SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549








FORM
10-K


(Mark
One)


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the fiscal year endedDecember 31, 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
              (I.R.S.
      Employer Identification No.)incorporation
      or organization)





9204
      Columbia Avenue
                    46321Munster,
      Indiana
                    (Zip
      Code)(Address
      of principal executive offices)


(219)
836-4400


(Registrant’s
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Act:  None


Securities
registered pursuant to Section 12(g) of the Act:  Common Stock, without par
value





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes   ̈No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes   ̈No x





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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.    x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈  No
x





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)


Based on
the average bid and ask prices for the registrant’s Common Stock at June 30,
2009, at that date, the aggregate market value of the registrant’s Common Stock
held by nonaffiliates of the registrant (assuming solely for the purposes of
this calculation that all directors and executive officers of the registrant are
“affiliates”) was $41,756,285.





There
were 2,820,842 shares of the registrant’s Common Stock, without par value,
outstanding at January 31, 2010.





DOCUMENTS
INCORPORATED BY REFERENCE


Portions
of the following documents have been incorporated by reference into this Annual
Report on Form 10-K:


1.  2009
Annual Report to Shareholders.  (Part II)


2.  Definitive
Proxy Statement for the 2010 Annual Meeting of Shareholders.  (Part
III)











PART
I




Item
1.  Business




General






NorthWest Indiana Bancorp, an Indiana
corporation (the “Bancorp”), was incorporated on January 31, 1994, and is the
holding company for Peoples Bank SB, an Indiana savings bank (the
“Bank”).  The Bank is a wholly owned subsidiary of the
Bancorp.  The Bancorp has no other business activity other than being
the holding company for the Bank and the Bank's wholly owned
subsidiaries.





The Bank is primarily engaged in the
business of attracting deposits from the general public and the origination of
loans, mostly upon the security of single family residences and commercial real
estate, as well as, construction loans and various types of consumer loans,
commercial business loans and municipal loans, within its primary market area of
Lake and Porter Counties, in northwest Indiana.  In addition, the
Bancorp's Wealth Management Group provides estate and retirement planning,
guardianships, land trusts, profit sharing and 401(k) retirement plans, IRA and
Keogh accounts, investment agency accounts, and serves as the personal
representative of estates and acts as trustee for revocable and irrevocable
trusts.





The Bank’s deposit accounts are insured
up to applicable limits by the Deposit Insurance Fund (“DIF”), which is
administered by the Federal Deposit Insurance Corporation (“FDIC”), an agency of
the federal government.  As the holding company for the Bank, the
Bancorp is subject to comprehensive examination, supervision and regulation by
the Board of Governors of the Federal Reserve System (“FRB”), while the Bank is
subject to comprehensive examination, supervision and regulation by both the
FDIC and the Indiana Department of Financial Institutions
(“DFI”).  The Bank is also subject to regulation by the FRB governing
reserves required to be maintained against certain deposits and other
matters.  The Bank is also a member of the Federal Home Loan Bank
(“FHLB”) of Indianapolis, which is one of the twelve regional banks comprising
the system of Federal Home Loan Banks.





The Bancorp maintains its corporate
office at 9204 Columbia Avenue, Munster, Indiana, from which it oversees the
operation of its eleven branch locations.  For further information,
see “Properties.”





Recent
Developments





The Current Economic Environment.We are operating in a challenging and uncertain economic environment,
including generally uncertain national conditions and local conditions in our
markets. The capital and credit markets have been experiencing volatility and
disruption for more than 24 months. The risks associated with our business
become more acute in periods of a slowing economy or slow growth. Financial
institutions continue to be affected by sharp declines in the real estate market
and constrained financial markets. While we are taking steps to decrease and
limit our exposure to problem loans, we nonetheless retain direct exposure to
the residential and commercial real estate markets, and we are affected by these
events.








2







Our loan
portfolio includes residential mortgage loans, construction loans, and
commercial real estate loans. Continued declines in real estate values, home
sales volumes and financial stress on borrowers as a result of the uncertain
economic environment, including job losses, could have an adverse effect on our
borrowers or their customers, which could adversely affect our financial
condition and results of operations. In addition, the current level of low
economic growth on a national scale, the occurrence of another national
recession, or further deterioration in local economic conditions in our markets
could drive losses beyond that which is provided for in our allowance for loan
losses and result in the following other consequences: increases in loan
delinquencies; problem assets and foreclosures may increase; demand for our
products and services may decline; deposits may decrease, which would adversely
impact our liquidity position; and collateral for our loans, especially real
estate, may decline in value, in turn reducing customers’ borrowing power, and
reducing the value of assets and collateral associated with our existing
loans.





Impact of Recent and Future
Legislation.Congress and the U.S. Department of the Treasury
(“Treasury”) have recently adopted legislation and taken actions to address the
disruptions in the financial system and declines in the housing market. They
also have proposed additional legislation that could materially affect the
financial services industry, such as President Obama’s broad and complex plan
for financial regulatory reform.  See “Regulation and Supervisions —
Recent Legislative Developments.” It is not clear at this time what impact the
Emergency Economic Stabilization Act of 2008 (“EESA”), the Troubled Asset Relief
Program, the American Recovery and Reinvestment Act of 2009, other liquidity and
funding initiatives of the Treasury and other bank regulatory agencies that have
been previously announced, and any additional programs that may be initiated in
the future, will have on the financial markets and the financial services
industry. The actual impact that EESA and such related measures undertaken to
alleviate the credit crisis will have generally on the financial markets,
including the levels of volatility and limited credit availability currently
being experienced, is unknown. The failure of such measures to help stabilize
the financial markets and a continuation or worsening of current financial
market conditions could materially and adversely affect our business, financial
condition, results of operations, access to credit or the trading price of our
common stock. Finally, there can be no assurance regarding the specific impact
that such measures may have on us, or whether (or to what extent) we will be
able to benefit from such programs. In addition to the legislation mentioned
above, federal and state governments could pass additional legislation
responsive to current credit conditions. For example, the Bancorp could
experience higher credit losses because of federal or state legislation or
regulatory action that reduces the amount the Bancorp’s borrowers are otherwise
contractually required to pay under existing loan contracts. Also, the Bancorp
could experience higher credit losses because of federal or state legislation or
regulatory action that limits its ability to foreclose on property or other
collateral or makes foreclosure less economically feasible.








3







Difficult Market Conditions Have
Adversely Affected Our Industry.We are particularly exposed to downturns
in the U.S. housing market. Dramatic declines in the housing market over the
past two years, with falling home prices and increasing foreclosures,
unemployment and under-employment, have negatively impacted the credit
performance of mortgage loans and securities and resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities, major commercial and investment banks, and
regional financial institutions. Reflecting concern about the stability of the
financial markets generally and the strength of counterparties, many lenders and
institutional investors have reduced or ceased providing funding to borrowers,
including to other financial institutions. This market turmoil and tightening of
credit have led to an increased level of commercial and consumer delinquencies,
lack of consumer confidence, increased market volatility and widespread
reduction of business activity generally. We do not expect that the difficult
conditions in the financial markets are likely to improve in the near future. A
worsening of these conditions would likely exacerbate the adverse effects of
these difficult market conditions on us and others in the financial institutions
industry. In particular, we may face the following risks in connection with
these events:





·
            We
      expect to face increased regulation of our industry. Compliance with such
      regulation may increase our costs and limit our ability to pursue business
      opportunities.




·
            Our
      ability to assess the creditworthiness of our customers may be impaired if
      the models and approaches we use to select, manage and underwrite our
      customers become less predictive of future
  behaviors.




·
            The
      process we use to estimate losses inherent in our credit exposure requires
      difficult, subjective and complex judgments, including forecasts of
      economic conditions and how these economic predictions might impair the
      ability of our borrowers to repay their loans, which may no longer be
      capable of accurate estimation which may, in turn, impact the reliability
      of the process.




·
            Our
      ability to borrow from other financial institutions on favorable terms or
      at all could be adversely affected by further disruptions in the capital
      markets or other events, including actions by rating agencies and
      deteriorating investor
expectations.




·
            Competition
      in our industry could intensify as a result of the increasing
      consolidation of financial services companies in connection with current
      market conditions.




·
            We
      may be required to pay significantly higher deposit insurance premiums
      because market developments have significantly depleted the insurance fund
      of the Federal Deposit Insurance Corporation and reduced the ratio of
      reserves to insured deposits.





In
addition, the Federal Reserve Bank has been injecting vast amounts of liquidity
into the banking system to compensate for weaknesses in short-term borrowing
markets and other capital markets. A reduction in the Federal Reserve’s
activities or capacity could reduce liquidity in the markets, thereby increasing
funding costs to the Bancorp or reducing the availability of funds to the
Bancorp to finance its existing operations.








4







Concentrations of Real Estate Loans
Could Subject the Bancorp to Increased Risks in the Event of a Protracted Real
Estate Recession.A significant portion of the Bancorp’s loan portfolio
is secured by real estate. The real estate collateral in each case provides an
alternate source of repayment in the event of default by the borrower and may
deteriorate in value during the time the credit is extended. A further weakening
of the real estate market area could result in an increase in the number of
borrowers who default on their loans and a reduction in the value of the
collateral securing their loans, which in turn could have an adverse effect on
our profitability and asset quality. If we are required to liquidate the
collateral securing a loan to satisfy the debt during a period of reduced real
estate values, our earnings and capital could be adversely
affected.




Forward-Looking
Statements





Statements contained in this filing on
Form 10-K that are not historical facts are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995.  The words or phrases “would be,” “will allow,” “intends to,”
“will likely result,” “are expected to,” “will continue,” “is anticipated,”
“estimate,” “project,” or similar expressions are also intended to identify
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act.  The Bancorp cautions readers that
forward-looking statements, including without limitation those relating to the
Bancorp’s future business prospects, interest income and expense, net income,
liquidity, and capital needs are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward-looking statements due to a number of factors, including those set forth
above in “Recent Developments” and below in “Regulation and Supervision –
Federal Home Loan Bank System” and “– Federal Deposit Insurance” of this Form
10-K.





Lending
Activities





General.The
Bancorp’s product offerings include residential mortgage loans, construction
loans, commercial real estate loans, consumer loans, commercial business loans
and loans to municipalities.The Bancorp’s lending
strategy stresses quality growth, product diversification and, competitive and
profitable pricing.  While lending efforts include both fixed and
adjustable rate products, the focus has been on products with adjustable rates
and/or shorter terms to maturity.  It is management’s goal that all
programs are marketed effectively to our primary market area.





The Bancorp is primarily a portfolio
lender.  Mortgage banking activities are limited to the sale of fixed
rate mortgage loans with contractual maturities generally exceeding fifteen
years and greater.  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.  All loan sales are made to Freddie Mac.  All loans
held for sale are recorded at the lower of cost or market value.





Under Indiana Law, an Indiana stock
savings bank generally may not make any loan to a borrower or its related
entities if the total of all such loans by the savings bank exceeds 15% of its
unimpaired capital and unimpaired surplus (plus up to an additional 10% of
unimpaired capital and unimpaired surplus, in the case of loans fully
collateralized by readily marketable collateral); provided, however, that
certain specified types of loans are exempted from these limitations or subject
to different limitations.  The maximum amount that the Bank could have
loaned to one borrower and the borrower’s related entities at December 31, 2009,
under the 15% of capital and surplus limitation was approximately
$8,749,000.  At December 31, 2009, the Bank had no loans that exceeded
the regulatory limitations.








5







At
December 31, 2009, there were no concentrations of loans in any type of industry
that exceeded 10% of total loans that were not otherwise disclosed as a loan
category.





Loan Portfolio.  The
following table sets forth selected data relating to the composition of the
Bancorp’s loan portfolio by type of loan and type of collateral at the end of
each of the last five years.  The amounts are stated in thousands
(000’s).




2009
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005Type
      of loan:Conventional
      real estate loans:Construction
      and development loans
                      
                      $
                      53,288
                      
                      
                      $
                      54,975
                      
                      
                      $
                      46,289
                      
                      
                      $
                      48,688
                      
                      
                      $
                      47,957Loans
      on existing properties (1)
                      
                      
                      325,880
                      
                      
                      
                      368,476
                      
                      
                      
                      361,154
                      
                      
                      
                      361,011
                      
                      
                      
                      347,542Consumer
      loans
                      
                      
                      1,504
                      
                      
                      
                      1,966
                      
                      
                      
                      2,399
                      
                      
                      
                      3,012
                      
                      
                      
                      3,983Commercial
      business
                      
                      
                      63,099
                      
                      
                      
                      49,309
                      
                      
                      
                      46,953
                      
                      
                      
                      46,751
                      
                      
                      
                      50,069Government
      and other (2)
                      
                      
                      14,474
                      
                      
                      
                      14,783
                      
                      
                      
                      11,664
                      
                      
                      
                      12,254
                      
                      
                      
                      19,492Loans
      receivable (3)
                      
                      $
                      458,245
                      
                      
                      $
                      489,509
                      
                      
                      $
                      468,459
                      
                      
                      $
                      471,716
                      
                      
                      $
                      469,043Type
      of collateral:Real
      estate:1-to-4
      family
                      
                      $
                      184,437
                      
                      
                      $
                      225,936
                      
                      
                      $
                      229,012
                      
                      
                      $
                      232,271
                      
                      
                      $
                      228,475Other
      dwelling units, land and commercial real estate
                      
                      
                      194,731
                      
                      
                      
                      197,514
                      
                      
                      
                      178,431
                      
                      
                      
                      177,427
                      
                      
                      
                      167,023Consumer
      loans
                      
                      
                      1,446
                      
                      
                      
                      1,879
                      
                      
                      
                      2,290
                      
                      
                      
                      2,904
                      
                      
                      
                      3,966Commercial
      business
                      
                      
                      61,522
                      
                      
                      
                      47,523
                      
                      
                      
                      45,441
                      
                      
                      
                      45,671
                      
                      
                      
                      49,044Government
                      
                      
                      14,385
                      
                      
                      
                      14,688
                      
                      
                      
                      11,551
                      
                      
                      
                      12,254
                      
                      
                      
                      19,492Loans
      receivable (4)
                      
                      $
                      456,521
                      
                      
                      $
                      487,540
                      
                      
                      $
                      466,725
                      
                      
                      $
                      470,527
                      
                      
                      $
                      468,000Average
      loans outstanding during the period (3)
                      
                      $
                      472,541
                      
                      
                      $
                      484,854
                      
                      
                      $
                      472,212
                      
                      
                      $
                      443,523
                      
                      
                      $
                      415,098





(1)
            Includes
      residential and commercial construction loans converted to permanent term
      loans and commercial real estate
loans.


(2)
            Includes
      overdrafts to deposit accounts.


(3)
            Net
      of unearned income and deferred loan
fees.


(4)
            Net
      of unearned income and deferred loan fees. Does not include unsecured
      loans.








6







Loan Originations, Purchases and
Sales.  Set forth on the following table loan originations,
purchases and sales activity for each of the last three years are
shown.  The amounts are stated in thousands (000’s).




