2009
Annual Report










David
A. Bochnowski


Chairman
and


Chief
Executive Officer





Dear
Shareholder,




On the heels of the
financial panic that swept our nation in the fall of 2008, the year 2009 will be
remembered for the “Great Recession.”  The economy ground to a halt as
economic activity fell to record proportions not seen for many generations. Our
financial system, as a result of the high-flying practices of unregulated Wall
Street firms, faced turmoil unparalleled since the
1930s.





While our
region and community were not immune from the downturn, and despite chaos in the
national markets, your company turned a profit again in 2009.





For the
year, we reported income of $2.5 million and earnings per share of
$0.88.  These results, while not at the level of prior experience,
still compare favorably to industry performance for the year.





The
Economy and Operating Environment




During 2009, the Bancorp
had been operating in a challenging environment marked by uncertainty and
volatility. The disruption of capital and credit markets can be traced to
beginnings nearly two years ago that reached their zenith in 2009. Operating
risks became more acute this year due to the slowing of the
economy.





Nationally,
unemployment reached unprecedented levels for modern times with our community
not far behind with an unemployment rate that exceeded 10
percent.  The economic downturn was led by housing with dramatic
declines in home prices, increasing foreclosures, rising consumer and commercial
loan delinquencies, and significant write-downs of asset values by financial
institutions. The market turmoil cascaded down to credit facilities for
commercial and small business customers.





The
banking industry was directly impacted by higher deposit insurance premiums as
well as a special assessment by the Federal Deposit Insurance
Corporation.  During the year, our FDIC insurance payments totaled
$1.2 million, a 253 percent increase over the $348 thousand assessed in 2008.
This additional cost negatively impacted earnings and paid for industry losses
caused by practices the Bancorp prudently avoided.




1





The
downturn in the economy has been exacerbated by the collapse of consumer
confidence. Although by year-end there were signs of an emerging recovery,
spending by consumers and investment by small business owners waned during the
year. The absence of confidence in the economy resulted in a decrease in lending
activity at both national and local levels.





Performance
Strategy




The Bancorp relies upon
traditional banking principles to drive earnings. Our strategic plan calls for a
strong net interest margin, strong capital, effective risk management of asset
quality, operating efficiency, smart growth, and diversified sources of income
from banking operations.





During
2009, the Bank fully executed on the key elements of our business plan: our tax
equivalent net interest margin was a strong 3.97%; the Bancorp and Bank were
considered well capitalized as defined by federal regulations; loans were
written down with adequate reserves for potential losses; operating costs
were stable; our operations expanded to Porter County; and noninterest income
from banking operations rose 23.7%.





Core
Earnings




Our banking subsidiary,
Peoples Bank, has been strategically positioned as a core funded financial
institution primarily dependent on a strong net interest margin as the driver of
profitability. Our net interest margin is the difference between interest earned
on loans and investments, and interest expense paid on deposits and borrowings.
The Bank’s deposit base is weighted toward core accounts: savings, checking,
and money markets which comprise 58.0 % of deposits. Unlike some banks, we
do not rely on high interest rate, hot money certificates of deposits, brokered
deposits, or substantial borrowings for the funding of our
operations.





Management
believes that the action of the Federal Reserve to accommodate economic growth
through an unprecedented low interest rate environment will shift to higher
rates as the economy recovers. To protect the Bank’s net interest margin in a
rising rate environment, all fixed rate loans with terms of ten years and
greater were sold into the secondary mortgage market during the year. These
loans were originated under the underwriting guidelines of the Federal Home Loan
Mortgage Corporation.


2





Capital




The Bancorp strongly
believes that safe and sound operations are enhanced by a strong capital
position. Stockholder equity at year-end totaled $53.1 million and exceeds the
well-capitalized risk based requirements of federal regulations. Our total
capital to risk weighted assets was 11.5 % compared to the requirement of 10.0%,
and our Tier I capital to risk weighted assets was 10.3% compared to the
requirement of 6.0%.





In order
to ensure that our capital position continues to exceed regulatory requirements,
balance sheet strategies have been focused on managing asset growth through
pricing strategies for our liabilities, along with loan sales and timely
activity in our available-for-sale investment portfolio. In addition, the Board
of Directors took action during the year to reduce our dividend to preserve
capital in an uncertain economy.





Asset
Quality




As previously reported,
asset quality has been impacted by weakness in the Bank’s loan participation
portfolio. Beginning in the fourth quarter of 2005 through the third quarter of
2007, in response to weak local loan demand and in an effort to reduce credit
risk associated with loan concentrations in our community, a strategy was
implemented to purchase real estate participations outside of our primary market
area. The strategy was limited to 10% of the Bank’s loan portfolio and has been
discontinued.





Deteriorating
economic conditions forced the write down of several of these loans along with
other credits in our local market. Prudent action was taken consistent with and
as dictated by events, appraisals, and complex estimates required by banking
regulations and accounting standards. As a result, $8.4 million in loans were
charged off during the year and additional reserves were added to our allowance
for loan losses (ALL).  At year end, our ALL to total loans stood at
1.33%, which management considers adequate after a thorough examination of the
loan portfolio, past experience, and current economic and market
conditions.





Operating
Efficiency




As pressure on earnings
increased during the year, management reviewed our expense structure to ensure
maximum utilization of our resources. Management analyzed our staffing
requirements for Private Banking, Wealth Management, and banking center
functions.  An attrition policy also was implemented whereby vacancies
created by employees who voluntarily left the bank would not be replaced. These
actions resulted in a $586 thousand reduction in compensation
costs.


3


Our
efficiency ratio, a key measure of operating costs which is determined by
dividing all operating expenses by all income sources, was 64.7% — a very
respectable figure in today’s banking environment. Despite the cost impact of
our new banking centers in Gary and Valparaiso as well as the additional costs
of our FDIC insurance, our efficiency ratio held relatively steady when compared
to the 63.5% reported for 2008.  Without this year’s additional FDIC
costs, our 2009 efficiency ratio would have been 61.7%.





Smart
Growth




Today’s trend of many
local banks to consolidate their operations with those of larger regional and
national banks provides an opportunity for a strong community bank to expand its
brand into new markets. As a result, beginning in 2007, the Bancorp implemented
a strategy for growth to open a new banking center annually. We are very pleased
that our Crown Point office that opened in 2007, our Gary office that opened in
2008, and our Valparaiso office that opened in June 2009 have garnered growth
beyond our expectations. At year-end, the combined balances of these newest
offices exceeded $39 million with a solid mix of deposit and loan
products.





As
potential geographies for new locations are reviewed, management focuses on
market stratifications that mirror the profile of our existing customer base. In
addition, our marketing outreach in new as well as existing markets depends on
extensive research and a highly effective data based marketing program. Our
marketing effort constantly reviews our suite of products and services for
enhancements to our traditional and electronic offerings in order to increase
the number of accounts held by households and small businesses in our customer
base.





Banking
Operations




Our business plan during
the year focused on opportunities to generate income from banking operations as
the Bancorp acted to offset interest rate risk associated with long term assets.
Efforts to expand our Wealth Management services continued consistent with the
opportunity created by regional banks exiting the wealth management space in our
community. Noninterest income from banking operations rose 23.7% during 2009
over the prior year.





Market
conditions provided management with opportunities to manage cash flows which
focused on shortening the duration of both the mortgage and investment
portfolios.  Gains from loan sales totaled $1.1 million and gains from
the sale of investments totaled $736 thousand. Our Wealth Management Group also
contributed $933 thousand to income in 2009 — an increase of 14.7% over the
prior year.


4





100
Years Strong




In January of 2010, the
Bancorp celebrated the 100th year of our tradition of community banking in
Northwest Indiana. Founded on the simple principle that building a rapport with
customers would result in financial opportunities for families and community
investment, our story of success is woven into the fabric of Northwest
Indiana.





For a
century, our strong work ethic and honesty in business dealings have been the
trademark of the Bancorp. Our tradition has thrived during the best of times and
survived the challenges of the era as the boom and bust cycle of the American
story has unfolded.  History shows that in each instance our community
banking tradition has not only endured but grown stronger.





Since
1910, America has experienced 19 recessions and one depression. There have also
been 19 recoveries and all indications are that another is on the way. That
said, everyday we are reminded of the stress the current economy has exerted on
our customers, community, and the Bancorp.





We will
continue to service our customers with our commitment to putting customers first
with “You First Banking”.  Our pledge is to stand with our customers
and community in these challenging times and, as always, to take the lead in
opportunities that will provide not only for revitalization but also for the
growth of our local economy.





The
Bancorp will extend our footprint into St. John with a new banking center that
will open in September 2010.  We will continue to look for additional
expansion of our traditional and electronic banking services, while staying true
to our long standing belief that banking is driven by relationships and not just
transactions.





Above
all, we will prudently manage the trust our customers and shareholders have
placed in us as the Bancorp continues to lead the way into the next
century.





Sincerely,David
      A. BochnowskiChairman
      and Chief Executive
Officer




5





6





7


Selected
Consolidated Financial Data




in
thousands of dollars, except per share data




December 31,
                                                          
                                                          
                                                          December 31,
                                                          
                                                          
                                                          December 31,
                                                          
                                                          
                                                          December 31,
                                                          
                                                          
                                                          December 31,
                                                          
                                                          
                                                          December 31,Fiscal Year Ended
                                                          
                                                          2009
                                                          
                                                          
                                                          2008
                                                          
                                                          
                                                          2007
                                                          
                                                          
                                                          2006
                                                          
                                                          
                                                          2005
                                                          
                                                          
                                                          2004Statement
      of Income:Total
      interest income
                                                          
                                                          $
                                                          32,189
                                                          
                                                          
                                                          $
                                                          35,167
                                                          
                                                          
                                                          $
                                                          35,768
                                                          
                                                          
                                                          $
                                                          34,979
                                                          
                                                          
                                                          $
                                                          30,024
                                                          
                                                          
                                                          $
                                                          26,614Total
      interest expense
                                                          
                                                          
                                                          8,841
                                                          
                                                          
                                                          
                                                          12,933
                                                          
                                                          
                                                          
                                                          17,882
                                                          
                                                          
                                                          
                                                          15,738
                                                          
                                                          
                                                          
                                                          9,758
                                                          
                                                          
                                                          
                                                          6,858Net
      interest income
                                                          
                                                          
                                                          23,348
                                                          
                                                          
                                                          
                                                          22,234
                                                          
                                                          
                                                          
                                                          17,886
                                                          
                                                          
                                                          
                                                          19,241
                                                          
                                                          
                                                          
                                                          20,266
                                                          
                                                          
                                                          
                                                          19,756Provision
      for loan losses
                                                          
                                                          
                                                          8,540
                                                          
                                                          
                                                          
                                                          2,388
                                                          
                                                          
                                                          
                                                          552
                                                          
                                                          
                                                          
                                                          15
                                                          
                                                          
                                                          
                                                          245
                                                          
                                                          
                                                          
                                                          385Net
      interest income after provision for loan losses
                                                          
                                                          
                                                          14,808
                                                          
                                                          
                                                          
                                                          19,846
                                                          
                                                          
                                                          
                                                          17,334
                                                          
                                                          
                                                          
                                                          19,226
                                                          
                                                          
                                                          
                                                          20,021
                                                          
                                                          
                                                          
                                                          19,371Noninterest
      income
                                                          
                                                          
                                                          5,602
                                                          
                                                          
                                                          
                                                          4,528
                                                          
                                                          
                                                          
                                                          4,431
                                                          
                                                          
                                                          
                                                          4,219
                                                          
                                                          
                                                          
                                                          3,540
                                                          
                                                          
                                                          
                                                          3,312Noninterest
      expense
                                                          
                                                          
                                                          18,735
                                                          
                                                          
                                                          
                                                          16,999
                                                          
                                                          
                                                          
                                                          14,525
                                                          
                                                          
                                                          
                                                          14,296
                                                          
                                                          
                                                          
                                                          13,771
                                                          
                                                          
                                                          
                                                          13,174Net
      noninterest expense
                                                          
                                                          
                                                          13,133
                                                          
                                                          
                                                          
                                                          12,471
                                                          
                                                          
                                                          
                                                          10,094
                                                          
                                                          
                                                          
                                                          10,077
                                                          
                                                          
                                                          
                                                          10,231
                                                          
                                                          
                                                          
                                                          9,862Income
      tax expenses/(benefit)
                                                          
                                                          
                                                          (813
                                                          )
                                                          
                                                          
                                                          1,445
                                                          
                                                          
                                                          
                                                          1,651
                                                          
                                                          
                                                          
                                                          2,674
                                                          
                                                          
                                                          
                                                          3,118
                                                          
                                                          
                                                          
                                                          3,219Net
      income
                                                          
                                                          $
                                                          2,488
                                                          
                                                          
                                                          $
                                                          5,930
                                                          
                                                          
                                                          $
                                                          5,589
                                                          
                                                          
                                                          $
                                                          6,475
                                                          
                                                          
                                                          $
                                                          6,672
                                                          
                                                          
                                                          $
                                                          6,290Basic
      earnings per common share
                                                          
                                                          $
                                                          0.88
                                                          
                                                          
                                                          $
                                                          2.11
                                                          
                                                          
                                                          $
                                                          1.99
                                                          
                                                          
                                                          $
                                                          2.32
                                                          
                                                          
                                                          $
                                                          2.40
                                                          
                                                          
                                                          $
                                                          2.28Diluted
      earnings per common share
                                                          
                                                          $
                                                          0.88
                                                          
                                                          
                                                          $
                                                          2.10
                                                          
                                                          
                                                          $
                                                          1.98
                                                          
                                                          
                                                          $
                                                          2.30
                                                          
                                                          
                                                          $
                                                          2.37
                                                          
                                                          
                                                          $
                                                          2.24Cash
      dividends declared per common share
                                                          
                                                          $
                                                          1.21
                                                          
                                                          
                                                          $
                                                          1.44
                                                          
                                                          
                                                          $
                                                          1.44
                                                          
                                                          
                                                          $
                                                          1.40
                                                          
                                                          
                                                          $
                                                          1.32
                                                          
                                                          
                                                          $
                                                          1.24December
      31,
                                                          
                                                          
                                                          December
      31,
                                                          
                                                          
                                                          December
      31,
                                                          
                                                          
                                                          December
      31,
                                                          
                                                          
                                                          December
      31,
                                                          
                                                          
                                                          December
      31,2009
                                                          
                                                          
                                                          2008
                                                          
                                                          
                                                          2007
                                                          
                                                          
                                                          2006
                                                          
                                                          
                                                          2005
                                                          
                                                          
                                                          2004Balance
      Sheet:Total
      assets
                                                          
                                                          $
                                                          661,806
                                                          
                                                          
                                                          $
                                                          664,732
                                                          
                                                          
                                                          $
                                                          628,718
                                                          
                                                          
                                                          $
                                                          618,982
                                                          
                                                          
                                                          $
                                                          627,439
                                                          
                                                          
                                                          $
                                                          557,393Loans
      receivable
                                                          
                                                          
                                                          458,245
                                                          
                                                          
                                                          
                                                          489,509
                                                          
                                                          
                                                          
                                                          468,459
                                                          
                                                          
                                                          
                                                          471,716
                                                          
                                                          
                                                          
                                                          469,043
                                                          
                                                          
                                                          
                                                          433,790Investment
      securities
                                                          
                                                          
                                                          144,333
                                                          
                                                          
                                                          
                                                          126,722
                                                          
                                                          
                                                          
                                                          114,644
                                                          
                                                          
                                                          
                                                          99,012
                                                          
                                                          
                                                          
                                                          90,093
                                                          
                                                          
                                                          
                                                          79,979Deposits
                                                          
                                                          
                                                          540,527
                                                          
                                                          
                                                          
                                                          528,148
                                                          
                                                          
                                                          
                                                          493,384
                                                          
                                                          
                                                          
                                                          512,931
                                                          
                                                          
                                                          
                                                          525,731
                                                          
                                                          
                                                          
                                                          451,573Borrowed
      funds
                                                          
                                                          
                                                          63,022
                                                          
                                                          
                                                          
                                                          74,795
                                                          
                                                          
                                                          
                                                          76,930
                                                          
                                                          
                                                          
                                                          51,501
                                                          
                                                          
                                                          
                                                          51,152
                                                          
                                                          
                                                          
                                                          57,201Total
      stockholders’ equity
                                                          
                                                          
                                                          53,078
                                                          
                                                          
                                                          
                                                          52,773
                                                          
                                                          
                                                          
                                                          52,733
                                                          
                                                          
                                                          
                                                          50,010
                                                          
                                                          
                                                          
                                                          46,433
                                                          
                                                          
                                                          
                                                          44,097December
      31,
                                                          
                                                          
                                                          December
      31,
                                                          
                                                          
                                                          December
      31,
                                                          
                                                          
                                                          December
      31,
                                                          
                                                          
                                                          December
      31,
                                                          
                                                          
                                                          December
      31,Fiscal
      Year Ended
                                                          
                                                          2009
                                                          
                                                          
                                                          2008
                                                          
                                                          
                                                          2007
                                                          
                                                          
                                                          2006
                                                          
                                                          
                                                          2005
                                                          
                                                          
                                                          2004Interest
      Rate Spread During Period:Average
      effective yield on loans and investment securities
                                                          
                                                          
                                                          5.16
                                                          %
                                                          
                                                          
                                                          5.78
                                                          %
                                                          
                                                          
                                                          6.21
                                                          %
                                                          
                                                          
                                                          6.02
                                                          %
                                                          
                                                          
                                                          5.50
                                                          %
                                                          
                                                          
                                                          5.31
                                                          %Average
      effective cost of deposits and borrowings
                                                          
                                                          
                                                          1.45
                                                          %
                                                          
                                                          
                                                          2.19
                                                          %
                                                          
                                                          
                                                          3.18
                                                          %
                                                          
                                                          
                                                          2.77
                                                          %
                                                          
                                                          
                                                          1.82
                                                          %
                                                          
                                                          
                                                          1.40
                                                          %Interest
      rate spread
                                                          
                                                          
                                                          3.71
                                                          %
                                                          
                                                          
                                                          3.59
                                                          %
                                                          
                                                          
                                                          3.03
                                                          %
                                                          
                                                          
                                                          3.25
                                                          %
                                                          
                                                          
                                                          3.68
                                                          %
                                                          
                                                          
                                                          3.91
                                                          %Net
      interest margin
                                                          
                                                          
                                                          3.74
                                                          %
                                                          
                                                          
                                                          3.65
                                                          %
                                                          
                                                          
                                                          3.10
                                                          %
                                                          
                                                          
                                                          3.31
                                                          %
                                                          
                                                          
                                                          3.71
                                                          %
                                                          
                                                          
                                                          3.94
                                                          %Return
      on average assets
                                                          
                                                          
                                                          0.37
                                                          %
                                                          
                                                          
                                                          0.91
                                                          %
                                                          
                                                          
                                                          0.91
                                                          %
                                                          
                                                          
                                                          1.04
                                                          %
                                                          
                                                          
                                                          1.14
                                                          %
                                                          
                                                          
                                                          1.17
                                                          %Return
      on average equity
                                                          
                                                          
                                                          4.55
                                                          %
                                                          
                                                          
                                                          10.96
                                                          %
                                                          
                                                          
                                                          10.78
                                                          %
                                                          
                                                          
                                                          13.42
                                                          %
                                                          
                                                          
                                                          14.67
                                                          %
                                                          
                                                          
                                                          14.64
                                                          %December
      31,
                                                          
                                                          
                                                          December
      31,
                                                          
                                                          
                                                          December
      31,
                                                          
                                                          
                                                          December
      31,
                                                          
                                                          
                                                          December
      31,
                                                          
                                                          
                                                          December
      31,2009
                                                          
                                                          
                                                          2008
                                                          
                                                          
                                                          2007
                                                          
                                                          
                                                          2006
                                                          
                                                          
                                                          2005
                                                          
                                                          
                                                          2004Total
      capital to risk-weighted assets
                                                          
                                                          
                                                          11.5
                                                          %
                                                          
                                                          
                                                          12.0
                                                          %
                                                          
                                                          
                                                          12.0
                                                          %
                                                          
                                                          
                                                          12.0
                                                          %
                                                          
                                                          
                                                          11.6
                                                          %
                                                          
                                                          
                                                          12.2
                                                          %Tier
      1 capital to risk-weighted assets
                                                          
                                                          
                                                          10.3
                                                          %
                                                          
                                                          
                                                          10.8
                                                          %
                                                          
                                                          
                                                          11.0
                                                          %
                                                          
                                                          
                                                          11.1
                                                          %
                                                          
                                                          
                                                          10.7
                                                          %
                                                          
                                                          
                                                          11.2
                                                          %Tier
      1 capital to adjusted average assets
                                                          
                                                          
                                                          7.8
                                                          %
                                                          
                                                          
                                                          8.2
                                                          %
                                                          
                                                          
                                                          8.3
                                                          %
                                                          
                                                          
                                                          8.0
                                                          %
                                                          
                                                          
                                                          7.9
                                                          %
                                                          
                                                          
                                                          8.0
                                                          %Allowance
      for loan losses to total loans
                                                          
                                                          
                                                          1.33
                                                          %
                                                          
                                                          
                                                          1.19
                                                          %
                                                          
                                                          
                                                          0.98
                                                          %
                                                          
                                                          
                                                          0.90
                                                          %
                                                          
                                                          
                                                          0.89
                                                          %
                                                          
                                                          
                                                          0.90
                                                          %Allowance
      for loan losses to non-performing loans
                                                          
                                                          
                                                          32.93
                                                          %
                                                          
                                                          
                                                          46.97
                                                          %
                                                          
                                                          
                                                          53.16
                                                          %
                                                          
                                                          
                                                          153.95
                                                          %
                                                          
                                                          
                                                          198.00
                                                          %
                                                          
                                                          
                                                          371.00
                                                          %Non-performing
      loans to total loans
                                                          
                                                          
                                                          4.05
                                                          %
                                                          
                                                          
                                                          2.54
                                                          %
                                                          
                                                          
                                                          1.84
                                                          %
                                                          
                                                          
                                                          0.58
                                                          %
                                                          
                                                          
                                                          0.45
                                                          %
                                                          
                                                          
                                                          0.24
                                                          %Total
      loan accounts
                                                          
                                                          
                                                          4,846
                                                          
                                                          
                                                          
                                                          5,193
                                                          
                                                          
                                                          
                                                          5,268
                                                          
                                                          
                                                          
                                                          5,392
                                                          
                                                          
                                                          
