and
proceeds from FHLB advances increased by $557 thousand compared to $2.4 million
for the three months ended March 31, 1998.
10
At March 31, 1999, outstanding commitments to fund loans totaled $45.9
million. Approximately 85% of the commitments were at variable rates. Management
believes that the Bancorp has sufficient cash flow and borrowing capacity to
fund outstanding commitments and to maintain proper levels of liquidity.
Management strongly believes that maintaining a high level of capital
enhances safety and soundness. During the three months ended March 31, 1999,
stockholders' equity increased by $298 thousand (1.0%). The increase resulted
primarily from earnings of $957 thousand during the period. In addition, $17
thousand represents proceeds from the exercise of 3,314 stock options. The
Bancorp paid $581 thousand in cash dividends during the three month period. The
net unrealized loss on available-for-sale securities was $95 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 I capital. In addition, the FRB
and FDIC regulations provide for a minimum Tier I leverage ratio (Tier I 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 I leverage ratio of 3% plus an
additional cushion of at least one to two percent.
The following table shows that, at March 31, 1999, the Bancorp's capital
exceeded all regulatory capital requirements. At March 31, 1999, the Bancorp's
and the Bank's regulatory capital ratios were substantially the same. The dollar
amounts are in millions.
Required for To be well
Actual adequate capital capitalized
------ ---------------- -----------
Amount Ratio Amount Ratio Amount Ratio
------------ ------ ----- ------------
Total capital to risk-weighted assets $34.6 14.9% $ 18.5 8.0% $23.2 10.0%
Tier I capital to risk-weighted assets $31.7 13.7% $ 9.3 4.0% $13.9 6.0%
Tier I capital to adjusted average assets $31.7 9.3% $ 10.3 3.0% $17.1 5.0%
11
RESULTS OF OPERATIONS - COMPARISON OF THE QUARTER ENDED MARCH 31, 1999 TO THE
QUARTER ENDED MARCH 31, 1998
Net income for the three months ended March 31, 1999 was $957 thousand
compared to $894 thousand for the quarter ended March 31, 1998, an increase of
$63 thousand (7.0%). The earnings represent a ROA of 1.12% for the current
quarter compared to 1.10% for the quarter ended March 31, 1998. The ROE was
12.11% for the current quarter compared to 12.00% for the quarter ended March
31, 1998.
Net interest income for the three months ended March 31, 1999 was $3.4
million, up $219 thousand (6.9%) from $3.2 million for the three months ended
March 31, 1998. The increase in net interest income was due to a lower cost of
funds. The weighted-average yield on interest-earning assets was 7.58% for the
three months ended March 31, 1999 compared to 8.09% for the three months ended
March 31, 1998. The weighted-average cost of funds for the quarter ended March
31, 1999, was 3.64% compared to 4.28% for the quarter ended March 31, 1998. The
impact of the 7.58% return on interest-earning assets and the 3.64% cost of
funds resulted in an interest rate spread of 3.94% for the current quarter
compared to 3.81% for the quarter ended March 31, 1998. During the current
quarter total interest income decreased by $96 thousand (1.5%) while total
interest expense decreased by $315 thousand (10.1%). The net interest margin was
3.95% for the three months ended March 31, 1999 compared to 3.90% for the
quarter ended March 31, 1998.
During the three months ended March 31, 1999, interest income from loans
decreased by $201 thousand (3.5%) compared to the three months ended March 31,
1998. The decrease was due to a decrease in the loan portfolio yield. The
weighted-average yield on loans outstanding was 7.88% for the current quarter
compared to 8.37% for the three months ended March 31, 1998. Loan balances
averaged $278.5 million for the current quarter, up $6.8 million (2.5%) from
$271.7 million for the three months ended March 31, 1998. During the three
months ended March 31, 1999, interest income on investments and other deposits
increased by $105 thousand (18.1%) compared to the quarter ended March 31, 1998.
The increase was due to higher average daily balances. The weighted-average
yield on securities and other deposits was 5.83% for the current quarter
compared to 6.13% for the three months ended March 31, 1998. Securities and
other deposits averaged $47.0 million for the current quarter, up $9.2 million
(24.3%) from $37.8 million for the three months ended March 31, 1998.
Interest expense for deposits decreased by $312 thousand (10.8%) during the
current quarter compared to the three months ended March 31, 1998. The decrease
was due to a lower cost of funds. The weighted-average rate paid on deposits for
the three months ended March 31, 1999 was 3.55% compared to 4.21% for the
quarter ended March 31, 1998. The lower cost of funds was due to growth in core
deposits (checking accounts, savings accounts and money market accounts). Core
deposits averaged $129.8 million for the current quarter, up $20.6 million
(18.9%) from $109.2 million for the quarter ended March 31, 1998. Total deposit
balances averaged $289.4 million for the current quarter, up $15.8 million
(5.8%) from $273.6 for the quarter ended March 31, 1998. Interest expense on
borrowed funds decreased by $3 thousand (1.3%) during the current quarter due to
a decrease in the cost of borrowed funds. The weighted-average cost of borrowed
funds was 5.05% for the current quarter compared to 5.33% for the three months
ended March 31, 1998. Borrowed funds averaged $17.5 million during the quarter
ended March 31, 1999, up $700 thousand (4.2%) from $16.8 million for the quarter
ended March 31, 1998.
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Noninterest income for the quarter ended March 31, 1999 was $338 thousand,
up $28 thousand (9.0%) from $310 thousand for the three months ended March 31,
1998. During the current quarter, net gains on the sale of earning assets
totaled $30 thousand compared to $3 thousand during the three months ended March
31, 1998.
