SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549





FORM
10-Q





(Mark
One)


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





For the quarterly period ended June 30,
2010 or





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





For the transition period
from to______





Commission File Number:
0-26128





NorthWest Indiana Bancorp


(Exact
name of registrant as specified in its charter)





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





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





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x  No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes o No  o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of  “large accelerated filer”, “accelerated filer”,
and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check
one):


Large
accelerated filer  o    Accelerated
filer  o    Non-accelerated
filer  o  Smaller
Reporting Company x


(Do
not check if a smaller reporting company)





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





There
were 2,823,021 shares of the registrant’s Common Stock, without par value,
outstanding at June 30, 2010.





NorthWest
Indiana Bancorp


Index




PageNumberPART
      I. Financial InformationItem 1.
                          Unaudited
      Financial StatementsConsolidated
      Balance Sheets, June 30, 2010 and December 31, 2009
                          
                          1Consolidated
      Statements of Income, Three and Six Months EndedJune
      30, 2010 and 2009
                          
                          2Consolidated
      Statements of Changes in Stockholders' Equity, Three andSix
      Months Ended June 30, 2010 and 2009
                          
                          3Consolidated
      Statements of Cash Flows, Six Months Ended June 30, 2010and
      2009
                          
                          4Notes
      to Consolidated Financial Statements
                          
                          5-14Item
      2.
                          Management’s
      Discussion and Analysis of Financial Condition andResults
      of Operations
                          
                          15-25Item
      3.
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          
                          26Item
      4.
                          Controls
      and Procedures
                          
                          26PART
      II. Other Information
                          
                          27SIGNATURES
                          
                          28EXHIBITS31.1
                          Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
                          Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
      Officer32.1
                          Section
      1350 Certifications








NorthWest Indiana Bancorp


Consolidated
Balance Sheets





June 30,
                                          
                                          
                                          December 31,2010
                                          
                                          
                                          2009(Dollars
      in thousands)
                                          
                                          (unaudited)ASSETSCash
      and non-interest bearing balances in financial
      institutions
                                          
                                          $
                                          10,333
                                          
                                          
                                          $
                                          8,705Interest
      bearing balances in financial institutions
                                          
                                          
                                          30,559
                                          
                                          
                                          
                                          447Federal
      funds sold
                                          
                                          
                                          11,320
                                          
                                          
                                          
                                          4,070Total
      cash and cash equivalents
                                          
                                          
                                          52,212
                                          
                                          
                                          
                                          13,222Securities
      available-for-sale
                                          
                                          
                                          131,651
                                          
                                          
                                          
                                          124,776Securities
      held-to-maturity
                                          
                                          
                                          18,610
                                          
                                          
                                          
                                          19,557Loans
      held for sale
                                          
                                          
                                          477
                                          
                                          
                                          
                                          1,025Loans
      receivable
                                          
                                          
                                          442,478
                                          
                                          
                                          
                                          458,245Less:
      allowance for loan losses
                                          
                                          
                                          (7,020
                                          )
                                          
                                          
                                          (6,114
                                          )Net
      loans receivable
                                          
                                          
                                          435,458
                                          
                                          
                                          
                                          452,131Federal
      Home Loan Bank stock
                                          
                                          
                                          3,650
                                          
                                          
                                          
                                          3,650Accrued
      interest receivable
                                          
                                          
                                          2,748
                                          
                                          
                                          
                                          2,878Premises
      and equipment
                                          
                                          
                                          19,244
                                          
                                          
                                          
                                          19,590Foreclosed
      real estate
                                          
                                          
                                          6,245
                                          
                                          
                                          
                                          3,747Cash
      value of bank owned life insurance
                                          
                                          
                                          12,253
                                          
                                          
                                          
                                          12,049Prepaid
      FDIC insurance premium
                                          
                                          
                                          2,542
                                          
                                          
                                          
                                          3,282Other
      assets
                                          
                                          
                                          4,921
                                          
                                          
                                          
                                          5,899Total
      assets
                                          
                                          $
                                          690,011
                                          
                                          
                                          $
                                          661,806LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Non-interest
      bearing
                                          
                                          $
                                          51,061
                                          
                                          
                                          $
                                          42,390Interest
      bearing
                                          
                                          
                                          519,097
                                          
                                          
                                          
                                          498,137Total
                                          
                                          
                                          570,158
                                          
                                          
                                          
                                          540,527Repurchase
      agreements
                                          
                                          
                                          20,533
                                          
                                          
                                          
                                          15,893Borrowed
      funds
                                          
                                          
                                          32,732
                                          
                                          
                                          
                                          47,129Accrued
      expenses and other liabilities
                                          
                                          
                                          10,280
                                          
                                          
                                          
                                          5,179Total
      liabilities
                                          
                                          
                                          633,703
                                          
                                          
                                          
                                          608,728Stockholders'
      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:  June 30, 2010 - 2,889,252
                                          
                                          
                                          361
                                          
                                          
                                          
                                          361December
      31, 2009 - 2,889,452shares
      outstanding:  June 30, 2010 - 2,823,021December
      31, 2009 - 2,818,578Additional
      paid in capital
                                          
                                          
                                          5,123
                                          
                                          
                                          
                                          5,104Accumulated
      other comprehensive income/(loss)
                                          
                                          
                                          1,141
                                          
                                          
                                          
                                          (170
                                          )Retained
      earnings
                                          
                                          
                                          51,085
                                          
                                          
                                          
                                          49,312Treasury
      stock, common shares at cost:  June 30, 2010 -
      66,231December
      31, 2009 - 70,874
                                          
                                          
                                          (1,402
                                          )
                                          
                                          
                                          (1,529
                                          )Total
      stockholders' equity
                                          
                                          
                                          56,308
                                          
                                          
                                          
                                          53,078Total
      liabilities and stockholders' equity
                                          
                                          $
                                          690,011
                                          
                                          
                                          $
                                          661,806





See
accompanying notes to consolidated financial statements.


1





NorthWest Indiana Bancorp


Consolidated
Statements of Income


(unaudited)





Three Months Ended
                  
                  
                  Six Months Ended(Dollars in thousands, except per share data)
                  
                  June 30,
                  
                  
                  June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Interest
      income:Loans
      receivableReal
      estate loans
                  
                  $
                  5,083
                  
                  
                  $
                  5,611
                  
                  
                  $
                  10,238
                  
                  
                  $
                  11,533Commercial
      loans
                  
                  
                  1,121
                  
                  
                  
                  916
                  
                  
                  
                  2,153
                  
                  
                  
                  1,813Consumer
      loans
                  
                  
                  20
                  
                  
                  
                  30
                  
                  
                  
                  45
                  
                  
                  
                  64Total
      loan interest
                  
                  
                  6,224
                  
                  
                  
                  6,557
                  
                  
                  
                  12,436
                  
                  
                  
                  13,410Securities
                  
                  
                  1,564
                  
                  
                  
                  1,512
                  
                  
                  
                  3,094
                  
                  
                  
                  3,095Other
      interest earning assets
                  
                  
                  7
                  
                  
                  
                  5
                  
                  
                  
                  13
                  
                  
                  
                  10Total
      interest income
                  
                  
                  7,795
                  
                  
                  
                  8,074
                  
                  
                  
                  15,543
                  
                  
                  
                  16,515Interest
      expense:Deposits
                  
                  
                  1,055
                  
                  
                  
                  1,885
                  
                  
                  
                  2,255
                  
                  
                  
                  4,051Repurchase
      agreements
                  
                  
                  48
                  
                  
                  
                  76
                  
                  
                  
                  100
                  
                  
                  
                  164Borrowed
      funds
                  
                  
                  234
                  
                  
                  
                  385
                  
                  
                  
                  504
                  
                  
                  
                  783Total
      interest expense
                  
                  
                  1,337
                  
                  
                  
                  2,346
                  
                  
                  
                  2,859
                  
                  
                  
                  4,998Net
      interest income
                  
                  
                  6,458
                  
                  
                  
                  5,728
                  
                  
                  
                  12,684
                  
                  
                  
                  11,517Provision
      for loan losses
                  
                  
                  1,270
                  
                  
                  
                  1,115
                  
                  
                  
                  2,505
                  
                  
                  
                  1,815Net
      interest income after provision for loan losses
                  
                  
                  5,188
                  
                  
                  
                  4,613
                  
                  
                  
                  10,179
                  
                  
                  
                  9,702Noninterest
      income:Fees
      and service charges
                  
                  
                  635
                  
                  
                  