                                                          5,422
                                                          
                                                          
                                                          
                                                          5,370Total
      deposit accounts
                                                          
                                                          
                                                          32,616
                                                          
                                                          
                                                          
                                                          33,692
                                                          
                                                          
                                                          
                                                          30,760
                                                          
                                                          
                                                          
                                                          32,435
                                                          
                                                          
                                                          
                                                          33,963
                                                          
                                                          
                                                          
                                                          32,866Total
      Banking Centers (all full service)
                                                          
                                                          
                                                          11
                                                          
                                                          
                                                          
                                                          10
                                                          
                                                          
                                                          
                                                          9
                                                          
                                                          
                                                          
                                                          8
                                                          
                                                          
                                                          
                                                          8
                                                          
                                                          
                                                          
                                                          8





8


December 31,
                                                                                                
                                                                                                
                                                                                                December 31,
                                                                                                
                                                                                                
                                                                                                December 31,
                                                                                                
                                                                                                
                                                                                                December 31,2003
                                                                                                
                                                                                                
                                                                                                2002
                                                                                                
                                                                                                
                                                                                                2001
                                                                                                
                                                                                                
                                                                                                2000$
                                                                                                26,357
                                                                                                
                                                                                                
                                                                                                $
                                                                                                27,781
                                                                                                
                                                                                                
                                                                                                $
                                                                                                28,425
                                                                                                
                                                                                                
                                                                                                $
                                                                                                28,0777,521
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,107
                                                                                                
                                                                                                
                                                                                                
                                                                                                13,222
                                                                                                
                                                                                                
                                                                                                
                                                                                                13,38618,836
                                                                                                
                                                                                                
                                                                                                
                                                                                                17,674
                                                                                                
                                                                                                
                                                                                                
                                                                                                15,203
                                                                                                
                                                                                                
                                                                                                
                                                                                                14,691420
                                                                                                
                                                                                                
                                                                                                
                                                                                                720
                                                                                                
                                                                                                
                                                                                                
                                                                                                230
                                                                                                
                                                                                                
                                                                                                
                                                                                                17518,416
                                                                                                
                                                                                                
                                                                                                
                                                                                                16,954
                                                                                                
                                                                                                
                                                                                                
                                                                                                14,973
                                                                                                
                                                                                                
                                                                                                
                                                                                                14,5162,968
                                                                                                
                                                                                                
                                                                                                
                                                                                                2,675
                                                                                                
                                                                                                
                                                                                                
                                                                                                2,402
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,99512,037
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,859
                                                                                                
                                                                                                
                                                                                                
                                                                                                9,911
                                                                                                
                                                                                                
                                                                                                
                                                                                                9,4499,069
                                                                                                
                                                                                                
                                                                                                
                                                                                                8,184
                                                                                                
                                                                                                
                                                                                                
                                                                                                7,509
                                                                                                
                                                                                                
                                                                                                
                                                                                                7,4543,411
                                                                                                
                                                                                                
                                                                                                
                                                                                                3,277
                                                                                                
                                                                                                
                                                                                                
                                                                                                2,754
                                                                                                
                                                                                                
                                                                                                
                                                                                                2,691$
                                                                                                5,936
                                                                                                
                                                                                                
                                                                                                $
                                                                                                5,493
                                                                                                
                                                                                                
                                                                                                $
                                                                                                4,710
                                                                                                
                                                                                                
                                                                                                $
                                                                                                4,371$
                                                                                                2.16
                                                                                                
                                                                                                
                                                                                                $
                                                                                                2.01
                                                                                                
                                                                                                
                                                                                                $
                                                                                                1.73
                                                                                                
                                                                                                
                                                                                                $
                                                                                                1.61$
                                                                                                2.13
                                                                                                
                                                                                                
                                                                                                $
                                                                                                1.99
                                                                                                
                                                                                                
                                                                                                $
                                                                                                1.71
                                                                                                
                                                                                                
                                                                                                $
                                                                                                1.60$
                                                                                                1.20
                                                                                                
                                                                                                
                                                                                                $
                                                                                                1.12
                                                                                                
                                                                                                
                                                                                                $
                                                                                                1.04
                                                                                                
                                                                                                
                                                                                                $
                                                                                                0.96December
      31,
                                                                                                
                                                                                                
                                                                                                December
      31,
                                                                                                
                                                                                                
                                                                                                December
      31,
                                                                                                
                                                                                                
                                                                                                December
      31,2003
                                                                                                
                                                                                                
                                                                                                2002
                                                                                                
                                                                                                
                                                                                                2001
                                                                                                
                                                                                                
                                                                                                2000$
                                                                                                508,775
                                                                                                
                                                                                                
                                                                                                $
                                                                                                488,002
                                                                                                
                                                                                                
                                                                                                $
                                                                                                440,710
                                                                                                
                                                                                                
                                                                                                $
                                                                                                392,313409,808
                                                                                                
                                                                                                
                                                                                                
                                                                                                380,428
                                                                                                
                                                                                                
                                                                                                
                                                                                                342,642
                                                                                                
                                                                                                
                                                                                                
                                                                                                326,20763,733
                                                                                                
                                                                                                
                                                                                                
                                                                                                56,571
                                                                                                
                                                                                                
                                                                                                
                                                                                                67,260
                                                                                                
                                                                                                
                                                                                                
                                                                                                38,128421,640
                                                                                                
                                                                                                
                                                                                                
                                                                                                406,673
                                                                                                
                                                                                                
                                                                                                
                                                                                                355,215
                                                                                                
                                                                                                
                                                                                                
                                                                                                324,31040,895
                                                                                                
                                                                                                
                                                                                                
                                                                                                36,065
                                                                                                
                                                                                                
                                                                                                
                                                                                                44,989
                                                                                                
                                                                                                
                                                                                                
                                                                                                30,59941,554
                                                                                                
                                                                                                
                                                                                                
                                                                                                39,148
                                                                                                
                                                                                                
                                                                                                
                                                                                                35,882
                                                                                                
                                                                                                
                                                                                                
                                                                                                33,529December
      31,
                                                                                                
                                                                                                
                                                                                                December
      31,
                                                                                                
                                                                                                
                                                                                                December
      31,
                                                                                                
                                                                                                
                                                                                                December
      31,2003
                                                                                                
                                                                                                
                                                                                                2002
                                                                                                
                                                                                                
                                                                                                2001
                                                                                                
                                                                                                
                                                                                                20005.65
                                                                                                %
                                                                                                
                                                                                                
                                                                                                6.26
                                                                                                %
                                                                                                
                                                                                                
                                                                                                7.29
                                                                                                %
                                                                                                
                                                                                                
                                                                                                7.88
                                                                                                %1.67
                                                                                                %
                                                                                                
                                                                                                
                                                                                                2.38
                                                                                                %
                                                                                                
                                                                                                
                                                                                                3.55
                                                                                                %
                                                                                                
                                                                                                
                                                                                                3.95
                                                                                                %3.98
                                                                                                %
                                                                                                
                                                                                                
                                                                                                3.88
                                                                                                %
                                                                                                
                                                                                                
                                                                                                3.74
                                                                                                %
                                                                                                
                                                                                                
                                                                                                3.93
                                                                                                %4.04
                                                                                                %
                                                                                                
                                                                                                
                                                                                                3.99
                                                                                                %
                                                                                                
                                                                                                
                                                                                                3.90
                                                                                                %
                                                                                                
                                                                                                
                                                                                                4.12
                                                                                                %1.20
                                                                                                %
                                                                                                
                                                                                                
                                                                                                1.18
                                                                                                %
                                                                                                
                                                                                                
                                                                                                1.15
                                                                                                %
                                                                                                
                                                                                                
                                                                                                1.17
                                                                                                %14.65
                                                                                                %
                                                                                                
                                                                                                
                                                                                                14.58
                                                                                                %
                                                                                                
                                                                                                
                                                                                                13.49
                                                                                                %
                                                                                                
                                                                                                
                                                                                                13.30
                                                                                                %December
      31,
                                                                                                
                                                                                                
                                                                                                December
      31,
                                                                                                
                                                                                                
                                                                                                December
      31,
                                                                                                
                                                                                                
                                                                                                December
      31,2003
                                                                                                
                                                                                                
                                                                                                2002
                                                                                                
                                                                                                
                                                                                                2001
                                                                                                
                                                                                                
                                                                                                200012.5
                                                                                                %
                                                                                                
                                                                                                
                                                                                                13.1
                                                                                                %
                                                                                                
                                                                                                
                                                                                                13.6
                                                                                                %
                                                                                                
                                                                                                
                                                                                                13.6
                                                                                                %11.5
                                                                                                %
                                                                                                
                                                                                                
                                                                                                11.9
                                                                                                %
                                                                                                
                                                                                                
                                                                                                12.5
                                                                                                %
                                                                                                
                                                                                                
                                                                                                12.3
                                                                                                %8.0
                                                                                                %
                                                                                                
                                                                                                
                                                                                                7.6
                                                                                                %
                                                                                                
                                                                                                
                                                                                                8.3
                                                                                                %
                                                                                                
                                                                                                
                                                                                                8.6
                                                                                                %0.92
                                                                                                %
                                                                                                
                                                                                                
                                                                                                0.96
                                                                                                %
                                                                                                
                                                                                                
                                                                                                0.92
                                                                                                %
                                                                                                
                                                                                                
                                                                                                1.02
                                                                                                %220.31
                                                                                                %
                                                                                                
                                                                                                
                                                                                                152.43
                                                                                                %
                                                                                                
                                                                                                
                                                                                                108.64
                                                                                                %
                                                                                                
                                                                                                
                                                                                                183.54
                                                                                                %0.42
                                                                                                %
                                                                                                
                                                                                                
                                                                                                0.63
                                                                                                %
                                                                                                
                                                                                                
                                                                                                0.85
                                                                                                %
                                                                                                
                                                                                                
                                                                                                0.55
                                                                                                %5,213
                                                                                                
                                                                                                
                                                                                                
                                                                                                5,049
                                                                                                
                                                                                                
                                                                                                
                                                                                                4,964
                                                                                                
                                                                                                
                                                                                                
                                                                                                4,76232,502
                                                                                                
                                                                                                
                                                                                                
                                                                                                31,385
                                                                                                
                                                                                                
                                                                                                
                                                                                                30,433
                                                                                                
                                                                                                
                                                                                                
                                                                                                28,9068
                                                                                                
                                                                                                
                                                                                                
                                                                                                8
                                                                                                
                                                                                                
                                                                                                
                                                                                                8
                                                                                                
                                                                                                
                                                                                                
                                                                                                8





Business




NorthWest
Indiana Bancorp (the Bancorp) is a bank holding company registered with the
Board of Governors of the Federal Reserve System. Peoples Bank (the Bank), an
Indiana 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.




The
Bancorp conducts business from its Corporate Center in Munster and its eleven
full-service offices located in Crown Point, Dyer, East Chicago, Gary, Hammond,
Hobart, Merrillville, Munster, Schererville and Valparaiso, Indiana. The Bancorp
is primarily engaged in the business of attracting deposits from the general
public and the origination of loans secured by single family residences and
commercial real estate, as well as, construction loans, various types of
consumer loans and commercial business loans, and loans to local municipalities.
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, and investment agency accounts. The
Wealth Management Group may also serve as the personal representative of estates
and act as trustee for revocable and irrevocable trusts.




The
Bancorp’s common stock is traded in the over-the-counter market and is quoted on
the OTC Bulletin Board. On January 31, 2010, the Bancorp had 2,820,842 shares of
common stock outstanding and 413 stockholders of record. This does not reflect
the number of persons or entities who may hold their stock in nominee or
“street” name through brokerage firms.


9


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations




General




The
Bancorp’s earnings are dependent upon the earnings of the Bank. The Bank’s
earnings are primarily dependent upon net interest margin. The net interest
margin is the difference between interest income earned on loans and investments
and interest expense paid on deposits and borrowings stated as a percentage of
average interest earning assets. The net interest margin is perhaps the clearest
indicator of a financial institution’s ability to generate core earnings. Fees
and service charges, wealth management operations income, gains and losses from
the sale of assets, provisions for loan losses, income taxes and operating
expenses also affect the Bancorp’s profitability.




A summary
of the Bancorp’s significant accounting policies is detailed in Note 1 to the
Bancorp’s consolidated financial statements included in this report. The
preparation of our financial statements requires management to make estimates
and assumptions that affect our financial condition and operating results.
Actual results could differ from those estimates. Estimates associated with the
allowance for loan losses, fair values of foreclosed real estate, financial
instruments and status of contingencies are particularly susceptible to material
change in the near term as further information becomes available and future
events occur.




At
December 31, 2009, the Bancorp had total assets of $661.8 million and total
deposits of $540.5 million. The Bancorp’s deposit accounts are insured up to
applicable limits by the Deposit Insurance Fund (DIF) that is administered by
the Federal Deposit Insurance Corporation (FDIC), an agency of the federal
government. At December 31, 2009, stockholders’ equity totaled $53.1 million,
with book value per share at $18.83. Net income for 2009 was $2.5 million, or
$0.88 basic earnings per common share and $0.88 diluted earnings per common
share. The return on average assets was 0.37%, while the return on average
stockholders’ equity was 4.55%.





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.




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. 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.


10


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.





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 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.





Financial
Condition




During
the year ended December 31, 2009, total assets decreased by $2.9 million (0.4%),
to $661.8 million, with interest-earning assets decreasing by $9.4 million
(1.6%). At December 31, 2009, interest-earning assets totaled $611.8 million and
represented 92.5% of total assets. Loans totaled $458.2 million and represented
75.2% of interest-earning assets, 69.3% of total assets and 85.0% of total
deposits. The loan portfolio, which is the Bancorp’s largest asset, is a
significant source of both interest and fee income. The Bancorp’s lending
strategy emphasizes quality growth, product diversification, and competitive and
profitable pricing. The loan portfolio includes $184.4 million (40.2%) in
residential real estate loans, $132.3 million (28.8%) in commercial real estate
loans, $53.3 million (11.6%) in construction and land development loans, $63.1
million (13.7%) in commercial business loans, $14.5 million (3.2%) in government
and other loans, $9.2 million (2.0%) in multifamily loans, $1.5 million (0.3%)
in consumer loans, and $1.0 million (0.2%) in loans held for sale. Adjustable
rate loans comprised 43.3% of total loans at year-end. During 2009, loan
balances decreased by $31.3 million (6.2%), with commercial business and
commercial real estate loan balances increasing, while construction and
development, residential real estate, government, multifamily, and consumer loan
balances decreased. The decrease in loans during the year is the result of
management’s interest rate reduction strategy of selling fixed rate mortgage
loans to the secondary market.




The
Bancorp is primarily a portfolio lender. Mortgage banking activities are
generally limited to the sale of fixed rate mortgage loans with contractual
maturities greater than 15 years. However, as a result of the low interest rate
environment, during 2009, management sold newly originated fixed rate mortgage
loans with maturities ranging from 10 to 30 years in an effort to minimize
future interest rate risk.




11


These
loans are identified as held for sale when originated and sold, on a
case-by-case basis, in the secondary market. During 2009, the Bancorp sold $49.6
million in fixed rate mortgage loans, compared to $4.3 million during 2008.
During the current year, loan sales increased primarily as a result of the
Federal Reserve’s successful effort to lower long-term interest rates. Lower
long-term interest rates also created mortgage loan refinance opportunities for
borrowers within the Bank’s market area. In addition, during the first quarter
of 2009, the Bancorp conducted a $10.5 million one-time sale of portfolio fixed
rate mortgage loans, which were sold to reduce interest rate risk. Net gains
realized from mortgage loan sales totaled $1.1 million for 2009, compared to
$108 thousand for 2008. At December 31, 2009, the Bancorp had $1.0 million in
loans that were classified as held for sale.




The
allowance for loan losses (ALL) is a valuation allowance for probable incurred
credit losses, increased by the provision for loan losses, and decreased by
charge-offs less recoveries. A loan is charged-off against the allowance by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur. The determination of the amounts of
the ALL and provisions for loan losses is based on management’s current
judgments about the credit quality of the loan portfolio with consideration
given to all known relevant internal and external factors that affect loan
collectability as of the reporting date. The appropriateness of the current year
provision and the overall adequacy of the ALL are determined through a
disciplined and consistently applied quarterly process that reviews the
Bancorp’s current credit risk within the loan portfolio and identifies the
required allowance for loan losses given the current risk
estimates.




Historically,
the Bancorp has successfully originated commercial real estate loans within its
primary market area. However, beginning in the fourth quarter of 2005, in a
response to a decrease in local loan demand and in an effort to reduce the
potential credit risk associated with geographic concentrations, a strategy was
implemented to purchase commercial real estate participation loans outside of
the Bancorp’s primary market area. The strategy to purchase these commercial
real estate participation loans was limited to 10% of the Bancorp’s loan
portfolio. As of December 31, 2009, the Bancorp’s commercial real estate
participation loan portfolio consisted of eleven loans with an aggregate balance
of $32.3 million, and an additional $1.1 million in funding commitments for five
of the eleven loans. Of the $32.3 million in commercial real estate
participation loans, $12.5 million has been purchased within the Bancorp’s
primary market area and $19.8 million outside of the primary market. At December
31, 2009, $11.9 million or 36.8% of the Bancorp’s commercial real estate
participation loans have been internally classified as substandard and placed in
non-accrual status.  Of the $11.9 million in commercial real estate
participation loans placed in non-accrual status, $8.2 million are located
outside of the Bancorp’s primary market area. As a result of the current credit
risk associated with purchasing the out of market commercial real estate
participation loans, the Bancorp’s management discontinued the strategy during
the third quarter of 2007. The discussion in the paragraphs that follow
regarding non-performing loans, internally classified loans and impaired loans
include loans from the Bancorp’s commercial real estate participation loan
portfolio.




For all
of its commercial real estate participation loans, the Bancorp’s management
requires that the lead lenders obtain external appraisals to determine the fair
value of the underlying collateral for these collateral dependent loans. The
Bancorp’s management requires current external appraisals when entering into a
new lending relationship or when events have occurred that materially change the
assumptions in the existing appraisal, such as loan impairment. The lead lenders
receive external appraisals from qualified appraisal firms that have expertise
in valuing commercial properties and are able to comply with the required scope
of the engagement. After the lead lender receives the external appraisal and
performs its compliance review, the appraisal is forwarded to the Bancorp for
review. The Bancorp’s management validates the external appraisal by conducting
an internal in-house review by personnel with expertise in commercial real
estate developments. If additional expertise is needed, an independent review
appraiser is obtained to assist in the evaluation of the appraisal. The Bancorp
is not aware of any significant time lapses during this process. Periodically,
the Bancorp’s management may make adjustments to the external appraisal
assumptions if additional known quantifiable data becomes available that
materially impacts the value of a project. Examples of adjustments that may
occur are changes in property tax assumptions or changes in capitalization
rates. No adjustments were made to the appraisals that affected the December 31,
2009 reporting period. The Bancorp’s management relies on up to date external
appraisals to determine the current value of its commercial real estate
participation loans. These values are appropriately adjusted to reflect changes
in market value and, when necessary, are the basis for establishing the
appropriate allowance for loan loss reserve. If an updated external appraisal
for a commercial real estate participation loan is received after the balance
sheet date, but before the annual or quarterly financial statements are issued,
material changes in appraised values are “pushed back” in the yet to be issued
financial statements in order that appropriate loan loss provision is recorded
for the current reporting period. The Bancorp’s management consistently records
loan charge-offs based on the fair value of the collateral as presented in the
current external appraisal.


12


Non-performing
loans include those loans that are 90 days or more past due and those loans that
have been placed in non-accrual status. Non-performing loans totaled $18.6
million at December 31, 2009, compared to $12.4 million at December 31, 2008, an
increase of $6.2 million or 50.0%.  The increase in non-performing
loans is related to four commercial real estate participation loans in the
aggregate of $11.9 million that were placed in non-accrual status during 2009.
As previously reported, one commercial real estate participation loan is a
condominium construction project in Orlando, Florida, with a current balance of
$1.6 million, which is classified as substandard. Based on a current appraisal
provided by the lead lender, management charged-off $3.4 million of the $5.0
million balance during 2009.  The second commercial real estate
participation loan is an end loan for a hotel located in Dundee, Michigan, with
a current balance of $1.6 million, which is classified as substandard. Based on
current operating projections provided by the borrower to the lead lender,
management charged-off $1.4 million of the $3.0 million balance during 2009. The
third commercial real estate participation loan is an end loan for a hotel
located in Fort Worth, Texas, with a balance of $5.0 million, which is
classified as substandard. Based on current information provided by the lead
lender, management has estimated a collateral sufficiency for this loan. The
fourth commercial real estate participation loan is a condominium construction
project located in Chicago, Illinois, with a balance of $3.7 million, which is
classified as substandard. Based on current information provided by the lead
lender, management has estimated a $562 thousand collateral deficiency for this
loan. For these four commercial real estate participation loans, to the extent
that actual cash flows, collateral values and strength of personal guarantees
differ from current estimates, additional provisions to the allowance for loan
losses may be required.




The ratio
of non-performing loans to total loans was 4.05% at December 31, 2009, compared
to 2.54% at December 31, 2008. The ratio of non-performing loans to total assets
was 2.81% at December 31, 2009, compared to 1.87% at December 31, 2008. The
December 31, 2009, non-performing loan balances include $17.1 million in loans
accounted for on a non-accrual basis and $1.5 million in accruing loans, which
were contractually past due 90 days or more. Loans, internally classified as
substandard, totaled $22.7 million at December 31, 2009, compared to $11.4
million at December 31, 2008. The increase in substandard loans is related to
the previously mentioned $11.9 million commercial real estate participation
loans that were classified as non-performing and substandard during 2009. No
loans were internally classified as doubtful at December 31, 2009, compared to
$2.0 million classified as doubtful at December 31, 2008.  No loans
were classified as loss at December 31, 2009 or December 31, 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 one construction
development borrower and one commercial business borrower.




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 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 of $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 as of December 31, 2009. Typically, management does
not individually classify smaller-balance homogeneous loans, such as mortgage or
consumer, as impaired.




As of
December 31, 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 book value 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 book value of $1.3 million remains in accrual
status.


13


At
December 31, 2009, management is of the opinion that there are no loans or
securities, 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.




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 also 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
year ended December 31, 2009, $8.5 million in provisions to the ALL account were
required, compared to $2.4 million for the year 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 year ended December
31, 2009, compared to $552 thousand for the year 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.