2009
                        
                        
                        2008
                        
                        
                        2007Loans
      originated:Conventional
      real estate loans:Construction
      and development loans
                        
                        $
                        1,704
                        
                        
                        $
                        1,960
                        
                        
                        $
                        4,982Loans
      on existing property
                        
                        
                        43,594
                        
                        
                        
                        41,847
                        
                        
                        
                        43,371Loans
      refinanced
                        
                        
                        28,559
                        
                        
                        
                        9,620
                        
                        
                        
                        11,382Total
      conventional real estate loans originated
                        
                        
                        73,857
                        
                        
                        
                        53,427
                        
                        
                        
                        59,735Commercial
      business loans
                        
                        
                        134,302
                        
                        
                        
                        152,577
                        
                        
                        
                        155,649Consumer
      loans
                        
                        
                        1,077
                        
                        
                        
                        1,199
                        
                        
                        
                        1,821Total
      loans originated
                        
                        $
                        209,236
                        
                        
                        $
                        207,203
                        
                        
                        $
                        217,205Loan
      participations purchased
                        
                        $
                        -
                        
                        
                        $
                        957
                        
                        
                        $
                        12,465Whole
      loans and participations sold
                        
                        $
                        60,256
                        
                        
                        $
                        10,463
                        
                        
                        $
                        12,246





Loan Maturity
Schedule.The following table sets forth certain information
at December 31, 2009 regarding the dollar amount of loans in the Bancorp’s
portfolio based on their contractual terms to maturity.  Demand loans,
loans having no schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less.  Contractual principal
repayments of loans do not necessarily reflect the actual term of the loan
portfolio.  The average life of mortgage loans is substantially less
than their contractual terms because of loan prepayments and because of
enforcement of due-on-sale clauses, which give the Bancorp the right to declare
a loan immediately due and payable in the event, among other things, that the
borrower sells the property subject to the mortgage.  The amounts are
stated in thousands (000’s).




Maturing
                  
                  
                  After oneWithin
                  
                  
                  but within
                  
                  
                  Afterone year
                  
                  
                  five years
                  
                  
                  five years
                  
                  
                  TotalReal
      estate loans
                  
                  $
                  80,159
                  
                  
                  $
                  48,837
                  
                  
                  $
                  250,172
                  
                  
                  $
                  379,168Consumer
      loans
                  
                  
                  519
                  
                  
                  
                  988
                  
                  
                  
                  -
                  
                  
                  
                  1,507Commercial
      business, other loans
                  
                  
                  33,148
                  
                  
                  
                  33,005
                  
                  
                  
                  11,417
                  
                  
                  
                  77,570Total
      loans receivable
                  
                  $
                  113,826
                  
                  
                  $
                  82,830
                  
                  
                  $
                  261,589
                  
                  
                  $
                  458,245




7







The table
below sets forth the dollar amount of all loans due after one year from December
31, 2009 which have predetermined interest rates or have floating or adjustable
interest rates.  The amounts are stated in thousands
(000’s).






Predetermined
                      
                      
                      Floating orrates
                      
                      
                      adjustable rates
                      
                      
                      TotalReal
      estate loans
                      
                      $
                      95,530
                      
                      
                      $
                      203,480
                      
                      
                      $
                      299,010Consumer
      loans
                      
                      
                      988
                      
                      
                      
                      -
                      
                      
                      
                      988Commercial
      business, other loans
                      
                      
                      34,310
                      
                      
                      
                      10,112
                      
                      
                      
                      44,422Total
                      
                      $
                      130,828
                      
                      
                      $
                      213,592
                      
                      
                      $
                      344,420




Lending Area.  The
primary lending area of the Bancorp encompasses all of Lake and Porter Counties
in northwest Indiana, where a majority of loan activity is concentrated. To a
lesser extent, the Bancorp also has lending activity in LaPorte, Newton and
Jasper counties in Indiana, and Lake, Cook and Will counties in
Illinois.  The communities of Munster, Crown Point, Dyer, St. John,
Merrillville, Schererville and Cedar Lake have experienced consistent growth
and, therefore, have provided the greatest lending opportunities.





Loan Origination
Fees.  All loan origination and commitment fees, as well as
incremental direct loan origination costs, are deferred and amortized into
income as yield adjustments over the contractual lives of the related
loans.





Loan Origination
Procedure.  The primary sources for loan originations are
referrals from commercial customers, real estate brokers and builders,
solicitations by the Bancorp’s lending and retail staff, and advertising of loan
programs and rates.  The Bancorp employs no staff
appraisers.  All appraisals are performed by fee appraisers that have
been approved by the Board of Directors and who meet all federal guidelines and
state licensing and certification requirements.





Designated officers have authorities,
established by the Board of Directors, to approve loans.  Loans up to
$2,000,000 are approved by the loan officers loan committee.  Loans
from $2,000,000 to $3,000,000 are approved by the senior officers loan
committee.  All loans in excess of $3,000,000, up to the legal lending
limit of the Bank, must be approved by the Bank’s Board of Directors or its
Executive Committee.  (All members of the Bank’s Board of Directors
and Executive Committee are also members of the Bancorp’s Board of Directors and
Executive Committee, respectively.) The
maximum in-house legal lending limit as set by the Board of Directors is
$5,000,000.  Requests that exceed this amount will be considered on a
case-by-case basis, after taking into consideration the legal lending limit, by
specific Board action.  Peoples Bank will not extend credit to any of
its executive officers, directors, or principal shareholders or to any related
interest of that person, except in compliance with the insider lending
restrictions of Regulation O under the Federal Reserve Act and in an amount
that, when aggregated with all other extensions of credit to that person,
exceeds $500,000 unless: (1) the extension of credit has been approved in
advance by a majority of the entire Board of Directors of the Bank, and (2) the
interested party has abstained from participating directly or indirectly in the
voting.








8




All loans
secured by personal property must be covered by insurance in an amount
sufficient to cover the full amount of the loan.  All loans secured by
real estate must be covered by insurance in an amount sufficient to cover the
full amount of the loan or restore the property to its original
state.  First mortgage loans must be covered by a lenders title
insurance policy in the amount of the loan.





The
Current Lending Programs





Residential Mortgage Loans.
The primary lending activity of the Bancorp has been the granting of
conventional mortgage loans to enable borrowers to purchase existing homes,
refinance existing homes, or construct new homes. Conventional loans are made up
to a maximum of 100% of the purchase price or appraised value, whichever is
less. For loans made in excess of 80% of value, private mortgage insurance is
generally required in an amount sufficient to reduce the Bancorp’s exposure to
80% or less of the appraised value of the property. Loans insured by private
mortgage insurance companies can be made for up to 95% of value. During 2009,
over 90% of mortgage loans closed were conventional loans with borrowers having
20% or more equity in the property. This type of loan does not require private
mortgage insurance because of the borrower’s level of equity
investment.





Fixed-rate loans currently originated
generally conform to Freddie Mac guidelines for loans purchased under the
one-to-four family program.  Loan interest rates are determined based
on secondary market yield requirements and local market
conditions.  Fixed rate mortgage loans with contractual maturities
generally exceeding fifteen years and greater may be sold and/or classified as
held for sale to control exposure to interest rate risk.





The 15-year mortgage loan program has
gained wide acceptance in the Bancorp’s primary market area.  As a
result of the shortened maturity of these loans, this product has been priced
below the comparable 20 and 30 year loan offerings.  Mortgage
applicants for 15 year loans tend to have a larger than normal down payment;
this, coupled with the larger principal and interest payment amount, has caused
the 15 year mortgage loan portfolio to consist, to a significant extent, of
second time home buyers whose underwriting qualifications tend to be above
average.





The
Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice
annually or are “Mini-Fixed.” The “Mini-Fixed” mortgage reprices annually after
a one, three, five or seven year period. ARM originations totaled $9.6 million
for 2009 and $21.9 million for 2008. During 2009, ARMs represented 16.1% of
total mortgage loan originations. The ability of the Bancorp to successfully
market ARM’s depends upon loan demand, prevailing interest rates, volatility of
interest rates, public acceptance of such loans and terms offered by
competitors.





Construction Loans.
Construction loans on residential properties are made primarily to individuals
and contractors who are under contract with individual purchasers. These loans
are personally guaranteed by the borrower. The maximum loan-to-value ratio is
80% of either the current appraised value or the cost of construction, whichever
is less. Residential construction loans are typically made for periods of six
months to one year.








9




Loans are also made for the
construction of commercial properties. All such loans are made in accordance
with well-defined underwriting standards. Generally if the loans are not owner
occupied, these types of loans require proof of intent to lease and a confirmed
end-loan takeout. In general, loans made do not exceed 80% of the appraised
value of the property. Commercial construction loans are typically made for
periods not to exceed two years or date of occupancy, whichever is
less.





Commercial Real Estate Loans.
Commercial real estate loans are typically made to a maximum of 80% of the
appraised value. Such loans are generally made on an adjustable rate basis.
These loans are typically made for terms of 15 to 20 years. Loans with an
amortizing term exceeding 15 years normally have a balloon feature calling for a
full repayment within seven to ten years from the date of the loan. The balloon
feature affords the Bancorp the opportunity to restructure the loan if economic
conditions so warrant. Commercial real estate loans include loans secured by
commercial rental units, apartments, condominium developments, small shopping
centers, owner occupied commercial/industrial properties, hospitality units and
other retail and commercial developments.





While commercial real estate lending is
generally considered to involve a higher degree of risk than single-family
residential lending due to the concentration of principal in a limited number of
loans and the effects of general economic conditions on real estate developers
and managers, the Bancorp has endeavored to reduce this risk in several ways. In
originating commercial real estate loans, the Bancorp considers the feasibility
of the project, the financial strength of the borrowers and lessees, the
managerial ability of the borrowers, the location of the project and the
economic environment. Management evaluates the debt coverage ratio and analyzes
the reliability of cash flows, as well as the quality of earnings. All such
loans are made in accordance with well-defined underwriting standards and are
generally supported by personal guarantees, which represent a secondary source
of repayment.





Loans for the construction of
commercial properties are generally located within an area permitting physical
inspection and regular review of business records. Projects financed outside of
the Bancorp’s primary lending area generally involve borrowers and guarantors
who are or were previous customers of the Bancorp or projects that are
underwritten according to the Bank’s underwriting standards.





Consumer Loans. The Bancorp
offers consumer loans to individuals for personal, household or family
purposes. Consumer loans are either secured by adequate collateral, or
unsecured. Unsecured loans are based on the strength of the applicant’s
financial condition. All borrowers must meet current underwriting standards. The
consumer loan program includes both fixed and variable rate products. The
Bancorp purchases indirect dealer paper from various well-established businesses
in its immediate banking area.





Home Equity Line of Credit.
The Bancorp offers a fixed and variable rate revolving line of credit secured by
the equity in the borrower’s home. Both products offer an interest only option
where the borrower pays interest only on the outstanding balance each month.
Equity lines will typically require a second mortgage appraisal and a second
mortgage lender’s title insurance policy. Loans are generally made up to a
maximum of 80% of the appraised value of the property less any outstanding
liens.








10







Home Improvement Loans and Equity
Loans—Fixed Term. Home improvement and equity loans are made up to a
maximum of 80% of the appraised value of the improved property, less any
outstanding liens. These loans are offered on both a fixed and variable rate
basis with a maximum term of 120 months. All home equity loans are made on a
direct basis to borrowers.





Commercial Business Loans.
Although the Bancorp’s priority in extending various types of commercial
business loans changes from time to time, the basic considerations in
determining the makeup of the commercial business loan portfolio are economic
factors, regulatory requirements and money market conditions. The Bancorp seeks
commercial loan relationships from the local business community and from its
present customers. Conservative lending policies based upon sound credit
analysis governs the extension of commercial credit. The following loans,
although not inclusive, are considered preferable for the Bancorp’s commercial
loan portfolio: loans collateralized by liquid assets; loans secured by general
use machinery and equipment; secured short-term working capital loans to
established businesses secured by business assets; short-term loans with
established sources of repayment and secured by sufficient equity and real
estate; and unsecured loans to customers whose character and capacity to repay
are firmly established.





Government Loans. The Bancorp
is permitted to purchase non-rated municipal securities, tax anticipation notes
and warrants within the local market area.





Non-Performing
Assets, Asset Classification and Provision for Loan Losses





Loans are reviewed on a regular basis
and are generally placed on a non-accrual status when, in the opinion of
management, serious doubt exists as to the collectibility of a loan. Loans are
generally placed on non-accrual status when either principal or interest is 90
days or more past due. Consumer non-residential loans are generally charged off
when the loan becomes over 120 days delinquent. Interest accrued and unpaid at
the time a loan is placed on non-accrual status is charged against interest
income. Subsequent payments are either applied to the outstanding principal
balance, tax and insurance reserve or recorded as interest income, depending on
the assessment of the ultimate collectibility of the loan.





The Bancorp’s mortgage loan collection
procedures provide that, when a mortgage loan is 15 days or more delinquent, the
borrower will be contacted by mail and payment requested. If the delinquency
continues, subsequent efforts will be made to contact the delinquent borrower.
In certain instances, the Bancorp will recast the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his, her or its
financial affairs. If the loan continues in a delinquent status for 60 days, the
Bancorp will generally initiate foreclosure proceedings. Any property acquired
as the result of foreclosure or by voluntary transfer of property made to avoid
foreclosure is classified as foreclosed real estate until such time as it is
sold or otherwise disposed of by theBancorp. Foreclosed real
estate is recorded at fair value at the date of foreclosure. At foreclosure, any
write-down of the property is charged to the allowance for loan losses. Costs
relating to improvement of property are capitalized, whereas holding costs are
expensed. Valuations are periodically performed by management, and a valuation
allowance is established by a charge to operations if the carrying value of a
property exceeds its estimated fair value less selling costs. Subsequent gains
or losses on disposition, including expenses incurred in connection with the
disposition, are charged to operations. Collection procedures for consumer loans
provide that when a consumer loan becomes ten days delinquent, the borrower will
be contacted by mail and payment requested. If the delinquency continues,
subsequent efforts will be made to contact the delinquent borrower. In certain
instances, the Bancorp may grant a payment deferral. If a loan continues
delinquent after 90 days and all collection efforts have been exhausted, the
Bancorp will initiate legal proceedings. Collection procedures for commercial
business loans provide that when a commercial loan becomes ten days delinquent,
the borrower will be contacted by mail and payment requested. If the delinquency
continues, subsequent efforts will be made to contact the delinquent borrower
pursuant to the commercial loan collection policy. In certain instances, the
Bancorp may grant a payment deferral or restructure the loan. Once it has been
determined that collection efforts are unsuccessful, the Bancorp will initiate
legal proceedings.








11







The table
that follows sets forth information with respect to the Bancorp’s non-performing
assets at December 31, for the periods indicated. During 2009, the Bancorp
classified three loans totaling $7.2 million as troubled debt restructurings,
which involves foregoing a portion of interest or principal on any loans or
making loans at a rate materially less than market rates or terms. The troubled
debt restructurings are comprised of one construction development participation
hotel loan in the amount of $1.6 million, for which a significant deferral of
principal repayment was granted. The second troubled debt restructuring is for a
commercial real estate participation hotel loan in the amount of $5.0 million,
for which a significant deferral of principal repayment and extension in
maturity was granted. The third troubled debt restructuring, which is currently
in bankruptcy proceedings is for a commercial real estate loan in the amount of
$588 thousand, for which a significant deferral of principal repayment was
granted. The three loans classified as troubled debt restructurings are
currently in nonaccrual status and classified as impaired. The valuation basis
for the three troubled debt restructurings is based on the fair value of the
collateral securing these loans.