                  671
                  
                  
                  
                  1,244
                  
                  
                  
                  1,310Gain
      on sale of securities, net
                  
                  
                  452
                  
                  
                  
                  204
                  
                  
                  
                  742
                  
                  
                  
                  344Wealth
      management operations
                  
                  
                  253
                  
                  
                  
                  205
                  
                  
                  
                  534
                  
                  
                  
                  402Gain
      on sale of loans, net
                  
                  
                  163
                  
                  
                  
                  299
                  
                  
                  
                  272
                  
                  
                  
                  865Increase
      in cash value of bank owned life insurance
                  
                  
                  104
                  
                  
                  
                  104
                  
                  
                  
                  205
                  
                  
                  
                  208Gain/(loss)
      on foreclosed real estate, net
                  
                  
                  44
                  
                  
                  
                  6
                  
                  
                  
                  65
                  
                  
                  
                  (31
                  )Other-than-temporary
      impairment of securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (11
                  )
                  
                  
                  -Portion
      of loss recognized in other comprehensive income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (102
                  )
                  
                  
                  -Other
                  
                  
                  4
                  
                  
                  
                  7
                  
                  
                  
                  8
                  
                  
                  
                  11Total
      noninterest income
                  
                  
                  1,655
                  
                  
                  
                  1,496
                  
                  
                  
                  2,957
                  
                  
                  
                  3,109Noninterest
      expense:Compensation
      and benefits
                  
                  
                  2,458
                  
                  
                  
                  2,245
                  
                  
                  
                  4,867
                  
                  
                  
                  4,610Occupancy
      and equipment
                  
                  
                  808
                  
                  
                  
                  750
                  
                  
                  
                  1,593
                  
                  
                  
                  1,533Federal
      deposit insurance premiums
                  
                  
                  265
                  
                  
                  
                  553
                  
                  
                  
                  496
                  
                  
                  
                  740Data
      processing
                  
                  
                  231
                  
                  
                  
                  215
                  
                  
                  
                  463
                  
                  
                  
                  430Marketing
                  
                  
                  114
                  
                  
                  
                  147
                  
                  
                  
                  239
                  
                  
                  
                  214Other
                  
                  
                  1,005
                  
                  
                  
                  1,042
                  
                  
                  
                  1,899
                  
                  
                  
                  1,973Total
      noninterest expense
                  
                  
                  4,881
                  
                  
                  
                  4,952
                  
                  
                  
                  9,557
                  
                  
                  
                  9,500Income
      before income tax expenses
                  
                  
                  1,962
                  
                  
                  
                  1,157
                  
                  
                  
                  3,579
                  
                  
                  
                  3,311Income
      tax expenses
                  
                  
                  346
                  
                  
                  
                  104
                  
                  
                  
                  574
                  
                  
                  
                  553Net
      income
                  
                  $
                  1,616
                  
                  
                  $
                  1,053
                  
                  
                  $
                  3,005
                  
                  
                  $
                  2,758Earnings
      per common share:Basic
                  
                  $
                  0.57
                  
                  
                  $
                  0.37
                  
                  
                  $
                  1.06
                  
                  
                  $
                  0.98Diluted
                  
                  $
                  0.57
                  
                  
                  $
                  0.37
                  
                  
                  $
                  1.06
                  
                  
                  $
                  0.98Dividends
      declared per common share
                  
                  $
                  0.21
                  
                  
                  $
                  0.32
                  
                  
                  $
                  0.42
                  
                  
                  $
                  0.68





See
accompanying notes to consolidated financial statements.


2





NorthWest Indiana Bancorp


Consolidated
Statements of Changes in Stockholders' Equity


(unaudited)





Three Months Ended
                      
                      
                      Six Months Ended(Dollars in thousands)
                      
                      June 30,
                      
                      
                      June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Balance
      at beginning of period
                      
                      $
                      54,319
                      
                      
                      $
                      53,173
                      
                      
                      $
                      53,078
                      
                      
                      $
                      52,773Comprehensive
      income:Net
      income
                      
                      
                      1,616
                      
                      
                      
                      1,053
                      
                      
                      
                      3,005
                      
                      
                      
                      2,758Net
      unrealized change on securitiesavailable-for-sale,
      net of reclassifications and tax effects
                      
                      
                      919
                      
                      
                      
                      (86
                      )
                      
                      
                      1,315
                      
                      
                      
                      (333
                      )Amortization
      of unrecognized gain
                      
                      
                      (2
                      )
                      
                      
                      (2
                      )
                      
                      
                      (4
                      )
                      
                      
                      (4
                      )Comprehensive
      income
                      
                      
                      2,533
                      
                      
                      
                      965
                      
                      
                      
                      4,316
                      
                      
                      
                      2,421Issuance
      of common stock,under
      stock based compensation plan, including tax effects
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4Stock
      based compensation expense
                      
                      
                      9
                      
                      
                      
                      9
                      
                      
                      
                      19
                      
                      
                      
                      23Sale
      of treasury stock
                      
                      
                      40
                      
                      
                      
                      48
                      
                      
                      
                      80
                      
                      
                      
                      48Adjustment
      to retained earnings for EITF 06-4
                      
                      
                      -
                      
                      
                      
                      (21
                      )
                      
                      
                      -
                      
                      
                      
                      (84
                      )Cash
      dividends
                      
                      
                      (593
                      )
                      
                      
                      (900
                      )
                      
                      
                      (1,185
                      )
                      
                      
                      (1,911
                      )Balance
      at end of period
                      
                      $
                      56,308
                      
                      
                      $
                      53,274
                      
                      
                      $
                      56,308
                      
                      
                      $
                      53,274





See
accompanying notes to consolidated financial statements.


3





NorthWest
Indiana Bancorp


Consolidated
Statements of Cash Flows


(unaudited)




Six Months Ended(Dollars in thousands)
                      
                      June 30,2010
                      
                      
                      2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                      
                      $
                      3,005
                      
                      
                      $
                      2,758Adjustments
      to reconcile net income tonet
      cash provided by operating activities:Origination
      of loans for sale
                      
                      
                      (10,466
                      )
                      
                      
                      (36,916
                      )Sale
      of loans originated for sale
                      
                      
                      11,253
                      
                      
                      
                      36,188Depreciation
      and amortization, net of accretion
                      
                      
                      1,005
                      
                      
                      
                      694Amortization
      of mortgage servicing rights
                      
                      
                      56
                      
                      
                      
                      74Amortization
      of investment in real estate limited partnerships
                      
                      
                      76
                      
                      
                      
                      95Equity
      in loss of investment in limited partnership,net
      of interest received
                      
                      
                      3
                      
                      
                      
                      6Stock
      based compensation expense
                      
                      
                      19
                      
                      
                      
                      23Gains
      on sales and calls of securities
                      
                      
                      (742
                      )
                      
                      
                      (344
                      )Net
      gains on sale of loans
                      
                      
                      (272
                      )
                      
                      
                      (865
                      )Net
      losses due to other-than-temporary impairment of
securities
                      
                      
                      113
                      
                      
                      
                      -Net
      (gains)/losses on foreclosed real estate
                      
                      
                      (65
                      )
                      
                      
                      31Provision
      for loan losses
                      
                      
                      2,505
                      
                      
                      
                      1,815Net
      change in:Interest
      receivable
                      
                      
                      130
                      
                      
                      
                      120Other
      assets
                      
                      
                      916
                      
                      
                      
                      (313
                      )Cash
      value of bank owned life insurance
                      
                      
                      (205
                      )
                      
                      
                      (208
                      )Accrued
      expenses and other liabilities
                      
                      
                      5,101
                      
                      
                      
                      (3,619
                      )Total
      adjustments
                      
                      
                      9,427
                      
                      
                      
                      (3,219
                      )Net
      cash - operating activities
                      
                      
                      12,432
                      
                      
                      
                      (461
                      )CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from maturities and pay downs of securities
    available-for-sale
                      
                      
                      11,931
                      
                      
                      
                      11,771Proceeds
      from sales of securities available-for-sale
                      
                      
                      13,962
                      
                      
                      
                      7,575Purchase
      of securities available-for-sale
                      
                      
                      (30,330
                      )
                      
                      
                      (37,667
                      )Purchase
      of securities held-to-maturity
                      
                      
                      -
                      
                      
                      
                      (725
                      )Proceeds
      from maturities and pay downs of securities
    held-to-maturity
                      
                      
                      933
                      
                      
                      
                      992Proceeds
      from sale of loans transferred to held-for-sale
                      
                      
                      -
                      
                      
                      