At
December 31, 2009, the Bancorp had twenty-one properties in foreclosed real
estate totaling $3.7 million, compared to seven properties totaling $527
thousand at December 31, 2008. The increase is primarily related to a
foreclosure during September of a commercial real estate participation loan in
Ann Arbor, Michigan, with a post charge-off balance of $1.9 million. During
2009, foreclosed real estate also increased as the result of the addition of
seven commercial real estate loans for one borrower totaling $723 thousand
located within the Bancorp’s primary market area.




At
December 31, 2009, the Bancorp’s investment portfolio totaled $144.3 million and
was invested as follows: 60.3% in U.S. government agency mortgage-backed
securities and collateralized mortgage obligations, 37.4% in municipal
securities, 1.4% in U.S. government agency debt securities, and 0.9% in trust
preferred securities. At December 31, 2009, securities available-for-sale
totaled $124.8 million or 86.5% of total
securities.  Available-for-sale securities are those the Bancorp may
decide to sell if needed for liquidity, asset-liability management or other
reasons. During 2009, securities increased by $17.6 million (13.9%). In
addition, at December 31, 2009, the Bancorp had $3.7 million in FHLB
stock.




Deposits
are a fundamental and cost-effective source of funds for lending and other
investment purposes. The Bancorp offers a variety of products designed to
attract and retain customers, with the primary focus on building and expanding
relationships. At December 31, 2009, deposits totaled $540.5 million. During
2009, deposits increased by $12.4 million (2.3%). The 2009 change in deposits
was comprised of the following: certificates of deposit decreased by $4.2
million (1.8%), checking accounts increased by $13.9 million (10.7%), money
market deposit accounts (MMDA’s) decreased by $1.8 million (1.6%), while savings
accounts increased by $4.5 million (8.5%).




The
Bancorp’s borrowed funds are primarily comprised of repurchase agreements and
FHLB advances that are used to fund asset growth not supported by deposit
generation. At December 31, 2009, borrowed funds totaled $63.0 million compared
to $74.8 million at December 31, 2008, a decrease of $11.8 million (15.8%).
Retail repurchase agreements totaled $15.9 million at December 31, 2009,
compared to $25.8 million at December 31, 2008, a decrease of $9.9 million
(38.3%). During 2009, the retail repurchase agreements decrease was associated
with a planned $8.0 million construction disbursement for a local governmental
unit. FHLB advances totaled $38.0 million,


14


decreasing
$8.0 million or 17.4%, as the Bancorp paid-off maturing advances with funds
provided from deposit and retail repurchase agreement growth. In addition, the
Bancorp’s FHLB line of credit carried a balance of $8.4 million at December 31,
2009, compared to $2.0 million at December 31, 2008.  Other short-term
borrowings totaled $664 thousand at December 31, 2009, compared to $978 thousand
at December 31, 2008.





Liquidity
and Capital Resources




The
Bancorp’s primary goal for funds and liquidity management is to ensure that at
all times it can meet the cash demands of its depositors and its loan customers.
A secondary purpose of funds management is profit management. Because profit and
liquidity are often conflicting objectives, management will maximize the Bank’s
net interest margin by making adequate, but not excessive, liquidity provisions.
Furthermore, funds are managed so that future profits will not be significantly
impacted as funding costs increase.




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




During
2009, cash and cash equivalents increased $1.9 million compared to a decrease of
$815 thousand for 2008.  During 2009, the primary sources of cash and
cash equivalents were from loan sales and repayments, maturities and sales of
securities, deposit growth, FHLB advances and cash from operating activities.
The primary uses of cash and cash equivalents were loan originations, purchase
of securities, expenditures for premises and equipment, FHLB advance repayments
and the payment of common stock dividends.  During 2009, cash from
operating activities totaled $1.2 million, compared to $12.1 million for 2008.
The 2009 decrease in cash provided by operating activities was a result of lower
net income, prepaying three years of FDIC assessments and a reduction in an ACH
prefunding liability. Cash inflows from investing activities totaled $3.3
million during 2009, compared to outflows of $41.5 million during 2008. The
change for the current year was primarily related to the decrease in loan
balances, as a result of the sale of fixed rate mortgage loans. Loan sales
totaled $59.9 million for 2009, compared to $4.3 million 2008. Net cash outflows
from financing activities totaled $2.7 million in 2009, compared to net cash
inflows of $28.6 million in 2008. The change during 2009 was primarily due to a
decrease in deposit growth and a reduction in FHLB advances. Deposits increased
by $12.4 million during 2009, compared to an increase of $34.8 million for 2008.
FHLB advances decreased by $8.0 million during 2009 compared to a $4.0 million
increase during 2008. The lower deposit growth and reduction in advance balances
was a result of lower funding requirements during 2009. The Bancorp paid
dividends on common stock of $3.4 million and $4.0 million during 2009 and 2008,
respectively.




During
the second quarter of 2009, the Bancorp opened its eleventh full service banking
center in Valparaiso, Indiana. The new $2.2 million state-of-the-art facility
did not have a material impact on noninterest expense during 2009. It is
expected that the new banking center will provide opportunities to expand market
share for the Bancorp’s products and services.




Management
strongly believes that safety and soundness is enhanced by maintaining a high
level of capital. Stockholders’ equity totaled $53.1 million at December 31,
2009, compared to $52.8 million at December 31, 2008, an increase of $305
thousand (0.6%). The increase was a result of $2.5 million in net income for
2009. Additional items increasing stockholders’ equity were $1.1 million from
the net change in the valuation of available-for-sale securities, $141 thousand
from the sale of treasury stock, and $46 thousand from stock-based compensation
plans. Decreasing stockholders’ equity were the Bancorp’s declaration of $3.4
million in cash dividends, $84 thousand from adjustments related to the adoption
of split-dollar life insurance arrangements, and $9 thousand from the change in
net unrealized items from the Bank’s postretirement plans. At December 31, 2009,
book value per share was $18.83 compared to $18.79 for 2008.




The
Bancorp is subject to risk-based capital guidelines adopted by the Board of
Governors of the Federal Reserve System (the FRB), and the Bank is subject to
risk-based capital guidelines adopted by the FDIC. As applied to the Bancorp and
the Bank, the FRB and FDIC capital requirements are substantially the same.
These regulations divide capital into two tiers. The first tier (Tier 1)
includes common equity, certain non-cumulative perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and certain other intangible assets. Supplementary (Tier 2) capital
includes, among other things, cumulative perpetual and long-term limited-life
preferred stock, mandatory convertible securities, certain hybrid capital
instruments, term subordinated debt and the allowance for loan losses, subject
to certain limitations, less required deductions. The Bancorp and the Bank are
required to maintain a total risk-based capital ratio of 8%, of which 4% must be
Tier 1 capital. In addition, the FRB and FDIC regulations provide for a minimum
Tier 1 leverage ratio (Tier 1 capital to adjusted average assets) of 3% for
financial institutions that meet certain specified criteria, including that they
have the highest regulatory rating and are not experiencing or anticipating
significant growth. All other financial institutions are required to maintain a
Tier 1 leverage ratio of 3% plus an additional cushion of at least one to two
percent.


15


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. The dollar amounts
are in millions.





Required for
                                
                                
                                To Be WellAt December 31, 2009
                                
                                Actual
                                
                                
                                AdequateCapital
                                
                                
                                CapitalizedAmount
                                
                                
                                Ratio
                                
                                
                                Amount
                                
                                
                                Ratio
                                
                                
                                Amount
                                
                                
                                RatioTotal
      capital to risk-weighted assets
                                
                                $
                                58,689
                                
                                
                                
                                11.5
                                %
                                
                                $
                                40,770
                                
                                
                                
                                8.0
                                %
                                
                                $
                                50,963
                                
                                
                                
                                10.0
                                %Tier
      1 capital to risk-weighted assets
                                
                                $
                                52,574
                                
                                
                                
                                10.3
                                %
                                
                                $
                                20,385
                                
                                
                                
                                4.0
                                %
                                
                                $
                                30,578
                                
                                
                                
                                6.0
                                %Tier
      1 capital to adjusted average assets
                                
                                $
                                52,574
                                
                                
                                
                                7.8
                                %
                                
                                $
                                20,112
                                
                                
                                
                                3.0
                                %
                                
                                $
                                33,520
                                
                                
                                
                                5.0
                                %





Results
of Operations -


Comparison
of 2009 to 2008




Net
income for 2009 was $2.5 million, compared to $5.9 million for 2008, a decrease
of $3.4 million (58.0%). The decrease in net income for 2009 was a result of
required loan loss provisions of $8.5 million, as $8.3 million in loan
charge-offs were recorded during the year. The earnings represent a return on
average assets of 0.37% for 2009 compared to 0.91% for 2008. The return on
average equity was 4.63% for 2009 compared to 10.96% for 2008.




Net
interest income for 2009 was $23.3 million, an increase of $1.1 million (5.0%)
from $22.2 million for 2008. The increase in net interest income has been
positively impacted by the decrease in the Bancorp’s cost of funds as a result
the Federal Reserve’s continued action in maintaining a low short-term interest
rate environment. The weighted-average yield on interest-earning assets was
5.16% for 2009 compared to 5.78% for 2008. The weighted-average cost of funds
was 1.45% for 2009 compared to 2.19% for 2008. The impact of the 5.16% return on
interest earning assets and the 1.45% cost of funds resulted in a net interest
spread of 3.71% for 2009 compared to 3.59% for 2008. During
2009, total interest income decreased by $3.0 million (8.5%) while total
interest expense decreased by $4.1 million (31.6%). The net interest margin was
3.74% for 2009 compared to 3.65% for 2008. During 2009, the Bancorp continued to
focus on reducing its effective tax rate by investing in tax-exempt securities
and loans. As a result, the Bancorp’s tax equivalent net interest margin for
2009 was 3.97% compared to 3.82% for 2008.




During
2009, interest income from loans decreased by $3.3 million (11.2%) compared to
2008. The change was primarily due to a decrease in the weighted-average yield
of the loan portfolio and lower average balances. The weighted-average yield on
loans outstanding was 5.50% for 2009 compared to 6.04% for 2008. Loan balances
averaged $472.5 million for 2009, a decrease of $12.3 million (2.53%) from
$484.8 million for 2008. During 2009, interest income from securities and other
interest earning assets increased by $302 thousand (5.1%) compared to 2008. The
increase was due to an increase in securities balances, offset by a decrease in
average yield. The weighted-average yield on securities and other interest
earning assets was 4.11% for 2009 compared to 4.75% for 2008. Securities and
other interest earning assets averaged $151.0 million for 2009, up $27.0 million
(21.8%) from $124.0 million for 2008.




Interest
expense for deposits decreased by $3.6 million (33.5%) during 2009 compared to
2008. The change was due to a decrease in the weighted-average rate paid on
deposits. The weighted-average rate paid on deposits for 2009 was 1.31% compared
to 2.06% for 2008.  Total deposit balances averaged $540.7 million for
2009, an increase of $23.3 million (4.2%) from $517.4 million for 2008. Interest
expense on borrowed funds decreased by $528 thousand (23.1%) during 2009 due to
a decrease in the cost of borrowing. The weighted-average cost of borrowed funds
was 2.58% for 2009 compared to 3.08% for 2008.  Borrowed funds
averaged $68.0 million during 2009, a decrease of $6.3 million (8.5%) from $74.3
million for 2008.




Noninterest
income for 2009 was $5.6 million, an increase of $1.1 million (23.7%) from $4.5
million for 2008. During 2009, fees and service charges totaled $2.7 million, a
decrease of $237 thousand (8.2%) from $2.9 million for 2008. Fees from Wealth
Management operations totaled $933 thousand for 2009, an increase of $119
thousand (14.7%) from $814 thousand for 2008.  The increase in Wealth
Management income is related to consistent asset growth that has occurred during
the past twelve months and an increase in asset market values. Income from an
increase in the cash value of bank owned life insurance totaled $407 thousand
for 2009, a decrease of $6 thousand (1.5%), compared to $413 thousand for
2008.  Gains from the sale of securities totaled $736 thousand for the
current year, an increase of $526 thousand (251.0%) from $210 thousand for 2008.
Current market conditions provided opportunities to manage securities cash
flows, while shortening the duration of cashflows. Gains from loan sales totaled
$1.1 million for the year, an increase of $1.0 million (954.6%), compared to
$108 thousand for 2008. The increase in gains from the sale of loans is a result
of increased customer refinancing activity to low rate fixed rate mortgages.
Additionally, a onetime sale of portfolio fixed rate mortgage loans, which the
Bancorp sold to reduce interest rate risk on its balance sheet, attributed for
$231 thousand of gains realized from loan sales. For 2009, $161 thousand in
losses were realized related to foreclosed real estate, compared to $52 thousand
in 2008.  During 2009, other noninterest income totaled $23 thousand,
a decrease of $114 thousand (83.2%) from $137 thousand for 2008. The decrease in
other noninterest income was due to the reversal of an allowance for a previous
impairment on a letter of credit during 2008.




Noninterest
expense for 2009 was $18.7 million, up $1.7 million (10.2%) from $17.0 million
for 2008. During 2009, compensation and benefits totaled $9.3 million, an
increase of $524 thousand (5.9%) from $8.8 million for 2008.  The
change in compensation and benefits is related to the increase in additional
personnel for retail banking activities related to the newly opened Gary,
Indiana and Valparaiso, Indiana banking centers, and annual compensation
increases for bank personnel. Occupancy and equipment totaled $2.9 million for
2009, an increase of $59 thousand (2.1%) compared to $2.8 million for 2008. The
increase is related to the operations of the new banking


16


centers
in Gary and Valparaiso. Federal deposit insurance premiums totaled $1.2 million
for 2009, an increase of $879 thousand (252.6%) from $348 thousand for 2008. The
change is a result of an industry wide increase in the FDIC insurance premium
assessment rates, elimination of 2008 premium credits and an industry wide FDIC
special assessment that was recorded as of June 30, 2009. The FDIC special
assessment totaled $305 thousand. Data processing expense totaled $871 thousand
for 2009, an increase of $19 thousand (2.2%) from $852 thousand for 2008.
Marketing expense related to banking products totaled $469 thousand for the
year, an increase of $64 thousand (15.8%) from $405 thousand for 2008. The
increase in marketing expense was a result of additional brand and product
advertising during the current year. Other expenses related to banking
operations totaled $3.3 million for 2009, an increase of $312 thousand (10.3%)
from $3.0 million for 2008. The change in other expenses is a result of
increased expense associated with foreclosed real estate, deposit and loan
products and community donations. The Bancorp’s efficiency ratio for 2009 was
64.72% compared to 63.5% for 2008. The ratio is determined by dividing total
noninterest expense by the sum of net interest income and total noninterest
income for the period.





The Bancorp had an income tax benefit
for 2009 of $813 thousand compared to income tax expense of $1.4 million for
2008, a decrease to expense of $2.3 million (154.3%). The combined effective
federal and state tax rates for the Bancorp were (48.6%) for 2009 and 19.6% for
2008.  The Bancorp’s current effective tax rate is a result of tax
benefits recorded as a result of the current year’s lower net income, and
continued tax strategies associated with the Bancorp’s tax-exempt investments
and loans, bank owned life insurance and real estate investment
trust.





Critical
Accounting Policies





Critical accounting policies are those
accounting policies that management believes are most important to the portrayal
of the Bancorp’s financial condition and that require management’s most
difficult, subjective or complex judgments. The Bancorp’s most critical
accounting policies are summarized below. Other accounting policies, including
those related to the fair values of financial instuments and the status of
contingencies, are summarized in Note 1 to the Bancorp’s consolidated financial
statements.





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





At the end of each reporting period
securities held in the investment portfolio are evaluated on an individual
security level for other-than-temporary impairment in accordance with the
Investments – Debt and Equity Securities Topic. Significant judgments are
required in determining impairment, which include making assumptions regarding
the estimated prepayments, loss assumptions and the change in interest
rates.





We consider the following factors when
determining an other-than-temporary impairment for a security: The length of
time and the extent to which the market value has been less than amortized cost;
The financial condition and near-term prospects of the issuer; The underlying
fundamentals of the relevant market and the outlook for such market for the near
future; and an assessment of whether the Bancorp has (1) the intent to sell the
debt securities or (2) more likely than not will be required to sell the debt
securities before its anticipated market recovery. If either of these conditions
is met, management will recognize other-than-temporary impairment. If, in
management’s judgement, an other-than temporary impairment exists, the cost
basis of the security will be written down for the credit loss, and the
unrealized loss will be transferred from accumulated other comprehensive loss as
an immediate reduction of current earnings.





Allowance for Loan Losses – The Bancorp
maintains an Allowance for Loan Losses (ALL) to absorb probable incurred credit
losses that arise from the loan portfolio. The ALL is increased by the provision
for loan losses, and decreased by charge-offs net of recoveries. The
determination of the amounts of the ALL and provisions for loan losses is based
upon management’s current judgments about the credit quality of the loan
portfolio with consideration given to all known relevant internal and external
factors that affect loan collectibility. The methodology used to determine the
current year provision and the overall adequacy of the ALL includes a
disciplined and consistently applied quarterly process that combines a review of
the current position with a risk assessment worksheet. Factors that are taken
into consideration in the analysis include an assessment of national and local
economic trends, a review of current year loan portfolio growth and changes in
portfolio mix, and an assessment of trends for loan delinquencies and loan
charge-off activity.  Particular attention is given to non-accruing
loans and accruing loans past due 90 days or more, and loans that have been
classified as substandard, doubtful, or loss. Changes in the provision are
directionally consistent with changes in observable data.





Commercial and industrial, and
commercial real estate loans that exhibit credit weaknesses and loans that have
been classified as impaired are subject to an individual review. Where
appropriate, ALL allocations are made to these loans based on management’s
assessment of financial position, current cash flows, collateral values,
financial strength of guarantors, industry trends, and economic conditions. ALL
allocations for homogeneous loans, such as residential


17


mortgage
loans and consumer loans, are based on historical charge-off activity and
current delinquency trends. Management has allocated general reserves to both
performing and non-performing loans based on historical data and current
information available.





Risk factors for non-performing and
internally classified loans are based on an analysis of the estimated collateral
liquidation value for individual loans defined as substandard or doubtful.
Estimated collateral liquidation values are based on established loan
underwriting standards and adjusted for current mitigating factors on a
loan-by-loan basis. Aggregate substandard loan collateral deficiencies are
determined for residential, commercial real estate, commercial business, and
consumer loan portfolios. These deficiencies are then stated as a percentage of
the total substandard balances to determine the appropriate risk
factors.





Risk factors for performing and
non-classified loans are based on a weighted average of net charge-offs for the
most recent three years, which are then stated as a percentage of average
loans for the same period. Historical risk factors are calculated for
residential, commercial real estate, commercial business, and consumer loans.
The  three year weighted average historical factors are then adjusted
for current subjective risks attributable to: regional and national economic
factors; loan growth and changes in loan composition; organizational structure;
composition of loan staff; loan concentrations; policy changes and out of market
lending activity.





The risk factors are applied to these
types of loans to determine the appropriate level for the ALL. Adjustments may
be made to these allocations that reflect management’s judgment on current
conditions, delinquency trends, and charge-off activity.





Based on the above discussion,
management believes that the ALL is currently adequate, but not excessive, given
the risk inherent in the loan portfolio.





Impact
of Inflation and Changing Prices




The
financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. The primary
assets and liabilities of the Bancorp are monetary in nature. As a result,
interest rates have a more significant impact on the Bancorp’s performance than
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or magnitude as the prices of goods and
services.





Forward-Looking
Statements




Statements
contained in this report 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, among
other things, factors identified in this report.


18


Report
of Independent Registered


Public
Accounting Firms








Board of
Directors


NorthWest
Indiana Bancorp


Munster,
Indiana





We have
audited the accompanying consolidated balance sheet of NorthWest Indiana Bancorp
(“Company”) as of December 31, 2009  and the related consolidated
statement of income, changes in stockholders’ equity, and cash flows for the
year ended December 31, 2009. The consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on the consolidated financial statements based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NorthWest Indiana Bancorp as
of December 31, 2009  and the results of  operations and
cash flows for the year ended December 31, 2009 in conformity with U.S.
generally accepted accounting principles.





Plante
      & Moran, PLLC


Chicago,
Illinois


February
12, 2010










Board of
Directors


NorthWest
Indiana Bancorp


Munster,
Indiana





We have
audited the accompanying consolidated balance sheet of NorthWest Indiana Bancorp
(“Company”) as of December 31, 2008 and the related consolidated statement of
income, changes in stockholders' equity, and cash flows for the period ended
December 31, 2008. The consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements.  An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NorthWest Indiana Bancorp as
of December 31, 2008, and the results of their operations and cash flows for the
year ended December 31, 2008 in conformity with U.S. generally accepted
accounting principles.





