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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) 836-4400

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

There were 2,766,539 shares of the registrant’s Common Stock, without par value, outstanding at June 30, 2004.

NorthWest Indiana Bancorp
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NorthWest Indiana Bancorp
Consolidated Balance Sheets

See accompanying notes to consolidated financial statements

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NorthWest Indiana Bancorp
Consolidated Statements of Income
(unaudited)

See accompanying notes to consolidated financial statements

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

See accompanying notes to consolidated financial statements

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NorthWest Indiana Bancorp
Consolidated Statements of Cash Flows
(unaudited)

See accompanying notes to consolidated financial statements

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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 and NWIN, LLC. 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 consolidated balance sheets of the Bancorp as of June 30, 2004 and December 31, 2003, and the consolidated statements of income and changes in stockholders’ equity for the three and six months ended June 30, 2004 and 2003, and cash flows for the six months ended June 30, 2004 and 2003. The income reported for the six month period ended June 30, 2004 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 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 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, 2003 consolidated financial statements and the June 30, 2003 Form 10-Q have been reclassified to conform to the June 30, 2004 presentation.

Note 5 — Stock Compensation

     The following proforma information presents net income and basic and diluted earnings per share had the fair value method been used to measure compensation for stock options granted. The exercise price of options granted is equivalent to the market price of the underlying stock at the grant date; therefore, no compensation expense has been recorded for stock options granted.

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Note 5 — Stock Compensation (continued)

     Stock options were issued during the first quarter of 2004 and 2003 totaling 11,450 and 23,025, respectively. The weighted average fair value of the grants for 2004 and 2003 were $3.48 and $1.42. The fair value of options granted were estimated using an option pricing model with the following weighted average information as of the grant dates:

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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, 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 June 30, 2004, the Bancorp had total assets of $539.0 million and total deposits of $442.0 million. Stockholders’ equity totaled $42.0 million or 7.8% of total assets, with book value per share at $15.18. Net income for the six months ended June 30, 2004, was $3.0 million, or $1.09 earnings per common share for basic and $1.08 for diluted calculations. The annualized return on average assets (ROA) was 1.16%, while the annualized return on average stockholders’ equity (ROE) was 14.27%, for the six months ended June 30, 2004.

Financial Condition

     During the six months ended June 30, 2004, total assets increased by $30.2 million (5.9%), with interest-earning assets increasing by $29.1 million (6.1%). At June 30, 2004, interest-earning assets totaled $505.7 million and represented 93.8% of total assets.

     Loans receivable totaled $420.1 million at June 30, 2004, compared to $409.8 million at December 31, 2003. At June 30, 2004, loans receivable represented 83.1% of interest-earning assets, 78.0% of total assets and 95.1% 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 loan growth, product diversification, and competitive and profitable pricing. The loan portfolio includes $27.6 million (6.6%) in construction and development loans, $235.6 million (56.1%) in residential mortgage loans, $9.8 million (2.3%) in multifamily loans, $90.7 million (21.6%) in commercial real estate loans, $5.8 million (1.4%) in consumer loans, $38.2 million (9.1%) in commercial business and $12.4 million (2.9%) in government and other loans. Adjustable rate loans comprised 45.2% of total loans at June 30, 2004. During the six months ended June 30, 2004, loans increased by $10.3 million (2.5%), including $6.9 million in government, $3.9 million in construction & land development, $3.1 in residential mortgages, $2.4 million in commercial business, and $659 thousand in consumer loans. During the six months ended June 30, 2004, commercial real estate decreased by $6.1 million and multifamily loans decrease by $601 thousand. During the six months ended June 30, 2004, loan growth was affected by a decrease in loan originations and an increase in commercial loan payoffs. Management believes that, despite the moderate pace of its local economy, the positive trend in loan growth is likely to continue during the rest of 2004. Management expects to fund future loan growth with retail funds.