                      10,651Net
      change in loans receivable
                      
                      
                      10,803
                      
                      
                      
                      16,031Purchase
      of premises and equipment, net
                      
                      
                      (442
                      )
                      
                      
                      (1,151
                      )Proceeds
      from sale of foreclosed real estate
                      
                      
                      932
                      
                      
                      
                      21Net
      cash - investing activities
                      
                      
                      7,789
                      
                      
                      
                      7,498CASH
      FLOWS FROM FINANCING ACTIVITIES:Change
      in deposits
                      
                      
                      29,631
                      
                      
                      
                      1,848Proceeds
      from FHLB advances
                      
                      
                      9,000
                      
                      
                      
                      2,000Repayment
      of FHLB advances
                      
                      
                      (15,000
                      )
                      
                      
                      (3,000
                      )Change
      in other borrowed funds
                      
                      
                      (3,757
                      )
                      
                      
                      1,410Proceeds
      from issuance of common stock
                      
                      
                      -
                      
                      
                      
                      4Proceeds
      from sale of treasury stock
                      
                      
                      80
                      
                      
                      
                      48Dividends
      paid
                      
                      
                      (1,185
                      )
                      
                      
                      (1,911
                      )Net
      cash - financing activities
                      
                      
                      18,769
                      
                      
                      
                      399Net
      change in cash and cash equivalents
                      
                      
                      38,990
                      
                      
                      
                      7,436Cash
      and cash equivalents at beginning of period
                      
                      
                      13,222
                      
                      
                      
                      11,296Cash
      and cash equivalents at end of period
                      
                      $
                      52,212
                      
                      
                      $
                      18,732SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
                      
                      $
                      2,885
                      
                      
                      $
                      5,037Income
      taxes
                      
                      $
                      1,010
                      
                      
                      $
                      800SUPPLEMENTAL
      NONCASH INFORMATION:Transfers
      from loans to foreclosed real estate
                      
                      $
                      3,442
                      
                      
                      $
                      1,177Transfers
      from loans to loans held for sale
                      
                      $
                      -
                      
                      
                      $
                      10,497





See
accompanying notes to consolidated financial statements.




4




NorthWest
Indiana Bancorp




Notes
to Consolidated Financial Statements





Note
1 - Basis of Presentation


The consolidated financial statements
include the accounts of NorthWest Indiana Bancorp (the “Bancorp”), its
wholly-owned subsidiary, Peoples Bank SB (the “Bank”), and the Bank’s
wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC and NWIN
Funding, Inc. The Bancorp has no other business activity other than being a
holding company for the Bank. The Bancorp’s earnings are dependent upon the
earnings of the Bank. The accompanying unaudited consolidated financial
statements were prepared in accordance with instructions for Form 10-Q and,
therefore, do not include all disclosures required by U.S. generally accepted
accounting principles for complete presentation of financial statements. In the
opinion of management, the consolidated financial statements contain all
adjustments necessary to present fairly the consolidated balance sheets of the
Bancorp as of June 30, 2010 and December 31, 2009, and the consolidated
statements of income, changes in stockholders’ equity, for the three and six
months ended June 30, 2010 and 2009, and cash flows for the six months ended
June 30, 2010 and 2009. The income reported for the six month period ended June
30, 2010 is not necessarily indicative of the results to be expected for the
full year.





Note
2 - Use of Estimates


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





Note
3 – Securities


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





(Dollars in thousands)Gross
                
                
                GrossCost
                
                
                Unrealized
                
                
                Unrealized
                
                
                FairBasis
                
                
                Gains
                
                
                Losses
                
                
                Value6/30/2010U.S.
      government sponsored entities
                
                $
                1,000
                
                
                $
                13
                
                
                $
                -
                
                
                $
                1,013CMO
      and residential mortgage-backed securities
                
                
                57,386
                
                
                
                2,366
                
                
                
                -
                
                
                
                59,752Municipal
      securities
                
                
                33,069
                
                
                
                1,736
                
                
                
                (49
                )
                
                
                34,756CMO
      government sponsored entities
                
                
                33,294
                
                
                
                1,497
                
                
                
                -
                
                
                
                34,791Collateralized
      debt obligations
                
                
                5,230
                
                
                
                -
                
                
                
                (3,891
                )
                
                
                1,339Total
      debt securities
                
                $
                129,979
                
                
                $
                5,612
                
                
                $
                (3,940
                )
                
                $
                131,65112/31/2009U.S.
      government sponsored entities
                
                $
                1,993
                
                
                $
                52
                
                
                $
                -
                
                
                $
                2,045CMO
      and residential mortgage-backed securities
                
                
                61,095
                
                
                
                2,302
                
                
                
                (82
                )
                
                
                63,315Municipal
      securities
                
                
                34,151
                
                
                
                1,516
                
                
                
                (94
                )
                
                
                35,573CMO
      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
                )
                
                $
                124,776




5




The carrying amount (cost basis),
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
                    
                    
                    Value6/30/2010Municipal
      securities
                    
                    $
                    17,604
                    
                    
                    $
                    866
                    
                    
                    $
                    -
                    
                    
                    $
                    18,470Residential
      mortgage-backed securities
                    
                    
                    1,006
                    
                    
                    
                    59
                    
                    
                    
                    -
                    
                    
                    
                    1,065Total
      debt securities
                    
                    $
                    18,610
                    
                    
                    $
                    925
                    
                    
                    $
                    -
                    
                    
                    $
                    19,53512/31/2009Municipal
      securities
                    
                    $
                    18,539
                    
                    
                    $
                    724
                    
                    
                    $
                    -
                    
                    
                    $
                    19,263Residential
      mortgage-backed securities
                    
                    
                    1,018
                    
                    
                    
                    28
                    
                    
                    
                    (6
                    )
                    
                    
                    1,040Total
      debt securities
                    
                    $
                    19,557
                    
                    
                    $
                    752
                    
                    
                    $
                    (6
                    )
                    
                    $
                    20,303





The fair value of debt securities and
carrying amount, if different, at June 30, 2010 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
                          
                          $
                          194
                          
                          
                          $
                          -
                          
                          
                          $
                          -Due
      from one to five years
                          
                          
                          3,133
                          
                          
                          
                          560
                          
                          
                          
                          597Due
      over five years
                          
                          
                          33,781
                          
                          
                          
                          17,044
                          
                          
                          
                          17,873CMO
      and residential mortgage-backed securities
                          
                          
                          94,543
                          
                          
                          
                          1,006
                          
                          
                          
                          1,065Total
                          
                          $
                          131,651
                          
                          
                          $
                          18,610
                          
                          
                          $
                          19,535





Sales of available-for-sale securities
were as follows:





(Dollars in thousands)6/30/2010
                    
                    
                    6/30/2009Proceeds
                    
                    $
                    13,962
                    
                    
                    $
                    7,575Gross
      gains
                    
                    
                    742
                    
                    
                    
                    344Gross
      losses
                    
                    
                    -
                    
                    
                    
                    -





Change in net unrealized gain/(loss) on
available-for-sale securities included in other comprehensive income is as
follows:


(Dollars in thousands)UnrealizedgainsBeginning
      balance, December 31, 2009
                    
                    $
                    (247
                    )Current
      period change
                    
                    
                    1,315Ending
      balance, June 30, 2010
                    
                    $
                    1,068





Securities with carrying values of $
$22,265,000 and $27,394,000 were pledged as of June 30, 2010 and December 31,
2009, respectively, as collateral for repurchase agreements and public funds and
for other purposes as permitted or required by law.




6




Securities with unrealized losses at
June 30, 2010 and December 31, 2009 not recognized in income are as
follows:





(Dollars in thousands)Lessthan12months
                  
                  
                  12monthsorlonger
                  
                  
                  TotalFair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  UnrealizedValue
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  Losses6/30/2010Description
      of Securities:CMO
      and residential mortgage-backed
      securities
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Municipal
      securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,503
                  
                  
                  
                  (49
                  )
                  
                  
                  1,503
                  
                  
                  
                  (49
                  )Collateralized
      debt obligations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,339
                  
                  
                  
                  (3,891
                  )
                  
                  
                  1,339
                  
                  
                  
                  (3,891
                  )Total
      temporarily impaired
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  2,842
                  
                  
                  $
                  (3,940
                  )
                  
                  $
                  2,842
                  
                  
                  $
                  (3,940
                  )Number
      of securities
                  
                  
                  
                  
                  
                  
                  0
                  
                  
                  
                  
                  
                  
                  
                  7
                  
                  
                  
                  
                  
                  
                  
                  7





(Dollars
      in thousands)Less than 12 months
                  
                  
                  12 months or longer
                  
                  
                  TotalFair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  UnrealizedValue
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  Losses12/31/2009Description
      of Securities:CMO
      and residential mortgage-backed
      securities
                  
                  $
                  15,604
                  
                  
                  $
                  (297
                  )
                  
                  $
                  13
                  
                  
                  $
                  -
                  
                  
                  $
                  15,617
                  
                  
                  $
                  (297
                  )Municipal
      securities
                  
                  
                  2,443
                  
                  
                  
                  (15
                  )
                  
                  
                  1,476
                  
                  
                  
                  (79
                  )
                  
                  
                  3,919
                  
                  
                  
                  (94
                  )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





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.