12




The
amounts are stated in thousands (000’s).




2009
                                          
                                          
                                          2008
                                          
                                          
                                          2007
                                          
                                          
                                          2006
                                          
                                          
                                          2005Loans
      accounted for on a non-accrual basis:Real
      estate:Residential
                                          
                                          $
                                          2,762
                                          
                                          
                                          $
                                          2,316
                                          
                                          
                                          $
                                          1,383
                                          
                                          
                                          $
                                          1,128
                                          
                                          
                                          $
                                          784Commercial
                                          
                                          
                                          13,926
                                          
                                          
                                          
                                          7,902
                                          
                                          
                                          
                                          6,065
                                          
                                          
                                          
                                          1,467
                                          
                                          
                                          
                                          62Commercial
      business
                                          
                                          
                                          358
                                          
                                          
                                          
                                          712
                                          
                                          
                                          
                                          328
                                          
                                          
                                          
                                          301
                                          
                                          
                                          
                                          266Consumer
                                          
                                          
                                          28
                                          
                                          
                                          
                                          7
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1Total
                                          
                                          $
                                          17,074
                                          
                                          
                                          $
                                          10,937
                                          
                                          
                                          $
                                          7,776
                                          
                                          
                                          $
                                          2,896
                                          
                                          
                                          $
                                          1,113Accruing
      loans which are contractually past due 90 days or more:Real
      estate:Residential
                                          
                                          $
                                          1,268
                                          
                                          
                                          $
                                          1,198
                                          
                                          
                                          $
                                          819
                                          
                                          
                                          $
                                          156
                                          
                                          
                                          $
                                          53Commercial
                                          
                                          
                                          -
                                          
                                          
                                          
                                          278
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          815Commercial
      business
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          130Consumer
                                          
                                          
                                          223
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          23
                                          
                                          
                                          
                                          26
                                          
                                          
                                          
                                          -Total
                                          
                                          $
                                          1,491
                                          
                                          
                                          $
                                          1,476
                                          
                                          
                                          $
                                          842
                                          
                                          
                                          $
                                          182
                                          
                                          
                                          $
                                          998Total
      of non-accrual and 90 days past due
                                          
                                          $
                                          18,565
                                          
                                          
                                          $
                                          12,413
                                          
                                          
                                          $
                                          8,618
                                          
                                          
                                          $
                                          3,078
                                          
                                          
                                          $
                                          2,111Ratio
      of non-performing loans to total assets
                                          
                                          
                                          2.81
                                          %
                                          
                                          
                                          1.87
                                          %
                                          
                                          
                                          1.37
                                          %
                                          
                                          
                                          0.50
                                          %
                                          
                                          
                                          0.34
                                          %Ratio
      of non-performing loans to total loans
                                          
                                          
                                          4.05
                                          %
                                          
                                          
                                          2.54
                                          %
                                          
                                          
                                          1.84
                                          %
                                          
                                          
                                          0.65
                                          %
                                          
                                          
                                          0.45
                                          %Foreclosed
      real estate
                                          
                                          $
                                          3,747
                                          
                                          
                                          $
                                          527
                                          
                                          
                                          $
                                          136
                                          
                                          
                                          $
                                          323
                                          
                                          
                                          $
                                          260Ratio
      of foreclosed real estate to total assets
                                          
                                          
                                          0.57
                                          %
                                          
                                          
                                          0.08
                                          %
                                          
                                          
                                          0.02
                                          %
                                          
                                          
                                          0.05
                                          %
                                          
                                          
                                          0.04
                                          %





During 2009, gross interest income of
$1,067,000 would have been recorded on loans accounted for on a non-accrual
basis if the loans had been current throughout the period.  Interest
on such loans included in income during the period amounted to
$509,000.





Federal
regulations require savings banks to classify their own loans and to establish
appropriate general and specific allowances, subject to regulatory
review.  These regulations are designed to encourage management to
evaluate loans on a case-by-case basis and to discourage automatic
classifications.  Loans classified as substandard or doubtful must be
evaluated by management to determine loan loss reserves.  Loans
classified as loss must either be written off or reserved for by a specific
allowance.  Amounts reported in the general loan loss reserve are
included in the calculation of the Bancorp’s total risk-based capital
requirement (to the extent that the amount does not exceed 1.25% of total
risk-based assets), but are not included in Tier 1 leverage ratio calculations
and Tier 1 risk-based capital requirements.  Amounts reserved for by a
specific allowance are not counted toward capital for purposes of any of the
regulatory capital requirements.  Loans internally classified as
substandard totaled $22.7 million at December 31, 2009, compared to $11.4
million at December 31, 2008.  No loans are internally classified as
doubtful oat December 31, 2009, compared to $2.0 million at December 31,
2008.  No loans were classified as loss at either December 31, 2009 or
2008.  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 closely monitoring due to one or more factors that may cause the
loan to become classified.  Watch loans totaled $26.7 million at
December 31, 2009, compared to $22.7 million at December 31, 2008. The increase
in watch loans for 2009 is a result of the addition of two commercial real
estate borrowers with loan balances of $7.8 million, and one land development
borrower with loan balances of $2.0 million.








13




A loan is
considered impaired when, based on current information and events, it is
probable that a borrower will be unable to pay all amounts due according to the
contractual terms of the loan agreement.  At December 31, 2009,
impaired loans totaled $17.0 million, compared to $8.6 million at December 31,
2008.  The December 31, 2009, impaired loan balances consist of twenty
commercial real estate and commercial business loans that are secured by
business assets and real estate, and are personally guaranteed by the owners of
the businesses.  The December 31, 2009 ALL contained $1.2 million in
specific allowances for collateral deficiencies, compared to $1.7 million in
specific allowances at December 31, 2008.  During the fourth quarter
of 2009, two additional commercial business loans totaling $2.8 million were
classified as impaired and two additional commercial real estate loans totaling
$241 thousand were classified as impaired.  Management’s current
estimate indicates there are no collateral deficiencies for these
loans.  During the third quarter of 2009, the Bancorp’s Ann Arbor,
Michigan commercial real estate participation loan in the amount was $3.8
million was transferred to foreclosed real estate and removed from impaired
status.  Prior to foreclosure, the lead lender for this commercial
real estate participation loan provided management with an updated appraisal
that indicated a further decline in market value.  As a result, a
charge-off of $1.9 million was recorded during September and the remaining loan
balance of $1.9 million transferred to foreclosed real estate.  For
the Ann Arbor commercial real estate participation loan, during the first
quarter of 2008, management filed a lawsuit against the lead lender to actively
pursue potential material violations of the participation agreement and the
underlying loan documentation.   Management and its legal counsel
will continue to actively pursue the claims asserted within the
lawsuit.  As of December 31, 2009, all loans classified as impaired
were also included in the previously discussed substandard loan
balances.  There were no other loans considered to be impaired for the
year ended, December 31, 2009.  Typically, management does not
individually classify smaller-balance homogeneous loans, such as mortgage or
consumer, as impaired.





At
December 31, 2009, management is of the opinion that there are no loans, except
those discussed above, where known information about possible credit problems of
borrowers causes management to have serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms and which may result
in disclosure of such loans as non-accrual, past due or restructured
loans.  Also, at December 31, 2009, no other interest bearing assets
were required to be disclosed as non-accrual, past due or
restructured.  Management does not presently anticipate that any of
the non-performing loans or classified loans would materially impact future
operations, liquidity or capital resources.




14







The
Bancorp is a party to financial instruments in the normal course of business to
meet financing needs of its customers.  These financial instruments,
which include commitments to make loans and standby letters of credit, are not
reflected in the accompanying consolidated financial statements.  Such
financial instruments are recorded when they are funded.  The Bancorp
has a $1.1 million participation in a $6.4 million letter of credit, which acts
as payment support to bondholders.  The letter of credit is secured by
a cash collateral account in the amount of $2.2 million and a collateralized
guarantee in the amount of $1.0 million.  For the past two years, the
cash flows from the security collateralizing the letter of credit have been
negatively impacted as the property was vacant.  Currently, the letter
of credit participants have secured a signed lease from a new tenant that opened
for operations during May 2009.  The signing of the lease resolved one
of the defaults that existed under the letter of credit document.  The
bank group is currently in negotiations with the borrower to arrive at a
resolution to the remaining items of default.  Management will
continue to monitor the letter of credit, bond repayments and the operating
results of the new tenant.





For the
twelve months ended December 31, 2009, $8.5 million in provisions to the ALL
account were required, compared to $2.4 million for the twelve months ended
December 31, 2008.  The increase in the 2009 ALL provision was related
to the need for additional specific allowances for the collateral deficiencies
and subsequent charge-offs for the previously mentioned commercial real estate
participation loans.  Charge-offs, net of recoveries, totaled $8.3
million for the twelve months ended December 31, 2009, compared to $1.1 million
for the twelve months ended December 31, 2008.  The ALL provisions
take into consideration management’s current judgments about the credit quality
of the loan portfolio, loan portfolio balances, changes in the portfolio mix and
local economic conditions.  In determining the provision for loan
losses for the current period, management has given consideration to increased
risks associated with in the local economy, changes in loan balances and mix,
and asset quality.





The ALL
to total loans was 1.33% at December 31, 2009, compared to 1.19% at December 31,
2008.  The ALL to non-performing loans (coverage ratio) was 32.9% at
December 31, 2009, compared to 47.0% at December 31, 2008.  The
December 31, 2009 balance in the ALL account of $6.1 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 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 reserves to both performing and
non-performing loans based on current information available.





The table
that follows sets forth the allowance for loan losses and related ratios for the
periods indicated.  There were no charge-offs or recoveries of real
estate construction loans during the periods presented.  The amounts
are stated in thousands (000’s).








15




2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005Balance
      at beginning of period
                    
                    $
                    5,830
                    
                    
                    $
                    4,581
                    
                    
                    $
                    4,267
                    
                    
                    $
                    4,181
                    
                    
                    $
                    3,892Loans
      charged-off:Real
      estate - residential
                    
                    
                    (489
                    )
                    
                    
                    (27
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (37
                    )Commercial
      real estate
                    
                    
                    (268
                    )
                    
                    
                    (64
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Commercial
      real estate participations
                    
                    
                    (7,133
                    )
                    
                    
                    (1,026
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Commercial
      business
                    
                    
                    (504
                    )
                    
                    
                    (1
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Consumer
                    
                    
                    (46
                    )
                    
                    
                    (109
                    )
                    
                    
                    (268
                    )
                    
                    
                    (7
                    )
                    
                    
                    -Total
      charge-offs
                    
                    
                    (8,440
                    )
                    
                    
                    (1,227
                    )
                    
                    
                    (268
                    )
                    
                    
                    (7
                    )
                    
                    
                    (37
                    )Recoveries:Residential
      real estate
                    
                    
                    1
                    
                    
                    
                    2
                    
                    
                    
                    3
                    
                    
                    
                    20
                    
                    
                    
                    18Commercial
      real estate
                    
                    
                    15
                    
                    
                    
                    7
                    
                    
                    
                    -
                    
                    
                    
                    33
                    
                    
                    
                    -Commercial
      real estate participations
                    
                    
                    45
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Commercial
      business
                    
                    
                    116
                    
                    
                    
                    -
                    
                    
                    
                    24
                    
                    
                    
                    21
                    
                    
                    
                    60Consumer
                    
                    
                    7
                    
                    
                    
                    79
                    
                    
                    
                    3
                    
                    
                    
                    4
                    
                    
                    
                    3Total
      recoveries
                    
                    
                    184
                    
                    
                    
                    88
                    
                    
                    
                    30
                    
                    
                    
                    78
                    
                    
                    
                    81Net
      (charge-offs) / recoveries
                    
                    
                    (8,256
                    )
                    
                    
                    (1,139
                    )
                    
                    
                    (238
                    )
                    
                    
                    71
                    
                    
                    
                    44Provision
      for loan losses
                    
                    
                    8,540
                    
                    
                    
                    2,388
                    
                    
                    
                    552
                    
                    
                    
                    15
                    
                    
                    
                    245Balance
      at end of period
                    
                    $
                    6,114
                    
                    
                    $
                    5,830
                    
                    
                    $
                    4,581
                    
                    
                    $
                    4,267
                    
                    
                    $
                    4,181ALL
      to loans outstanding
                    
                    
                    1.33
                    %
                    
                    
                    1.19
                    %
                    
                    
                    0.98
                    %
                    
                    
                    0.90
                    %
                    
                    
                    0.89
                    %ALL
      to nonperforming loans
                    
                    
                    32.93
                    %
                    
                    
                    46.97
                    %
                    
                    
                    53.16
                    %
                    
                    
                    138.60
                    %
                    
                    
                    198.10
                    %Net
      charge-offs / recoveries to average loans out - standing during the
      period
                    
                    
                    1.75
                    %
                    
                    
                    -0.24
                    %
                    
                    
                    -0.05
                    %
                    
                    
                    0.02
                    %
                    
                    
                    0.01
                    %




The
following table shows the allocation of the allowance for loan losses at
December 31, for the dates indicated. The dollar amounts are stated in thousands
(000’s). The percent columns represent the percentage of loans in each category
to total loans.




2009
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005$
                      
                      
                      %
                      
                      
                      $
                      
                      
                      %
                      
                      
                      $
                      
                      
                      %
                      
                      
                      $
                      
                      
                      %
                      
                      
                      $
                      
                      
                      %Real
      estate loans:Residential
                      
                      
                      241
                      
                      
                      
                      40.2
                      
                      
                      
                      394
                      
                      
                      
                      46.2
                      
                      
                      
                      808
                      
                      
                      
                      47.8
                      
                      
                      
                      761
                      
                      
                      
                      60.0
                      
                      
                      
                      644
                      
                      
                      
                      55.1Commercial
      and other dwelling
                      
                      
                      5,371
                      
                      
                      
                      42.5
                      
                      
                      
                      3,934
                      
                      
                      
                      40.3
                      
                      
                      
                      2,353
                      
                      
                      
                      39.2
                      
                      
                      
                      1,472
                      
                      
                      
                      26.9
                      
                      
                      
                      1,089
                      
                      
                      
                      24.0Consumer
      loans
                      
                      
                      51
                      
                      
                      
                      0.3
                      
                      
                      
                      69
                      
                      
                      
                      0.4
                      
                      
                      
                      53
                      
                      
                      
                      0.5
                      
                      
                      
                      87
                      
                      
                      
                      0.6
                      
                      
                      
                      99
                      
                      
                      
                      6.1Commercial
      business and other
                      
                      
                      451
                      
                      
                      
                      17.0
                      
                      
                      
                      1,433
                      
                      
                      
                      13.1
                      
                      
                      
                      1,367
                      
                      
                      
                      12.5
                      
                      
                      
                      1,947
                      
                      
                      
                      12.5
                      
                      
                      
                      2,349
                      
                      
                      
                      14.8Total
                      
                      
                      6,114
                      
                      
                      
                      100.0
                      
                      
                      
                      5,830
                      
                      
                      
                      100.0
                      
                      
                      
                      4,581
                      
                      
                      
                      100.0
                      
                      
                      
                      4,267
                      
                      
                      
                      100.0
                      
                      
                      
                      4,181
                      
                      
                      
                      100.0




Investment
Activities





The primary objective of the 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.  Securities are classified as either held-to-maturity (HTM)
or available-for-sale (AFS) at the time of purchase.  No securities
are classified as trading.  At December 31, 2009, AFS securities
totaled $124.8 million or 86.5% of total securities.  AFS securities
are those the Bancorp may decide to sell if needed for liquidity,
asset-liability management or other reasons.  During 2009, the Bancorp
did not have derivative instruments and was not involved in hedging activities
as defined by Topic 815 Derivatives and Hedging.  It has been the
policy of the Bancorp to invest its excess cash in U.S. government agency
securities, mortgage-backed securities, collateralized mortgage obligations and
municipal securities.  In addition, short-term funds are generally
invested as interest-bearing balances in financial institutions and federal
funds.  At December 31, 2009, the Bancorp’s investment portfolio
totaled $144.3 million.  In addition, the Bancorp had $4.1 million
federal funds sold, and $3.7 million in FHLB stock.