Crowe
      Horwath LLP


South
Bend Indiana


March 11, 2009




19




Consolidated
Balance Sheets





December 31,(Dollars in thousands)
                                  
                                  2009
                                  
                                  
                                  2008ASSETSCash
      and non-interest bearing balances in financial
institutions
                                  
                                  $
                                  8,705
                                  
                                  
                                  $
                                  10,005Interest
      bearing balances in financial institutions
                                  
                                  
                                  447
                                  
                                  
                                  
                                  1,291Federal
      funds sold
                                  
                                  
                                  4,070
                                  
                                  
                                  
                                  –Total
      cash and cash equivalents
                                  
                                  
                                  13,222
                                  
                                  
                                  
                                  11,296Securities
      available-for-sale
                                  
                                  
                                  124,776
                                  
                                  
                                  
                                  108,207Securities
      held-to-maturity
                                  
                                  
                                  19,557
                                  
                                  
                                  
                                  18,515Loans
      held for sale
                                  
                                  
                                  1,025
                                  
                                  
                                  
                                  –Loans
      receivable
                                  
                                  
                                  458,245
                                  
                                  
                                  
                                  489,509Less:
      allowance for loan losses
                                  
                                  
                                  (6,114
                                  )
                                  
                                  
                                  (5,830
                                  )Net
      loans receivable
                                  
                                  
                                  452,131
                                  
                                  
                                  
                                  483,679Federal
      Home Loan Bank stock
                                  
                                  
                                  3,650
                                  
                                  
                                  
                                  3,650Accrued
      interest receivable
                                  
                                  
                                  2,878
                                  
                                  
                                  
                                  3,160Premises
      and equipment
                                  
                                  
                                  19,590
                                  
                                  
                                  
                                  19,083Foreclosed
      real estate
                                  
                                  
                                  3,747
                                  
                                  
                                  
                                  527Cash
      value of bank owned life insurance
                                  
                                  
                                  12,049
                                  
                                  
                                  
                                  11,641Prepaid
      FDIC insurance premium
                                  
                                  
                                  3,282
                                  
                                  
                                  
                                  –Other
      assets
                                  
                                  
                                  5,899
                                  
                                  
                                  
                                  4,974Total
      assets
                                  
                                  $
                                  661,806
                                  
                                  
                                  $
                                  664,732LIABILITIES
      AND STOCKHOLDERS’ EQUITYDeposits:Non-interest
      bearing
                                  
                                  $
                                  42,390
                                  
                                  
                                  $
                                  43,367Interest
      bearing
                                  
                                  
                                  498,137
                                  
                                  
                                  
                                  484,781Total
                                  
                                  
                                  540,527
                                  
                                  
                                  
                                  528,148Repurchase
      agreements
                                  
                                  
                                  15,893
                                  
                                  
                                  
                                  25,773Borrowed
      funds
                                  
                                  
                                  47,129
                                  
                                  
                                  
                                  49,022Accrued
      expenses and other liabilities
                                  
                                  
                                  5,179
                                  
                                  
                                  
                                  9,016Total
      liabilities
                                  
                                  
                                  608,728
                                  
                                  
                                  
                                  611,959Stockholders’
      Equity:Preferred
      stock, no par or stated value;10,000,000
      shares authorized, none outstanding
                                  
                                  
                                  –
                                  
                                  
                                  
                                  –Common
      stock, no par or stated value; 10,000,000 shares
    authorized;shares
      issued: December 31, 2009 - 2,889,452December
      31, 2008 - 2,887,452shares
      outstanding: December 31, 2009 - 2,818,578December 31, 2008 - 2,809,075
                                  
                                  
                                  361
                                  
                                  
                                  
                                  361Additional
      paid-in capital
                                  
                                  
                                  5,104
                                  
                                  
                                  
                                  5,064Accumulated
      other comprehensive income/(loss)
                                  
                                  
                                  (170
                                  )
                                  
                                  
                                  (1,289
                                  )Retained
      earnings
                                  
                                  
                                  49,312
                                  
                                  
                                  
                                  50,365Treasury
      stock, common shares at cost: December 31, 2009 - 70,874December
      31, 2008 - 78,377
                                  
                                  
                                  (1,529
                                  )
                                  
                                  
                                  (1,728
                                  )Total
      stockholders’ equity
                                  
                                  
                                  53,078
                                  
                                  
                                  
                                  52,773Total
      liabilities and stockholders’ equity
                                  
                                  $
                                  661,806
                                  
                                  
                                  $
                                  664,732





See
accompanying notes to consolidated financial statements.


20


Consolidated
Statements of Income





Year ended December 31,(Dollars in thousands, except per share data)
                    
                    2009
                    
                    
                    2008Interest
      income:Loans
      receivableReal
      estate loans
                    
                    $
                    22,046
                    
                    
                    $
                    25,274Commercial
      loans
                    
                    
                    3,822
                    
                    
                    
                    3,843Consumer
      loans
                    
                    
                    121
                    
                    
                    
                    152Total
      loan interest
                    
                    
                    25,989
                    
                    
                    
                    29,269Securities
                    
                    
                    6,185
                    
                    
                    
                    5,833Other
      interest earning assets
                    
                    
                    15
                    
                    
                    
                    65Total
      interest income
                    
                    
                    32,189
                    
                    
                    
                    35,167Interest
      expense:Deposits
                    
                    
                    7,083
                    
                    
                    
                    10,648Repurchase
      agreements
                    
                    
                    290
                    
                    
                    
                    432Borrowed
      funds
                    
                    
                    1,468
                    
                    
                    
                    1,853Total
      interest expense
                    
                    
                    8,841
                    
                    
                    
                    12,933Net
      interest income
                    
                    
                    23,348
                    
                    
                    
                    22,234Provision
      for loan losses
                    
                    
                    8,540
                    
                    
                    
                    2,388Net
      interest income after provision for loan losses
                    
                    
                    14,808
                    
                    
                    
                    19,846Noninterest
      income:Fees
      and service charges
                    
                    
                    2,661
                    
                    
                    
                    2,898Gain
      on sale of loans, net
                    
                    
                    1,139
                    
                    
                    
                    108Wealth
      management operations
                    
                    
                    933
                    
                    
                    
                    814Gain
      on sales of securities, net
                    
                    
                    736
                    
                    
                    
                    210Increase
      in cash value of bank owned life insurance
                    
                    
                    407
                    
                    
                    
                    413Loss
      on sale of foreclosed real estate
                    
                    
                    (161
                    )
                    
                    
                    (52
                    )Other-than-temporary
      credit loss impairment of debt securities
                    
                    
                    (523
                    )
                    
                    
                    –Net
      credit portion of gain recognized in other comprehensive
      income
                    
                    
                    387
                    
                    
                    
                    –Other
                    
                    
                    23
                    
                    
                    
                    137Total
      noninterest income
                    
                    
                    5,602
                    
                    
                    
                    4,528Noninterest
      expense:Compensation
      and benefits
                    
                    
                    9,346
                    
                    
                    
                    8,822Occupancy
      and equipment
                    
                    
                    2,893
                    
                    
                    
                    2,834Federal
      deposit insurance premiums
                    
                    
                    1,227
                    
                    
                    
                    348Data
      processing
                    
                    
                    871
                    
                    
                    
                    852Marketing
                    
                    
                    469
                    
                    
                    
                    405Statement
      and check processing
                    
                    
                    325
                    
                    
                    
                    378Professional
      services
                    
                    
                    261
                    
                    
                    
                    329Other
                    
                    
                    3,343
                    
                    
                    
                    3,031Total
      noninterest expense
                    
                    
                    18,735
                    
                    
                    
                    16,999Income
      before income tax expenses
                    
                    
                    1,675
                    
                    
                    
                    7,375Income
      tax (benefits) expenses
                    
                    
                    (813
                    )
                    
                    
                    1,445Net
      income
                    
                    $
                    2,488
                    
                    
                    $
                    5,930Earnings
      per common share:Basic
                    
                    $
                    0.88
                    
                    
                    $
                    2.11Diluted
                    
                    $
                    0.88
                    
                    
                    $
                    2.10Dividends
      declared per common share
                    
                    $
                    1.21
                    
                    
                    $
                    1.44





See
accompanying notes to consolidated financial statements.


21


Consolidated
Statements of


Changes
in Stockholders’ Equity





AccumulatedAdditional
                    
                    
                    OtherCommon
                    
                    
                    Paid-in
                    
                    
                    Comprehensive
                    
                    
                    Retained
                    
                    
                    Treasury
                    
                    
                    Total(Dollars
      in thousands, except per share data)
                    
                    Stock
                    
                    
                    Capital
                    
                    
                    Income (Loss)
                    
                    
                    Earnings
                    
                    
                    Stock
                    
                    
                    EquityBalance
      at December 31, 2007
                    
                    
                    360
                    
                    
                    
                    4,895
                    
                    
                    
                    563
                    
                    
                    
                    48,500
                    
                    
                    
                    (1,585
                    )
                    
                    
                    52,733Comprehensive
      income:Net
      income
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    5,930
                    
                    
                    
                    –
                    
                    
                    
                    5,930Net
      unrealized gain/(loss) on securities available-for-sale, net of
      reclassification and tax effects
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (1,841
                    )
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (1,841
                    )Change
      in unrecognized gain on post retirement benefit, net of reclassification
      and tax effects
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (11
                    )
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (11
                    )Comprehensive
      income
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    4,078Issuance
      of 5,355 shares of common stock at $20.50 - $28.00 per share, under
      stock-based compensation plans, including related tax
    effects
                    
                    
                    1
                    
                    
                    
                    106
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    107Stock-based
      compensation expense
                    
                    
                    –
                    
                    
                    
                    57
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    57Purchase
      of treasury stock
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (226
                    )
                    
                    
                    (226
                    )Sale
      of treasury stock
                    
                    
                    –
                    
                    
                    
                    6
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    83
                    
                    
                    
                    89Adjustments
      to retained earnings for split-dollar life insurance
      arrangements
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (20
                    )
                    
                    
                    –
                    
                    
                    
                    (20
                    )Cash
      dividends, $1.44 per share
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (4,045
                    )
                    
                    
                    –
                    
                    
                    
                    (4,045
                    )Balance
      at December 31, 2008
                    
                    $
                    361
                    
                    
                    $
                    5,064
                    
                    
                    $
                    (1,289
                    )
                    
                    $
                    50,365
                    
                    
                    $
                    (1,728
                    )
                    
                    $
                    52,773Comprehensive
      income:Net
      income
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    2,488
                    
                    
                    
                    –
                    
                    
                    
                    2,488Net
      unrealized gain/(loss) on securities available-for-sale, net of
      reclassification and tax effects
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    1,128
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    1,128Change
      in unrecognized gain on post retirement benefit, net of reclassification
      and tax effects
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (9
                    )
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (9
                    )Comprehensive
      income
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    3,607Issuance
      of 9,503 shares of common stock at $18.50 - $20.50 per share, under
      stock-based compensation plans, including related tax
    effects
                    
                    
                    –
                    
                    
                    
                    6
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    6Stock-based
      compensation expense
                    
                    
                    –
                    
                    
                    
                    40
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    40Sale
      of treasury stock
                    
                    
                    –
                    
                    
                    
                    (6
                    )
                    
                    
                    –
                    
                    
                    
                    (52
                    )
                    
                    
                    199
                    
                    
                    
                    141Adjustments
      to retained earnings for split-dollar life insurance
      arrangements
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (84
                    )
                    
                    
                    –
                    
                    
                    
                    (84
                    )Cash
      dividends, $1.21 per share
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (3,405
                    )
                    
                    
                    –
                    
                    
                    
                    (3,405
                    )Balance
      at December 31, 2009
                    
                    $
                    361
                    
                    
                    $
                    5,104
                    
                    
                    $
                    (170
                    )
                    
                    $
                    49,312
                    
                    
                    $
                    (1,529
                    )
                    
                    $
                    53,078





See
accompanying notes to consolidated financial statements.


22





Consolidated
Statements of Cash Flows





Year Ended December 31,(Dollars in thousands)
                
                2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                2,488
                
                
                $
                5,930Adjustments
      to reconcile net income to net cash provided by operating
      activities:Origination
      of loans for sale
                
                
                (49,670
                )
                
                
                (4,225
                )Sale
      of loans originated for sale
                
                
                49,449
                
                
                
                4,333Depreciation
      and amortization, net of accretion
                
                
                1,457
                
                
                
                1,330Amortization
      of mortgage servicing rights
                
                
                144
                
                
                
                98Amortization
      of investment in real estate limited partnerships
                
                
                26
                
                
                
                32Equity
      in loss of investments in real estate limited partnership, net of interest
      received
                
                
                151
                
                
                
                41Stock
      based compensation expense
                
                
                40
                
                
                
                57Net
      gains on sales and calls of securities
                
                
                (736
                )
                
                
                (210
                )Net
      gains on sale of loans
                
                
                (1,139
                )
                
                
                (108
                )Net
      losses due to other-than-temporary impairment of
securities
                
                
                136
                
                
                
                –Net
      losses on foreclosed real estate
                
                
                161
                
                
                
                52Provision
      for loan losses
                
                
                8,540
                
                
                
                2,388Net
      change in:Interest
      receivable
                
                
                282
                
                
                
                134Other
      assets
                
                
                (4,964
                )
                
                
                (613
                )Cash
      value of bank owned life insurance
                
                
                (408
                )
                
                
                (412
                )Accrued
      expenses and other liabilities
                
                
                (4,710
                )
                
                
                3,318Total
      adjustments
                
                
                (1,241
                )
                
                
                6,215Net
      cash –operating
      activities
                
                
                1,247
                
                
                
                12,145CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from maturities and paydowns of securities
    available-for-sale
                
                
                21,178
                
                
                
                26,577Proceeds
      from sales of securities available-for-sale
                
                
                29,933
                
                
                
                11,203Purchase
      of securities available-for-sale
                
                
                (64,566
                )
                
                
                (52,191
                )Purchase
      of securities held-to-maturity
                
                
                (3,860
                )
                
                
                (2,171
                )Proceeds
      from maturities and paydowns of securities
held-to-maturity
                
                
                2,790
                
                
                
                1,991Proceeds
      from sale of loans transferred to held-for-sale
                
                
                10,651
                
                
                
                –Loan
      participations purchased
                
                
                –
                
                
                
                (957
                )Net
      change in loans receivable
                
                
                8,744
                
                
                
                (22,094
                )Purchase
      of Federal Home Loan Bank Stock
                
                
                –
                
                
                
                (100
                )Purchase
      of premises and equipment, net
                
                
                (1,929
                )
                
                
                (4,144
                )Proceeds
      from sale of foreclosed real estate
                
                
                390
                
                
                
                372Net
      cash –investing
      activities
                
                
                3,331
                
                
                
                (41,514
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Change
      in deposits
                
                
                12,379
                
                
                
                34,764Proceeds
      from FHLB advances
                
                
                8,000
                
                
                
                36,000Repayment
      of FHLB advances
                
                
                (16,000
                )
                
                
                (32,000
                )Change
      in other borrowed funds
                
                
                (3,773
                )
                
                
                (6,135
                )Tax
      effect of nonqualified stock option exercise
                
                
                –
                
                
                
                6Proceeds
      from issuance of common stock
                
                
                6
                
                
                
                107Proceeds
      from sale of treasury stock
                
                
                141
                
                
                
                83Dividends
      paid
                
                
                (3,405
                )
                
                
                (4,045
                )Treasury
      stock purchased
                
                
                –
                
                
                
                (226
                )Net
      cash –financing
      activities
                
                
                (2,652
                )
                
                
                28,554Net
      change in cash and cash equivalents
                
                
                1,926
                
                
                
                (815
                )Cash
      and cash equivalents at beginning of period
                
                
                11,296
                
                
                
                12,111Cash
      and cash equivalents at end of period
                
                $
                13,222
                
                
                $
                11,296SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
                
                $
                8,947
                
                
                $
                12,916Income
      taxes
                
                $
                990
                
                
                $
                1,885SUPPLEMENTAL
      NONCASH INFORMATION:Transfers
      from loans to foreclosed real estate
                
                $
                3,763
                
                
                $
                817Transfers
      from loans to loans held for sale
                
                $
                10,497
                
                
                
                –




See
accompanying notes to consolidated financial statements.


23


Notes
to Consolidated Financial Statements


Years
ended December 31, 2009 and 2008





NOTE
1 - Summary of Significant Accounting Policies





Principles
of Consolidation–The consolidated
financial statements include NorthWest Indiana Bancorp (the Bancorp), its wholly
owned subsidiary, Peoples Bank SB (the Bank), and the Bank’s wholly owned
subsidiaries, Peoples Service Corporation and NWIN, LLC. The Bancorp has no
other business activity other than being a holding company for the Bank. The
Bancorp’s earnings are dependent upon the earnings of the Bank. Peoples Service
Corporation provides insurance and annuity investments to the Bank’s wealth
management customers. NWIN, LLC is located in Las Vegas, Nevada and serves as
the Bank’s investment subsidiary and parent of a real estate investment trust,
NWIN Funding, Inc.





NWIN Funding, Inc. was formed on
September 1, 2006, as an Indiana Real Estate Investment Trust. 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. All significant inter-company
accounts and transactions have been eliminated in consolidation.





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





Concentrations
of Credit Risk–The Bancorp
grants residential, commercial real estate, commercial business and installment
loans to customers primarily of Lake County, in northwest Indiana. The Bancorp
is also an active lender in Porter County, and to a lesser extent, LaPorte,
Newton and Jasper counties in Indiana, and Lake, Cook and Will counties in
Illinois. Substantially all loans are secured by specific items of collateral
including residences, commercial real estate, business assets and consumer
assets.





Cash
Flow Reporting–For purposes of
the statement of cash flows, the Bancorp considers cash on hand, noninterest
bearing balances in financial institutions, all interest-bearing balances in
financial institutions with original maturities of ninety days or less and
federal funds sold to be cash and cash equivalents.  The Bancorp
reports net cash flows for customer loan and deposit transactions and short-term
borrowings with maturities of 90 days or less.





Interest-bearing
Deposits in Other Financial Institutions–Interest bearing
deposits in other financial institutions mature within one year and are carried
at cost.





Securities–The Bancorp
classifies securities into held-to-maturity, available-for-sale, or trading
categories.  Held-to-maturity securities are those which management
has the positive intent and the Bancorp has the ability to hold to maturity, and
are reported at amortized cost. Available-for-sale securities are those the
Bancorp may decide to sell if needed for liquidity, asset-liability management
or other reasons. Available-for-sale securities are reported at fair value, with
unrealized gains and losses reported in other comprehensive income, net of tax.
The Bancorp does not have a trading portfolio. Realized gains and losses
resulting from the sale of securities recorded on the trade date are computed by
the specific identification method. Interest and dividend income, adjusted by
amortization of premium or discount on a level yield method are included in
earnings. Securities are reviewed for other-than-temporary
impairment.




We
consider the following factors when determining an other-than-temporary
impairment for a security: the length of time and the extent to which the market
value has been less than amortized cost; the financial condition and near-term
prospects of the issuer; the underlying fundamentals of the relevant market and
the outlook for such market for the near future: and assessment of whether the
Bancorp has (1) the intent to sell the debt securities or (2) more likely than
not will be required to sell the debt securities before it anticipated market
recovery. If either of these conditions is met, management will recognize
other-than-temporary impairment. If, in management’s judgement, an
other-than-temporary exists, the cost basis of the security will be written down
for the credit loss, and the unrealized loss will be transferred from
accumulated other comprehensive loss as an immediate reduction of current
earnings.





Loans
Held for Sale–Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of aggregate cost or market, as determined by
outstanding commitments from investors. Net unrealized losses, if any, are
recorded as a valuation allowance and charged to earnings.




Mortgage loans held for sale are
generally sold with servicing rights retained. The carrying value of mortgage
loans sold is reduced by the amount allocated to the servicing rights. Gains and
losses on sales of mortgage loans are based on the difference between the
selling price and the carrying value of the related loan sold.





Loans
and Loan Income–Loans that
management has the intent and ability to hold for the foreseeable future or
until maturity or payoff are reported at the principal balance outstanding, net
of unearned interest, deferred loan fees and costs, and an allowance for loan
losses. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and
recognized in interest income using the level yield method without anticipating
prepayments.





Interest income on mortgage and
commercial loans is discontinued at the time the loan is 90 days delinquent
unless the loan is well-secured and in process of collection. Consumer loans are
typically charged off no later than 120


24


days past
due. Past due status is based on the contractual terms of the loan. In all
cases, loans are placed on non-accrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful.





Generally, interest accrued but not
received for loans placed on non-accrual is reversed against interest
income.  Interest received on such loans is accounted for on the
cash-basis or cost recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.





Allowance
for Loan Losses–The allowance
for loan losses is a valuation allowance for probable incurred credit
losses.  Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Management estimates the
allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management’s judgment, should be charged
off.





A loan is considered impaired when,
based on current information and events, it is probable that the Bancorp will be
unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral value,
and the probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case by case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected future
cash flows discounted at the loan’s effective interest rate, the loan’s
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent. Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the Bancorp does not
separately identify individual consumer and residential loans for impairment
disclosures.





Federal
Home Loan Bank Stock–The Bank is a
member of the FHLB system. Members are required to own a certain amount of stock
based on the level of borrowings and other factors, and may invest in additional
amounts. FHLB stock is carried at cost, classified as a restricted security, and
periodically evaluated for impairment based on ultimate recovery of par
value.  Both cash and stock dividends are reported as
income.





Premises
and Equipment–Land is carried at cost.  Premises and equipment are stated
at cost less accumulated depreciation. Premises and related components are
depreciated using the straight-line method with useful lives ranging from 26 to
39 years. Furniture and equipment are depreciated using the straight-line method
with useful lives ranging from 2 to 10 years.





Foreclosed
Real Estate–Assets acquired through or instead of loan foreclosure are initially
recorded at fair value when acquired, establishing a new cost basis. If fair
value declines subsequent to foreclosure, a valuation allowance is recorded
through expense. Operating costs after acquisition are expensed.





Servicing
Rights–Servicing rights are initially recorded at fair value with the income
statement effect recorded in gains on sales of loans. Fair value is based on
market prices for comparable mortgage servicing contracts, when available, or
alternatively, is based on a valuation model that calculates the present value
of estimated future net servicing income.  The valuation model
incorporates assumptions that market participants would use in estimating future
net servicing income, such as the cost to service, the discount rate, the
custodial earnings rate, an inflation rate, ancillary income, prepayment speeds
and default rates and losses. The Company compares the valuation model inputs
and results to published industry data in order to validate the model results
and assumptions. All classes of servicing assets are subsequently measured using
the amortization method which requires servicing rights to be amortized into
noninterest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying loans.





Servicing assets are evaluated for
impairment based upon the fair value of the rights as compared to carrying
amount. Impairment is determined by stratifying rights into groupings based on
predominant risk characteristics, such as interest rate, loan type and investor
type. Impairment is recognized through a valuation allowance for an individual
grouping, to the extent that fair value is less than the carrying amount. If the
Bancorp later determines that all or a portion of the impairment no longer
exists for a particular grouping, a reduction of the allowance may be recorded
as an increase to income. Changes in valuation allowances are reported with
Other Noninterest Income on the income statement. The fair values of servicing
rights are subject to significant fluctuations as a result of changes in
estimated and actual prepayment speeds and default rates and
losses.





Servicing fee income which is reported
on the income statement as Other Noninterest Income is recorded for fees earned
for servicing loans. The fees are based on a contractual percentage of the
outstanding principal; or a fixed amount per loan and are recorded as income
when earned.  The amortization of mortgage servicing rights is netted
against loan servicing fee income. Servicing fees totaled $177 thousand and $111
thousand for the years ended December 31, 2009 and 2008. Late fees and ancillary
fees related to loan servicing are not material.