     The Bancorp is primarily a portfolio lender. Mortgage banking activities are generally limited to the sale of fixed rate mortgage loans with contractual maturities generally exceeding 15 years. These loans are identified as held for sale when originated and 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 six months ended June 30, 2004, the Bancorp sold $1.2 million in fixed rate mortgages compared to $10.3 million during the six months ended June 30, 2003. Net gains realized from current year sales totaled $42 thousand compared to $316 thousand for the six months ended June 30, 2003. The decrease in gain on sale of loans is a result of the current interest rate environment and a reduction of loans originated for sale. Management believes that, during the remaining months of 2004 gains on sale of loans will be less than that reported during the prior year. At June 30, 2004, the Bancorp had $86 thousand classified as loans 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, federal agency obligations and obligations of state and local municipalities. Investments are generally for terms ranging from one day to seven years. The investment portfolio totaled $82.4 million at June 30, 2004, compared to $63.7 million at December 31, 2003. At June 30, 2004, the investment portfolio represented 16.9% of interest-earning assets, 15.8% of total assets and was invested as follows: 62.4% in U.S. government agency debt securities, 27.2% in U.S. government agency mortgage-backed securities and collateralized mortgage obligations, and 10.4% in municipal securities. At June 30, 2004, securities available-for-sale (AFS) totaled $74.1 million or 89.9% 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 June 30, 2004, the Bancorp had $203 thousand in federal funds sold and $2.8 million in Federal Home Loan Bank (FHLB) stock. During the six months ended June 30, 2004, securities increased by $18.7 million (29.3%). The increase in securities was a result of deposit growth outpacing loan growth.

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     The allowance for loan losses (ALL) is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses, and decreased by charge-offs less recoveries. A loan is charged-off against the allowance by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur.

     The determination of the amounts of the ALL and provisions for loan losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectibility as of the reporting date. The appropriateness of the current year provision and the overall adequacy of the ALL are determined through a disciplined and consistently applied quarterly process that combines a review of the current position with a risk assessment worksheet.

     The Risk Assessment Worksheet covers the residential, commercial real estate, commercial business, and consumer loan portfolios. Management uses a risk rating system to assist in determining the appropriate level for the ALL. Management assigns risk factors to non-performing loans; loans that management has internally classified as impaired; loans that management has internally classified as substandard, doubtful, loss, or watch; and, performing loans. Risk factors are based on an evaluation of the Bank’s own historical information, industry trends, and subjective assessment and interpretation. While management evaluates the loan portfolio as a pool, judgment is applied to determine risk factors associated with impaired loans and large commercial loans.

     Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status. Non-performing loans totaled $1.8 million at June 30, 2004 compared to $1.7 million at December 31, 2003, an increase of $55 thousand or 3.2%. The ratio of non-performing loans to total loans was 0.42% at June 30, 2004 and December 31, 2003. The ratio of non-performing loans to total assets was 0.33% at June 30, 2004, compared to 0.34% at December 31, 2003. The June 30, 2004 balance includes $1.5 million in loans accounted for on a non-accrual basis and $249 thousand in accruing loans which were contractually past due 90 days or more. Loans, internally classified as substandard totaled $2.6 million at June 30, 2004, a decrease of $93 thousand from the $2.7 million reported at December 31, 2003. No loans were classified as doubtful or loss. Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of watch loans. Watch loans represent loans management is more closely monitoring due to one or more factors that may cause the loan to become classified. Watch loans were $7.9 million at June 30, 2004, compared to $8.3 million at December 31, 2003.

     At June 30, 2004, the balance for non-performing and substandard loans includes three loans to three borrowers totaling $530 thousand that have been classified as impaired. 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 six months ended June 30, 2004. 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 June 30, 2004, there were no other interest bearing assets that would be required to be disclosed as non-accrual, past due, restructured or potential problems 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.

     During the six months ended June 30, 2004, additions to the ALL account totaled $135 thousand compared to $260 thousand for the six months ended June 30, 2003. The decrease during the current year was due to an improvement in non-performing loan ratios and a reduction in loan charge-offs. Charge-offs, net of recoveries, totaled $38 thousand for the current period compared to $92 thousand for the six months ended June 30, 2003. Changes in the provision are directionally consistent with changes in observable data and take into consideration 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 loan portfolio remains sound, provisions during the current period were warranted because of increased average daily loan balances and continued apparent weaknesses in the local economy.