Note
4 – Loans Receivable


Non-performing loans at period-end were
as follows:





(Dollars
      in thousands)6/30/2010
                
                
                12/31/2009Loans
      past due over 90 days still on accrual
                
                $
                1,932
                
                
                $
                1,491Non-accrual
      loans
                
                
                14,259
                
                
                
                17,074





Impaired
loans at period-end were as follows:





(Dollars
      in thousands)6/30/2010
                                        
                                        
                                        12/31/2009Period-end
      loans with no allocatedallowance
      for loan losses (including troubled debt restructurings of $6,231 and
      $0)
                                        
                                        $
                                        11,543
                                        
                                        
                                        $
                                        3,853Period-end
      loans with allocatedallowance
      for loan losses (including troubled debt restructurings of $5,553 and
      $7,199)
                                        
                                        
                                        6,832
                                        
                                        
                                        
                                        13,112Total
                                        
                                        $
                                        18,375
                                        
                                        
                                        $
                                        16,965Amount
      of the allowance forloan
      losses allocated
                                        
                                        $
                                        658
                                        
                                        
                                        $
                                        1,179Average
      of impaired loansduring
      the period
                                        
                                        
                                        19,540
                                        
                                        
                                        
                                        12,820Interest
      income recognizedduring
      impairment
                                        
                                        
                                        16
                                        
                                        
                                        
                                        10Cash-basis
      interest incomerecognized
      during impairment
                                        
                                        
                                        312
                                        
                                        
                                        
                                        95




7




Note
5 – Foreclosed Real Estate





Foreclosed
real estate at period-end is summarized below:


(Dollars
      in thousands)6/30/2010
                  
                  
                  12/31/2009Construction
      and land development
                  
                  $
                  2,641
                  
                  
                  $
                  768Commercial
      real estate and other dwelling
                  
                  
                  1,926
                  
                  
                  
                  1,897Residential
      real estate
                  
                  
                  1,534
                  
                  
                  
                  1,082Commercial
      and industrial
                  
                  
                  144
                  
                  
                  
                  -Total
                  
                  $
                  6,245
                  
                  
                  $
                  3,747





Note
6 - Concentrations of Credit Risk


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





Note
7 – Earnings Per Share


Earnings per common share is computed
by dividing net income by the weighted average number of common shares
outstanding.  A reconciliation of the numerators and denominators of
the basic and diluted earnings per common share computation for the three and
six months ended June 30, 2010 and 2009 are presented below:





(Dollars in thousands, except per share data)Three Months Ended
                      
                      
                      Six Months EndedJune 30,
                      
                      
                      June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Basic
      earnings per common share:Net
      income as reported
                      
                      $
                      1,616
                      
                      
                      $
                      1,053
                      
                      
                      $
                      3,005
                      
                      
                      $
                      2,758Weighted
      average common shares outstanding:
                      
                      
                      2,823,008
                      
                      
                      
                      2,813,143
                      
                      
                      
                      2,821,931
                      
                      
                      
                      2,811,217Basic
      earnings per common share:
                      
                      $
                      0.57
                      
                      
                      $
                      0.37
                      
                      
                      $
                      1.06
                      
                      
                      $
                      0.98Diluted
      earnings per common share:Net
      income as reported
                      
                      $
                      1,616
                      
                      
                      $
                      1,053
                      
                      
                      $
                      3,005
                      
                      
                      $
                      2,758Weighted
      average common shares outstanding:
                      
                      
                      2,823,008
                      
                      
                      
                      2,813,143
                      
                      
                      
                      2,821,931
                      
                      
                      
                      2,811,217Add:  Dilutive
      effect of assumed stockoption
      exercises:
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      240Weighted
      average common and dilutivepotential
      common shares outstanding:
                      
                      
                      2,823,008
                      
                      
                      
                      2,813,143
                      
                      
                      
                      2,821,931
                      
                      
                      
                      2,811,457Diluted
      earnings per common share:
                      
                      $
                      0.57
                      
                      
                      $
                      0.37
                      
                      
                      $
                      1.06
                      
                      
                      $
                      0.98




Note
8 – Stock Based Compensation


The Bancorp’s 2004 Stock Option Plan
(the Plan), which is stockholder-approved, permits the grant of share options to
its employees for up to 250,000 shares of common stock. Awards granted under the
Plan may be in the form of incentive stock options, non-incentive stock options,
or restricted stock. As required by the Compensation – Stock Compensation Topic
(formerly Financial Accounting Standards No. 123R (FAS 123R,), “Share-Based
Payments”), companies are required to record compensation cost for stock options
provided to employees in return for employment service. The cost is measured at
the fair value of the options when granted, and this cost is expensed over the
employment service period, which is normally the vesting period of the options.
Compensation cost will also be recorded for prior option grants that vest after
the date of adoption. For the six months ended June 30, 2010, stock based
compensation expense of $19,000 was recorded, compared to $23,000 for the six
months ended June 30, 2009. It is anticipated that current outstanding vested
and unvested options will result in additional compensation expense of
approximately $18,000 in 2010 and $34,000 in 2011.




8





There were 300 shares of restricted
stock granted during the first six months of 2010, compared to 2,000 shares
during the first six months of 2009.





A summary of option activity under the
Bancorp’s incentive stock option plan for the six  months ended June
30, 2010 is presented below:





Weighted-Weighted-
                            
                            
                            AverageAverage
                            
                            
                            Remaining
                            
                            
                            AggregateExercise
                            
                            
                            Contractual
                            
                            
                            IntrinsicOptions
                            
                            Shares
                            
                            
                            Price
                            
                            
                            Term
                            
                            
                            ValueOutstanding
      at January 1, 2010
                            
                            
                            65,747
                            
                            
                            $
                            23.69Granted
                            
                            
                            -
                            
                            
                            $
                            -Exercised
                            
                            
                            -
                            
                            
                            $
                            -Forfeited
                            
                            
                            (4,800
                            )
                            
                            $
                            24.04Expired
                            
                            
                            (11,700
                            )
                            
                            $
                            21.13Outstanding
      at June 30, 2010
                            
                            
                            49,247
                            
                            
                            $
                            24.27
                            
                            
                            
                            2.2
                            
                            
                            
                            -Exercisable
      at June 30, 2010
                            
                            
                            48,247
                            
                            
                            $
                            24.18
                            
                            
                            
                            2.1
                            
                            
                            
                            -





Note 9 – Adoption of New Accounting
Standards


The Transfers and Servicing Topic was
updated 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 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.





The Fair Value Measurements and
Disclosures Topic was amended to improve disclosure requirements for those
entities required to make recurring and nonrecurring fair value measurements.
The amendment requires new disclosures for transfers in and out of Levels 1 and
2 and for separate presentation of purchases, sales, issuances and settlements
for activity in Level 3. Further, this amendment clarifies the existing required
disclosures when determining the level of disaggregation when reporting classes
of assets and liabilities and disclosure about valuation techniques and inputs
to measure fair value for both recurring and nonrecurring measurements. The new
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosure about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The Fair
Value Footnote (Note 10) has been updated to incorporate these
amendments.




In July
2010, FASB issued a statement which expands disclosures about credit quality of
financing receivables and allowance for credit losses.  The standard
will require the Company to expand disclosures about the credit quality of our
loans and the related reserves against them.  The extra disclosures
will include details on our past due loans, credit quality indicators, and
modifications of loans.  The Company will adopt the standard beginning
with our December 31, 2010 financial statements.


9


Note 10 – Fair
Value


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





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





Level 2:
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.