16







The table
below shows the carrying values of the components of the investment securities
portfolio at December 31, on the dates indicated.  The amounts are
stated in thousands (000’s).




2009
                  
                  
                  2008
                  
                  
                  2007U.S.
      government agencies:Available-for-sale
                  
                  
                  2,045
                  
                  
                  
                  5,621
                  
                  
                  
                  26,220Mortgage-backed
      securities (1):Available-for-sale
                  
                  
                  32,778
                  
                  
                  
                  32,745
                  
                  
                  
                  24,381Held-to-maturity
                  
                  
                  1,018
                  
                  
                  
                  388
                  
                  
                  
                  461Collateralized
      Mortgage Obligations (1):Available-for-sale
                  
                  
                  53,030
                  
                  
                  
                  36,476
                  
                  
                  
                  27,532Municipal
      Securities:Available-for-sale
                  
                  
                  35,573
                  
                  
                  
                  26,679
                  
                  
                  
                  14,104Held-to-maturity
                  
                  
                  18,539
                  
                  
                  
                  18,127
                  
                  
                  
                  17,897Corporate
      Securities:Available-for-sale
                  
                  
                  -
                  
                  
                  
                  4,813
                  
                  
                  
                  -Trust
      Preferred Securities:Available-for-sale
                  
                  
                  1,350
                  
                  
                  
                  1,873
                  
                  
                  
                  4,049Totals
                  
                  $
                  144,333
                  
                  
                  $
                  126,722
                  
                  
                  $
                  114,644








(1)
Mortgage-backed securities and Collateralized Mortgage Obligations are U.S.
government agency and sponsored securities.





The
contractual maturities and weighted average yields for the U.S. government
securities, agency securities, municipal securities at December 31, 2009, are
summarized in the table below.  Securities not due at a single
maturity date, such as mortgage-backed securities and collateralized mortgage
obligations are not included in the following table.  The carrying
values are stated in thousands (000’s).




Within 1 Year
                    
                    
                    1 - 5 Years
                    
                    
                    5 - 10 Years
                    
                    
                    After 10 YearsAmount
                    
                    
                    Yield
                    
                    
                    Amount
                    
                    
                    Yield
                    
                    
                    Amount
                    
                    
                    Yield
                    
                    
                    Amount
                    
                    
                    YieldU.S.
      government Securities:AFS
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %U.S.
      government Agencies:AFS
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    2,044
                    
                    
                    
                    5.35
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %HTM
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %Municipal
      Securities:AFS
                    
                    
                    191
                    
                    
                    
                    4.75
                    %
                    
                    
                    2,100
                    
                    
                    
                    4.03
                    %
                    
                    
                    4,712
                    
                    
                    
                    4.19
                    %
                    
                    
                    28,571
                    
                    
                    
                    4.31
                    %HTM
                    
                    
                    920
                    
                    
                    
                    4.50
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    11,624
                    
                    
                    
                    4.09
                    %
                    
                    
                    5,995
                    
                    
                    
                    4.06
                    %Trust
      Preferred Securities:AFS
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    1,350
                    
                    
                    
                    0.99
                    %Totals
                    
                    $
                    1,111
                    
                    
                    
                    4.54
                    %
                    
                    $
                    4,144
                    
                    
                    
                    4.68
                    %
                    
                    $
                    16,336
                    
                    
                    
                    4.12
                    %
                    
                    $
                    35,916
                    
                    
                    
                    4.14
                    %




17




During
2009, the Bancorp’s management was notified that the quarterly interest payments
for three of its four investments in trust preferred securities have been placed
in “payment in kind” status.  Payment in kind status results in a
temporary delay in the payment of interest.  As a result of a delay in
the collection of the interest payments, management placed these securities in
non-accrual status.  At December 31, 2009, the cost basis of the three
trust preferred securities in non-accrual status totaled $4.2
million.  Current estimates indicate that the interest payment delays
may exceed ten years.  One trust preferred security with a cost basis
of $1.3 million remains in accrual status.





Sources
of Funds





General.  Deposits
are the major source of the Bancorp’s funds for lending and other investment
purposes.  In addition to deposits, the Bancorp derives funds from
maturing investment securities and certificates of deposit, dividend receipts
from the investment portfolio, loan principal repayments, repurchase agreements,
advances from the Federal Home Loan Bank of Indianapolis (FHLB) and other
borrowings.  Loan repayments are a relatively stable source of funds,
while deposit inflows and outflows are significantly influenced by general
interest rates and money market conditions.  Borrowings may be used on
a short-term basis to compensate for reductions in the availability of other
sources of funds.  They may also be used on a longer-term basis for
general business purposes.  The Bancorp uses repurchase agreements, as
well as, a line-of-credit and advances from the FHLB for
borrowings.  At December 31, 2009, the Bancorp had $15.9 million in
repurchase agreements.  Other borrowings totaled $47.1 million, of
which $38.0 million represents FHLB advances.





Deposits.  Retail
and commercial deposits are attracted principally from within the Bancorp’s
primary market area.  The Bancorp offers a broad selection of deposit
instruments including checking accounts, NOW accounts, savings accounts, money
market deposit accounts, certificate accounts and retirement savings plans.
Deposit accounts vary as to terms, with the principal differences being the
minimum balance required, the time period the funds must remain on deposit and
the interest rate.  Certificate accounts currently range in maturity
from ten days to 42 months.  The deregulation of federal controls on
insured deposits has allowed the Bancorp to be more competitive in obtaining
funds and to be flexible in meeting the threat of net deposit
outflows.  The Bancorp does not obtain funds through
brokers.








18







The
following table presents the average daily amount of deposits bearing interest
and average rates paid on such deposits for the years indicated.  The
amounts are stated in thousands (000’s).





2009
                  
                  
                  2008
                  
                  
                  2007Amount
                  
                  
                  Rate
      %
                  
                  
                  Amount
                  
                  
                  Rate
      %
                  
                  
                  Amount
                  
                  
                  Rate
      %Demand
      deposits
                  
                  $
                  44,438
                  
                  
                  
                  -
                  
                  
                  $
                  43,753
                  
                  
                  
                  -
                  
                  
                  $
                  50,913
                  
                  
                  
                  -NOW
      accounts
                  
                  
                  93,938
                  
                  
                  
                  0.41
                  
                  
                  
                  92,198
                  
                  
                  
                  0.89
                  
                  
                  
                  59,113
                  
                  
                  
                  1.26MMDA
      accounts
                  
                  
                  108,874
                  
                  
                  
                  0.82
                  
                  
                  
                  113,266
                  
                  
                  
                  1.94
                  
                  
                  
                  110,943
                  
                  
                  
                  3.54Savings
      accounts
                  
                  
                  55,665
                  
                  
                  
                  0.22
                  
                  
                  
                  52,830
                  
                  
                  
                  0.40
                  
                  
                  
                  54,210
                  
                  
                  
                  0.40Certificates
      of deposit
                  
                  
                  237,789
                  
                  
                  
                  2.39
                  
                  
                  
                  215,327
                  
                  
                  
                  3.44
                  
                  
                  
                  219,052
                  
                  
                  
                  4.59Total
      deposits
                  
                  $
                  540,704
                  
                  
                  
                  1.31
                  
                  
                  $
                  517,374
                  
                  
                  
                  2.06
                  
                  
                  $
                  494,231
                  
                  
                  
                  3.02




Maturities of time certificates of
deposit and other time deposits of $100,000 or more at December 31, 2009 are
summarized as follows.  The amounts are stated in thousands
(000’s).




3
      months or less
                      
                      $
                      41,306Over
      3 months through 6 months
                      
                      
                      27,041Over
      6 months through 12 months
                      
                      
                      17,875Over
      12 months
                      
                      
                      12,450Total
                      
                      $
                      98,672





Borrowings.  Borrowed
money is used on a short-term basis to compensate for reductions in the
availability of other sources of funds and is generally accomplished through
repurchase agreements, as well as, through a line of credit and advances from
the FHLB.  Repurchase agreements generally mature within one year and
are generally secured by U.S. government securities or U.S. agency securities,
under the Bancorp’s control.  FHLB advances with maturities ranging
from one year to five years are used to fund securities and loans of comparable
duration, as well as to reduce the impact that movements in short-term interest
rates have on the Bancorp’s overall cost of funds.  Fixed rate
advances are payable at maturity, with a prepayment penalty.  Putable
advances are fixed for a period of one to five years and then may adjust
annually to the three-month London Interbank Offered Rate (LIBOR) until
maturity.  Once the putable advance interest rate adjusts, the Bancorp
has the option to prepay the advance on specified annual interest rate reset
dates without prepayment penalty.








19







The
following tables sets forth certain information regarding borrowing and
repurchase agreements by the Bancorp at the end of and during the periods
indicated.  The amounts are stated in thousands (000’s).




At December 31,2009
                  
                  
                  2008
                  
                  
                  2007Fixed
      rate advances from the FHLB
                  
                  
                  33,000
                  
                  
                  
                  41,000
                  
                  
                  
                  31,000Putable
      advances from the FHLB
                  
                  
                  5,000
                  
                  
                  
                  5,000
                  
                  
                  
                  2,000Variable
      advances from the FHLB
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  26,000FHLB
      line-of-credit
                  
                  
                  8,464
                  
                  
                  
                  2,044
                  
                  
                  
                  2,846Limited
      partnership obligation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Overdrawn
      due from & Treasury Tax & Loan
                  
                  
                  665
                  
                  
                  
                  978
                  
                  
                  
                  898Total
      borrowings
                  
                  $
                  47,129
                  
                  
                  $
                  49,022
                  
                  
                  $
                  62,744





At December 31,Repurchase agreements:
                
                2009
                
                
                2008
                
                
                2007Balance
                
                $
                15,893
                
                
                $
                25,773
                
                
                $
                14,186Securities
      underlying the agreements:Ending
      carrying amount
                
                
                27,394
                
                
                
                37,414
                
                
                
                21,421Ending
      fair value
                
                
                27,394
                
                
                
                37,414
                
                
                
                21,421Weighted
      average rate (1)
                
                
                1.34
                %
                
                
                1.46
                %
                
                
                3.71
                %





For year ended December 31,2009
                
                
                2008
                
                
                2007Highest
      month-end balance
                
                $
                23,451
                
                
                $
                25,773
                
                
                $
                15,746Approximate
      average outstanding balance
                
                
                21,333
                
                
                
                16,301
                
                
                
                14,581Approximate
      weighted average rate on securities sold under agreements to repurchase
      (2)
                
                
                1.36
                %
                
                
                2.65
                %
                
                
                3.79
                %


(1)    The
weighted average rate for each period is calculated by weighting the principal
balances outstanding for the various interest rates.


(2)    The
weighted average rate is calculated by dividing the interest expense for the
period by the average daily balances of securities sold under agreements to
repurchase for the period.





20





Trust
Powers





The activities of the Bancorp's Wealth
Management Group provides estate and retirement planning, guardianships, land
trusts, profit sharing and 401(k) retirement plans, IRA and Keogh accounts,
investment agency accounts, and serves as personal representative of estates and
acts as trustee for revocable and irrevocable trusts.  At December 31,
2009, the market value of the Wealth Management Group’s assets totaled $206.8
million, an increase of $14.4 million, compared to December 31,
2008.





Analysis
of Profitability and Key Operating Ratios





Distribution
of Assets, Liabilities and Shareholders’ Equity;


Interest
Rates and Interest Differential.





The net earnings of the Bancorp depend
primarily upon the “spread” (difference) between (a) the income it receives from
its loan portfolio and other investments, and (b) its cost of money, consisting
principally of the interest paid on savings accounts and on other
borrowings.





The following table presents the
weighted average yields on loans and securities, the weighted average cost of
interest-bearing deposits and other borrowings, and the interest rate spread for
the year ended December 31, 2009.




Weighted
      average yield:Securities
                  
                  
                  4.44
                  %Loans
      receivable
                  
                  
                  5.50Federal
      Home Loan Bank stock
                  
                  
                  2.00Total
      interest-earning assets
                  
                  
                  5.16Weighted
      average cost:Deposit
      accounts
                  
                  
                  1.31Borrowed
      funds
                  
                  
                  2.58Total
      interest-bearing liabilities
                  
                  
                  1.45Interest
      rate spread:Weighted
      average yield on interest-earning assets minus the weighted average cost
      of interest-bearing funds
                  
                  
                  3.71




Financial
Ratios and the Analysis of Changes in Net Interest Income.




The tables below set forth certain
financial ratios of the Bancorp for the periods indicated:




Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Return
      on average assets
                  
                  
                  0.37
                  %
                  
                  
                  0.91
                  %
                  
                  
                  0.91
                  %Return
      on average equity
                  
                  
                  4.55
                  
                  
                  
                  10.96
                  
                  
                  
                  10.78Average
      equity-to-average assets ratio
                  
                  
                  8.17
                  
                  
                  
                  8.32
                  
                  
                  
                  8.41Dividend
      payout ratio
                  
                  
                  136.9
                  
                  
                  
                  68.2
                  
                  
                  
                  71.85





At December 31,2009
                        
                        
                        2008
                        
                        
                        2007Total
      stockholders’ equity tototal assets
                        
                        
                        8.02
                        %
                        
                        
                        7.94
                        %
                        
                        
                        8.39
                        %




21







The
average balance sheet amounts, the related interest income or expense, and
average rates earned or paid are presented in the following table.


The
amounts are stated in thousands (000's).