     The ALL to total loans was 0.92% at June 30, 2004 and December 31, 2003, while the ALL to non-performing loans (coverage ratio) was 218.9% compared to 220.3% for the same periods. A consistently strong coverage ratio is an indicator that sufficient provisions for loan losses have been established. The June 30, 2004 balance in the ALL account of $3.9 million is considered adequate by management after evaluation of the loan portfolio, past experience and current economic and market conditions. While management may periodically allocate portions of the allowance for specific problem loans, the whole allowance is available for any loan charge-offs that occur. The allocation of the ALL reflects performance and growth trends within the various loan categories, as well as,

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consideration of the facts and circumstances that affect the repayment of individual loans, and 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 general reserves to both performing and non-performing loans based on current information available.

     At June 30, 2004, foreclosed real estate totaled $114 thousand compared to $0 at December 31, 2003. The current year balance is comprised of two residential properties. Management is actively seeking a purchaser for the properties.

     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 June 30, 2004, deposits totaled $442.0 million. During the six months ended June 30, 2004, deposits increased by $20.4 million (4.8%). Checking accounts increased by $10.7 million (11.5%), money market deposit accounts (MMDA’s) increased $13.6 million (19.9%) and savings accounts increased $2.2 million (3.1%). During the current period, certificates of deposits decreased by $6.1 million (3.2%). At June 30, 2004, the deposit base was comprised of 23.5% checking accounts, 18.5% MMDA’s, 16.4% savings accounts and 41.6% certificates of deposit. The growth in deposits was a result of competitive product offerings and an aggressive marketing program.

     Borrowings are primarily used to fund asset growth not supported by deposit generation. At June 30, 2004, borrowed funds totaled $50.7 million compared to $40.9 million at December 31, 2003, an increase of $9.8 million (24.0%). Retail repurchase agreements totaled $12.1 million at June 30, 2004, compared to $11.5 million at December 31, 2003, an increase of $687 thousand (6.0%). FHLB advances totaled $35.5 million at June 30, 2004, compared to $26.5 million at December 31, 2003, an increase of $9.0 million, as the Bancorp extended the maturity structure of interest-bearing liabilities at cost effective interest rates. Other short-term borrowings totaled $3.1 million at June 30, 2004, compared to $2.9 million at December 31, 2003, an increase of $115 thousand as the Bancorp increased short-term funding.

Liquidity and Capital Resources

     For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet 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 six months ended June 30, 2004, cash and cash equivalents increased $1.5 million compared to a $5.6 million decrease for the six months ended June 30, 2003. The increase for the current period was principally due to deposit growth and proceeds from FHLB advances. The primary sources of cash were proceeds from maturities and sales of securities, loan sales, deposit growth, FHLB advances and cash provided by operating activities. The primary uses of cash were loan originations, purchase of securities and the payment of common stock dividends. During the current six months cash provided by operating activities totaled $3.8 million compared to $3.5 million for the six months ended June 30, 2003. Cash outflows from investing activities totaled $31.0 million compared to $16.6 million for the six months ended June 30, 2003. The change for the current period was due primarily to an increase in security purchases and a decrease in proceeds from security maturities and pay downs. Net cash inflows from financing activities totaled $28.7 million during the current period compared to net cash outflows of $7.6 million for the six months ended June 30, 2003. The increase in net cash inflows was primarily due to an increase in deposits, principally core deposit growth and additional FHLB advances. The Bancorp paid dividends on common stock of $1.7 million during the current six months compared to $1.6 million for the six months ended June 30, 2003.

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     At June 30, 2004, outstanding commitments to fund loans totaled $71.0 million. Approximately 84% 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.

     Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the six months ended June 30, 2004, stockholders’ equity increased by $443 thousand (1.1%). The increase resulted primarily from earnings of $3.0 million during the period. In addition, $226 thousand represents proceeds from the exercise of 10,421 stock options. The Bancorp declared $1.7 million in cash dividends for the six month period ended June 30, 2004. The net unrealized loss on available-for-sale securities, net of tax was $1.1 million for the current 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 June 30, 2004, and December 31, 2003, 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.