Level 3:
Significant unobservable inputs that reflect a reporting entity’s own
assumptions about the assumptions that market participants would use in pricing
an 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.  Significant judgments are required in determining impairment,
which include making assumptions regarding the estimated prepayments, loss
assumptions and the change in interest rates. We consider the following factors
when determining an other-than-temporary impairment for a security: the length
of time and the extent to which the market value has been less than amortized
cost; the financial condition and near-term prospects of the issuer; the
underlying fundamentals of the relevant market and the outlook for such market
for the near future; an assessment of whether the Bancorp has (1) the intent to
sell the debt securities or (2) more likely than not will be required to sell
the debt securities before its anticipated market recovery. If either of these
conditions is met, management will recognize other-than-temporary impairment.
If, in management’s judgment, an other-than-temporary impairment exists, the
cost basis of the security will be written down for the credit loss, and the
unrealized loss will be transferred from accumulated other comprehensive loss as
an immediate reduction of current earnings.





For the period ended June 30, 2010, 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 then
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 their financial ratios were
compared 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 $249 thousand, as of June 30,
2010.


10





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


(Dollars in thousands)Collateralized debt obligationsEnding
      balance, December 31, 2009
                        
                        $
                        136Additions
      not previously recognized
                        
                        
                        113Ending
      balance, June 30, 2010
                        
                        $
                        249





Below is a table containing information
regarding the Bancorp’s pooled trust preferred securities as of June 30,
2010:





Deal name
                
                PreTSL XXIV
                
                
                PreTSL XXVII
                
                
                Alesco IX
                
                
                Alesco XVIIClass
                
                
                B-1
                
                
                
                C-1
                
                
                
                A-2A
                
                
                
                BBook
      value
                
                
                1,258,772
                
                
                
                1,296,077
                
                
                
                1,323,252
                
                
                
                1,351,903Fair
      value
                
                
                253,706
                
                
                
                187,891
                
                
                
                639,600
                
                
                
                258,096Unrealized
      gains/(losses)
                
                
                (1,005,066
                )
                
                
                (1,108,186
                )
                
                
                (683,652
                )
                
                
                (1,093,807
                )Lowest
      credit rating assigned
                
                Caa3
                
                
                Ca
                
                
                BB
                
                
                CaNumber
      of performing banks
                
                
                52
                
                
                
                28
                
                
                
                47
                
                
                
                38Number
      of performing insurance companies
                
                
                12
                
                
                
                7
                
                
                
                10
                
                
                
                n/aNumber
      of issuers in default
                
                
                13
                
                
                
                5
                
                
                
                8
                
                
                
                7Number
      of issuers in deferral
                
                
                16
                
                
                
                9
                
                
                
                11
                
                
                
                11Defaults
      & deferrals as a % of performing collateral
                
                
                49.63
                %
                
                
                34.29
                %
                
                
                41.61
                %
                
                
                50.11
                %Subordination:As
      a % of performing collateral
                
                
                -15.28
                %
                
                
                -19.13
                %
                
                
                17.84
                %
                
                
                -20.23
                %As
      a % of performing collateral - adjusted for projected future
      defaults
                
                
                -20.71
                %
                
                
                -24.48
                %
                
                
                12.96
                %
                
                
                -26.43
                %Other-than-temporary
      impairment model assumptions:Defaults:Year
      1
                
                
                3.10
                %
                
                
                2.70
                %
                
                
                4.00
                %
                
                
                3.60
                %Year
      2
                
                
                0.80
                %
                
                
                0.90
                %
                
                
                0.90
                %
                
                
                0.80
                %Year
      3
                
                
                0.60
                %
                
                
                0.70
                %
                
                
                0.70
                %
                
                
                0.50
                %>
      3 Years
                
                
                (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
                
                
                
                132,000
                
                
                
                15,884
                
                
                
                61,950





(1) -
Default rates > 3 years are evaluated on a issuer by issuer basis and range
from 0.25% to 5.00%.


(2) -
Recovery assumptions are evaluated on a issuer by issuer basis and range from 0%
to 15% 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 other-than-temporary-impairment
analysis. Subordination assuming future default/deferral assumptions is
calculated by deducting future defaults from the current performing collateral.
At June 30, 2010, 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.


11




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 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.




At June 30, 2010, three of the trust
preferred securities with a cost basis of $3.9 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




There were no transfers to or from
Levels 1 and 2 during the quarter ended June 30, 2010. Assets and liabilities
measured at fair value on a recurring basis are summarized below:





(Dollars in thousands)
                    
                    
                    
                    
                    Fair Value Measurements at June 30, 2010 Using6/30/2010
                    
                    
                    Quoted Prices in
                      Active Markets for
                      Identical Assets
                      (Level 1)
                    
                    
                    Significant Other
                      Observable Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable Inputs
                      (Level 3)Assets:Available-for-sale
      debt securitiesU.S.
      government sponsored entities
                    
                    $
                    1,013
                    
                    
                    $
                    -
                    
                    
                    $
                    1,013
                    
                    
                    $
                    -CMO
      and residential mortgage-backed securities
                    
                    
                    59,752
                    
                    
                    
                    -
                    
                    
                    
                    59,752
                    
                    
                    
                    -Municipal
      securities
                    
                    
                    34,756
                    
                    
                    
                    -
                    
                    
                    
                    34,756
                    
                    
                    
                    -CMO
      government sponsored entities
                    
                    
                    34,791
                    
                    
                    
                    -
                    
                    
                    
                    34,791
                    
                    
                    
                    -Collateralized
      debt obligations
                    
                    
                    1,339
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,339Total
      available for sale debt securities
                    
                    $
                    131,651
                    
                    
                    $
                    -
                    
                    
                    $
                    130,312
                    
                    
                    $
                    1,339





(Dollars in thousands)
                    
                    
                    
                    
                    Fair Value Measurements at December 31, 2009 Using12/31/2009
                    
                    
                    Quoted Prices in
                      Active Markets for
                      Identical Assets
                      (Level 1)
                    
                    
                    Significant Other
                      Observable Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable Inputs
                      (Level 3)Assets:Available-for-sale
      debt securitiesU.S.
      government sponsored entities
                    
                    $
                    2,045
                    
                    
                    $
                    -
                    
                    
                    $
                    2,045
                    
                    
                    $
                    -CMO
      and residential mortgage-backed securities
                    
                    
                    63,315
                    
                    
                    
                    -
                    
                    
                    
                    63,315
                    
                    
                    
                    -Municipal
      securities
                    
                    
                    35,573
                    
                    
                    
                    -
                    
                    
                    
                    35,573
                    
                    
                    
                    -CMO
      government sponsored entities
                    
                    
                    22,493
                    
                    
                    
                    -
                    
                    
                    
                    22,493
                    
                    
                    
                    -Collateralized
      debt obligations
                    
                    
                    1,350
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,350Total
      available for sale debt securities
                    
                    $
                    124,776
                    
                    
                    $
                    -
                    
                    
                    $
                    123,426
                    
                    
                    $
                    1,350


12





Roll forward of available-for-sale
securities, which require significant adjustment based on unobservable data are
presented below:


(Dollars in thousands)
                      
                      Fair Value Measurements at
                        June 30, 2010 Using
                        Significant Unobservable
                        Inputs
                        (Level 3)Available for
                        sale debt securitiesCollateralized DebtObligationsBeginning
      balance, December 31, 2009
                      
                      $
                      1,350Transfers
      in and/or (out) of Level 3
                      
                      
                      -Total
      gains or (losses)Included
      in earnings
                      
                      
                      (113
                      )Included
      in other comprehensive income
                      
                      
                      102Purchases,
      issuances, sales, and settlementsPurchases
                      
                      
                      -Issuances
                      
                      
                      -Sales
                      
                      
                      -Settlements
                      
                      
                      -Ending
      balance, June 30, 2010
                      
                      $
                      1,339





Assets and liabilities measured at fair
value on a non-recurring basis are summarized below:





(Dollars in thousands)
                  
                  
                  
                  
                  Fair Value Measurements at June 30, 2010 Using6/30/2010
                  
                  
                  Quoted Prices in
                    Active Markets for
                    Identical Assets
                    (Level 1)
                  
                  
                  Significant Other
                    Observable Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable Inputs
                    (Level 3)Assets:Impaired
      loans
                  
                  $
                  6,174
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  6,174Foreclosed
      real estate
                  
                  
                  6,245
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,245





(Dollars in thousands)
                  
                  
                  
                  
                  Fair Value Measurements at December 31, 2009 Using12/31/2009
                  
                  
                  Quoted Prices in
                    Active Markets for
                    Identical Assets
                    (Level 1)
                  
                  
                  Significant Other
                    Observable Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable Inputs
                    (Level 3)Assets:Impaired
      loans
                  
                  $
                  11,933
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  11,933Foreclosed
      real estate
                  
                  
                  3,747
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,747





The fair
value of impaired loans with specific allocations of the allowance for loan
losses and foreclosed real estate, which has been written down to fair value, 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 $6.2 million, with a valuation allowance of $658 thousand,
resulting in no additional provision for the quarter. 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 often used by the appraiser, therefore, qualifying the
assets as Level 3 in the fair value hierarchy.