Year ended December 31, 2009
                            
                            
                            Year ended December 31, 2008
                            
                            
                            Year ended December 31, 2007Interest
                            
                            
                            
                            
                            
                            
                            
                            
                            Interest
                            
                            
                            
                            
                            
                            
                            
                            
                            InterestAverage
                            
                            
                            Income/
                            
                            
                            Average
                            
                            
                            Average
                            
                            
                            Income/
                            
                            
                            Average
                            
                            
                            Average
                            
                            
                            Income/
                            
                            
                            AverageBalance
                            
                            
                            Expense
                            
                            
                            Rate
                            
                            
                            Balance
                            
                            
                            Expense
                            
                            
                            Rate
                            
                            
                            Balance
                            
                            
                            Expense
                            
                            
                            RateAssets:Interest
      bearing balances in financial institutions
                            
                            $
                            6,574
                            
                            
                            $
                            9
                            
                            
                            
                            0.14
                            %
                            
                            $
                            802
                            
                            
                            $
                            10
                            
                            
                            
                            1.25
                            %
                            
                            $
                            229
                            
                            
                            $
                            14
                            
                            
                            
                            6.11
                            %Federal
      funds sold
                            
                            
                            5,240
                            
                            
                            
                            5
                            
                            
                            
                            0.10
                            
                            
                            
                            2,448
                            
                            
                            
                            55
                            
                            
                            
                            2.25
                            
                            
                            
                            1,891
                            
                            
                            
                            97
                            
                            
                            
                            5.12Securities
                            
                            
                            139,212
                            
                            
                            
                            6,186
                            
                            
                            
                            4.44
                            
                            
                            
                            120,782
                            
                            
                            
                            5,833
                            
                            
                            
                            4.83
                            
                            
                            
                            107,845
                            
                            
                            
                            4,862
                            
                            
                            
                            4.51Total
      investments
                            
                            
                            151,026
                            
                            
                            
                            6,200
                            
                            
                            
                            4.11
                            
                            
                            
                            124,032
                            
                            
                            
                            5,898
                            
                            
                            
                            4.76
                            
                            
                            
                            109,965
                            
                            
                            
                            4,973
                            
                            
                            
                            4.52Loans:*Real
      estate mortgage loans
                            
                            
                            397,146
                            
                            
                            
                            22,046
                            
                            
                            
                            5.55
                            
                            
                            
                            417,819
                            
                            
                            
                            25,274
                            
                            
                            
                            6.05
                            
                            
                            
                            410,795
                            
                            
                            
                            26,637
                            
                            
                            
                            6.48Commercial
      business loans
                            
                            
                            73,669
                            
                            
                            
                            3,822
                            
                            
                            
                            5.19
                            
                            
                            
                            64,912
                            
                            
                            
                            3,843
                            
                            
                            
                            5.92
                            
                            
                            
                            52,840
                            
                            
                            
                            3,963
                            
                            
                            
                            7.50Consumer
      loans
                            
                            
                            1,725
                            
                            
                            
                            121
                            
                            
                            
                            7.02
                            
                            
                            
                            2,123
                            
                            
                            
                            152
                            
                            
                            
                            7.16
                            
                            
                            
                            2,718
                            
                            
                            
                            195
                            
                            
                            
                            7.17Total
      loans
                            
                            
                            472,540
                            
                            
                            
                            25,989
                            
                            
                            
                            5.50
                            
                            
                            
                            484,854
                            
                            
                            
                            29,269
                            
                            
                            
                            6.04
                            
                            
                            
                            466,353
                            
                            
                            
                            30,795
                            
                            
                            
                            6.60Total
      interest-earning assets
                            
                            
                            623,566
                            
                            
                            
                            32,189
                            
                            
                            
                            5.16
                            
                            
                            
                            608,886
                            
                            
                            
                            35,167
                            
                            
                            
                            5.78
                            
                            
                            
                            576,319
                            
                            
                            
                            35,768
                            
                            
                            
                            6.21Allowance
      for loan losses
                            
                            
                            (6,153
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (5,160
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (4,203
                            )Cash
      and due from banks
                            
                            
                            9,243
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            9,393
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            11,600Premises
      and equipment
                            
                            
                            19,444
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            17,542
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            14,757Other
      assets
                            
                            
                            23,490
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            19,735
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            17,999Total
      assets
                            
                            $
                            669,590
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            650,396
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            616,472Liabilities:Demand
      deposit
                            
                            $
                            44,438
                            
                            
                            
                            -
                            
                            
                            
                            -
                            %
                            
                            $
                            43,754
                            
                            
                            
                            -
                            
                            
                            
                            -
                            %
                            
                            $
                            50,913
                            
                            
                            
                            -
                            
                            
                            
                            -
                            %NOW
      accounts
                            
                            
                            93,938
                            
                            
                            
                            389
                            
                            
                            
                            0.41
                            
                            
                            
                            92,198
                            
                            
                            
                            824
                            
                            
                            
                            0.89
                            
                            
                            
                            59,113
                            
                            
                            
                            742
                            
                            
                            
                            1.26Money
      market demand accounts
                            
                            
                            108,874
                            
                            
                            
                            891
                            
                            
                            
                            0.82
                            
                            
                            
                            113,266
                            
                            
                            
                            2,200
                            
                            
                            
                            1.94
                            
                            
                            
                            110,943
                            
                            
                            
                            3,924
                            
                            
                            
                            3.54Savings
      accounts
                            
                            
                            55,665
                            
                            
                            
                            124
                            
                            
                            
                            0.22
                            
                            
                            
                            52,829
                            
                            
                            
                            209
                            
                            
                            
                            0.40
                            
                            
                            
                            54,210
                            
                            
                            
                            217
                            
                            
                            
                            0.40Certificates
      of deposit
                            
                            
                            237,789
                            
                            
                            
                            5,679
                            
                            
                            
                            2.39
                            
                            
                            
                            215,327
                            
                            
                            
                            7,414
                            
                            
                            
                            3.44
                            
                            
                            
                            219,052
                            
                            
                            
                            10,059
                            
                            
                            
                            4.59Total
      interest-bearing deposits
                            
                            
                            540,704
                            
                            
                            
                            7,083
                            
                            
                            
                            1.31
                            
                            
                            
                            517,374
                            
                            
                            
                            10,647
                            
                            
                            
                            2.06
                            
                            
                            
                            494,231
                            
                            
                            
                            14,942
                            
                            
                            
                            3.02Borrowed
      funds
                            
                            
                            68,017
                            
                            
                            
                            1,758
                            
                            
                            
                            2.58
                            
                            
                            
                            74,266
                            
                            
                            
                            2,286
                            
                            
                            
                            3.08
                            
                            
                            
                            68,002
                            
                            
                            
                            2,938
                            
                            
                            
                            4.32Total
      interest-bearing liabilities
                            
                            
                            608,721
                            
                            
                            
                            8,841
                            
                            
                            
                            1.45
                            
                            
                            
                            591,640
                            
                            
                            
                            12,933
                            
                            
                            
                            2.19
                            
                            
                            
                            562,233
                            
                            
                            
                            17,881
                            
                            
                            
                            3.18Other
      liabilities
                            
                            
                            6,154
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            4,663
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,374Total
      liabilities
                            
                            
                            614,875
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            596,303
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            564,607Stockholders'
      equity
                            
                            
                            54,715
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            54,093
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            51,865Total
      liabilities and stockholders' equity
                            
                            $
                            669,590
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            650,396
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            616,472Net
      interest income
                            
                            
                            
                            
                            
                            $
                            23,348
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            22,234
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            17,886Net
      interest spread
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3.71
                            %
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3.59
                            %
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3.03
                            %Net
      interest margin**
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3.74
                            %
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3.65
                            %
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3.10
                            %





*  Non-accruing
loans have been included in the average balances.


** Net
interest income divided by average interest-earning assets.








22







Rate/Volume
Analysis





The table
below sets forth certain information regarding changes in interest income and
interest expense of the Bancorp for the periods indicated.  For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to: (1) changes in volume (change in volume
multiplied by old rate) and (2) changes in rate (change in rate multiplied by
old volume).  Changes attributable to both rate and volume which
cannot be segregated have been allocated proportionately to the change due to
volume and the change due to rate.  The amounts are stated in
thousands (000's).






Year Ended December 31,
                                                                  
                                                                  
                                                                  Year Ended December 31,2009
                                                                  
                                                                  
                                                                  vs.
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  vs.
                                                                  
                                                                  
                                                                  2007Increase / (Decrease)
                                                                  
                                                                  
                                                                  Increase / (Decrease)Due To
                                                                  
                                                                  
                                                                  Due ToVolume
                                                                  
                                                                  
                                                                  Rate
                                                                  
                                                                  
                                                                  Total
                                                                  
                                                                  
                                                                  Volume
                                                                  
                                                                  
                                                                  Rate
                                                                  
                                                                  
                                                                  TotalInterest
      income:Loans
      receivable
                                                                  
                                                                  $
                                                                  (729
                                                                  )
                                                                  
                                                                  $
                                                                  (2,551
                                                                  )
                                                                  
                                                                  $
                                                                  (3,280
                                                                  )
                                                                  
                                                                  $
                                                                  1,189
                                                                  
                                                                  
                                                                  $
                                                                  (2,715
                                                                  )
                                                                  
                                                                  $
                                                                  (1,526
                                                                  )Securities
                                                                  
                                                                  
                                                                  843
                                                                  
                                                                  
                                                                  
                                                                  (490
                                                                  )
                                                                  
                                                                  
                                                                  353
                                                                  
                                                                  
                                                                  
                                                                  609
                                                                  
                                                                  
                                                                  
                                                                  362
                                                                  
                                                                  
                                                                  
                                                                  971Other
      interest-earning assets
                                                                  
                                                                  
                                                                  53
                                                                  
                                                                  
                                                                  
                                                                  (103
                                                                  )
                                                                  
                                                                  
                                                                  (50
                                                                  )
                                                                  
                                                                  
                                                                  42
                                                                  
                                                                  
                                                                  
                                                                  (87
                                                                  )
                                                                  
                                                                  
                                                                  (45
                                                                  )Total
      interest-earning assets
                                                                  
                                                                  
                                                                  167
                                                                  
                                                                  
                                                                  
                                                                  (3,144
                                                                  )
                                                                  
                                                                  
                                                                  (2,977
                                                                  )
                                                                  
                                                                  
                                                                  1,840
                                                                  
                                                                  
                                                                  
                                                                  (2,440
                                                                  )
                                                                  
                                                                  
                                                                  (600
                                                                  )Interest
      Expense:Deposits
                                                                  
                                                                  
                                                                  506
                                                                  
                                                                  
                                                                  
                                                                  (4,071
                                                                  )
                                                                  
                                                                  
                                                                  (3,565
                                                                  )
                                                                  
                                                                  
                                                                  672
                                                                  
                                                                  
                                                                  
                                                                  (4,968
                                                                  )
                                                                  
                                                                  
                                                                  (4,296
                                                                  )Borrowed
      Funds
                                                                  
                                                                  
                                                                  (177
                                                                  )
                                                                  
                                                                  
                                                                  (351
                                                                  )
                                                                  
                                                                  
                                                                  (528
                                                                  )
                                                                  
                                                                  
                                                                  252
                                                                  
                                                                  
                                                                  
                                                                  (904
                                                                  )
                                                                  
                                                                  
                                                                  (652
                                                                  )Total
      interest-bearingliabilities
                                                                  
                                                                  
                                                                  329
                                                                  
                                                                  
                                                                  
                                                                  (4,422
                                                                  )
                                                                  
                                                                  
                                                                  (4,093
                                                                  )
                                                                  
                                                                  
                                                                  924
                                                                  
                                                                  
                                                                  
                                                                  (5,872
                                                                  )
                                                                  
                                                                  
                                                                  (4,948
                                                                  )Net
      change in net interestincome/(expense)
                                                                  
                                                                  $
                                                                  (162
                                                                  )
                                                                  
                                                                  $
                                                                  1,278
                                                                  
                                                                  
                                                                  $
                                                                  1,116
                                                                  
                                                                  
                                                                  $
                                                                  916
                                                                  
                                                                  
                                                                  $
                                                                  3,432
                                                                  
                                                                  
                                                                  $
                                                                  4,348




23




Bank
Subsidiary Activities





Peoples Service Corporation, a wholly
owned subsidiary of the Bank was incorporated under the laws of the State of
Indiana.  The subsidiary currently provides insurance and annuity
investments to the Bank’s wealth management customers.  At December
31, 2009, the Bank had an investment balance of $130 thousand in Peoples Service
Corporation.





NWIN, LLC
is a wholly owned subsidiary of the Bank.  NWIN, LLC was incorporated
under the laws of the State of Nevada as an investment subsidiary. The
investment subsidiary currently holds Bank security investments, which are
managed by a professional portfolio manager.  In addition, the
investment subsidiary is the parent of a real estate investment trust, NWIN
Funding, Inc., that invests in real estate loans originated by the
Bank.  At December 31, 2009, the Bank had an investment balance of
$211.2 million in NWIN, LLC.  The investment balance represents a
decrease of $4.9 million, as a result of return of capital to the Bank during
2009.





NWIN
Funding, Inc. is a subsidiary of NWIN, LLC, and was formed as an Indiana Real
Estate Investment Trust (REIT).  The formation of NWIN Funding, Inc.
provides the Bancorp with a vehicle that may be used to raise capital utilizing
portfolio mortgages as collateral, without diluting stock
ownership.  In addition, NWIN Funding, Inc. will receive favorable
state tax treatment for income generated by its operations.  At
December 31, 2009, the REIT held assets of $64.8 million in real estate
loans.







The Consolidated Financial Statements
of the Bancorp include the assets, liabilities, net worth and results of
operations of the Bank and its subsidiaries.  Significant
inter-company transactions have been eliminated in the
consolidation.





Competition





The Bancorp’s primary market area for
deposits, loans and financial services encompasses Lake and Porter Counties, in
northwest Indiana, where all of its offices are located.  Ninety-five
percent of the Bancorp’s business activities are within this area.





The Bancorp faces strong competition in
its primary market area for the attraction and retention of deposits and in the
origination of loans.  The Bancorp’s most direct competition for
deposits has historically come from commercial banks, savings associations and
credit unions located in its primary market area.  Particularly in
times of high interest rates, the Bancorp has had significant competition from
mutual funds and other firms offering financial services.  The
Bancorp’s competition for loans comes principally from savings associations,
commercial banks, mortgage banking companies, credit unions, insurance companies
and other institutional lenders.





The Bancorp competes for loans
principally through the interest rates and loan fees it charges and the
efficiency and quality of the services it provides borrowers and other
third-party sources .  It competes for deposits by offering depositors
a wide variety of savings accounts, checking accounts, competitive interest
rates, convenient banking center locations, drive-up facilities, automatic
teller machines, tax-deferred retirement programs, electronic banking and other
miscellaneous services.








24




The activities of the Bancorp and the
Bank in the geographic market served involve competition with other banks as
well as with other financial institutions and enterprises, many of which have
substantially greater resources than those available to the
Bancorp.  In addition, non-bank competitors are generally not subject
to the extensive regulation applicable to the Bancorp and the Bank.





Personnel





As of December 31, 2009, the Bank had
158 full-time and 33 part-time employees. The employees are not represented by a
collective bargaining agreement. Management believes its employee relations are
good.  The Bancorp has five officers (listed below under Item 4.5
“Executive Officers of the Bancorp”), but has no other employees. The Bancorp’s
officers also are full-time employees of the Bank, and are compensated by the
Bank.





Regulation
and Supervision





Bank Holding Company
Regulation.  As a registered bank holding company for the Bank,
the Bancorp is subject to the regulation and supervision of the FRB under the
Bank Holding Company Act of 1956, as amended (the "BHCA").  Bank
holding companies are required to file periodic reports with and are subject to
periodic examination by the FRB.





Under the BHCA, without the prior
approval of the FRB, the Bancorp may not acquire direct or indirect control of
more than 5% of the voting stock or substantially all of the assets of any
company, including a bank, and may not merge or consolidate with another bank
holding company.  In addition, the Bancorp is generally prohibited by
the BHCA from engaging in any nonbanking business unless such business is
determined by the FRB to be so closely related to banking as to be a proper
incident thereto.  Under the BHCA, the FRB has the authority to
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
FRB's determination that such activity or control constitutes a serious risk to
the financial soundness and stability of any bank subsidiary of the bank holding
company.