Noninterest expense for the quarter ended March 31, 1999 was $2.1 million,
up $120 thousand (6.1%) from $2.0 million for the three months ended March 31,
1998. The increase in compensation and benefits was due to additional staffing,
annual salary increases and the increased cost of employee benefits. The
increases in occupancy and equipment, and data processing reflect investments in
technology and new products and services. The Bancorp's efficiency ratio was
55.9% for the quarter ended March 31, 1999 compared to 56.6% for the three
months ended March 31, 1998. The ratio is determined by dividing total
noninterest expense by the sum of net interest income and total noninterest
income for the period.
Income tax expenses for the three months ended March 31, 1999 totaled $633
thousand compared to $593 thousand for the three months ended March 31, 1998, an
increase of $40 thousand (6.7%). The increase was due to an increase in pretax
earnings during the current quarter. The combined effective federal and state
tax rates for the Bancorp were 40% for the three months ended March 31, 1999 and
1998.
YEAR 2000
The Year 2000 problem stems from computer programs that identify the
year with two digits instead of four. The problem with this code is that in the
Year 2000, `00' may be interpreted as 1900 or not processed at all. The year
2000 problem is not limited to one type of software or hardware. Machines and
programs affected include mainframes, personal computers, networks, ATMs, and
other items such as elevators, infrastructures, and telephone systems.
The Federal Financial Institutions Examination Council (FFIEC) has
outlined five phases for institutions to effectively manage the Year 2000
challenge.
Awareness - Gain executive support and commit resources to the Year
2000 challenge.
Assessment - Identify all critical business processes and elements of
information technology (IT) and non-IT systems that must be modified.
Renovation - Convert, replace or eliminate software and databases as
necessary, according to the risk-based priorities established during
assessment.
Validation - Test and verify systems, databases and utilities by
simulating data conditions for the Year 2000.
Implementation - Put renovated systems, databases and utilities into
production.
In April 1997, the Bancorp implemented an action plan to address the
century date change issue so that service and business operations will not be
interrupted in the year 2000. This plan meets all FFIEC guidelines and the
Bancorp is on schedule to meet all plan deadlines. A project leader and a team
of
13
employees have analyzed daily operations, business forms, software, hardware
and equipment for year 2000 compliance.
At March 31, 1999 the awareness and assessment phases have been
completed. Validation has been completed for mission critical systems. The
renovation and implementation phases for mission critical systems are in process
and will be completed within the FFIEC guidelines. In addition, management has
assessed its credit and liquidity risk by evaluating the Year 2000 preparedness
of significant customers. At this time, management believes that the overall
risk rating for deposit and loan customers is low. Management has identified
customers of moderate or high risk and is monitoring their efforts to be Year
2000 ready.
The current estimate of total Year 2000 program costs is approximately
$300 thousand. Management expects to invest approximately $225 thousand in new
computers and software that will provide significantly enhanced functionality
over the systems that are currently being used. The remaining $75 thousand
represents the modification and upgrades to existing systems and equipment.
Purchased hardware and software will be capitalized in accordance with Bancorp
policy while other remediation costs will be expensed as incurred. The Bancorp
does not expect the cost of Year 2000 compliance to have a material effect on
its business, financial position or results of operations.
The Bancorp relies heavily on computer technology and third party
vendors for computer processing and its business activities. The Year 2000 issue
has created risk for the Bancorp from unforeseen problems that could arise
internally, as well as, from third parties whom the Bancorp uses to process
information. If not adequately addressed, the failure of the Bancorp's computer
systems and/or third party's computer systems could have a material impact of
the Bancorp's ability to conduct its business. To mitigate this risk, the Board
of Directors and management have made a total commitment to resolving all Year
2000 issues. Ongoing communication with third party vendors has been established
to monitor their year 2000 efforts. The Bancorp's primary third party processors
have stated that they have completed the renovation and testing of their systems
for Year 2000 readiness. All systems and interfaces are being tested internally
to confirm reported compliance.
The Bancorp has designed its contingency plan to mitigate risks
associated with the failure of systems, equipment and forms. The plan identifies
and prioritizes systems, equipment and forms needed for Bancorp operations and
customer service; lists individuals responsible for monitoring Year 2000 efforts
for each operational area of the Bancorp; lists alternative actions available
for systems failing to achieve Year 2000 readiness; provides for target dates
for implementation of contingency strategies; assesses the risk of various
components of the plan; and provides for independent review of the plan. The
Board of Directors and management understand in a recovery situation, the
Bancorp may not be able to continue operations at the same level that it
currently maintains. However, because the Board of Directors and management have
been proactive in their involvement with the Year 2000 project, the Bancorp
believes it is well positioned to make timely decisions related to the need to
invoke the contingency plan and avoid disruptions to customer service and
business operations.
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PART II - Other Information
---------------------------
Item 1. Legal Proceedings
-----------------
The registrant is not party to any legal proceedings. No
significant changes in legal proceedings of the Bancorp
occurred during the quarter.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
--------
(27) Financial Data Schedule
(b) Reports on Form 8-K. None.
-------------------
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SIGNATURES
Pursuant to the requirement 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.
NORTHWEST INDIANA BANCORP
Date: May 10, 1999 /s/ David A. Bochnowski
-----------------------
David A. Bochnowski
Chairman of the Board and Chief Executive
Officer
Date: May 10, 1999 /s/ Edward J. Furticella
------------------------
Edward J. Furticella
Vice President, Chief Financial Officer and
Treasurer
16