25




Investment in Real Estate Limited
Partnerships –Investment in real estate limited partnerships represent
the Bancorp’s investments in affordable housing projects for the primary purpose
of available tax benefits. The method of accounting used for each investment is
based on ownership percentage in the investment. One investment is accounted for
using the cost method of accounting. The excess of the carrying amount of the
investment over its estimated residual value is amortized during the periods in
which associated tax credits are allocated to the investor. The annual
amortization of the investment is based on the proportion of tax credits
received in the current year to total estimated tax credits to be allocated to
the Bancorp. The other investment is accounted for using the equity method of
accounting. Under the equity method of accounting, the Bancorp records its share
of the partnership’s earnings or losses in its income statement and adjusts the
carrying amount of the investments on the balance sheet. These investments are
reviewed for impairment when events indicate their carrying amounts may not be
recoverable from future undiscounted cash flows. If impaired, the investments
are reported at fair value. The Bancorp’s involvement in these types of
investments is for tax planning purposes only and, as such, the Bancorp is not
involved in the management or operation of such investments.
  Long-term Assets –Premises
and equipment and other long-term assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future undiscounted
cash flows. If impaired, the assets are recorded at fair value.
  Bank Owned Life Insurance –The Bancorp has purchased life insurance policies on certain key
executives. In accordance with accounting for split-dollar life insurance, Bank
owned life insurance is recorded at the amount that can be realized under the
insurance contract at the balance sheet date, which is the cash surrender value
adjusted for other charges or other amounts due that are probable at
settlement.
  Repurchase Agreements –Substantially, all repurchase agreement liabilities represent amounts
advanced by various customers that are not covered by federal deposit insurance
and are secured by securities owned by the Bancorp.
  Postretirement Benefits Other Than
Pensions –The Bancorp sponsors a defined benefit postretirement plan
that provides comprehensive major medical benefits to all eligible retirees.
Postretirement benefits are accrued based on the expected cost of providing
postretirement benefits to employees during the years the employees have
rendered service to the Bancorp.
  Income Taxes –Income tax
expense is the total of the current year income tax due or refundable and the
change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax amounts for the temporary differences
between carrying amounts and tax bases of assets and liabilities, computed using
enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized.
  Loan
Commitments and Related Financial Instruments – Financial
instruments include off-balance sheet credit instruments, such as commitments to
make loans and standby letters of credit, issued to meet customer financing
needs. The face amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay. Such financial instruments
are recorded when they are funded.
  Earnings Per Common Share –Basic earnings per common share is net income divided by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per common share includes the dilutive effect of additional potential
common shares issuable under stock options.
  Comprehensive Income –Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and losses on
securities available-for-sale and the unrecognized gains and losses on
postretirement benefits.
  Loss Contingencies –Loss
contingencies, including claims and legal actions arising in the ordinary course
of business, are recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated. Management does not
believe there now are such matters that will have a material effect on the
financial statements.
  Restrictions on Cash –Cash
on hand or on deposit with the Federal Reserve Bank of $537,000 and $539,000 was
required to meet regulatory reserve and clearing requirements at year-end 2009
and 2008. These balances do not earn interest.
  Fair Value of Financial Instruments
–Fair values of financial instruments are estimated using relevant
market information and other assumptions, as more fully disclosed in a separate
note. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the
estimates.
  Operating Segments –While
the Bancorp’s executive management monitors the revenue streams of the various
products and services, the identifiable segments are not material and operations
are managed and financial performance is evaluated on a company-wide basis.
Accordingly, all of the Bancorp’s financial service operations are considered by
management to be aggregated in one reportable operating segment.
  Reclassification –Certain
amounts appearing in the consolidated financial statements and notes thereto for
the year ended December 31, 2008, may have been reclassified to conform to the
December 31, 2009 presentation.
  Adoption of New Accounting Standards
–Effective for periods on or after September 15, 2009, references to
GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards
Codification, which is sometimes referred to as the Codification or ASC. The
Codification
  26
  does not
change how NorthWest Indiana Bancorp accounts for its transactions or the nature
of related disclosures made. However, when referring to GAAP, the Bancorp refers
to topics in the ASC. We have updated references to GAAP to reflect the guidance
in the Codification.
  The Fair
Value Measurements Topic of the ASC (formerly known as FAS No. 157), establishes
a framework for measuring fair value and expands disclosures about fair value
measurements. This Topic establishes a fair value hierarchy about the
assumptions used to measure fair value and clarifies assumptions about risk and
the effect of a restriction on the sale or use of an asset. The Topic was
effective for fiscal years beginning after November 15, 2007. In February 2008,
this Topic was updated (formerly FSP 157-2) to delay the effective date
of  the Standard for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. In October 2008, the Topic
was updated (formerly FSP 157-3) to clarify the application of the Topic in a
market that is not active.  In April 2009, the Topic was
updated  (formerly FSP 157-4)  to provide additional
guidance for estimating fair value in accordance with the Topic when the volume
and level of activity for the asset or liability being measured have
significantly decreased. This update also included guidance on identifying
circumstances that indicate a transaction is not orderly. This update was
effective for reporting periods ending after June 15, 2009.
 
 The
Compensation – Retirement Benefits Aspects Topic (formerly known as EITF No.
06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects
of Endorsement Split-Dollar Life Insurance Arrangements”) requires that a
liability be recorded during the service period when a split-dollar life
insurance agreement continues after participants’ employment or retirement. The
required accrued liability will be based on either the post-employment benefit
cost for the continuing life insurance or based on the future death benefit
depending on the contractual terms of the underlying agreement. This issue was
effective for fiscal years beginning after December 15, 2007. A liability of
$104,000 has been recorded and reflected as an adjustment to retained earnings
since adoption.
  The
Financial Instruments Topic was updated (formerly FSP FAS 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial Instruments”) to require
disclosures about fair value of financial instruments in interim reporting
periods of publicly traded companies that were previously only required to be
disclosed in annual financial statements. This update was effective for the
Bancorp’s interim period ending on June 30, 2009 and has been included as part
of Note 16, Fair Values of Financial Instruments.
  The
Investments – Debt and Equity Securities Topic was updated (formerly FSP FAS
115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”) to amend current other-than-temporary impairment guidance in the
Topic for debt securities to make the guidance more operational and to improve
the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This update does not amend
existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. The Topic was effective for the Bancorp’s
interim period ending on June 30, 2009.
  The
Subsequent Events Topic (formerly FAS No. 165, “Subsequent Events”) establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. In particular, this Topic sets forth the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. In
accordance with this Topic, an entity should apply the requirements to interim
or annual financial periods ending after June 15, 2009. Management has evaluated
subsequent events through February 16 of 2010 which is the date that financial
statements were issued and were available to be issued.
  The
Transfers and Servicing Topic was updated (formerly FAS No. 166, “Accounting for
Transfers of Financial Assets—an amendment of FASB Statement No. 140”) to remove
the concept of a qualifying special-purpose entity from the Topic and removes
the exception from applying the Consolidations Topic (formerly FASB
Interpretation No. 46R) The objective in issuing this update is to improve the
relevance, representational faithfulness, and comparability of the information
that a reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. This update must be applied as of the beginning
of each reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period
and for interim and annual reporting periods thereafter. The impact of adoption
was not material.
  The
Consolidations Topic was amended (formerly FAS No. 167, “Amendments to FASB
Interpretation No. 46(R)”) to improve financial reporting by enterprises
involved with variable interest entities. The amendment addresses (1) the
effects on certain provisions of the Topic as they relate to the elimination of
the qualifying special-purpose entity concept in the Transfers and Servicing
Topic and (2) constituent concerns about the application of certain key
provisions of the Topic including those in which the accounting and disclosures
under the Topic do not always provide timely and useful information about an
enterprise’s involvement in a variable interest entity. This amendment shall be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. The impact of adoption was not material.
  27
  NOTE
2 - Securities
 
 The fair
value of available-for-sale securities and the related gross unrealized gains
and losses recognized in accumulated other comprehensive income (loss) were as
follows:
 
 (Dollars in thousands)Gross
                                    
                                    
                                    GrossCost
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Unrealized
                                    
                                    
                                    FairBasis
                                    
                                    
                                    Gains
                                    
                                    
                                    Losses
                                    
                                    
                                    Value2009U.S.
      government sponsored securities
                                    
                                    $
                                    1,993
                                    
                                    
                                    $
                                    52
                                    
                                    
                                    $
                                    –
                                    
                                    
                                    $
                                    2,045CMO
      and residential mortgage-backed securities
                                    
                                    
                                    61,095
                                    
                                    
                                    
                                    2,302
                                    
                                    
                                    
                                    (82
                                    )
                                    
                                    
                                    63,315Municipal
      securities
                                    
                                    
                                    34,151
                                    
                                    
                                    
                                    1,516
                                    
                                    
                                    
                                    (94
                                    )
                                    
                                    
                                    35,573Corporate
      debt securities
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –
      .
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –CMO
      government sponsored entities
                                    
                                    
                                    22,534
                                    
                                    
                                    
                                    168
                                    
                                    
                                    
                                    (209
                                    )
                                    
                                    
                                    22,493Collateralized
      debt obligations
                                    
                                    
                                    5,343
                                    
                                    
                                    
                                    –.
                                    
                                    
                                    
                                    (3,993
                                    )
                                    
                                    
                                    1,350Total
      debt securities
                                    
                                    $
                                    125,116
                                    
                                    
                                    $
                                    4,038
                                    
                                    
                                    $
                                    (4,378
                                    )
                                    
                                    $
                                    124,7762008U.S.
      government sponsored securities
                                    
                                    $
                                    5,484
                                    
                                    
                                    $
                                    137
                                    
                                    
                                    $
                                    –
                                    
                                    
                                    $
                                    5,621CMO
      and residential mortgage-backed securities
                                    
                                    
                                    63,520
                                    
                                    
                                    
                                    1,856
                                    
                                    
                                    
                                    (7
                                    )
                                    
                                    
                                    65,369Municipal
      securities
                                    
                                    
                                    26,952
                                    
                                    
                                    
                                    259
                                    
                                    
                                    
                                    (532
                                    )
                                    
                                    
                                    26,679Corporate
      debt securities
                                    
                                    
                                    5,079
                                    
                                    
                                    
                                    –
      .
                                    
                                    
                                    
                                    (266
                                    )
                                    
                                    
                                    4,813CMO
      government sponsored entities
                                    
                                    
                                    3,756
                                    
                                    
                                    
                                    97
                                    
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    3,852Collateralized
      debt obligations
                                    
                                    
                                    5,481
                                    
                                    
                                    
                                    –.
                                    
                                    
                                    
                                    (3,608
                                    )
                                    
                                    
                                    1,873Total
      debt securities
                                    
                                    $
                                    110,272
                                    
                                    
                                    $
                                    2,349
                                    
                                    
                                    $
                                    (4,414
                                    )
                                    
                                    $
                                    108,207
 
 The
carrying amount, unrecognized gains and losses, and fair value of securities
held-to-maturity were as follows:
 
 (Dollars in thousands)Gross
                                    
                                    
                                    GrossCost
                                    
                                    
                                    Unrecognized
                                    
                                    
                                    Unrecognized
                                    
                                    
                                    FairBasis
                                    
                                    
                                    Gains
                                    
                                    
                                    Losses
                                    
                                    
                                    Value2009Municipal
      securities
                                    
                                    $
                                    18,539
                                    
                                    
                                    $
                                    724
                                    
                                    
                                    $
                                    –
                                    
                                    
                                    $
                                    19,263Residential
      mortgage-backed securities
                                    
                                    
                                    1,018
                                    
                                    
                                    
                                    28
                                    
                                    
                                    
                                    (6
                                    )
                                    
                                    
                                    1,040Total
      debt securities
                                    
                                    $
                                    19,557
                                    
                                    
                                    $
                                    752
                                    
                                    
                                    $
                                    (6
                                    )
                                    
                                    $
                                    20,3032008Municipal
      securities
                                    
                                    $
                                    18,127
                                    
                                    
                                    $
                                    117
                                    
                                    
                                    $
                                    (263
                                    )
                                    
                                    $
                                    17,981Residential
      mortgage-backed securities
                                    
                                    
                                    388
                                    
                                    
                                    
                                    16
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    404Total
      debt securities
                                    
                                    $
                                    18,515
                                    
                                    
                                    $
                                    133
                                    
                                    
                                    $
                                    (263
                                    )
                                    
                                    $
                                    18,385
 
 The fair
value of debt securities and carrying amount, if different, at year end 2009 by
contractual maturity were as follows. Securities not due at a single maturity
date, primarily mortgage-backed securities, are shown separately.
 
 (Dollars in thousands)Available-for-sale
                          
                          
                          Held-to-maturityFair
                          
                          
                          Carrying
                          
                          
                          FairValue
                          
                          
                          Amount
                          
                          
                          ValueDue
      in one year or less
                          
                          $
                          191
                          
                          
                          $
                          920
                          
                          
                          $
                          921Due
      from one to five years
                          
                          
                          4,144
                          
                          
                          
                          –
                          
                          
                          
                          –Due
      over five years
                          
                          
                          34,633
                          
                          
                          
                          17,619
                          
                          
                          
                          18,342CMO
      and mortgage-backedsecurities
                          
                          
                          85,808
                          
                          
                          
                          1,018
                          
                          
                          
                          1,040Total
                          
                          $
                          124,776
                          
                          
                          $
                          19,557
                          
                          
                          $
                          20,303
 
 Sales of
available-for-sale securities were as follows:
 
 (Dollars in thousands)2009
                  
                  
                  2008Proceeds
                  
                  $
                  29,933
                  
                  
                  $
                  11,203Gross
      gains
                  
                  
                  736
                  
                  
                  
                  214Gross
      losses
                  
                  
                  –
                  
                  
                  
                  (5
                  )
 
 The tax
benefits related to these net realized gains and losses were $289,000 for 2009
and $84,000 for 2008.
 
 Securities
with carrying values of $27,394,000 and $37,414,000 were pledged as of December
31, 2009 and 2008 as collateral for repurchase agreements and public funds and
for other purposes as permitted or required by law.
 
 Securities
with unrealized losses at year-end 2009 and 2008 not recognized in income are as
follows:
 
 (Dollars in thousands)Less than
                                                                        
                                                                        
                                                                        12 months12
      months
                                                                        
                                                                        
                                                                        or
      longer
                                                                        
                                                                        
                                                                        TotalFair
                                                                        
                                                                        
                                                                        Unrealized
                                                                        
                                                                        
                                                                        Fair
                                                                        
                                                                        
                                                                        Unrealized
                                                                        
                                                                        
                                                                        Fair
                                                                        
                                                                        
                                                                        UnrealizedValue
                                                                        
                                                                        
                                                                        Losses
                                                                        
                                                                        
                                                                        Value
                                                                        
                                                                        
                                                                        Losses
                                                                        
                                                                        
                                                                        Value
                                                                        
                                                                        
                                                                        Losses2009Description
      of Securities:U.S.
      government sponsored entities
                                                                        
                                                                        $
                                                                        –
                                                                        
                                                                        
                                                                        $
                                                                        –
                                                                        
                                                                        
                                                                        $
                                                                        –
                                                                        
                                                                        
                                                                        $
                                                                        –
                                                                        
                                                                        
                                                                        $
                                                                        –
                                                                        
                                                                        
                                                                        $
                                                                        –CMO
      and residential mortgage-backed securities
                                                                        
                                                                        
                                                                        15,604
                                                                        
                                                                        
                                                                        
                                                                        (297
                                                                        )
                                                                        
                                                                        
                                                                        13
                                                                        
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        
                                                                        15,617
                                                                        
                                                                        
                                                                        
                                                                        (297
                                                                        )Municipal
      securities
                                                                        
                                                                        
                                                                        2,443
                                                                        
                                                                        
                                                                        
                                                                        (15
                                                                        )
                                                                        
                                                                        
                                                                        1,476
                                                                        
                                                                        
                                                                        
                                                                        (79
                                                                        )
                                                                        
                                                                        
                                                                        3,919
                                                                        
                                                                        
                                                                        
                                                                        (94
                                                                        )Corporate
      debt securities
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        
                                                                        –Collateralized
      debt obligations
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        
                                                                        1,350
                                                                        
                                                                        
                                                                        
                                                                        (3,993
                                                                        )
                                                                        
                                                                        
                                                                        1,350
                                                                        
                                                                        
                                                                        
                                                                        (3,993
                                                                        )Total
      temporarily impaired
                                                                        
                                                                        $
                                                                        18,047
                                                                        
                                                                        
                                                                        $
                                                                        (312
                                                                        )
                                                                        
                                                                        $
                                                                        2,839
                                                                        
                                                                        
                                                                        $
                                                                        (4,072
                                                                        )
                                                                        
                                                                        $
                                                                        20,886
                                                                        
                                                                        
                                                                        $
                                                                        (4,384
                                                                        )Number
      of securities
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        16
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        7
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        23(Dollars in thousands)Less than
                                                                        
                                                                        
                                                                        12 months12
      months
                                                                        
                                                                        
                                                                        or
      longer
                                                                        
                                                                        
                                                                        TotalFair
                                                                        
                                                                        
                                                                        Unrealized
                                                                        
                                                                        
                                                                        Fair
                                                                        
                                                                        
                                                                        Unrealized
                                                                        
                                                                        
                                                                        Fair
                                                                        
                                                                        
                                                                        UnrealizedValue
                                                                        
                                                                        
                                                                        Losses
                                                                        
                                                                        
                                                                        Value
                                                                        
                                                                        
                                                                        Losses
                                                                        
                                                                        
                                                                        Value
                                                                        
                                                                        
                                                                        Losses2008Description
      of Securities:U.S.
      government sponsored entities
                                                                        
                                                                        $
                                                                        –
                                                                        
                                                                        
                                                                        $
                                                                        –
                                                                        
                                                                        
                                                                        $
                                                                        104
                                                                        
                                                                        
                                                                        $
                                                                        (1
                                                                        )
                                                                        
                                                                        $
                                                                        104
                                                                        
                                                                        
                                                                        $
                                                                        (1
                                                                        )CMO
      and residential mortgage-backed securities
                                                                        
                                                                        
                                                                        1,368
                                                                        
                                                                        
                                                                        
                                                                        (3
                                                                        )
                                                                        
                                                                        
                                                                        371
                                                                        
                                                                        
                                                                        
                                                                        (4
                                                                        )
                                                                        
                                                                        
                                                                        1,739
                                                                        
                                                                        
                                                                        
                                                                        (7
                                                                        )Municipal
      securities
                                                                        
                                                                        
                                                                        25,924
                                                                        
                                                                        
                                                                        
                                                                        (795
                                                                        )
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        
                                                                        25,924
                                                                        
                                                                        
                                                                        
                                                                        (795
                                                                        )Corporate
      debt securities
                                                                        
                                                                        
                                                                        4,813
                                                                        
                                                                        
                                                                        
                                                                        (266
                                                                        )
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        
                                                                        4,813
                                                                        
                                                                        
                                                                        
                                                                        (266
                                                                        )Collateralized
      debt obligations
                                                                        
                                                                        
                                                                        1,409
                                                                        
                                                                        
                                                                        
                                                                        (2,640
                                                                        )
                                                                        
                                                                        
                                                                        464
                                                                        
                                                                        
                                                                        
                                                                        (968
                                                                        )
                                                                        
                                                                        
                                                                        1,873
                                                                        
                                                                        
                                                                        
                                                                        (3,608
                                                                        )Total
      temporarily impaired
                                                                        
                                                                        $
                                                                        33,514
                                                                        
                                                                        
                                                                        $
                                                                        (3,704
                                                                        )
                                                                        
                                                                        $
                                                                        939
                                                                        
                                                                        
                                                                        $
                                                                        (973
                                                                        )
                                                                        
                                                                        $
                                                                        34,453
                                                                        
                                                                        
                                                                        $
                                                                        (4,677
                                                                        )Number
      of securities
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        79
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        6
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        85
 
 Unrealized
losses on securities have not been recognized into income because the securities
are of high credit quality or have undisrupted cash flows. Management has the
intent and ability to hold for the foreseeable future, and the decline in fair
value is largely due to changes in interest rates. The fair value is expected to
recover as the securities approach maturity.
  28
 
 NOTE
3 - Loans Receivable
 
 Year end
loans are summarized below:
 
 (Dollars in thousands)2009
                            
                            
                            2008Loans
      secured by real estate:Construction
      and land development
                            
                            $
                            53,288
                            
                            
                            $
                            54,975Residential,
      including home equity
                            
                            
                            184,730
                            
                            
                            
                            238,638Commercial
      real estate and other dwelling
                            
                            
                            141,443
                            
                            
                            
                            130,256Total
      loans secured by real estate
                            
                            
                            379,461
                            
                            
                            
                            423,869Consumer
      loans
                            
                            
                            1,505
                            
                            
                            
                            1,967Commercial
      business
                            
                            
                            63,145
                            
                            
                            
                            49,418Government
      and other
                            
                            
                            14,474
                            
                            
                            
                            14,783Subtotal
                            
                            
                            458,585
                            
                            
                            
                            490,037Less:Net
      deferred loan origination fees
                            
                            
                            (285
                            )
                            
                            
                            (347
                            )Undisbursed
      loan funds
                            
                            
                            (55
                            )
                            
                            
                            (181
                            )Loans
      receivable
                            
                            $
                            458,245
                            
                            
                            $
                            489,509
 
 Activity
in the allowance for loan losses is summarized below for the years
indicated:
 
 (Dollars in thousands)2009
                        
                        
                        2008Balance
      at beginning of period
                        
                        $
                        5,830
                        
                        
                        $
                        4,581Provision
      charged to income
                        
                        
                        8,540
                        
                        
                        
                        2,388Loans
      charged-off
                        
                        
                        (8,440
                        )
                        
                        
                        (1,227
                        )Recoveries
                        
                        
                        184
                        
                        
                        
                        88Balance
      at end of period
                        
                        $
                        6,114
                        
                        
                        $
                        5,830
 
 Non-performing
loans at year end were as follows:
 
 (Dollars in thousands)2009
                    
                    
                    2008Loans
      past due over 90 days still on accrual
                    
                    $
                    1,491
                    
                    
                    $
                    1,476Non-accrual
      loans
                    
                    
                    17,074
                    
                    
                    
                    10,937
  Impaired
loans at year end were as follows:
 
 (Dollars in thousands)2009
                        
                        
                        2008Year
      end loans with no allocated allowances for loan losses
                        
                        $
                        3,853
                        
                        
                        $
                        1,748Year
      end loans with allocated allowances for loan losses (including troubled
      debt restructurings of $7,199 and 0)
                        
                        
                        13,112
                        
                        
                        
                        6,819Total
                        
                        $
                        16,965
                        
                        
                        $
                        8,567Amount
      of the allowance for loan losses allocated
                        
                        $
                        1,179
                        
                        
                        $
                        1,683Average
      of impaired loans during the year
                        
                        
                        12,820
                        
                        
                        
                        7,393Interest
      income recognized during impairment
                        
                        
                        –
                        
                        
                        
                        –Cash-basis
      interest income recognized
                        
                        
                        –
                        
                        
                        
                        –
 
 During
January 2009, the Bancorp’s management implemented a strategy with a one-time
sale of fixed rate mortgage loans from its loan portfolio by selling $10.7
million in fixed rate mortgage loans, while funding newly originated
construction and land development, commercial and government loan originations.
Implementing the balance sheet restructuring strategy had a positive impact on
interest rate risk by replacing longer duration fixed rate mortgage loans with
shorter duration non-mortgage loans that will reprice more frequently. The gain
realized from the loan sale totaled approximately $231 thousand.
 