Under FRB policy, a bank holding
company is expected to serve as a source of financial and managerial strength to
its subsidiary banks.  It is the policy of the FRB that, pursuant to
this requirement, a bank holding company should stand ready to use its resources
to provide adequate capital funds to its subsidiary banks during periods of
financial stress or adversity. This support may be required by the FRB at times
when the Bancorp may not have the resources to provide it or, for other reasons,
would not be inclined to provide it.  Additionally, under the Federal
Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA"), a bank
holding company is required to provide limited guarantee of the compliance by
any insured depository institution subsidiary that may become "undercapitalized"
(as defined in the statute) with the terms of any capital restoration plan filed
by such subsidiary with its appropriate federal banking agency.





Savings Bank
Regulation.  As an Indiana stock savings bank, the Bank is
subject to federal regulation and supervision by the FDIC and to state
regulation and supervision by the DFI.  The Bank's deposit accounts
are insured by DIF, which is administered by the FDIC.  The Bank is
not a member of the Federal Reserve System.




25





Both federal and Indiana law
extensively regulate various aspects of the banking business such as reserve
requirements, truth-in-lending and truth-in-savings disclosures, equal credit
opportunity, fair credit reporting, trading in securities and other aspects of
banking operations.  Current federal law also requires savings banks,
among other things, to make deposited funds available within specified time
periods.





Under FDICIA, insured state chartered
banks are prohibited from engaging as principal in activities that are not
permitted for national banks, unless: (i) the FDIC determines that the activity
would pose no significant risk to the appropriate deposit insurance fund, and
(ii) the bank is, and continues to be, in compliance with all applicable capital
standards.





Branches and
Affiliates.  The establishment of branches by the Bancorp is
subject to approval of the DFI and FDIC and geographic limits established by
state laws.  The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") facilitates the interstate
expansion and consolidation of banking organizations by permitting, among other
things,(i) bank holding companies that are adequately capitalized and managed to
acquire banks located in states outside their home state regardless of whether
such acquisitions are authorized under the law of the host state, (ii) the
interstate merger of banks, subject to the right of individual states to “opt
out” of this authority, and (iii) banks to establish new branches on an
interstate basis provided that such action is specifically authorized by the law
of the host state.





Transactions with
Affiliates.  Under Indiana law, the Bank is subject to Sections
22(h), 23A and 23B of the Federal Reserve Act, which restrict financial
transactions between banks and affiliated companies, such as the
Bancorp.  The statute limits credit transactions between a bank and
its executive officers and its affiliates, prescribes terms and conditions for
bank affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.


Capital
Requirements.  The FRB and the FDIC have issued substantially
similar risk-based and leverage capital guidelines that are applicable to the
Bancorp and the Bank.  These guidelines require a minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
activities such as standby letters of credit) of 8%.  At least half of
the total required capital must be "Tier 1 capital," consisting principally of
common stockholders' equity, noncumulative perpetual preferred stock, a limited
amount of cumulative perpetual preferred stock and minority interests in the
equity accounts of consolidated subsidiaries, less certain goodwill
items.  The remainder ("Tier 2 capital") may consist of a limited
amount of subordinated debt and intermediate-term preferred stock, certain
hybrid capital instruments and other debt securities, cumulative perpetual
preferred stock, and a limited amount of the allowance for loan
losses.





In addition to the risk-based capital
guidelines, the Bancorp and the Bank are subject to a Tier 1 (leverage) capital
ratio which requires a minimum level of Tier 1 capital to adjusted average
assets of 3% in the case of financial institutions that have the highest
regulatory examination ratings and are not contemplating significant growth or
expansion.  All other institutions are expected to maintain a ratio of
at least 1% to 2% above the stated minimum.





26





FDICIA requires, among other things,
federal bank regulatory authorities to take "prompt corrective action" with
respect to banks that do not meet minimum capital requirements.  The
FDIC has adopted regulations to implement the prompt corrective action
provisions of FDICIA, which, among other things, define the relevant capital
measures for five capital categories.  An institution is deemed to be
"well capitalized" if it has a total risk-based capital ratio of 10% or greater,
a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5%
or greater, and is not subject to a regulatory order, agreement or directive to
meet and maintain a specific capital level for any capital measure.





The following table shows that, at
December 31, 2009, the Bancorp’s capital exceeded all regulatory capital
requirements. At December 31, 2009, the Bancorp’s and the Bank’s regulatory
capital ratios were substantially the same.  At December 31, 2009, the
Bancorp and the Bank were categorized as well capitalized.  The dollar
amounts are stated in millions.





Required for
                    
                    
                    To be wellActual
                    
                    
                    adequate capital
                    
                    
                    capitalizedAmount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    RatioTotal
      capital to risk weighted assets
                    
                    $
                    58.7
                    
                    
                    
                    11.5
                    %
                    
                    $
                    40.8
                    
                    
                    
                    8.0
                    %
                    
                    $
                    51.0
                    
                    
                    
                    10.0
                    %Tier
      1 capital to risk weighted assets
                    
                    $
                    52.6
                    
                    
                    
                    10.3
                    %
                    
                    $
                    20.4
                    
                    
                    
                    4.0
                    %
                    
                    $
                    30.6
                    
                    
                    
                    6.0
                    %Tier
      1 capital to adjusted average assets
                    
                    $
                    52.6
                    
                    
                    
                    7.8
                    %
                    
                    $
                    20.1
                    
                    
                    
                    3.0
                    %
                    
                    $
                    33.5
                    
                    
                    
                    5.0
                    %





Banking regulators may change these
requirements from time to time, depending on the economic outlook generally and
the outlook for the banking industry.  The Bancorp is unable to
predict whether and when higher capital requirements would be imposed and, if
so, to what levels and on what schedule.


Dividend
Limitations.  The Bancorp is a legal entity separate and
distinct from the Bank.  The primary source of the Bancorp’s cash
flow, including cash flow to pay dividends on the Bancorp’s Common Stock, is the
payment of dividends to the Bancorp by the Bank.  Under Indiana law,
the Bank may pay dividends of so much of its undivided profits (generally,
earnings less losses, bad debts, taxes and other operating expenses) as is
considered expedient by the Bank’s Board of Directors.  However, the
Bank must obtain the approval of the DFI for the payment of a dividend if the
total of all dividends declared by the Bank during the current year, including
the proposed dividend, would exceed the sum of retained net income for the year
to date plus its retained net income for the previous two years.  For
this purpose, “retained net income” means net income as calculated for call
report purposes, less all dividends declared for the applicable
period.  Also, the FDIC has the authority to prohibit the Bank from
paying dividends if, in its opinion, the payment of dividends would constitute
an unsafe or unsound practice in light of the financial condition of the
Bank.  The aggregate amount of dividends that may be declared by the
Bank in 2010, without prior regulatory approval, approximates $1,775,000 plus
current 2010 net profits.  In addition, under FRB supervisory policy,
a bank holding company generally should not maintain its existing rate of cash
dividends on common shares unless (i) the organization's net income available to
common shareholders over the past year has been sufficient to fully fund the
dividends and (ii) the prospective rate of earnings retention appears consistent
with the organization's capital needs, assets, quality, and overall financial
condition.




27




Federal Deposit Insurance.The
FDIC is an independent federal agency that insures the deposits, up to
prescribed statutory limits, of federally insured banks and savings associations
and safeguards the safety and soundness of the banking and savings industries.
Due to the recent difficult economic conditions, deposit insurance per depositor
has been raised to $250,000 for all types of accounts until December 31, 2013.
The FDIC administers the DIF, which generally insures commercial bank, savings
association and state savings bank deposits. The DIF was created as a result of
the merger of the Bank Insurance Fund (“BIF”) and the Savings Association
Insurance Fund (“SAIF”), pursuant to the Federal Deposit Insurance Reform Act of
2005 (the “Reform Act”). The Bank is a member of the DIF and its deposit
accounts are insured by the FDIC up to prescribed limits.





The FDIC
is authorized to establish annual deposit insurance assessment rates for members
of the DIF, and to increase assessment rates if it determines such increases are
appropriate to maintain the reserves of the insurance fund. In addition, the
FDIC is authorized to levy emergency special assessments on DIF members. A
significant increase in insurance premiums would likely have an adverse effect
on the operating expenses and results of operations of the Bank, and management
cannot predict what insurance assessment rates will be in the
future.





Pursuant
to the final regulations adopted under the Reform Act, the FDIC’s deposit
insurance premiums are now assessed through a risk-based system under which all
insured depository institutions are placed into one of four categories and
assessed insurance premiums based upon their level of capital and risk profile.
An institution’s assessment rate depends upon the category to which it is
assigned. The Bank paid deposit insurance assessments of $708 thousand during
the year ended December 31, 2009. For 2009, the deposit insurance assessment
rate before applying one time credits was approximately 0.131% of insured
deposits. No institution may pay a dividend if it is in default of the federal
deposit insurance assessment. Future increases in deposit insurance premiums or
changes in risk classification would increase the Bank’s deposit related
costs.


The
FDIC is authorized to set the reserve ratio for the DIF at between 1.15% and
1.5% of estimated insured deposits. The designated reserve ratio is currently
1.25% and as a result of the deterioration in banking and economic conditions
and recent failures of banks, the reserve ratio was 0.22% as of June 30, 2009.
The FDIC expects a higher ratio of insured institution failures in the next few
years, which may result in a continued decline in the reserve ratio. The FDIC
has seven years to attain a reserve ratio of 1.15%. In addition, during 2009 the
FDIC adopted an interim rule that imposed a special assessment of 20 basis
points as of June 30, 2009, which was collected on September 30, 2009. The
FDIC’s interim rule also provides for the imposition of additional special
assessments of up to 10 basis points if necessary. Under the new assessment
system, banks in the best risk category will pay from 12 cents to 16 cents per
$100 of insured deposits on an annual basis. The special assessment for the Bank
paid on September 30, 2009 was $306 thousand. On December 30, 2009, banks also
were required to pay the third quarter FDIC assessment and to prepay estimated
insurance assessments for the years 2010 through 2012 on that date. The Bank
paid an aggregate of $3.7 million in premiums on December 30, 2009, $3.5 million
of which constituted prepaid premiums.





28





In
addition, all institutions with deposits insured by the FDIC are required to pay
assessments to fund interest payments on bonds issued by the Financing
Corporation, an agency of the Federal government established to recapitalize the
predecessor to the SAIF. The Bank paid interest payment assessments of $57
thousand during the year ended December 31, 2009. The interest payment
assessment rate for 2009 was approximately 0.010% of insured deposits. These
assessments will continue until the Financing Corporation bonds mature in
2017.





Due to
the anticipated continued failures of unaffiliated FDIC-insured depository
institutions and the increased premiums noted above, we anticipate that our FDIC
deposit insurance premiums could increase significantly in the future, which
would adversely impact our future earnings.





Federal Home Loan Bank
System.  The Bank is a member of the Federal Home Loan Bank of
Indianapolis, which is one of 12 regional Federal Home Loan
Banks.  Each Federal Home Loan Bank serves as a reserve or central
bank for its members within its assigned region.  It is funded
primarily from funds deposited by member institutions and proceeds from the sale
of consolidated obligations of the Federal Home Loan Bank system.  It
makes loans to members (i.e., advances) in accordance with policies and
procedures established by the board of trustees of the Federal Home Loan
Bank.  As a member, the Bank is required to purchase and maintain
stock in the Federal Home Loan Bank of Indianapolis in an amount equal to the
greater of 1% of its aggregate unpaid residential mortgage loans, home purchase
contracts or similar obligations at the beginning of each year or 5% of our
outstanding advances from the Federal Home Loan Bank.  At December 31,
2009, the Bank was in compliance with this requirement.




At
December 31, 2009, the Bancorp owned $3.65 million of stock of the Federal Home
Loan Bank of Indianapolis (“FHLBI”) and had outstanding borrowings of
approximately $38 million from the FHLBI.  The FHLBI stock entitles us
to dividends from the FHLBI.  The Bancorp recognized dividend income
of approximately $80 thousand in 2009.  Due to various financial
difficulties in the financial institution industry in 2008, including the
write-down of various mortgage-backed securities held by the FHLBI (which
lowered its regulatory capital levels), the FHLBI temporarily suspended
dividends during the 1st quarter of 2009.  When the dividends were
finally paid, they were reduced by 75 basis points from the dividend rate paid
for the previous quarter.  Continued and additional financial
difficulties at the FHLBI could further reduce or eliminate the dividends we
receive from the FHLBI.




At
December 31, 2009, the Bancorp’s excess borrowing capacity from the FHLBI was
$53 million.  Generally, the loan terms from the FHLBI are better than
the terms the Bancorp can receive from other sources making it cheaper to borrow
money from the FHLBI.  Continued and additional financial difficulties
at the FHLBI could reduce or eliminate our additional borrowing capacity with
the FHLBI which could force us to borrow money from other
sources.  Such other monies may not be available when we need them or,
more likely, will be available at higher interest rates and on less advantageous
terms, which will impact our net income and could impact our ability to
grow.




29




Community Reinvestment
Act.  Under the Community Reinvestment Act (“CRA”), the Bank
has a continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods.  The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution’s discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA.  The CRA requires the FDIC in connection with its examination
of the Bank, to assess its record of meeting the credit needs of its community
and to take that record into account in its evaluation of certain applications
by the Bank.  For example, the regulations specify that a bank’s CRA
performance will be considered in its expansion (e.g., branching) proposals and
may be the basis for approving, denying or conditioning the approval of an
application.  As of the date of its most recent regulatory
examination, the Bank was rated “satisfactory” with respect to its CRA
compliance.





Gramm-Leach-Bliley
Act.  Under the Gramm-Leach-Bliley Act ("Gramm-Leach"), bank
holding companies are permitted to offer their customers virtually any type of
financial service, including banking, securities underwriting, insurance (both
agency and underwriting) and merchant banking.  In order to engage in
these new financial activities, a bank holding company must qualify and register
with the FRB as a "financial holding company" by demonstrating that each of its
bank subsidiaries is well capitalized, well managed and has at least a
satisfactory rating under the CRA.  The Bancorp has no current
intention to elect to become a financial holding company under
Gramm-Leach.





Gramm-Leach established a system of
functional regulation, under which the federal banking agencies regulate the
banking activities of financial holding companies, the U.S. Securities and
Exchange Commission regulates their securities activities and state insurance
regulators regulate their insurance activities.





Under Gramm-Leach, federal banking
regulators adopted rules limiting the ability of banks and other financial
institutions to disclose nonpublic information about consumers to nonaffiliated
third parties.  The rules require disclosure of privacy policies to
consumers and, in some circumstances, allow consumers to prevent disclosure of
certain personal information to nonaffiliated third parties.  The
privacy provisions of Gramm-Leach affect how consumer information is transmitted
through diversified financial services companies and conveyed to outside
vendors.





The Bancorp does not disclose any
nonpublic information about any current or former customers to anyone except as
permitted by law and subject to contractual confidentially provisions which
restrict the release and use of such information.





Recent Legislative Developments.In response to the financial crises affecting the banking system and
financial markets and going concern threats to investment banks and other
financial institutions, on October 3, 2008, the Emergency Economic Stabilization
Act of 2008 (the “EESA”) was signed into law creating the Troubled Asset Relief
Program (“TARP”). Pursuant to the EESA, the U.S. Department of the Treasury (the
“Treasury”) has the authority to, among other things, purchase up to $700
billion of mortgages, mortgage-backed securities, and certain other financial
instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets.