13




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)June
      30, 2010Carrying
                      
                      
                      EstimatedValue
                      
                      
                      Fair
      ValueFinancial assets:Cash
      and cash equivalents
                      
                      $
                      52,212
                      
                      
                      $
                      52,212Securities
      available-for-sale
                      
                      
                      131,651
                      
                      
                      
                      131,651Securities
      held-to-maturity
                      
                      
                      18,610
                      
                      
                      
                      19,535Loans
      held for sale
                      
                      
                      477
                      
                      
                      
                      477Loans
      receivable, net
                      
                      
                      435,458
                      
                      
                      
                      479,245Federal
      Home Loan Bank stock
                      
                      
                      3,650
                      
                      
                      
                      3,650Accrued
      interest receivable
                      
                      
                      2,748
                      
                      
                      
                      2,748Financial liabilities:Demand
      and savings deposits
                      
                      
                      347,942
                      
                      
                      
                      347,942Certificates
      of deposit
                      
                      
                      222,216
                      
                      
                      
                      222,955Repurchase
      agreements
                      
                      
                      20,533
                      
                      
                      
                      20,041Borrowed
      funds
                      
                      
                      32,732
                      
                      
                      
                      33,216Accrued
      interest payable
                      
                      
                      124
                      
                      
                      
                      124





(Dollars
      in thousands)December
      31, 2009Carrying
                      
                      
                      EstimatedValue
                      
                      
                      Fair
      ValueFinancial assets:Cash
      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 liabilities:Demand
      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





For
purposes of the above disclosures of estimated fair value, the following
assumptions were used as of June 30, 2010 and December 31, 2009. 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 June 30, 2010 and December
31, 2009, 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 June
30, 2010 and December 31, 2009, 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.


14


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





Summary





NorthWest
Indiana Bancorp (the “Bancorp”) is a bank holding company registered with the
Board of Governors of the Federal Reserve System. Peoples Bank SB, an Indiana
savings bank, is a wholly-owned subsidiary of the Bancorp. The Bancorp has no
other business activity other than being the holding company for the
Bank.





At June
30, 2010, the Bancorp had total assets of $690.0 million, total loans of $442.5
million and total deposits of $570.2 million. Stockholders' equity totaled $56.3
million or 8.12% of total assets, with book value per share at
$19.95.  Net income for the quarter ended June 30, 2010, was $1.6
million, or $0.57 earnings per common share for both basic and diluted
calculations.  For the quarter ended June 30, 2010, the return on
average assets (ROA) was 0.95%, while the return on average stockholders’ equity
(ROE) was 11.44%.  For the six months ended June 30, 2010, the Bancorp
recorded net income of $3.0 million, or $1.06 earnings per basic share and $1.06
earnings per diluted share.  For the six months ended June 30, 2010,
the return on average assets (ROA) was 0.88%, while the return on average
stockholders’ equity (ROE) was 10.76%.





Recent
Developments





The Current Economic
Environment.  We continue to operate 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 30
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 continuing to take 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
loan losses beyond that which are 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,
including the passage and implementation of the Emergency Economic Stabilization
Act of 2008 (“EESA”), the Troubled Asset Relief Program (“TARP”), and the
American Recovery and Reinvestment Act of 2009 (“ARRA”).  In addition,
on July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly
changes the regulation of financial institutions and the financial services
industry.  The Dodd-Frank Act includes provisions affecting large and
small financial institutions alike, including several provisions that will
profoundly affect how community banks, thrifts, and small bank and thrift
holding companies, such as the Bancorp, will be regulated in the
future.  Among other things, these provisions abolish the Office of
Thrift Supervision and transfer its functions to the other federal banking
agencies, relax rules regarding interstate branching, allow financial
institutions to pay interest on business checking accounts, change the scope of
federal deposit insurance coverage, and impose new capital requirements on bank
and thrift holding companies.  The Dodd-Frank Act also establishes the
Bureau of Consumer Financial Protection as an independent entity within the
Federal Reserve, which will be given the authority to promulgate consumer
protection regulations applicable to all entities offering consumer financial
services or products, including banks.  Additionally, the Dodd-Frank
Act includes a series of provisions covering mortgage loan origination standards
affecting, among other things, originator compensation, minimum repayment
standards, and pre-payments.  The Dodd-Frank Act contains numerous
other provisions affecting financial institutions of all types, many of which
may have an impact on the operating environment of the Bancorp in substantial
and unpredictable ways.  Consequently, the Dodd-Frank Act is likely to
affect our cost of doing business, it may limit or expand our permissible
activities, and it may affect the competitive balance within our industry and
market areas.  The nature and extent of future legislative and
regulatory changes affecting financial institutions, including as a result of
the Dodd-Frank Act, is very unpredictable at this time.  The Bancorp’s
management is actively reviewing the provisions of the Dodd-Frank Act, many of
which are phased-in over the next several months and years, and assessing its
probable impact on the business, financial condition, and results of operations
of the Bancorp.  However, the ultimate effect of the Dodd-Frank Act on
the financial services industry in general, and the Bancorp in particular, is
uncertain at this time..


15




Moreover, it is not clear at this time
what long-term impact the EESA,  TARP, the ARRA, 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 provide long-term stability to 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.





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 three years, with falling home prices and increasing foreclosures,
unemployment and under-employment, have negatively impacted the credit
performance of mortgage and construction 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, particularly in
      connection with the regulatory overhaul provisions of the Dodd-Frank
      Act.  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.


16




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.  While real estate values in some regions of the country are
beginning to show signs of stabilizing, 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 six months ended June 30, 2010, total assets increased by $28.2 million
(4.3%), with interest-earning assets increasing by $27.0 million (4.4%). At June
30, 2010, interest-earning assets totaled $638.7 million and represented 92.6%
of total assets.





Loans
receivable totaled $442.5 million at June 30, 2010, compared to $458.2 million
at December 31, 2009. At June 30, 2010, loans receivable represented 69.3% of
interest earning assets, 64.1% of total assets and 77.7% of total deposits. The
loan portfolio, which is the Bancorp’s largest asset, is a significant source of
both interest and fee income. The Bancorp’s lending strategy stresses quality
loan growth, product diversification, and competitive and profitable pricing.
The loan portfolio includes $48.4 million (10.9%) in construction and
development loans, $172.3 million (39.1%) in residential mortgage loans, $8.5
million (1.9%) in multifamily loans, $136.4 million (30.8%) in commercial real
estate loans, $900 thousand (0.2%) in consumer loans, $68.2 million (15.4%) in
commercial business loans and $7.8 million (1.7%) in government and other loans.
Adjustable rate loans comprised 41.5% of total loans at June 30,
2010.





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, management is selling all newly originated fixed rate mortgage
loans in an effort to minimize future interest rate risk.  These loans
are identified as held for sale when originated and sold, on a case-by-case
basis, in the secondary market.  During the six months ended June 30,
2010, the Bancorp sold $11.3 million in fixed rate mortgage loans, compared to
$36.2 million during the six months ended June 30, 2009.  During 2009,
a high level of loan sales occurred as a result of refinancing activity
associated with the Federal Reserve’s successful effort to lower long-term
interest rates.  Also, 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 $272 thousand for the six months ended June 30, 2010,
compared to $865 thousand for the six months ended June 30, 2009.  At
June 30, 2010, the Bancorp had $477 thousand 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 period 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.  The Bancorp’s management discontinued
the strategy during the third quarter of 2007.  As of June 30, 2010,
the Bancorp’s commercial real estate participation loan portfolio consisted of
ten loans with an aggregate balance of $28.4 million, and an additional $1.3
million in funding commitments for three of the ten loans.  Of the
$28.4 million in commercial real estate participation loans, $8.2 million has
been purchased within the Bancorp’s primary market area and $20.2 million
outside of the primary market.  At June 30, 2010, $10.3 million or
36.2% of the Bancorp’s commercial real estate participation loans have been
internally classified as substandard and placed in non-accrual
status.  Of the $10.3 million in commercial real estate participation
loans placed in non-accrual status, $8.1 million are located outside of the
Bancorp’s primary market area.  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.