 NOTE
4 - Loan Servicing
 
 Mortgage
loans serviced for others are not reported as assets. The principal balances of
these loans at year end are as follows:
 
 (Dollars in thousands)2009
                      
                      
                      2008Mortgage
      loan portfolio serviced for FHLMC
                      
                      $
                      51,512
                      
                      
                      $
                      43,212
 
 Custodial
escrow balances maintained in connection with the foregoing loan servicing were
approximately $446,000 and $619,000 at December 31, 2009 and 2008.
  Activity
for capitalized mortgage servicing rights, and the related valuation allowance,
was as follows:
 
 (Dollars in thousands)2009
                        
                        
                        2008Servicing
      rights:Beginning
      of year
                        
                        $
                        276
                        
                        
                        $
                        325Additions
                        
                        
                        177
                        
                        
                        
                        49Amortized
      to expense
                        
                        
                        (144
                        )
                        
                        
                        (98
                        )End
      of year
                        
                        $
                        309
                        
                        
                        $
                        276
 
 At year
end 2009 and 2008, there was no valuation allowance required.
 
 The fair
value of servicing rights was $398,000 and $438,000 at year end 2009 and 2008.
Fair value at year-end 2009 was determined using a discount rate of 8.3%,
prepayment speeds ranging from 141.7% to 500.0%, depending on the stratification
of the specific right, and a weighted average default rate of 0.0%. Fair value
at year-end 2008 was determined using a discount rate of 9.3%, prepayment speeds
ranging from 134.4% to 395.0%, depending on the stratification of the specific
right, and a weighted average default rate of 0.0%.
 
 The
weighted average amortization period is 6.4 years. Estimated amortization
expense for each of the next five years is:
 
 (Dollars in thousands)2010
                        
                        $
                        852011
                        
                        
                        722012
                        
                        
                        612013
                        
                        
                        522014
                        
                        
                        39
 
 NOTE
5 - Premises and Equipment, Net
 
 At year
end, premises and equipment are summarized below:
 
 (Dollars in thousands)2009
                          
                          
                          2008Cost:Land
                          
                          $
                          5,069
                          
                          
                          $
                          5,069Buildings
      and improvements
                          
                          
                          17,939
                          
                          
                          
                          16,821Furniture
      and equipment
                          
                          
                          10,194
                          
                          
                          
                          9,383Total
      cost
                          
                          
                          33,202
                          
                          
                          
                          31,273Less
      accumulated depreciation
                          
                          
                          (13,612
                          )
                          
                          
                          (12,190
                          )Premises
      and equipment, net
                          
                          $
                          19,590
                          
                          
                          $
                          19,083
 
 Depreciation
expense was $1,422,000 and $1,386,000 for 2009 and 2008.
  29
 
 NOTE
6 - Foreclosed Real Estate
 
 At year
end, foreclosed real estate is summarized below:
 
 (Dollars in thousands)2009
                        
                        
                        2008Commercial
      real estate and other dwelling
                        
                        $
                        1,897
                        
                        
                        $
                        –Residential
      real estate
                        
                        
                        1,082
                        
                        
                        
                        450Construction
      and land development
                        
                        
                        768
                        
                        
                        
                        77Total
                        
                        $
                        3,747
                        
                        
                        $
                        527
 
 NOTE 7 - Income
Taxes
 
 Components
of the income tax (benefit) expenses consist of the following:
 
 (Dollars in thousands)2009
                        
                        
                        2008Federal:Current
                        
                        $
                        (365
                        )
                        
                        $
                        1,825Deferred
                        
                        
                        (134
                        )
                        
                        
                        (305
                        )State:Current
                        
                        
                        6
                        
                        
                        
                        –Deferred
                        
                        
                        (320
                        )
                        
                        
                        (75
                        )Income
      tax (benefit) expense
                        
                        $
                        (813
                        )
                        
                        $
                        1,445
 
 Effective
tax rates differ from federal statutory rate of 34% applied to income before
income taxes due to the following:
 
 (Dollars in thousands)2009
                        
                        
                        2008Federal
      statutory rate
                        
                        
                        34
                        %
                        
                        
                        34
                        %Tax
      expense at statutory rate
                        
                        $
                        569
                        
                        
                        $
                        2,507State
      tax, net of federal effect
                        
                        
                        (201
                        )
                        
                        
                        (49
                        )Tax
      exempt income
                        
                        
                        (937
                        )
                        
                        
                        (686
                        )Bank
      owned life insurance
                        
                        
                        (138
                        )
                        
                        
                        (140
                        )Tax
      credits
                        
                        
                        (112
                        )
                        
                        
                        (114
                        )Reversal
      of FIN 48
                        
                        
                        –
                        
                        
                        
                        (84
                        )Other
                        
                        
                        6
                        
                        
                        
                        11Total
      income tax (benefit) expense
                        
                        $
                        (813
                        )
                        
                        $
                        1,445
 
 The
components of the net deferred tax asset recorded in the consolidated balance
sheets are as follows:
 
 (Dollars in thousands)2009
                              
                              
                              2008Deferred
      tax assets:Bad
      debts
                              
                              $
                              2,404
                              
                              
                              $
                              2,276Deferred
      loan fees
                              
                              
                              112
                              
                              
                              
                              136Deferred
      compensation
                              
                              
                              636
                              
                              
                              
                              609Unrealized
      depreciation on securitiesavailable-for-sale
                              
                              
                              92
                              
                              
                              
                              690Net
      operating loss
                              
                              
                              709
                              
                              
                              
                              276Tax
      credits
                              
                              
                              269
                              
                              
                              
                              24Nonaccrual
      loan interest income
                              
                              
                              79
                              
                              
                              
                              37Restricted
      stock awards
                              
                              
                              39
                              
                              
                              
                              73REO
      writedowns
                              
                              
                              66
                              
                              
                              
                              19Unqualified
      DCP
                              
                              
                              42
                              
                              
                              
                              38Post
      retirement benefit
                              
                              
                              65
                              
                              
                              
                              75Other-than-temporary
      impairment
                              
                              
                              46
                              
                              
                              
                              –Other
                              
                              
                              6
                              
                              
                              
                              9Total
      deferred tax assets
                              
                              
                              4,565
                              
                              
                              
                              4,262Deferred
      tax liabilities:Depreciation
                              
                              
                              (1,137
                              )
                              
                              
                              (894
                              )Prepaids
                              
                              
                              (198
                              )
                              
                              
                              (196
                              )Mortgage
      servicing rights
                              
                              
                              (121
                              )
                              
                              
                              (108
                              )Deferred
      stock dividends
                              
                              
                              (115
                              )
                              
                              
                              (115
                              )FAS
      158 - unrealized gain
                              
                              
                              (56
                              )
                              
                              
                              (62
                              )Other
                              
                              
                              (18
                              )
                              
                              
                              (62
                              )Total
      deferred tax liabilities
                              
                              
                              (1,645
                              )
                              
                              
                              (1,437
                              )Valuation
      allowance
                              
                              
                              (376
                              )
                              
                              
                              (143
                              )Net
      deferred tax assets
                              
                              $
                              2,544
                              
                              
                              $
                              2,682
 
 The
Bancorp has a state net operating loss carry forward of approximately $12.6
million which will begin to expire in 2022 if not used. The Bancorp also has a
state tax credit carry forward of approximately $65,000 which will begin to
expire in 2017 if not used. A valuation allowance of $376,000 and $143,000 was
provided at December 31, 2009 and 2008 for the state net operating loss and
state tax credit. The Bancorp has a federal alternative minimum tax credit carry
forward of approximately $226,000 for which there is no expiration
date.
 
 The
Bancorp qualified under provisions of the Internal Revenue Code, to deduct from
taxable income a provision for bad debts in excess of the provision for such
losses charged to income in the financial statements, if any. Accordingly,
retained earnings at December 31, 2009 and 2008 includes, approximately
$5,982,000 for which no provision for federal income taxes has been made. If, in
the future, this portion of retained earnings is used for any purpose other than
to absorb bad debt losses, federal income taxes would be imposed at the then
applicable rates. The unrecorded deferred income tax liability on the above
amounts was approximately $2,034,000 at December 31, 2009.
 
 The
Bancorp and its subsidiaries are subject to US Federal income tax as well as
income tax of the State of Indiana. The Bancorp is no longer subject to
examination by taxing authorities for the years before 2006 for federal and 2005
for state.
 
 Unrecognized Tax
Benefits
 
 A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
 
 (Dollars in thousands)2009
                                          
                                          
                                          2008Balance
      at beginning of period
                                          
                                          $
                                          –
                                          
                                          
                                          $
                                          47Additions
      based on tax positions related to the current year
                                          
                                          
                                          –
                                          
                                          
                                          
                                          –Additions
      for tax positions of prior years
                                          
                                          
                                          –
                                          
                                          
                                          
                                          37Reductions
      for tax positions of prior years
                                          
                                          
                                          –
                                          
                                          
                                          
                                          84Reductions
      due to the statute of limitations
                                          
                                          
                                          –
                                          
                                          
                                          
                                          –Settlements
                                          
                                          
                                          –
                                          
                                          
                                          
                                          –Balance
      at end of period
                                          
                                          $
                                          –
                                          
                                          
                                          $
                                          –
 
 The
Bancorp does not expect the total amount of tax benefits to significantly
increase or decrease in the next twelve months.
  We
recognize interest and penalties related to income tax matters in income tax
expense. We had no interest or penalties accrued at December 31, 2009 and
December 31, 2008.
  30


NOTE
8 - Deposits
 
 The aggregate amount of certificates of
deposit with a balance of $100 thousand or more was $98.7 million at December
31, 2009 and $99.6 million at December 31, 2008.
 
 At December 31, 2009, scheduled
maturities of certificates of deposit were as follows:
 
 (Dollars in thousands)2010
                      
                      $
                      194,6112011
                      
                      
                      29,7402012
                      
                      
                      2,2152013
                      
                      
                      2422014
                      
                      
                      51Total
                      
                      $
                      226,859
 
 NOTE
9 - Borrowed Funds
 
 At year end, borrowed funds are
summarized below:
 
 (Dollars
      in thousands)2009
                  
                  
                  2008Fixed rate
      advances from the FHLB
                  
                  $
                  33,000
                  
                  
                  $
                  41,000Putable
      advances from the FHLB
                  
                  
                  5,000
                  
                  
                  
                  5,000Line
      of credit from the FHLB
                  
                  
                  8,464
                  
                  
                  
                  2,044Other
                  
                  
                  665
                  
                  
                  
                  978Total
                  
                  $
                  47,129
                  
                  
                  $
                  49,022
 
 Repurchase agreements generally mature
within one year and are secured by U.S. government and U.S. agency securities,
under the Bancorp’s control. At year end, information concerning these retail
repurchase agreements is summarized below:
 
 (Dollars
      in thousands)2009
                  
                  
                  2008Ending
      balance
                  
                  $
                  15,893
                  
                  
                  $
                  25,773Average
      balance during the year
                  
                  
                  21,333
                  
                  
                  
                  16,301Maximum
      month-end balance during the year
                  
                  
                  23,451
                  
                  
                  
                  25,773Securities
      underlying the agreements at year end:Carrying
      value
                  
                  
                  27,394
                  
                  
                  
                  37,414Fair
      value
                  
                  
                  27,394
                  
                  
                  
                  37,414Average
      interest rate during the year
                  
                  
                  1.36
                  %
                  
                  
                  2.65
                  %Average
      interest rate at year end
                  
                  
                  1.34
                  %
                  
                  
                  1.46
                  %
 
 At year-end, advances from the Federal
Home Loan Bank were as follows:
 
 (Dollars
      in thousands)2009
                  
                  
                  2008Fixed
      rate advances, maturing January 2010 through December 2013, at rates from
      1.97% to 4.03% average rate:2009 - 2.98%; 2008 - 3.40%
                  
                  $
                  33,000
                  
                  
                  $
                  41,000Putable
      advances, maturing February 2013 at a rate of 2.62%, average rate: 2009 -
      2.62%; 2008 - 2.62%
                  
                  
                  5,000
                  
                  
                  
                  5,000
  Fixed rate advances are payable at
maturity, with a prepayment penalty. Variable rate advances have a maturity of
six months and reprice daily. Putable advances are fixed for a period of one to
three years and then may adjust quarterly 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 quarterly
interest rate reset dates.  The advances were collateralized by
mortgage loans totaling $179,006,000 and $231,267,000 at December 31, 2009 and
2008. In addition to the fixed rate and putable advances, the Bancorp maintains
a $10.0 million line of credit with the Federal Home Loan Bank of Indianapolis.
The outstanding balance on the line of credit was $8.5 million and $2.0 million
at December 31, 2009 and 2008. During January of 2010 a $3.0 million fixed rate
advance matured with a rate of 3.06% and was replaced with two advances totaling
$3.0 million with rates from 2.05% to 2.56%.
 
 Other borrowings at December 31, 2009
and 2008 include Treasury, Tax and Loan and reclassified bank
balances.
 
 At December 31, 2009, scheduled
maturities of borrowed funds were as follows:
 
 (Dollars in thousands)2010
                        
                        $
                        31,1292011
                        
                        
                        3,0002012
                        
                        
                        5,0002013
                        
                        
                        8,000Total
                        
                        $
                        47,129
 
 NOTE
10 - Employees’ Benefit Plans
 
 The Bancorp maintains an Employees’
Savings and Profit Sharing Plan and Trust for all employees who meet the plan
qualifications. Employees are eligible to participate in the Employees’ Savings
and Profit Sharing Plan and Trust on the next January 1 or July 1 following the
completion of one year of employment, age 18, and completion of at least 1,000
hours of employment. The Employees’ Savings Plan feature allows employees to
make pre-tax contributions to the Employees’ Savings Plan of 1% to 50% of Plan
Salary, subject to limitations imposed by Internal Revenue Code section 401(k).
The Profit Sharing Plan and Trust feature is noncontributory on the part of the
employee. Contributions to the Employees’ Profit Sharing Plan and Trust are made
at the discretion of the Bancorp’s Board of Directors.  Contributions
for the year ended December 31, 2009 and 2008, were based on 3% and 5% of the
participants’ total compensation excluding incentives, respectively.
Participants in the plan become 100% vested upon completion of five years of
service. The benefit plan expense amounted to $199,000 and $314,000 for 2009 and
2008.
  The Bancorp maintains an Unqualified
Deferred Compensation Plan (the Plan). The purpose of the Plan is to provide
deferred compensation to key senior management employees of the Bancorp in order
to recognize their substantial contributions to the Bank and provide them with
additional financial security as inducement to remain with the Bank. The
Compensation Committee selects which persons shall be participants in the
Plan.  Participants’ accounts are credited each year with an amount
based on a formula involving the participant’s employer funded contributions
under all qualified plans and the limitations imposed by Internal Revenue Code
subsection 401(a)(17) and Code section 415. The unqualified deferred
compensation plan liability at December 31, 2009 and 2008 was $107,000 and
$97,000. The Plan expense amounted to $8,000 for 2009 and $11,000 for
2008.
  31
 
 The Bancorp sponsors a defined benefit
postretirement plan that provides comprehensive major medical benefits to all
eligible retirees. Eligible retirees are those who have attained age 65, have
completed at least 18 years of service and are eligible for coverage under the
employee group medical plan as of the date of their retirement. Spouses of
eligible retirees are covered if they were covered as of the employee’s date of
retirement. Surviving spouses are covered if they were covered at the time of
the retiree’s death.  Dependent children of eligible retirees are
generally covered to the later of age 19 or until the child ceases being a
full-time student. Surviving dependent children are subject to the same
eligibility restrictions if they were covered at the time of the retiree’s
death. Currently, the Bancorp pays $143.00 of the retiree monthly medical
coverage premium. This amount will remain fixed over the benefit period.
Retirees pay 100% of the premiums for all dependent medical coverage. The
Bancorp uses December 31 as the measurement date for its postretirement plan.
The benefit obligation for this plan was $30,000 and $25,000 at December 31,
2009 and 2008. Benefit plan expense was $12,000 and $13,000 for 2009 and 2008
and contains no significant components, and thus details are not presented due
to immateriality. Since future expected payments over the next ten years are
approximately $12,000, detail by year is not presented due to immateriality.
Also, future benefit plan obligations, funded status, and expense are considered
immaterial.
 
 Directors have deferred some of their
fees in consideration of future payments. Fee deferrals, including interest
totaled $122,000 and $154,000 for 2009 and 2008. The deferred fee liability at
December 31, 2009 and 2008 was $1,618,000 and $1,561,000,
respectively.
 
 NOTE
11 - Regulatory Capital
 
 The Bancorp and Bank are subject to
regulatory capital requirements administered by federal banking
agencies.  Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators. Failure to meet various capital requirements can initiate regulatory
action. Prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition.  If
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized capital distributions are limited, as is asset
growth and expansion, and capital restoration plans are required. At December
31, 2009 and 2008, the most recent regulatory notifications categorized the
Bancorp and Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the Bancorp’s or the Bank’s
category.
 
 At year-end, capital levels for the
Bancorp and the Bank were considerably the same. Actual capital levels (in
millions), minimum required levels and levels needed to be classified as well
capitalized for the Bancorp are summarized below:
 
 MinimumRequired
      To BeWell
      CapitalizedMinimum
      Required
                                  
                                  
                                  Under
      Promptfor
      Capital
                                  
                                  
                                  CorrectiveActual
                                  
                                  
                                  Adequacy
      Purposes
                                  
                                  
                                  Action
      Regulations(Dollars
      in millions)
                                  
                                  Amount
                                  
                                  
                                  Ratio
                                  
                                  
                                  Amount
                                  
                                  
                                  Ratio
                                  
                                  
                                  Amount
                                  
                                  
                                  Ratio2009Total
      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
                                  %2008Total
      capital to risk-weighted assets
                                  
                                  $
                                  59.9
                                  
                                  
                                  
                                  12.0
                                  %
                                  
                                  $
                                  39.9
                                  
                                  
                                  
                                  8.0
                                  %
                                  
                                  $
                                  50.0
                                  
                                  
                                  
                                  10.0
                                  %Tier
      1 capital to risk-weighted assets
                                  
                                  $
                                  54.1
                                  
                                  
                                  
                                  10.8
                                  %
                                  
                                  $
                                  20.0
                                  
                                  
                                  
                                  4.0
                                  %
                                  
                                  $
                                  29.9
                                  
                                  
                                  
                                  6.0
                                  %Tier
      1 capital to adjusted average assets
                                  
                                  $
                                  54.1
                                  
                                  
                                  
                                  8.2
                                  %
                                  
                                  $
                                  20.0
                                  
                                  
                                  
                                  3.0
                                  %
                                  
                                  $
                                  33.1
                                  
                                  
                                  
                                  5.0
                                  %
 
 The Bancorp’s ability to pay dividends
is entirely dependent upon the Bank’s ability to pay dividends to the Bancorp.
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 Indiana Department of Financial
Institutions 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. Moreover, the FDIC and
the Federal Reserve Board may prohibit the payment of dividends if it determines
that the payment of dividends would constitute an unsafe or unsound practice
because of the financial condition of the Bank. The aggregate amount of
dividends, which may be declared by the Bank in 2010, without prior regulatory
approval, approximates $1,775,000 plus current 2010 net profits.
 
 NOTE
12 - Stock Based Compensation
 
 The Bancorp’s 2004 Stock Option Plan
(the Plan), which is stockholder-approved, permits the grant of share options to
its employees for up to 250,000 shares of common stock. Awards granted under the
Plan may be in the form of incentive stock options, non-incentive stock options,
or restricted stock. The purposes of the Plan are to attract and retain the best
available personnel, to provide additional incentives for all employees and to
encourage their continued employment by facilitating employees’ purchases of an
equity interest in the Bancorp. Option awards are generally granted with an
exercise price equal to the market price of the Bancorp’s common stock at the
date of grant; those option awards have five year vesting periods
  32
  and have
10-year contractual terms. Total compensation cost that has been charged against
income for incentive stock options was $1 thousand and $10 thousand for 2009 and
2008 respectively. The total income tax benefit was $0 and $7 thousand for 2009
and 2008, respectively.
 
 The fair value of each incentive stock
option award is estimated on the date of grant using a closed form option
valuation (Black-Scholes) model. Expected volatilities are based on historical
volatilities of the Company’s common stock. No incentive stock options were
granted during 2009. The Company uses historical data to estimate option
exercise and post-vesting termination behavior. The expected term of options
granted is based on historical data and represents the period of time that
options granted are expected to be outstanding, which takes into account that
the options are not transferable. The risk-free interest rate for the expected
term of the option is based on the U.S. Treasury yield curve in effect at the
time of the grant.
 
 A summary of the Bancorp’s stock option
activity for 2009 follows:
 WeightedWeighted
                        
                        
                        AverageAverage
                        
                        
                        Remaining
                        
                        
                        AggregateExercise
                        
                        
                        Contractual
                        
                        
                        IntrinsicShares
                        
                        
                        Price
                        
                        
                        Term
                        
                        
                        ValueOutstanding
      at beginning of year
                        
                        
                        70,597
                        
                        
                        $
                        23.56Granted
                        
                        
                        –
                        
                        
                        
                        –Exercised
                        
                        
                        (200
                        )
                        
                        
                        20.50Forfeited
      or expired
                        
                        
                        (4,650
                        )
                        
                        
                        21.73Outstanding
      at end of year
                        
                        
                        65,747
                        
                        
                        $
                        23.69
                        
                        
                        
                        2.2
                        
                        
                        $
                        –Vested
      or expected to vest
                        
                        
                        65,747
                        
                        
                        $
                        23.69
                        
                        
                        
                        2.2
                        
                        
                        $
                        –Exercisable
      at end of year
                        
                        
                        64,747
                        
                        
                        $
                        23.62
                        
                        
                        
                        2.1
                        
                        
                        $
                        –
 
 Information related to the stock option
plan during each year follows:
 
 2009
                    
                    
                    2008Risk-free
      interest rate
                    
                    
                    –
                    
                    
                    
                    3.61%Expected
      term
                    
                    
                    –
                    
                    
                    10.0
      yearsExpected
      stock price volatility
                    
                    
                    –
                    
                    
                    
                    26.55%Dividend
      yield
                    
                    
                    –
                    
                    
                    
                    5.20%
 
 As of December 31, 2009, there was
$2,766 of total unrecognized compensation cost related to nonvested incentive
stock options granted under the Plan. The cost is expected to be recognized over
a weighted-average period of 2.9 years.
 