On
October 14, 2008, the Treasury also announced it would offer to qualifying U.S.
banking organizations the opportunity to sell preferred stock, along with
warrants to purchase common stock, to the Treasury on what may be considered
attractive terms under the TARP Capital Purchase Program (the “CPP”). The CPP
allows financial institutions to issue non-voting preferred stock to the
Treasury in an amount ranging between 1% and 3% of its total risk-weighted
assets. After a careful review of the terms of participation in the CPP, along
with consideration of the capital requirements applicable to the Bancorp and the
Bank, both of which have remained above the “well-capitalized” regulatory
guidelines, the Bancorp’s board of directors decided it was not in the best
interests of the Bancorp and its shareholders to participate in the
CPP.




30




On
February 17, 2009, President Obama signed into law the American Recovery and
Reinvestment Act of 2009 (the “ARRA”). The ARRA amends, among other things, the
TARP program legislation by directing the Treasury to issue regulations
implementing strict limitations on compensation paid or accrued by financial
institutions participating in the TARP, which regulations do not apply to the
Bancorp.





The EESA
and ARRA followed, and have been followed by, numerous actions by the Federal
Reserve, Congress, Treasury, the SEC and others to address the current liquidity
and credit crisis that has followed the sub-prime meltdown that commenced in
2007. These measures include homeowner relief that encourage loan restructuring
and modification; the establishment of significant liquidity and credit
facilities for financial institutions and investment banks; the lowering of the
federal funds rate; emergency action against short selling practices; a
temporary guaranty program for money market funds; the establishment of a
commercial paper funding facility to provide back-stop liquidity to commercial
paper issuers; coordinated international efforts to address illiquidity and
other weaknesses in the banking sector; and legislation that would require
creditors that transfer loans and securitizations of loans to maintain a
material portion (generally at least 10%) of the credit risk of the loans
transferred or securitized.





In
addition, President Obama has proposed, and the House of Representatives and
Senate are currently considering, legislation providing for broad and complex
regulatory reform which would restructure the regulation of depository
institutions.  The House Financial Services Committee already has
approved several elements of this plan, including the establishment of a
Consumer Financial Protection Agency (“CFPA”), which would have broad
rulemaking, interpretative, supervisory, examination and enforcement authority
over financial services providers such as the Bancorp.  Other aspects
of President Obama’s proposals range from the merger of the Office of Thrift
Supervision with the Office of the Comptroller of the Currency, which regulates
national banks, to the creation of an independent federal agency that would
assume the regulatory responsibilities of the Office of Thrift Supervision,
FDIC, Office of the Comptroller of the Currency and the Federal Reserve Board.
Savings and loan holding companies would become regulated as bank holding
companies under certain other proposals being considered. The CFPA proposal and
other aspects of the President’s plan remain controversial, and many obstacles
exist to achieving the President’s goal of enacting these reforms in 2010. On
October 22, 2009, the Federal Reserve issued proposed supervisory guidance
designed to ensure that incentive compensation practices of banking
organizations are consistent with safety and soundness. Uncertainty exists
regarding the interpretation and application of this guidance, and the impact of
the guidance on recruitment, retention and motivation of key officers and
employees.





Various
other legislation, including proposals to substantially change the financial
institution regulatory system and to expand or contract the powers of banking
institutions and bank holding companies, is from time to time introduced. This
legislation may change banking statutes and the operating environment of the
Bancorp and the Bank in substantial and unpredictable ways. If enacted, such
legislation could increase or decrease the cost of doing business, limit or
expand permissible activities or affect the competitive balance among banks,
savings associations, credit unions and other financial institutions. The
Bancorp cannot accurately predict whether any of this potential legislation will
ultimately be enacted, and, if enacted, the ultimate effect that it, or
implementing regulations, would have upon the financial condition or results of
operations of the Bancorp or the Bank.




31




It is not
clear at this time what impact the EESA, ARRA, CPP, TARP, other liquidity and
funding initiatives of the Federal Reserve and other agencies that have been
previously announced, and any additional programs that may be initiated in the
future will have on the financial markets, including the extreme levels of
volatility and limited credit availability currently being experienced, or on
the U.S. banking and financial industries and the broader U.S. and global
economies. Further adverse effects could have an adverse effect on the Bancorp
and its business.





Federal
Taxation





For federal income tax purposes, the
Bank reports its income and expenses on the accrual method of
accounting.  The Bancorp and the Bank file a consolidated federal
income tax return for each fiscal year ending December 31.  During
2008, the Bank’s 2006 federal income tax return was subject to an examination by
the Internal Revenue Service.  No improper tax positions were
identified during the examination.  In the last five years, the Bank’s
federal income returns have not been subject to any other examination by a
taxing authority.





State
Taxation





The Bank is subject to Indiana’s
Financial Institutions Tax (“FIT”), which is imposed at a flat rate of 8.5% on
“adjusted gross income.”  “Adjusted gross income,” for purposes of
FIT, begins with taxable income as defined by Section 63 of the Code and, thus,
incorporates federal tax law to the extent that it affects the computation of
taxable income.  Federal taxable income is then adjusted by several
Indiana modifications.  Other applicable state taxes include generally
applicable sales and use taxes plus real and personal property
taxes.





During 2007, the Bank’s state income
tax returns were subject to an examination by the Indiana Department of
Revenue.  No improper tax positions were identified during the
examination.  In the last five years, the Bank’s state income returns
have not been subject to any other examination by a taxing
authority.





Accounting
for Income Taxes





At December 31, 2009, the Bancorp’s
consolidated total deferred tax assets were $4.6 million and the consolidated
total deferred tax liabilities were $2.1 million, resulting in a consolidated
net deferred tax asset of $2.5 million.  Management believes it is
probable that approximately 80% of the deferred tax asset benefit will be
realized after considering the historical and anticipated future levels of
pretax earnings.





32




Item
      1A.
            Risk
      Factors





Not applicable.




Item
      1B.
            Unresolved
      Staff Comments





Not applicable.





Item
      2.
            Properties





The Bancorp maintains its corporate
office at 9204 Columbia Avenue, Munster, Indiana, from which it oversees the
operation of the Bank’s ten banking locations.  The Bancorp owns all
of its office properties.





The
following table sets forth additional information with respect to the Bank’s
offices as of December 31, 2009.  Net book value and total investment
figures are for land, buildings, furniture and fixtures.





Year
                                                            
                                                            
                                                            
                                                            
                                                            Approximatefacility
                                                            
                                                            Net book
                                                            
                                                            
                                                            square
                                                            
                                                            
                                                            TotalOffice location
                                                            
                                                            opened
                                                            
                                                            value
                                                            
                                                            
                                                            footage
                                                            
                                                            
                                                            cost9204
      Columbia AvenueMunster,
      IN 46321-3517
                                                            
                                                            1985
                                                            
                                                            $
                                                            1,083,788
                                                            
                                                            
                                                            
                                                            11,640
                                                            
                                                            
                                                            $
                                                            3,223,520141
      W. Lincoln HighwaySchererville,
      IN 46375-1851
                                                            
                                                            1990
                                                            
                                                            
                                                            812,746
                                                            
                                                            
                                                            
                                                            9,444
                                                            
                                                            
                                                            
                                                            2,674,6987120
      Indianapolis Blvd.Hammond,
      IN 46324-2221
                                                            
                                                            1978
                                                            
                                                            
                                                            155,541
                                                            
                                                            
                                                            
                                                            2,600
                                                            
                                                            
                                                            
                                                            926,2201300
      SheffieldDyer,
      IN 46311-1548
                                                            
                                                            1976
                                                            
                                                            
                                                            183,175
                                                            
                                                            
                                                            
                                                            2,100
                                                            
                                                            
                                                            
                                                            908,9517915
      TaftMerrillville,
      IN 46410-5242
                                                            
                                                            1968
                                                            
                                                            
                                                            98,909
                                                            
                                                            
                                                            
                                                            2,750
                                                            
                                                            
                                                            
                                                            669,3538600
      BroadwayMerrillville,
      IN 46410-7034
                                                            
                                                            1996
                                                            
                                                            
                                                            1,294,006
                                                            
                                                            
                                                            
                                                            4,400
                                                            
                                                            
                                                            
                                                            2,606,0294901
      Indianapolis Blvd.East
      Chicago, IN 46312-3604
                                                            
                                                            1995
                                                            
                                                            
                                                            829,665
                                                            
                                                            
                                                            
                                                            4,300
                                                            
                                                            
                                                            
                                                            1,553,7361501
      Lake Park AvenueHobart,
      IN 46342-6637
                                                            
                                                            2000
                                                            
                                                            
                                                            1,801,643
                                                            
                                                            
                                                            
                                                            6,992
                                                            
                                                            
                                                            
                                                            2,727,3359204
      Columbia AvenueCorporate
      Center BuildingMunster,
      IN 46321-3517
                                                            
                                                            2003
                                                            
                                                            
                                                            5,899,095
                                                            
                                                            
                                                            
                                                            36,685
                                                            
                                                            
                                                            
                                                            9,950,592855
      Stillwater ParkwayCrown
      Point, IN 46307-5361
                                                            
                                                            2007
                                                            
                                                            
                                                            2,084,914
                                                            
                                                            
                                                            
                                                            3,945
                                                            
                                                            
                                                            
                                                            2,437,4691801
      W. 25th AvenueGary,
      IN 46404-3546
                                                            
                                                            2008
                                                            
                                                            
                                                            1,777,808
                                                            
                                                            
                                                            
                                                            2,700
                                                            
                                                            
                                                            
                                                            1,901,3842905
      Calumet AvenueValparaiso,
      IN 46383-2645
                                                            
                                                            2009
                                                            
                                                            
                                                            2,233,882
                                                            
                                                            
                                                            
                                                            2,790
                                                            
                                                            
                                                            
                                                            2,287,534





At
December 31, 2009, the Bank had investments totaling $1.3 million in two
locations, which have been acquired for future development.  The Bank
outsources its core processing activities to Fidelity National Information
Services, Inc., or FIS (formerly Metavante) Corporation located in Brown Deer,
Wisconsin.  FIS provides real time services for loans, deposits,
retail delivery systems, card solutions and electronic
banking.  Additionally, the Bank utilizes Accutech in Muncie, Indiana
for its Wealth Management operations.




33




The net book value of the Bank’s
property, premises and equipment totaled $19.6 million at December 31,
2009.





Item
      3.
            Legal
      Proceedings





The Bancorp is not engaged in any legal
proceedings of a material nature at the present time.  From time to
time, the Bank is a party to legal proceedings incident to its business,
including foreclosures.





Item
      4.
            Submission
      of Matters to a Vote of Security
Holders





No matters were submitted to a vote of
security holders during the fourth quarter of 2009.




Item
      4.5
            Executive
      Officers of the Bancorp





Pursuant to General Instruction G(3) of
Form 10-K, the following information is included as an unnumbered item in this
Part I in lieu of being included in the Bancorp’s Proxy Statement for the
2010 Annual Meeting of Shareholders:





The executive officers of the Bancorp
are as follows:





Age
      atDecember
      31,2009
                              
                              PositionDavid
      A. Bochnowski
                              
                              
                              64
                              
                              Chairman
      and Chief Executive OfficerJoel
      Gorelick
                              
                              
                              62
                              
                              President
      and Chief Administrative OfficerJon
      E. DeGuilio
                              
                              
                              54
                              
                              Executive
      Vice President and  SecretaryJohn
      J. Diederich
                              
                              
                              57
                              
                              Executive
      Vice PresidentRobert
      T. Lowry
                              
                              
                              48
                              
                              Senior
      Vice President, Chief Financial  Officer and
      Treasurer





The following is a description of the
principal occupation and employment of the executive officers of the Bancorp
during at least the past five years:





David A. Bochnowski is Chairman and
Chief Executive Officer of the Bancorp and the Bank, and is accountable to the
Board of Directors, customers, shareholders, employees and stakeholders for the
operation of the company.  He has been the Chief Executive Officer
since 1981 and became the Chairman in 1995.  He has been a director
since 1977 and was the Bank’s legal counsel from 1977 to 1981.  Mr.
Bochnowski is a past Chairman of America’s Community Bankers (ACB), now known as
the new American Bankers Association (ABA) a national bank trade association
where he serves on the Government Affairs Committee, Corporate Governance
Committee, and Task Force on Financial Services Regulatory Reform. He is a
trustee and treasurer of the Munster Community Hospital, a director of the
Community Healthcare System, a former chairman and current board member of the
Legacy Foundation of Lake County, a Director of the Quality of Life Council, and
a trustee of the Purdue Technology Center Northwest Indiana.  He is a
former Chairman of the Indiana Department of Financial Institutions; former
Chairman of the Indiana League of Savings Institutions, now known as the Indiana
Bankers Association; former director of the Federal Home Loan Bank of
Indianapolis; and, a former member of the Federal Reserve Thrift Institutions
Advisory Committee.  Before joining the Bank, Mr. Bochnowski was an
attorney, self-employed in private practice.  He holds a Juris
Doctorate degree from Georgetown University and a Masters Degree from Howard
University. He served as an officer in the United States Army and is a Vietnam
veteran.




34




Joel Gorelick is President and Chief
Administrative Officer of the Bancorp and the Bank.  Mr. Gorelick has
responsibility for coordinating the daily activities of consumer,
residential,commercial lending, and wealth management activities.  Mr.
Gorelick has been with the Bank since 1983.  He became a director in
2000.  Mr. Gorelick is involved in many community service
organizations and has served in positions such as president of the Northwest
Indiana Boys & Girls Club, president of the Merrillville, IN, Rotary Club,
chairman of the board of the Northwest Indiana Regional Development Corporation,
and president of the Lake Central High School Athletics Booster
Club.  Mr. Gorelick is an instructor for the Indiana Banker’s
Commercial Lending School.  Mr. Gorelick received recognition as the
Small Business Advocate for 1999 at the Northwest Indiana Entrepreneurial
Excellence awards program and was named the 2000 board member of the year by the
National Association For Development Companies.  The Indiana District
Office of the U. S. Small Business Administration named Mr. Gorelick the year
2000 Financial Services Advocate of the Year.  Mr. Gorelick has been
appointed as a board member for the United States Selective Service System and
currently serves as board member of the Lake County Economic Development
Corporation, N.W. Indiana Regional Development Corporation.  He holds
a Masters of Science in Business Administration from Indiana University and is a
graduate of the Graduate School of Banking at the University of Wisconsin at
Madison.





Jon E. DeGuilio is Executive Vice
President and Secretary for the Bancorp and Executive Vice President,
Stakeholders Services Group and General Counsel, Corporate Secretary, for the
Bank.  Mr. DeGuilio assumed his current responsibilities with the Bank
and Bancorp during 2001.  He joined the Bank in December of 1999 as
Senior Vice President and Trust Officer.  He holds a Juris Doctorate
degree from the Valparaiso University School of Law and a Bachelor of Arts
degree from the University of Notre Dame.  Prior to his employment
with the Bancorp, Mr. DeGuilio was a partner with the law firm of Barnes and
Thornburg and served as the United States Attorney for the Northern District of
Indiana from November of 1993 until June of 1999.  Mr. DeGuilio is
actively involved in community service, serving on the boards of the “Friends of
the Lake County CASA”, the Lake County Drug Free Alliance, Our Lady of Grace
School Board, the Carnegie Performing Arts Association Board and the Juvenile
Diabetes Research Foundation Advisory Board.