17




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 June 30, 2010
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.





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
$16.2 million at June 30, 2010, compared to $18.6 million at December 31, 2009,
a decrease of $2.4 million or 12.8%.  The current level of
non-performing loans is concentrated with four commercial real estate
participation loans in the aggregate of $9.6 million.  As previously
reported, one commercial real estate participation loan is a condominium
construction project in Orlando, Florida, with a current balance of $1.5
million, which is classified as substandard.  The carrying value of
this loan is based on the current fair value of the project’s
collateral.  The second commercial real estate participation loan is
an end loan for a hotel located in Dundee, Michigan, with a current balance of
$1.2 million, which is classified as substandard.  The carrying value
of this loan is based on the current fair value of the hotel.  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 $193 thousand collateral deficiency
for this loan.  The fourth commercial real estate participation loan
is a condominium construction project located in Chicago, Illinois, with a
balance of $1.9 million, which is classified as substandard.  The
carrying value of this loan is based on the current fair value of the
project.  For these 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 3.67% at June 30, 2010, compared to
4.05% at December 31, 2009.  The ratio of non-performing loans to
total assets was 2.34% at June 30, 2010, compared to 2.81% at December 31,
2009.  The June 30, 2010, non-performing loan balances include $14.3
million in loans accounted for on a non-accrual basis and $1.9 million in
accruing loans, which were contractually past due 90 days or
more.  Loans, internally classified as substandard, totaled $23.4
million at June 30, 2010, compared to $22.7 million at December 31,
2009.  The current level of substandard loans includes the previously
mentioned four non-accruing commercial real estate participation loans and one
accruing commercial real estate hotel loan in the amount of $5.0
million.  No loans were internally classified as doubtful or loss at
June 30, 2010 or December 31, 2009.  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 $27.0 million at June 30, 2010,
compared to $26.7 million at December 31, 2009.  During the current
quarter, one commercial real estate hotel loan in the amount of $5.0 million was
moved to watch status as a result of loan modifications requested by the
borrower.  The requested modifications are currently being reviewed by
management .


18




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 June 30, 2010, impaired
loans totaled $18.4 million, compared to $17.0 million at December 31,
2009.  The June 30, 2010, impaired loan balances consist of a
multifamily loan, lot loan  and twenty-two 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
June 30, 2010 ALL contained $658 thousand in specific allowances for collateral
deficiencies, compared to $1.2 million in specific allowances at December 31,
2009.  The reduction is specific allowances is a result of loan
charge-offs recognized during the first half of 2010.  During the
second quarter of 2010, two additional commercial real estate loans totaling
$2.1 million and one multifamily loan totaling $109 thousand were newly
classified as impaired.  Management’s current estimates indicate no
collateral deficiency for these loans.  In addition during the current
quarter, a condominium participation loan in the amount of $2.3 million was
transferred to foreclosed real estate and removed from impaired
status.  Prior to transferring this loan to foreclosed real estate, a
charge-off of $230 thousand was recorded to recognize a decline in market
value.   Also, during the second quarter a loan for a commercial
retail complex in the amount of $2.6 million was removed from impaired
status.  As of June 30, 2010, all loans classified as impaired were
also included in the previously discussed substandard loan
balances.  There were no other loans considered to be impaired loans
as of June 30, 2010.  Typically, management does not individually
classify smaller-balance homogeneous loans, such as mortgage or consumer, as
impaired.





At June 30, 2010, the Bancorp
classified four loans totaling $11.8 million as troubled debt restructurings,
which involves modifying the terms of a loan to forego a portion of interest or
principal or reducing the interest rate on the loan to a rate materially less
than market rates.  The troubled debt restructurings are comprised of
one construction development participation hotel loan in the amount of $1.2
million, for which a significant deferral of principal repayment was
granted.  The second troubled debt restructuring is for a commercial
real estate participation hotel loan in the amount of $5.0 million, for which a
significant deferral of principal repayment and extension in maturity was
granted.  The third troubled debt restructuring, which is currently in
bankruptcy proceedings, is for a commercial real estate loan in the amount of
$553 thousand, for which a significant deferral of principal repayment was
granted.  The three loans classified as troubled debt restructurings
are currently in nonaccrual status and classified as impaired.  One
additional commercial real estate hotel loan for $5.0 million has been
classified as a troubled debt restructuring, for which a significant deferral of
principal repayment was granted.  This loan is in accrual status and
classified as impaired.  The valuation basis for the Bancorp’s
troubled debt restructurings is based on the fair value of the collateral
securing these loans.





As of June 30, 2010, the Bancorp’s
management was notified that the quarterly interest payments for three of its
four investments in trust preferred securities are 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 June 30, 2010, the cost basis of the three trust preferred
securities in non-accrual status totaled $3.9 million.  Current
estimates indicate that the interest payment delays may exceed ten
years.  One trust preferred security with a cost basis of $1.3 million
remains in accrual status.





At June 30, 2010, 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 June
30, 2010, 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.





For the
six months ended June 30, 2010, $2.5 million in provisions to the ALL account
were required, compared to $1.8 million for the six months ended June 30,
2009.  The current year ALL provisions were related to the elevated
credit risk in the commercial real estate, commercial business and mortgage loan
portfolios.  Charge-offs, net of recoveries, totaled $1.6 million for
the six months ended June 30, 2010, compared to $953 thousand for the six months
ended June 30, 2009.  The 2010 net loan charge-offs of $1.6 million
were comprised of $868 thousand in commercial real estate participation loans,
$404 thousand in commercial real estate loans, $158 thousand in residential real
estate loans, $148 thousand in commercial business loans and $21 thousand in
consumer loans.


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 in the local economy, changes in
loan balances and mix, and asset quality.





The ALL to total loans was 1.59% at
June 30, 2010, compared to 1.33% at December 31, 2009.  The ALL to
non-performing loans (coverage ratio) was 43.3% at June 30, 2010, compared to
32.9% at December 31, 2009.  The June 30, 2010 balance in the ALL
account of $7.0 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.


19




At June
30, 2010, the Bancorp had twenty-two properties in foreclosed real estate
totaling $6.2 million, compared to twenty-one properties totaling $3.7 million
at December 31, 2009.  Foreclosed real estate currently includes a
$1.9 million commercial real estate participation loan located in Ann Arbor,
Michigan.  During the first quarter of 2008, the Bancorp’s 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 continue to
actively pursue the claims asserted within the lawsuit.  In addition,
during the second quarter of 2010, a commercial real estate condominium
participation loan located in Chicago, Illinois, with a balance of $2.3 million
was transferred to foreclosed real estate.  The remainder of the
Bancorp’s foreclosed real estate is located within its primary market
area.





The
primary objective of the Bancorp’s investment portfolio is to provide for the
liquidity needs of the Bancorp and to contribute to profitability by providing a
stable flow of dependable earnings. Funds are generally invested in federal
funds, interest bearing balances in financial institutions, U.S. government
securities, federal agency obligations, obligations of state and local
municipalities and corporate securities. The securities portfolio totaled $150.3
million at June 30, 2010, compared to $144.3 million at December 31, 2009, an
increase of $5.9 million (4.1%). The increase in securities is a result of
investing excess liquidity in the securities portfolio. At June 30, 2010, the
securities portfolio represented 23.5% of interest-earning assets and 21.7% of
total assets. The securities portfolio was comprised of 0.7% in U.S. government
agency debt securities, 63.6% in U.S. government agency mortgage-backed
securities and collateralized mortgage obligations, 34.8 % in municipal
securities, and 0.9% in pooled trust preferred securities. At June 30, 2010,
securities available-for-sale (“AFS”) totaled $131.7 million or 87.6% of total
securities. AFS securities are those the Bancorp may decide to sell if needed
for liquidity, asset-liability management or other reasons. In addition, at June
30, 2010, as a result of the increased liquidity from deposit growth and
mortgage loans sales, the Bancorp carried $30.6 million in interest bearing
balances in financial institutions and $11.3 million in Fed funds sold. The
Bancorp’s management will develop strategies to reduce excess liquidity during
the third quarter of 2010. At June 30, 2010, the Bancorp had a Federal Home Loan
Bank (FHLB) stock balance of $3.7 million.