 Restricted stock awards are generally
granted with an award price equal to the market price of the Bancorp’s common
stock on the award date. Restricted stock awards have been issued with a five
year vesting period. Forfeiture provisions exist for personnel that separate
employment before the vesting period expires. Compensation expense related to
restricted stock awards are recognized over the vesting period. Total
compensation cost that has been charged against income for those plans was $39
thousand and $47 thousand for 2009 and 2008, respectively.
 
 A summary of changes in the Bancorp’s
nonvested restricted stock for 2009 follows:
 WeightedAverageGrant
      DateNonvested
      Shares
                  
                  Shares
                  
                  
                  Fair
      ValueNonvested
      at January 1, 2009
                  
                  
                  7,550
                  
                  
                  $
                  30.14Granted
                  
                  
                  2,500
                  
                  
                  
                  18.95Vested
                  
                  
                  (1,800
                  )
                  
                  
                  30.50Forfeited
                  
                  
                  (700
                  )
                  
                  
                  27.93Nonvested
      at December 31, 2009
                  
                  
                  7,550
                  
                  
                  $
                  26.55
 
 As of December 31, 2009, there was
$99,445 of total unrecognized compensation cost related to nonvested restricted
shares granted under the Plan. The cost is expected to be recognized over a
weighted-average period of 2.9 years.
 
 NOTE
13 - Earnings Per Common Share
 
 A reconciliation of the numerators and
denominators of the basic earnings per common share and diluted earnings per
common share computations for 2009 and 2008 is presented below.
 
 2009
                                                
                                                
                                                2008Basic
      earnings per common share:Net
      income available to common stockholders
                                                
                                                $
                                                2,487,851
                                                
                                                
                                                $
                                                5,930,255Weighted-average
      common shares outstanding
                                                
                                                
                                                2,814,488
                                                
                                                
                                                
                                                2,809,176Basic
      earnings per common share
                                                
                                                $
                                                0.88
                                                
                                                
                                                $
                                                2.11Diluted
      earnings per common share:Net
      income available to common stockholders
                                                
                                                $
                                                2,487,851
                                                
                                                
                                                $
                                                5,930,255Weighted-average
      common shares outstanding
                                                
                                                
                                                2,814,488
                                                
                                                
                                                
                                                2,809,176Add:
      dilutive effect of assumed stock option exercises and restricted
      stock
                                                
                                                
                                                –
                                                
                                                
                                                
                                                16,595Weighted-average
      common and dilutive potential common shares outstanding
                                                
                                                
                                                2,814,488
                                                
                                                
                                                
                                                2,825,771Diluted
      earnings per common share
                                                
                                                $
                                                0.88
                                                
                                                
                                                $
                                                2.10
 
 There were 65,747 and 11,183
anti-dilutive shares outstanding at December 31, 2009 and 2008.
 
 NOTE
14 - Related Party Transactions
 
 The Bancorp had aggregate loans
outstanding to directors and executive officers (with individual balances
exceeding $120,000) of $9,825,000 at December 31, 2009 and $8,999,000 at
December 31, 2008.  For the year ended December 31, 2009, the
following activity occurred on these loans:
 
 (Dollars in thousands)Aggregate
      balance - January 1, 2009
                        
                        $
                        8,999New
      loans
                        
                        
                        1,200Repayments
                        
                        
                        (374
                        )Aggregate
      balance - December 31, 2009
                        
                        $
                        9,825
 
 Deposits from directors and executive
officers were $3.3 million and $2.9 million at December 31, 2009 and
2008.
  33
 
 NOTE
15 - Commitments and Contingencies
 
 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’s exposure to credit loss
in the event of non-performance by the other party to the financial instrument
for commitments to originate loans and standby letters of credit is represented
by the contractual amount of those instruments. Commitments generally have fixed
expiration dates or other termination clauses and may require the payment of a
fee. The Bancorp uses the same credit policy to make such commitments as it uses
for on-balance sheet items.  Since commitments to make loans may
expire without being used, the amount does not necessarily represent future cash
commitments.
 
 The Bancorp had outstanding commitments
to originate loans as follows:
 
 (Dollars
      in thousands)Fixed
                            
                            
                            VariableRate
                            
                            
                            Rate
                            
                            
                            TotalDecember
      31, 2009:Commercial
      business
                            
                            $
                            –
                            
                            
                            $
                            58,493
                            
                            
                            $
                            58,493Real
      estate
                            
                            
                            5,731
                            
                            
                            
                            21,895
                            
                            
                            
                            27,626Consumer
      loans
                            
                            
                            –
                            
                            
                            
                            20
                            
                            
                            
                            20Unsecured
      consumer overdrafts
                            
                            
                            10,751
                            
                            
                            
                            –
                            
                            
                            
                            10,751Total
                            
                            $
                            16,482
                            
                            
                            $
                            80,408
                            
                            
                            $
                            96,890December
      31, 2008:Commercial
      business
                            
                            $
                            –
                            
                            
                            $
                            42,458
                            
                            
                            $
                            42,458Real
      estate
                            
                            
                            11,890
                            
                            
                            
                            28,618
                            
                            
                            
                            40,508Consumer
      loans
                            
                            
                            –
                            
                            
                            
                            17
                            
                            
                            
                            17Unsecured
      consumer overdrafts
                            
                            
                            12,345
                            
                            
                            
                            –
                            
                            
                            
                            12,345Total
                            
                            $
                            24,235
                            
                            
                            $
                            71,093
                            
                            
                            $
                            95,328
 
 The $5,731 thousand in fixed rate
commitments outstanding at December 31, 2009 had interest rates ranging from
4.375% to 6.500%, for a period not to exceed forty-five days. At December 31,
2008, fixed rate commitments outstanding of $11,890 thousand had interest rates
ranging from 4.50% to 8.75%, for a period not to exceed forty-five
days.
 
 Standby letters of credit are
conditional commitments issued by the Bancorp to guarantee the performance of a
customer to a third party. At December 31, 2009 and 2008, the Bancorp had
standby letters of credit totaling $2,569 thousand and $4,416 thousand,
respectively. The Bancorp evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bancorp upon extension of credit, is based on management’s credit evaluation
of the borrower. Collateral obtained may include accounts receivable, inventory,
property, land or other assets.
 
 NOTE
16 - Fair Values of Financial Instruments
 
 The Fair Value Measurments Topic
establishes a hierarchy that requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to
measure fair value:
 
 Level
1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.
 
 Level 2:Significant other observable
inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
 
 Level 3:Significant unobservable
inputs that reflect a reporting entity’s own assumptions about the assumptions
that market participants would use in pricing and asset or
liability.
 
 The fair values of securities available
for sale are determined on a recurring basis by obtaining quoted prices on
nationally recognized securities exchanges or pricing models utilizing
significant observable inputs such as matrix pricing, which is a mathematical
technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying
on the securities’ relationship to other benchmark quoted securities. Different
judgment and assumptions used in pricing could result in different estimates of
value. In certain cases where market data is not readily available because of
lack of market activity or little public disclosure, values may be based on
unobservable inputs and classified in Level 3 of the fair value
hierarchy.
 
 At the end of each reporting period,
securities held in the investment portfolio are evaluated on an individual
security level for other-than-temporary impairment in accordance with the
Investments – Debt and Equity Securities Topic.  An impairment is
other-than-temporary if the decline in the fair value of the security is below
its amortized cost and it is probable that all amounts due according to the
contractual terms of a debt security will not be received. Significant judgments
are required in determining impairment, which include making assumptions
regarding the estimated prepayments, loss assumptions and the change in interest
rates. We consider the following factors when determining an
other-than-temporary impairment for a security: the length of time and the
extent to which the market value has been less than amortized cost; the
financial condition and near-term prospects of the issuer; the underlying
fundamentals of the relevant market and the outlook for such market for the near
future; an assessment of whether the Bancorp has (1) the intent to sell the debt
securities or (2) more likely than not will be required to sell the debt
securities before its anticipated market recovery. If either of these conditions
is met, management will recognize other-than-temporary
impairment.  If, in management’s judgment, an other-than-temporary
impairment exists, the cost basis of the security
  34


will be
written down for the credit loss, and the unrealized loss will be transferred
from accumulated other comprehensive loss as an immediate reduction of current
earnings.




For the period ended December 31, 2009,
the Bancorp’s management utilized a specialist to perform an
other-than-temporary impairment analysis for each of its four pooled trust
preferred securities. The analysis utilizes analytical models used to project
future cash flows for the pooled trust preferred securities based on current
assumptions for prepayments, default and deferral rates, and recoveries. The
projected cash flows are than tested for impairment consistent with the
Investments – Other Topic (formerly FSP EITF 99-20-1) and the Investments – Debt
and Equity Securities Topic (formerly FSP FAS 115-2 and FAS 124-2). The
other-than-temporary impairment testing compares the present value of the cash
flows from quarter to quarter to determine if there is a “favorable” or
“adverse” change. Other-than-temporary impairment is recorded if the projected
present value of cash flows is lower than the book value of the security. To
perform the quarterly other-than-temporary impairment analysis, management
utilizes current reports issued by the trustee, which contains principal and
interest tests, waterfall distributions, note valuations, collection detail and
credit ratings for each pooled trust preferred security. In addition, a detailed
review of the performing collateral was performed. The review of the collateral
began with a review of financial information provided by SNL Financial, a
comprehensive database, widely used in the industry, which gathers financial
data on banks and thrifts from GAAP financial statements for public companies
(annual and quarterly reports on Forms 10-K and 10-Q, respectively), as well as
regulatory reports for private companies, including consolidated financial
statements for bank holding companies (FR Y-9C reports) and parent company-only
financial statements for bank holding companies (FR Y-9LP reports) filed with
the Federal Reserve, bank call reports filed with the FDIC and thrift financial
reports provided by the Office of Thrift Supervision. Using the information
sources described above, for each bank and thrift examined the following items
were examined: nature of the issuer’s business, years of operating history,
corporate structure, loan composition and loan concentrations, deposit mix,
asset growth rates, geographic footprint and local economic environment. The
issuers’ historical financial performance was reviewed and compared their
financial ratios to appropriate peer groups of regional banks or thrifts with
similar asset size. The analysis focused on six broad categories: profitability
(revenue streams and earnings quality, return on assets and shareholder’s
equity, net interest margin and interest rate sensitivity), credit quality
(charge-offs and recoveries, non-current loans and total non-performing assets
as a percentage of total loans, loan loss reserve coverage and the adequacy of
the loan loss provision), operating efficiency (non-interest expense compared to
total revenue), capital adequacy (Tier-1, total capital and leverage ratios and
equity capital growth), leverage (tangible equity as a percentage of tangible
assets, short-term and long-term borrowings and double leverage at the holding
company) and liquidity (the nature and availability of funding sources, net
non-core funding dependence and quality of deposits). In addition, for publicly
traded companies stock price movements were reviewed and the market price of
publicly traded debt instruments was examined. The other-than-temporary
impairment analysis indicated that the Bancorp’s four pooled trust preferred
securities had other-than-temporary impairment in the amount of $136 thousand,
as of December 31, 2009.
  The table below shows the credit loss
roll forward for the Bancorp’s trust preferred securities that have been
classified with other-than-temporary impairment:
 
 (Dollars
      in thousands)Collateralized
      debtobligations
      other-than-temporarilyimpairedEnding
      balance - December 31, 2008
                            
                            $
                            –Additions
      not previously recognized
                            
                            
                            136Ending
      balance - December 31, 2009
                            
                            $
                            136
 
 Below is a table containing information
regarding the
Bancorp’s pooled trust preferred securities as of December 31,
2009:
 
 Deal
      name
                        
                        PreTSL
      XXIV
                        
                        
                        PreTSL
      XXVII
                        
                        
                        Alesco
      IX
                        
                        
                        Alesco
      XVIIClass
                        
                        
                        B-1
                        
                        
                        
                        C-1
                        
                        
                        
                        A-2A
                        
                        
                        
                        BBook
      value
                        
                        
                        1,258,772
                        
                        
                        
                        1,409,027
                        
                        
                        
                        1,323,252
                        
                        
                        
                        1,351,903Fair
      value
                        
                        
                        250,849
                        
                        
                        
                        263,336
                        
                        
                        
                        646,350
                        
                        
                        
                        189,462Unrealized
      gains/(losses)
                        
                        
                        (1,007,922
                        )
                        
                        
                        (1,145,692
                        )
                        
                        
                        (676,902
                        )
                        
                        
                        (1,162,441
                        )Lowest
      credit rating assigned
                        
                        Caa3
                        
                        
                        Ca
                        
                        
                        BB
                        
                        
                        CaNumber
      of performing banks
                        
                        
                        57
                        
                        
                        
                        30
                        
                        
                        
                        63
                        
                        
                        
                        40Number
      of performing insurance companies
                        
                        
                        12
                        
                        
                        
                        7
                        
                        
                        
                        11
                        
                        
                        
                        n/aNumber
      of issuers in default
                        
                        
                        9
                        
                        
                        
                        3
                        
                        
                        
                        7
                        
                        
                        
                        6Number
      of issuers in deferral
                        
                        
                        15
                        
                        
                        
                        9
                        
                        
                        
                        6
                        
                        
                        
                        10Defaults
      & deferrals as a % of performing collateral
                        
                        
                        29.40
                        %
                        
                        
                        21.20
                        %
                        
                        
                        28.64
                        %
                        
                        
                        38.79
                        %Subordination:As
      a % of performing collateral
                        
                        
                        -10.09
                        %
                        
                        
                        -12.77
                        %
                        
                        
                        22.82
                        %
                        
                        
                        -1.33
                        %As
      a % of performing collateral - adjusted for projected future
      defaults
                        
                        
                        -18.76
                        %
                        
                        
                        -18.95
                        %
                        
                        
                        14.05
                        %
                        
                        
                        -10.62
                        %Other-than-temporary
      impairment model assumptions:Defaults:Year
      1 - issuer average
                        
                        
                        5.00
                        %
                        
                        
                        2.90
                        %
                        
                        
                        7.20
                        %
                        
                        
                        5.80
                        %Year
      2 - issuer average
                        
                        
                        1.70
                        %
                        
                        
                        1.70
                        %
                        
                        
                        2.40
                        %
                        
                        
                        2.10
                        %Year
      3 - issuer average
                        
                        
                        0.60
                        %
                        
                        
                        0.60
                        %
                        
                        
                        0.60
                        %
                        
                        
                        0.50
                        %>
      3 Years- issuer average
                        
                        
                        (1
                        )
                        
                        
                        (1
                        )
                        
                        
                        (1
                        )
                        
                        
                        (1
                        )Discount
      rate - 3-month LIBOR plus implicit yield spread at
purchase
                        
                        
                        1.48
                        %
                        
                        
                        1.23
                        %
                        
                        
                        1.27
                        %
                        
                        
                        1.44
                        %Recovery
      assumptions
                        
                        
                        (2
                        )
                        
                        
                        (2
                        )
                        
                        
                        (2
                        )
                        
                        
                        (2
                        )Prepayments
                        
                        
                        0.00
                        %
                        
                        
                        0.00
                        %
                        
                        
                        0.00
                        %
                        
                        
                        0.00
                        %Other-than-temporary impairment
                        
                        
                        39,300
                        
                        
                        
                        19,050
                        
                        
                        
                        15,884
                        
                        
                        
                        61,950
 
 (1)
Default rates > 3 years are evaluated on an issuer by issuer basis and range
from 0.25% to 1.25%.
 (2)
Recovery assumptions are evaluated on an issuer by issuer basis and range from
0% to 50% with a five year lag.
 
 In the table above, the Bancorp’s
subordination for each trust preferred security is calculated by taking the
total performing collateral and subtracting the sum of the total collateral
within the Bancorp’s class and the total collateral within all senior classes,
and then stating this result as a percentage of the total performing collateral.
This measure is an indicator of the level of collateral that can default before
potential cash flow disruptions may occur. In addition, management calculates
subordination assuming future collateral defaults by utilizing the
default/deferral assumptions in the Bancorp’s OTTI analysis. Subordination
assuming future default/deferral assumptions is calculated by deducting
  35
  future
defaults from the current performing collateral. At December 31, 2009,
management reviewed the subordination levels for each security in context of the
level of current collateral defaults and deferrals within each security; the
potential for additional defaults and deferrals within each security; the length
of time that the security has been in “payment in kind” status; and the
Bancorp’s class position within each security.
 
 Management calculated the
other-than-temporary impairment model assumptions based on the specific
collateral underlying each individual security. The following assumption
methodology was applied consistently to each of the four pooled trust preferred
securities: For collateral that has already defaulted, no recovery was assumed;
no cash flows were assumed from collateral currently in deferral, with the
exception of the recovery assumptions. The default and recovery assumptions were
calculated based on the a detailed collateral review. The discount rate
assumption used in the calculation of the present value of cash flows is based
on the discount margin (i.e., credit spread) at the time each security was
purchased using the original purchase price. The discount margin is then added
to the appropriate 3-month LIBOR forward rate obtained from the forward LIBOR
curve. As a result of the fourth quarter OTTI analysis refinements, the
prepayment assumption used at December 31, 2009 was 0%, compared to 1% at
September 30, 2009. Management believes that this change is not material to the
aggregate OTTI measurement. The assumption for collateral prepayment was
affected by the view that the terms and pricing of trust preferred securities
issued by banks and insurance companies were so aggressive that it is unlikely
that such financing will become available in the foreseeable
future.
  At December 31, 2009, three of the
trust preferred securities with a cost basis of $4.2 million have been placed in
“payment in kind” status. The Bancorp’s securities that are classified as
“payment in kind” are a result of not receiving the scheduled quarterly interest
payments. For the securities in “payment in kind” status, management anticipates
to receive the unpaid contractual interest payments from the issuer, because of
the self correcting cash flow waterfall provisions within the structure of the
securities. When a tranche senior to the Bancorp’s position fails the coverage
test, the Bancorp’s interest cash flows are paid to the senior tranche and
recorded as a reduction of principal. The coverage test represents an over
collateralization target by stating the balance of the performing collateral as
a percentage of the balance of the Bancorp’s tranche, plus the balance of all
senior tranches. The principal reduction in the senior tranche continues until
the appropriate coverage test is passed. As a result of the principal reduction
in the senior tranche, more cash is available for future payments to the
Bancorp’s tranche. Consistent with the Investments – Debt and Equity Securities
Topic management considered the failure of the issuer of the security to make
scheduled interest payments in determining whether a credit loss existed.
Management will not capitalize the “payment in kind” interest payments to the
book value of the securities and will keep these securities in non-accrual
status until the quarterly interest payments resume.
  Assets and Liabilities
Measured on a Recurring Basis
 
 Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
 
 (Dollars
      in thousands)Fair
      Value Measurements at December 31, 2009 UsingQuoted
      Prices
                                      
                                      
                                      Significantin
      Active
                                      
                                      
                                      Other
                                      
                                      
                                      SignificantMarkets
      for
                                      
                                      
                                      Observable
                                      
                                      
                                      UnobservableDecember
      31,
                                      
                                      
                                      Identical
      Assets
                                      
                                      
                                      Inputs
                                      
                                      
                                      Inputs2009
                                      
                                      
                                      (Level
      1)
                                      
                                      
                                      (Level
      2)
                                      
                                      
                                      (Level
      3)Assets:Available
      for sale securities
                                      
                                      $
                                      124,776
                                      
                                      
                                      $
                                      –
                                      
                                      
                                      $
                                      123,426
                                      
                                      
                                      $
                                      1,350(Dollars
      in thousands)Fair
      Value Measurements at December 31, 2008 UsingQuoted
      Prices
                                      
                                      
                                      Significantin
      Active
                                      
                                      
                                      Other
                                      
                                      
                                      SignificantMarkets
      for
                                      
                                      
                                      Observable
                                      
                                      
                                      UnobservableDecember
      31,
                                      
                                      
                                      Identical
      Assets
                                      
                                      
                                      Inputs
                                      
                                      
                                      Inputs2008
                                      
                                      
                                      (Level
      1)
                                      
                                      
                                      (Level
      2)
                                      
                                      
                                      (Level
      3)Assets:Available
      for sale securities
                                      
                                      $
                                      108,207
                                      
                                      
                                      $
                                      –
                                      
                                      
                                      $
                                      107,204
                                      
                                      
                                      $
                                      1,003
 
 Reconciliation of available for sale
securities, which require significant adjustment based on unobservable data are
presented below:
 
 (Dollars
      in thousands)Fair
      Value MeasurementsUsing
      SignificantUnobservable
      Inputs(Level
      3)Available
      for sale securitiesBeginning
      balance - January 1, 2008
                              
                              $
                              –Included
      in other comprehensive income
                              
                              
                              440Transfers
      in and/or out of Level 3
                              
                              
                              563Ending
      balance - December 31, 2008
                              
                              
                              1,003Total
      realized/unrealized lossesIncluded
      in earnings
                              
                              
                              (136
                              )Included
      in other comprehensive income
                              
                              
                              33Transfers
      in and/or out of Level 3
                              
                              
                              450Ending
      balance - December 31, 2009
                              
                              $
                              1,350
 
 Assets and liabilities measured at fair
value on a non-recurring basis are summarized below:
 
 (Dollars
      in thousands)Fair
      Value Measurements at December 31, 2009 UsingQuoted
      Prices
                                    
                                    
                                    Significantin
      Active
                                    
                                    
                                    Other
                                    
                                    
                                    SignificantMarkets
      for
                                    
                                    
                                    Observable
                                    
                                    
                                    UnobservableDecember
      31,
                                    
                                    
                                    Identical
      Assets
                                    
                                    
                                    Inputs
                                    
                                    
                                    Inputs2009
                                    
                                    
                                    (Level
      1)
                                    
                                    
                                    (Level
      2)
                                    
                                    
                                    (Level
      3)Assets:Impaired
      loans
                                    
                                    $
                                    11,933
                                    
                                    
                                    $
                                    –
                                    
                                    
                                    $
                                    –
                                    
                                    
                                    $
                                    11,933Foreclosed
      real estate
                                    
                                    
                                    3,738
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    3,738(Dollars
      in thousands)Fair
      Value Measurements at December 31, 2008 UsingQuoted
      Prices
                                    
                                    
                                    Significantin
      Active
                                    
                                    
                                    Other
                                    
                                    
                                    SignificantMarkets
      for
                                    
                                    
                                    Observable
                                    
                                    
                                    UnobservableDecember
      31,
                                    
                                    
                                    Identical
      Assets
                                    
                                    
                                    Inputs
                                    
                                    
                                    Inputs2008
                                    
                                    
                                    (Level
      1)
                                    
                                    
                                    (Level
      2)
                                    
                                    
                                    (Level
      3)Assets:Impaired
      loans
                                    
                                    $
                                    5,523
                                    
                                    
                                    $
                                    –
                                    
                                    
                                    $
                                    2,789
                                    
                                    
                                    $
                                    2,734Foreclosed
      real estate
                                    
                                    
                                    527
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    527
  36
  The fair
value of impaired loans with specific allocations of the allowance for loan
losses is generally based on recent real estate appraisals. These appraisals may
utilize a single valuation approach or a combination of approaches including
comparable sales and the income approach. Impaired loans, which are measured for
impairment using the fair value of the collateral for collateral dependent
loans, had a fair value of $11.9 million, with a valuation allowance of $1.2
million, resulting in no additional provision for the year. Fair value is
determined, where possible, using market prices derived from an appraisal or
evaluation, which are considered to be level 2. However, certain assumptions and
unobservable inputs are used many times by the appraiser, therefore, qualifying
the assets as Level 3 in the fair value hierarchy.
  The following table shows fair values
and the related carrying values of financial instruments as of the dates
indicated. Items that are not financial instruments are not
included.
 