John J.
Diederich is Executive Vice President of the Bancorp and the
Bank.  Mr. Diederich has responsibility for coordinating the daily
activities of retail banking and for the solicitation of new customers for the
bank’s commercial lending, wealth management, municipal and retail
areas.  Prior to joining the Bank in 2009, Mr. Diederich spent 35
years with JP Morgan Chase where his most recent responsibilities were as
Regional President in Northwest Indiana.  Mr. Diederich is involved in
many community service organizations currently serving as President of the
Crisis Center, Inc.  and as Director of the Northwest Indiana Boys and
Girls Clubs, the Crown Point Community Foundation, the Valparaiso Family YMCA,
the Northwest Indiana Regional Development Company, the Adult Education Alliance
Inc. and is on the Finance Committee for the Diocese of Gary.  Mr.
Diederich holds a B.S. Degree in Finance from St. Joseph’s College and a B.S.
Degree in Accounting from Calumet College.




35




Robert T.
Lowry is Senior Vice President, Chief Financial Officer and Treasurer of the
Bancorp and the Bank.  He is responsible for finance, accounting, and
financial reporting activities.  Mr. Lowry has been with the Bank
since 1985 and has previously served as the Bank’s Assistant Controller,
Internal Auditor and Controller.  Mr. Lowry is a Certified Public
Accountant (CPA).  Mr. Lowry holds a Masters of Business
Administration Degree from Indiana University and is a graduate of America’s
Community Bankers National School of Banking.  Mr. Lowry is an
instructor for the American Bankers Association online banking
courses.    Mr. Lowry is a member of the American Institute
of Certified Public Accountants, the Indiana CPA Society and the Financial
Managers Society.




36




PART
II





Item
      5.
            Market
      for the Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities





The information contained under the
caption "Market Information" in the 2009 Annual Report to Shareholders is
incorporated herein by reference.  Also see Item 12 of this Annual
Report on Form 10-K.





Item
      6.
            Selected
      Financial Data





The information contained in the table
captioned "Selected Consolidated Financial Data" in the 2009 Annual Report to
Shareholders is incorporated herein by reference.





Item
      7.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations





The information contained in the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the 2009 Annual Report to Shareholders is
incorporated herein by reference.





Item
      7A.
                Quantitative
      and Qualitative Disclosures About Market
Risk





Not applicable.





Item
      8.
            Financial
      Statements





The financial statements contained in
the 2009 Annual Report to Shareholders, which are listed under Item 15 herein,
are incorporated herein by reference.





Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure





There are no items reportable under
this item.





Item
      9A(T).
              Controls
      and Procedures





(a)           Evaluation of Disclosure
Controls and Procedures.




NorthWest
Indiana Bancorp (the “Bancorp”) conducted an evaluation under the supervision
and with the participation of management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) as of December 31, 2009.  Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer determined
that the disclosure controls and procedures were effective to ensure that
material information required to be disclosed by the Bancorp in the reports that
are filed or submitted under the Exchange Act is recorded, processed, summarized
and reported as and when required. The consolidated financial statements were
prepared in conformity with accounting principles generally accepted in the
United States of America and include amounts based on management’s best
estimates and judgments.


37




The Risk
Management Committee of the Board of Directors meets regularly with the
independent registered public accounting firm, Plante & Moran PLLC, and
representatives of management to review accounting, financial reporting,
internal control and audit matters, as well as the nature and extent of the
audit effort.  The Risk Management Committee is responsible for the
engagement of the independent auditors. The independent auditors have free
access to the Risk Management Committee.





(b)
            Report on Management’s
      Assessment of Internal Control Over Financial
      Reporting.





(i)
            Management’s
      Responsibility for Financial
Statements




The
Bancorp’s management is responsible for the integrity and objectivity of all
information presented in this report including the financial statements
contained in the Annual Report to shareholders which are incorporated by
reference into Item 8 of this Form 10-K. Management believes the consolidated
financial statements fairly reflect the form and substance of transactions and
that the financial statements fairly represent the Bancorp’s financial position
and results of operations for the periods and as of the dates stated
therein.




(ii)
            Management’s Assessment of
      Internal Control Over Financial
Reporting




The
management of the Bancorp is responsible for establishing and maintaining
adequate internal control over financial reporting for the Bancorp as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act. This system is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of
America.




The
Bancorp’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Bancorp; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Bancorp are being made only in accordance with
authorizations of management and the directors of the Bancorp; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Bancorp’s assets that
could have a material effect on the financial statements.




Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal controls over financial reporting may vary over time.





With the
participation of the Bancorp’s Chief Executive Officer and Chief Financial
Officer, management conducted an evaluation of the effectiveness of the system
of internal control over financial reporting based on the framework in Internal
Control-Integrated Framework, published by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
evaluation, management determined that the Bancorp’s system of internal control
over financial reporting was effective as of December 31,
2009.


38





This annual report does not include an
attestation report of the Bancorp’s registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject
to attestation by the Bancorp’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Bancorp to provide only management’s report in this annual report.





c.
            Evaluation of Changes
      in Internal Control Over Financial
  Reporting.





There were no changes in the Bancorp’s
internal control over financial reporting in the fourth quarter of 2009 that
have materially affected, or are reasonably likely to materially affect, the
Bancorp’s internal control over financial reporting.




Item
9B.  Other Information





There are no items reportable under
this item.


39





PART
III





Item
      10.
            Directors
      and Executive Officers of the
Registrant





The information contained under the
sections captioned "Election of Directors” and “Meetings of the Board of
Directors," “Corporate Governance - Board Committees,” "Security Ownership by
Certain Beneficial Owners and Management,” “Section 16(a) Beneficial Ownership
Reporting Compliance" and “Corporate Governance - Code of Ethics” in the
Bancorp’s definitive Proxy Statement for the 2010 Annual Meeting of Shareholders
is incorporated herein by reference.  Information regarding the
Bancorp’s executive officers is included under Item 4.5 captioned "Executive
Officers of the Bancorp" at the end of Part I hereof and is incorporated
herein by reference, in accordance with General Instruction G(3) to Form 10-K
and Instruction 3 to Item 401(b) of Regulation S-K.





Item
      11.
            Executive
      Compensation





The information contained under the
section captioned “Executive Compensation" in the Bancorp’s definitive Proxy
Statement for its 2010 Annual Meeting of Shareholders is incorporated herein by
reference.





Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters





The information contained within the
Bancorp’s definitive Proxy Statement for the 2010 Annual Meeting of
Shareholders, under the section captioned “Security Ownership by Certain
Beneficial Owners and Management”, and the table providing information on the
Bancorp’s director nominees and continuing directors in the section captioned
“Election of Directors” is incorporated herein by reference.





Equity
Compensation Plan Information





The
following table provides certain information as of December 31, 2009 with
respect to the Company’s existing equity compensation plans.





Plan Category
                  
                  Number of securities to be
                      issued upon exercise of
                      outstanding options,
                      warrants and rights
                      (a)
                  
                  
                  Weighted-average exercise
                      price of outstanding options,
                      warrants and rights
                      (b)
                  
                  
                  Number of securities
                      remaining available for future
                      issuance under equity
                      compensation plans (excluding
                      securities reflected in column
                      (a))
                      (c)Equity
      compensation plans approved by security holders
                  
                  
                  65,747
                  
                  
                  $
                  23.69
                  
                  
                  
                  243,250Equity
      compensation plans not approved by security holders
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0Total
                  
                  
                  65,747
                  
                  
                  $
                  23.69
                  
                  
                  
                  243,250


40





Item
13. Certain Relationships and Related Transactions





The information contained in the
“Summary Compensation Table for 2009”, contained under the section titled
"Executive Compensation," in the section titled “Transactions with Related
Persons, and on page 5 under the section titled “Corporate Governance-Director
Independence” in the Bancorp’s definitive Proxy Statement for its 2010 Annual
Meeting of Shareholders, is incorporated herein by reference.





Item
14. Principal Accountant Fees and Services





The information contained under the
section captioned "Independent Registered Public Accounting Firm’s Services and
Fees" in the Bancorp’s definitive Proxy Statement for its 2010 Annual Meeting of
Shareholders, is incorporated herein by reference.


41





PART
IV





Item
      15.
              Exhibits
      and Financial Statement
Schedules





(a)(1)                    Financial
Statements:





The following financial statements of
the Bancorp are incorporated herein by reference to the 2009 Annual Report to
Shareholders, filed as Exhibit 13 to this report:





(a)
            Reports
      of Independent Registered Public Accounting
  Firms





(b)
            Consolidated
      Balance Sheets, December 31, 2009 and
2008





(c)
            Consolidated
      Statements of Income for the years ended December 31, 2009 and
      2008





(d)
            Consolidated
      Statements of Changes in Stockholders' Equity for the years ended December
      31, 2009 and 2008





(e)
            Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      2008





(f)
            Notes
      to Consolidated Financial
Statements





All other financial statements,
schedules and historical financial information have been omitted as the subject
matter is not required, not present or not present in amounts sufficient to
require submission.





(3)                 Exhibits:


ExhibitNumber
                
                Description2.
                
                Plan
      of Conversion of Peoples Bank, A Federal Savings Bank, dated December 18,
      1993 (incorporated herein by reference to Exhibit A to the Bancorp’s
      Definitive Proxy Statement/Prospectus dated March 23, 1994, as filed
      pursuant to Rule 424(b) under the 1933 Act on March 28,
    1994).3.i.
                
                Articles
      of Incorporation (incorporated herein by reference to Exhibit 3(i) to the
      Bancorp’s Registration Statement on Form S-4 filed March 3, 1994 (File No.
      33-76038)).3.ii.
                
                By-Laws
      of NorthWest Indiana Bancorp (incorporated herein by reference to Exhibit
      3.1 of the Bancorp’s Form 8-K dated August 3, 2009).10.1.
      *
                
                1994
      Stock Option and Incentive Plan (incorporated herein by reference to
      Exhibit A to the Bancorp’s Definitive Proxy Statement/Prospectus dated
      March 23, 1994, as filed pursuant to Rule 424(b) under the 1933 Act on
      March 28, 1994).10.2.
      *
                
                Amended
      and Restated Employment Agreement, dated December 29, 2008, between
      Peoples Bank SB, NorthWest Indiana Bancorp and David A. Bochnowski
      (incorporated herein by reference to Exhibit 10.1 of the Bancorp’s Form
      8-K dated December 30, 2008).10.3.
      *
                
                Amended
      and Restated Employment Agreement, dated December 29, 2008, between
      Peoples Bank SB, NorthWest Indiana Bancorp and Joel Gorelick (incorporated
      herein by reference to Exhibit 10.2 of the Bancorp’s Form 8-K dated
      December 30, 2008).


42





10.4.
      *
                  
                  Unqualified
      Deferred Compensation Plan for the Directors of Peoples Bank effective
      January 1, 2005(incorporated herein by reference to Exhibit 10.5 to the
      Bancorp’s Annual Report on Form 10-K for the year ended December 31,
      2006).10.5.
      *
                  
                  Amended
      and Restated 2004 Stock Option and Incentive Plan (incorporated herein by
      reference to Exhibit 99.1 of the Bancorp’s Form 8-K dated April 20,
      2005).10.6
      *
                  
                  Amended
      and Restated 2004 Stock Option and Incentive Plan (incorporated herein by
      reference to Appendix A to the Bancorp’s Definitive Proxy Statement for
      its 2005 Annual Meeting of Shareholders, filed on March 25,
      2005).10.7
      *
                  
                  Post
      2004 Unfunded Deferred Compensation Plan for the Directors of Peoples Bank
      SB effective January 1, 2005 (incorporated herein by reference to Exhibit
      10.8 to the Bancorp’s Annual Report on Form 10-K for the year ended
      December 31, 2006).10.8
      *
                  
                  Form
      of Incentive Stock Option Agreement (incorporated by reference to Exhibit
      99.2 of the Bancorp’s Form 8-K dated April 20, 2005).10.9
      *
                  
                  Form
      of Non-Qualified Stock Option Agreement (incorporated by reference to
      Exhibit 99.3 of the Bancorp’s Form 8-K dated April 20,
    2005).10.10
      *
                  
                  Form
      of Agreement for Restricted Stock (incorporated by referenced to Exhibit
      99.4 of the Bancorp’s form 8-K dated April 20,2005).13.
                  
                  2009
      Annual Report to Shareholders16.
                  
                  Letter
      from Crowe Horwath LLC dated January 27, 2009 (incorporated
      by reference to Exhibit 16.1 of the Bancorp’s Form
      8-K dated January 29, 2009).21.
                  
                  Subsidiaries
      of the Bancorp (incorporated herein by reference to Exhibit 21. to the
      Bancorp’s Annual Report on Form 10-K for the year ended December 31,
      2006).23.1
                  
                  Plante
      & Moran, PLLC - Consent of Independent Registered Public Accounting
      Firm23.2
                  
                  Crowe
      Horwath LLP - Consent of Independent Registered Public Accounting
      Firm31.1
                  
                  Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
                  
                  Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32
                  
                  Section
      1350
Certifications





* - The
indicated exhibit is a management contract, compensatory plan or arrangement
required to be filed by Item 601 of Regulation S-K.


43





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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 BANCORPBy
                    /s/David A. BochnowskiDavid
      A. BochnowskiChairman
      of the Board andChief
      Executive
Officer





Date:  February
16, 2010





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on February 12, 2010:





Signature
                                                
                                                TitlePrincipal
      Executive Officer:/s/David A. Bochnowski
                                                
                                                Chairman
      of the Board andDavid
      A. Bochnowski
                                                
                                                Chief
      Executive OfficerPrincipal
      Financial Officer andPrincipal
      Accounting Officer:/s/Robert T. Lowry
                                                
                                                Senior
      Vice President,Robert
      T. Lowry
                                                
                                                Chief
      Financial Officer and TreasurerThe
      Board of Directors:/s/Frank J. Bochnowski
                                                
                                                DirectorFrank
      J. Bochnowski/s/Lourdes M. Dennison
                                                
                                                DirectorLourdes
      M. Dennison/s/Edward J. Furticella
                                                
                                                DirectorEdward
      J. Furticella/s/Joel Gorelick
                                                
                                                DirectorJoel
      Gorelick/s/Kenneth V. Krupinski
                                                
                                                DirectorKenneth
      V. Krupinski




44




/s/Stanley E. Mize
              
              DirectorStanley
      E. Mize/s/Anthony M. Puntillo
              
              DirectorAnthony
      M. Puntillo/s/James L. Wieser
              
              DirectorJames
      L. Wieser/s/Donald P. Fesko
              
              DirectorDonald
      P. Fesko/s/Amy W. Han
              
              DirectorAmy
      W. Han




45





EXHIBIT
INDEX





Exhibit
              Description13.
              2009
      Annual Report to Shareholders23.1.
              Plante
      & Moran, PLLC - Consent of Independent Registered Public Accounting
      Firm23.2
              Crowe
      Horwath LLP - Consent of Independent Registered Public Accounting
      Firm31.1
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32
              Section
      1350 Certifications


46