 (Dollars
      in thousands)December
      31,
      2009Carrying
                                                              
                                                              
                                                              EstimatedValue
                                                              
                                                              
                                                              Fair
      ValueFinancial
      assetsCash
      and cash equivalents
                                                              
                                                              $
                                                              13,222
                                                              
                                                              
                                                              $
                                                              13,222Securities
      available-for-sale
                                                              
                                                              
                                                              124,776
                                                              
                                                              
                                                              
                                                              124,776Securities
      held-to-maturity
                                                              
                                                              
                                                              19,557
                                                              
                                                              
                                                              
                                                              20,303Loans
      held for sale
                                                              
                                                              
                                                              1,025
                                                              
                                                              
                                                              
                                                              1,025Loans
      receivable, net
                                                              
                                                              
                                                              452,131
                                                              
                                                              
                                                              
                                                              498,005Federal
      Home Loan Bank stock
                                                              
                                                              
                                                              3,650
                                                              
                                                              
                                                              
                                                              3,650Accrued
      interest receivable
                                                              
                                                              
                                                              2,878
                                                              
                                                              
                                                              
                                                              2,878Financial
      liabilitiesDemand
      and savings deposits
                                                              
                                                              
                                                              313,669
                                                              
                                                              
                                                              
                                                              313,669Certificates
      of deposit
                                                              
                                                              
                                                              226,858
                                                              
                                                              
                                                              
                                                              227,672Repurchase
      agreements
                                                              
                                                              
                                                              15,893
                                                              
                                                              
                                                              
                                                              15,525Borrowed
      funds
                                                              
                                                              
                                                              47,129
                                                              
                                                              
                                                              
                                                              38,932Accrued
      interest payable
                                                              
                                                              
                                                              150
                                                              
                                                              
                                                              
                                                              150(Dollars
      in thousands)December31,
      2008Carrying
                                                              
                                                              
                                                              EstimatedValue
                                                              
                                                              
                                                              Fair
      ValueFinancial
      assetsCash
      and cash equivalents
                                                              
                                                              $
                                                              11,296
                                                              
                                                              
                                                              $
                                                              11,296Securities
      available-for-sale
                                                              
                                                              
                                                              108,207
                                                              
                                                              
                                                              
                                                              108,207Securities
      held-to-maturity
                                                              
                                                              
                                                              18,515
                                                              
                                                              
                                                              
                                                              18,385Loans
      held for sale
                                                              
                                                              
                                                              –
                                                              
                                                              
                                                              
                                                              –Loans
      receivable, net
                                                              
                                                              
                                                              483,679
                                                              
                                                              
                                                              
                                                              533,377Federal
      Home Loan Bank stock
                                                              
                                                              
                                                              3,650
                                                              
                                                              
                                                              
                                                              3,650Accrued
      interest receivable
                                                              
                                                              
                                                              3,160
                                                              
                                                              
                                                              
                                                              3,160Financial
      liabilitiesDemand
      and savings deposits
                                                              
                                                              
                                                              297,076
                                                              
                                                              
                                                              
                                                              297,076Certificates
      of deposit
                                                              
                                                              
                                                              231,072
                                                              
                                                              
                                                              
                                                              232,926Repurchase
      agreements
                                                              
                                                              
                                                              25,773
                                                              
                                                              
                                                              
                                                              25,464Borrowed
      funds
                                                              
                                                              
                                                              49,022
                                                              
                                                              
                                                              
                                                              49,702Accrued
      interest payable
                                                              
                                                              
                                                              256
                                                              
                                                              
                                                              
                                                              256
 
 For purposes of the above disclosures
of estimated fair value, the following assumptions were used as of December 31,
2009 and December 31, 2008. The estimated fair value for cash and cash
equivalents, Federal Home Loan Bank stock, and accrued interest receivable and
payable are considered to approximate carrying book value. The estimated fair
value for loans is based on estimates of the rate the Bancorp would charge for
similar such loans at December 31, 2009 and December 31, 2008, applied for the
time period until estimated repayment. For commercial loans the fair value
includes a liquidity adjustment to reflect current market conditions. The
estimated fair value for demand and savings deposits is based on their carrying
value. The estimated fair value for certificates of deposits is based on
estimates of the rate the Bancorp would pay on such deposits at December 31,
2009 and December 31, 2008, applied for the time period until maturity. The
estimated fair value for borrowed funds is based on current rates for similar
financings. The estimated fair value of other financial instruments, and
off-balance sheet loan commitments approximate cost and are not considered
significant to this presentation.
 
 NOTE
17 - Other Comprehensive Income/(Loss)
  Other
comprehensive income/(loss) components and related taxes were as
follows:
 
 (Dollars
      in thousands)2009
                                
                                
                                2008Net
      change in net unrealized gains andlosses
      on securities available for sale:Unrealized
      gains/(losses) arisingduring
      the year
                                
                                $
                                1,125
                                
                                
                                $
                                (2,981
                                )Reclassification
      adjustment for gainsincluded
      in net income
                                
                                
                                600
                                
                                
                                
                                210Net
      securities gain/(loss) during the year
                                
                                
                                1,725
                                
                                
                                
                                (2,771
                                )Tax
      effect
                                
                                
                                (597
                                )
                                
                                
                                930Net
      of tax amount
                                
                                
                                1,128
                                
                                
                                
                                (1,841
                                )Net
      change in unrecognized gain onpost
      retirement benefit:Net
      gain/(loss) on post retirement benefit
                                
                                
                                6
                                
                                
                                
                                5Amortization
      of net actuarial gain
                                
                                
                                (15
                                )
                                
                                
                                (16
                                )Net
      gain/(loss) activity during the year
                                
                                
                                (9
                                )
                                
                                
                                (11
                                )Tax
      effect
                                
                                
                                –
                                
                                
                                
                                –Net
      of tax amount
                                
                                
                                (9
                                )
                                
                                
                                (11
                                )Other
      comprehensive income (loss), net of tax
                                
                                $
                                1,119
                                
                                
                                $
                                (1,852
                                )
 
 Accumulated
other comprehensive income/(loss) balances, net of tax, were as
follows:
 
 (Dollars
      in thousands)Balance
      at
                              
                              
                              Current
                              
                              
                              Balance
      atDecember
      31,
                              
                              
                              Period
                              
                              
                              December
      31,2008
                              
                              
                              Change
                              
                              
                              2009Unrealized
      gains (losses) on securities available for
      sale
                              
                              $
                              (1,375
                              )
                              
                              $
                              1,128
                              
                              
                              $
                              (247
                              )Unrealized
      gain (loss) on pension benefits
                              
                              
                              86
                              
                              
                              
                              (9
                              )
                              
                              
                              77Total
                              
                              $
                              (1,289
                              )
                              
                              $
                              1,119
                              
                              
                              $
                              (170
                              )
  37
 
 NOTE
18 - Parent Company Only Statements
 
 (Dollars
      in thousands)NorthWest
      Indiana BancorpCondensed
      Balance SheetsDecember
      31,2009
                                      
                                      
                                      2008AssetsCash
      on deposit with Peoples Bank
                                      
                                      $
                                      2,691
                                      
                                      
                                      $
                                      1,867Investment
      in Peoples Bank
                                      
                                      
                                      52,212
                                      
                                      
                                      
                                      51,384Dividends
      receivable from Peoples Bank
                                      
                                      
                                      –
                                      
                                      
                                      
                                      1,012Other
      assets
                                      
                                      
                                      107
                                      
                                      
                                      
                                      219Total
      assets
                                      
                                      $
                                      55,010
                                      
                                      
                                      $
                                      54,482Liabilities
      and stockholders’ equityDividends
      payable
                                      
                                      $
                                      594
                                      
                                      
                                      $
                                      1,011Other
      liabilities
                                      
                                      
                                      1,338
                                      
                                      
                                      
                                      698Total
      liabilities
                                      
                                      
                                      1,932
                                      
                                      
                                      
                                      1,709Common
      stock
                                      
                                      
                                      361
                                      
                                      
                                      
                                      361Additional
      paid in capital
                                      
                                      
                                      5,104
                                      
                                      
                                      
                                      5,064Accumulated
      other comprehensive income (loss)
                                      
                                      
                                      (170
                                      )
                                      
                                      
                                      (1,289
                                      )Retained
      earnings
                                      
                                      
                                      49,312
                                      
                                      
                                      
                                      50,365Treasury
      stock
                                      
                                      
                                      (1,529
                                      )
                                      
                                      
                                      (1,728
                                      )Total
      stockholders’ equity
                                      
                                      
                                      53,078
                                      
                                      
                                      
                                      52,773Total
      liabilities and stockholders’ equity
                                      
                                      $
                                      55,010
                                      
                                      
                                      $
                                      54,482
 
 (Dollars
      in thousands)NorthWest
      Indiana BancorpCondensed
      Statements of IncomeYear
      Ended December 31,2009
                            
                            
                            2008Dividends
      from Peoples Bank
                            
                            $
                            2,813
                            
                            
                            $
                            4,047Operating
      expenses
                            
                            
                            176
                            
                            
                            
                            161Income
      before income taxes and equity in undistributed income of Peoples
      Bank
                            
                            
                            2,637
                            
                            
                            
                            3,886Income
      tax benefit
                            
                            
                            (58
                            )
                            
                            
                            (61
                            )Income
      before equity in undistributed income of Peoples Bank
                            
                            
                            2,695
                            
                            
                            
                            3,947Equity/(loss)
      in undistributed income of Peoples Bank
                            
                            
                            (207
                            )
                            
                            
                            1,983Net
      income
                            
                            $
                            2,488
                            
                            
                            $
                            5,930
 
 (Dollars
      in thousands)NorthWest
      Indiana BancorpCondensed
      Statements of Cash FlowsYear
      Ended December 31,2009
                                        
                                        
                                        2008Cash
      flows from operating activities:Net
      income
                                        
                                        $
                                        2,488
                                        
                                        
                                        $
                                        5,930Adjustments
      to reconcile net income to net cash from operating
    activitiesEquity
      in undistributed net income of Peoples Bank
                                        
                                        
                                        207
                                        
                                        
                                        
                                        (1,983
                                        )Stock-based
      compensation expense
                                        
                                        
                                        40
                                        
                                        
                                        
                                        57Change
      in other assets
                                        
                                        
                                        1,123
                                        
                                        
                                        
                                        33Change
      in other liabilities
                                        
                                        
                                        224
                                        
                                        
                                        
                                        151Total
      adjustments
                                        
                                        
                                        1,594
                                        
                                        
                                        
                                        (1,742
                                        )Net
      cash from operating activities
                                        
                                        
                                        4,082
                                        
                                        
                                        
                                        4,188Cash
      flows from investing activities
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –Cash
      flows from financing activities:Dividends
      paid
                                        
                                        
                                        (3,405
                                        )
                                        
                                        
                                        (4,045
                                        )Treasury
      stock purchased
                                        
                                        
                                        –
                                        
                                        
                                        
                                        (226
                                        )Sale
      of treasury stock
                                        
                                        
                                        141
                                        
                                        
                                        
                                        83Proceeds
      from issuance of common stock
                                        
                                        
                                        6
                                        
                                        
                                        
                                        113Net
      cash used in financing activities
                                        
                                        
                                        (3,258
                                        )
                                        
                                        
                                        (4,075
                                        )Net
      change in cash
                                        
                                        
                                        824
                                        
                                        
                                        
                                        113Cash
      at beginning of year
                                        
                                        
                                        1,867
                                        
                                        
                                        
                                        1,754Cash
      at end of year
                                        
                                        $
                                        2,691
                                        
                                        
                                        $
                                        1,867
  38
 Market
Information
 The Bancorp’s Common Stock is traded in
the over-the-counter market and quoted on the OTC Bulletin Board. The Bancorp’s
stock is not actively traded. As of January 31, 2010, the Bancorp had 2,820,842
shares of common stock outstanding and 413 stockholders of record. This does not
reflect the number of persons or entities who may hold their stock in nominee or
“street” name through brokerage firms. Set forth below are the high and low bid
prices during each quarter for the years ended December 31, 2009 and December
31, 2008. The bid prices reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
Also set forth is information concerning the dividends declared by the Bancorp
during the periods reported. Note 11 to the Financial Statements describes regulatory
limits on the Bancorp’s ability to pay dividends.
  DividendsPer
      Share Prices
                                                  
                                                  
                                                  Declared
      PerHigh
                                                  
                                                  
                                                  Low
                                                  
                                                  
                                                  Common
      ShareYear
      EndedDecember
      31, 2009
                                                  1st
      Quarter
                                                  
                                                  $
                                                  24.00
                                                  
                                                  
                                                  $
                                                  16.00
                                                  
                                                  
                                                  $
                                                  0.362nd
      Quarter
                                                  
                                                  
                                                  20.00
                                                  
                                                  
                                                  
                                                  18.25
                                                  
                                                  
                                                  
                                                  0.323rd
      Quarter
                                                  
                                                  
                                                  20.50
                                                  
                                                  
                                                  
                                                  17.00
                                                  
                                                  
                                                  
                                                  0.324th
      Quarter
                                                  
                                                  
                                                  19.95
                                                  
                                                  
                                                  
                                                  17.25
                                                  
                                                  
                                                  
                                                  0.21Year
      EndedDecember
      31, 2008
                                                  1st
      Quarter
                                                  
                                                  $
                                                  29.90
                                                  
                                                  
                                                  $
                                                  23.10
                                                  
                                                  
                                                  $
                                                  0.362nd
      Quarter
                                                  
                                                  
                                                  27.25
                                                  
                                                  
                                                  
                                                  26.00
                                                  
                                                  
                                                  
                                                  0.363rd
      Quarter
                                                  
                                                  
                                                  29.00
                                                  
                                                  
                                                  
                                                  26.00
                                                  
                                                  
                                                  
                                                  0.364th
      Quarter
                                                  
                                                  
                                                  27.25
                                                  
                                                  
                                                  
                                                  24.00
                                                  
                                                  
                                                  
                                                  0.36
  
 
  39
  
  40
  Corporate
Information
  Officers
of NorthWest Indiana Bancorp and
Peoples Bank
 David A.
Bochnowski
 Chairman
and Chief Executive Officer
 Joel
Gorelick
 President
and Chief Administrative Officer
 Jon E.
DeGuilio
 Executive
Vice President,
 General
Counsel and Corporate Secretary
 John J.
Diederich
 Executive
Vice President
 Robert T.
Lowry
 Senior
Vice President,
 Chief
Financial Officer and Treasurer
 
 Officers of Peoples Bank
 Tanya A.
Buerger
 Senior
Vice President,
 Chief
Operating Officer
 Stacy A.
Januszewski
 Senior
Vice President,
 Risk
Management Group
 Terrence
M. Quinn
 Senior
Vice President,
 Wealth
Management Group
 Todd M.
Scheub
 Senior
Vice President,
 Chief
Lending Officer
 
 Management
Personnel of Peoples Bank Lending
Group
 • Commercial
Lending
 Ronald P.
Knestrict
 Vice
President,
 Commercial
Loan Officer
 Daniel W.
Moser
 Vice
President,
 Construction
& Development Lending
 Brian E.
Rusin
 Vice
President, Commercial Loan Officer
 Michael
L. Zappia
 Vice
President, Commercial Loan Officer
 Daniel J.
Duncan
 Assistant
Vice President,
 Commercial
Loan Officer
 
 • Retail
Lending
 Catherine
L. Gonzalez
 Vice
President, Manager, Retail Lending
 John J.
Breckenridge
 Assistant
Vice President, Loan Officer
 Jeremy A.
Gorelick
 Assistant
Vice President,
 Residential
Loan Officer
 Rachel C.
Lentz
 Assistant
Vice President,
 Retail
Lending Officer
 Austin P.
Logue
 Assistant
Vice President,
 Residential
Loan Officer
 Alicia Q.
McMahon
 Assistant
Vice President,
 Residential
Loan Officer
 Nancy L.
Weckler
 Assistant
Vice President,
 Loan
Underwriting
 
 • Credit
Administration
 Jane G.
Bridgman
 Assistant
Vice President, Credit Manager
 
 • Loan
Collections
 Thomas
Guiden
 Manager
of Collections
 
 Retail
Banking Group
 Carla J.
Houck
 Vice
President, Retail Banking Group
 Meredith
L. Bielak
 Vice
President, Retail Banking Manager
 Cynthia
S. Miles
 Assistant
Vice President,
 Retail
Banking Assistant
 
 • Banking
Centers
 Marilyn
K. Repp
 Vice
President, Senior Manager,
 Crown
Point Banking Center
 Shannon
E. Franko
 Vice
President, Manager,
 Valparaiso
Banking Center
 Kelly A.
Stoming
 Vice
President, Banking Center Manager
 Charman
F. Williamson
 Vice
President,
 Manager,
Merrillville-Taft Banking Center
 Michael
A. Cronin
 Assistant
Vice President,
 Manager,
Dyer Banking Center
 Margaret
M. Haas
 Assistant
Vice President,
 Manager,
East Chicago Banking Center
 Candice
N. Logue
 Assistant
Vice President
 Manager,
Munster Banking Center
 Robin L.
Lubbinga
 Assistant
Vice President
 Manager,
Schererville Banking Center
 Colleen
A. Mastalski
 Assistant
Vice President,
 Manager,
Merrillville-Broadway
 Banking
Center
 Michael
C. Matlock
 Assistant
Vice President, Manager,
 Gary
Banking Center
 Sandra L.
Sigler
 Assistant
Vice President,
 Manager,
Woodmar Banking Center
 Donna M.
Vurva
 Assistant
Vice President,
 Manager,
Hobart Banking Center
 Jennifer
L. Gunning
 Assistant
Vice President, Assistant Manager,
 Merrillville-Broadway
Banking Center
 Antonio
Gonzalez, Jr.
 Assistant
Manager, Schererville Banking Center
 Nadia M.
Grisolia
 Assistant
Manager, East Chicago Banking Center
 Nancy M.
Kaczka
 Assistant
Manager, Munster Banking Center
 
 Wealth
Management Group
 Stephan
A. Ziemba
 Vice
President,
 Senior
Wealth Management Officer
 Mary T.
Ciciora
 Vice
President, Wealth Management Officer
 Randall
H. Walker
 Vice
President, Wealth Management Officer
 Joyce M.
Barr
 Assistant
Vice President,
 Wealth
Management Officer
 
 Shareholder
Services Group
 Timothy
G. Fesko
 Assistant
Vice President,
 Staff
Attorney and Assistant Secretary
 of
NorthWest Indiana Bancorp
 
 Operations
& Technology Group
 • Bank
Operations
 Mary D.
Mulroe
 Vice
President, Bank Operations
 
 • Deposit
Operations
 Donna M.
Gin
 Vice
President,
 Operations
& Technology
 Charlotte
V. Conn
 Assistant
Vice President, Deposit Operations
 
 • Information
Technology
 Matthew
S. Manoski
 Assistant
Vice President,
 Information
Technology
 
 • Loan
Operations
 Karen M.
Sulek
 Vice
President, Loan Operations
 Bonnie J.
Connors
 Assistant
Vice President, Loan Operations
 Antoinette
S. Shettles
 Assistant
Vice President, Loan Operations
 Margaret
Travis
 Assistant
Vice President, Loan Operations
 Sharon V.
Vacendak
 Assistant
Vice President, Loan Operations
 
 • Systems
Delivery
 Julie M.
Bonnema
 Assistant
Vice President,
 Systems
Delivery Manager
 
 Brand
Learning & Communications Group
 Elizabeth
O. Kasenga
 Vice
President, Manager, Human Resources
 Marilyn
Furticella
 Director,
Marketing/Communications
 Jill M.
Knight
 Vice
President, Training Coordinator
 Michelle
L. Dvorscak
 Assistant
Vice President,
 Human
Resource Generalist
 
 Finance
& Controls Group
 Peymon S.
Torabi
 Vice
President, Controller
 Teresa A.
Brudd
 Assistant
Vice President, Assistant Controller
 Michaelene
M. Smith
 Assistant
Vice President, Accounting
 
 Risk
Management Group
 Christine
M. Friel
 Vice
President,
 Loan
Review Officer
 Linda C.
Nemeth
 Vice
President, Internal Auditor
 Michael
J. Shimala,
 Vice
President, Compliance & Security Officer
 Nicole M.
Gullette
 Assistant
Vice President,
 Loan
Review Assistant
 
 Other Management
Personnel
 Laura J.
Spicer
 Assistant
Vice President,
 Executive
Assistant to the Chairman
 Patrick
E. Weiser
 Management
Development
 
 www.ibankpeoples.com