Deposits
are a fundamental and cost-effective source of funds for lending and other
investment purposes. The Bancorp offers a variety of products designed to
attract and retain customers, with the primary focus on building and expanding
relationships. At June 30, 2010, deposits totaled $570.2 million. During the six
months ended June 30, 2010, deposits increased by $29.6 million (5.5%). Checking
account balances increased by $19.3 million (13.4%). Savings account balances
increased by $3.0 million (5.3%) during the current period. Money market deposit
accounts (MMDA’s) increased by $11.9 million (10.6%). Certificates of deposit
decreased by $4.6 million (2.0%). At June 30, 2010, the deposit base was
comprised of 28.8% checking accounts, 21.7% MMDA’s, 10.5% savings accounts and
39.0% certificates of deposit.





The
Bancorp’s borrowed funds are primarily used to fund asset growth not supported
by deposit generation. At June 30, 2010, borrowed funds and repurchase
agreements totaled $53.3 million compared to $63.0 million at December 31, 2009,
a decrease of $9.7 million (15.4%). During 2010, management repaid borrowed
funds as a result of additional liquidity provided by strong deposit growth. As
a result, the Bancorp’s borrowed funds at June 30, 2010, are comprised of $32.0
million in Federal Home Loan Bank (FHLB) fixed advances, $20.6 million in retail
repurchase agreements, and $732 thousand other short term
borrowings.





Liquidity
and Capital Resources





For the
Bancorp, liquidity management refers to the ability to generate sufficient cash
to fund current loan demand, meet deposit withdrawals, and pay dividends and
operating expenses. Because profitability and liquidity are often conflicting
objectives, management attempts to maximize the Bancorp’s net interest margin by
making adequate, but not excessive, liquidity provisions.





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


20




During
the six months ended June 30, 2010, cash and cash equivalents increased by $39.0
million compared to a $7.4 million increase for the six months ended June 30,
2009. The primary sources of cash were proceeds from loan sales, pay downs of
securities, loan repayments, and funds from deposit growth. The primary uses of
cash were the purchase of securities, loan originations, repayment of FHLB
advances, and the payment of common stock dividends. Cash provided by operating
activities totaled $12.4 million for the six months ended June 30, 2010,
compared to $461 thousand required for the six month period ended June 30, 2009.
The increase in cash from operating activities was a result of an increase in
other liabilities due to the clearing of customer ACH transactions and an
account payable to the holding company by affiliates for tax settlements. Cash
inflows from investing activities totaled $7.8 million for the current period,
compared to cash inflows of $7.5 million for the six months ended June 30, 2009.
The increase for the current six months was primarily related to additional
securities sales and proceeds from the sale of foreclosed real estate. Net cash
inflows from financing activities totaled $18.8 million during the current
period compared to $399 thousand provided for the six months ended June 30,
2009. The change in net cash inflows from financing activities was a result of
increased deposits and reduced borrowings for the period. The Bancorp paid
dividends on common stock of $1.1 million for the six months ended June 30,
2010, compared to $1.9 million for the six months ended June 30,
2009.





At June
30, 2010, outstanding commitments to fund loans totaled $81.9 million.
Approximately 38.2% of the commitments were at variable rates. Standby letters
of credit, which are conditional commitments issued by the Bancorp to guarantee
the performance of a customer to a third party, totaled $2.4 million at June 30,
2010. Management believes that the Bancorp has sufficient cash flow and
borrowing capacity to fund all outstanding commitments and letters of credit,
while maintaining proper levels of liquidity.





During
April 2010, the Bancorp’s management entered into an agreement to begin
construction of a twelfth banking center in St. John, Indiana. The cost of the
new facility including land is expected to be approximately $2.3 million. During
the current quarter, construction disbursements totaled $197 thousand. The
facility is expected to open in the fall of 2010 and will not have a material
impact on noninterest expense during the current year.  The new
facility will provide opportunities to expand market share for the Bancorp’s
products and services within the town of St. John and nearby
communities.





Management
strongly believes that maintaining a high level of capital enhances safety and
soundness. During the six months ended June 30, 2010, stockholders' equity
increased by $3.2 million (6.1%). During the six months, stockholders’ equity
was increased by net income of $3.0 million and the net change in the valuation
of the available-for-sale securities of $1.3 million. Decreasing stockholders’
equity was the declaration of $1.1 million in cash dividends.





The
Bancorp is subject to risk-based capital guidelines adopted by the Board of
Governors of the Federal Reserve System (the “FRB”), and the Bank is subject to
risk-based capital guidelines adopted by the FDIC. As applied to the Bancorp and
the Bank, the FRB and FDIC capital requirements are substantially identical. The
Bancorp and the Bank are required to maintain a total risk-based capital ratio
of 8%, of which 4% must be Tier 1 capital. In addition, the FRB and FDIC
regulations provide for a minimum Tier 1 leverage ratio (Tier 1 capital to
adjusted average assets) of 3% for financial institutions that meet certain
specified criteria, including that they have the highest regulatory rating and
are not expecting or anticipating significant growth. All other financial
institutions are required to maintain a Tier 1 leverage ratio of 3% plus an
additional cushion of at least one to two percent.





The
following table shows that, at June 30, 2010, and December 31, 2009, the
Bancorp’s capital exceeded all regulatory capital requirements. During the six
months, the Bancorp’s regulatory capital ratios continue to be negatively
impacted by regulatory requirements regarding collateralized debt obligations.
The regulatory requirements state that for collateralized debt obligations that
have been downgraded below investment grade by the rating agencies, increased
risk based asset weightings are required for the downgraded investments. The
Bancorp currently holds four pooled Trust Preferred Securities with a cost basis
of $5.2 million. These investments currently have ratings that are below
investment grade. As a result, approximately $31.9 million of risk based assets
are required for the trust preferred securities in the Bancorp’s and Bank’s
total risk based capital calculation. The Bancorp’s and the Bank’s regulatory
capital ratios were substantially the same at both June 30, 2010 and December
31, 2009. The dollar amounts are in millions.


21




(Dollars
      in millions)
                      
                      
                      
                      
                      
                      
                      
                      Required
      for
                      
                      
                      To
      be wellActual
                      
                      
                      adequate
      capital
                      
                      
                      capitalizedAt
      June 30, 2010
                      
                      Amount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      RatioTotal
      capital to risk-weighted assets
                      
                      $
                      60.4
                      
                      
                      
                      12.3
                      %
                      
                      $
                      39.4
                      
                      
                      
                      8.0
                      %
                      
                      $
                      49.2
                      
                      
                      
                      10.0
                      %Tier
      1 capital to risk-weighted assets
                      
                      $
                      54.2
                      
                      
                      
                      11.0
                      %
                      
                      $
                      19.7
                      
                      
                      
                      4.0
                      %
                      
                      $
                      29.5
                      
                      
                      
                      6.0
                      %Tier
      1 capital to adjusted average assets
                      
                      $
                      54.2
                      
                      
                      
                      7.9
                      %
                      
                      $
                      20.5
                      
                      
                      
                      3.0
                      %
                      
                      $
                      34.1
                      
                      
                      
                      5.0
                      %





(Dollars
      in millions)
                      
                      
                      
                      
                      
                      
                      
                      Required
      for
                      
                      
                      To
      be wellActual
                      
                      
                      adequate
      capital
                      
                      
                      capitalizedAt
      December 31, 2009
                      
                      Amount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      RatioTotal
      capital to risk-weighted assets
                      
                      $
                      58.7
                      
                      
                      
                      11.5
                      %
                      
                      $
                      40.8
                      
                      
                      
                      8.0
                      %
                      
                      $
                      51.0
                      
                      
                      
                      10.0
                      %Tier
      1 capital to risk-weighted assets
                      
                      $
                      52.6
                      
                      
                      
                      10.3
                      %
                      
                      $
                      20.4
                      
                      
                      
                      4.0
                      %
                      
                      $
                      30.6
                      
                      
                      
                      6.0
                      %Tier
      1 capital to adjusted average assets
                      
                      $
                      52.6
                      
                      
                      
                      7.8
                      %
                      
                      $
                      20.1
                      
                      
                      
                      3.0
                      %
                      
                      $
                      33.5
                      
                      
                      
                      5.0
                      %





The Bancorp’s ability to pay dividends
to its shareholders is entirely dependent upon the Bank’s ability to pay
dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from 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 (DFI) 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. The aggregate amount of dividends,
which may be declared by the Bank in 2010, without prior DFI approval,
approximates $1,775,000 plus current 2010 net profits. 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 in
light of the financial condition of the Bank. On May 5, 2010, the Federal
Reserve Bank of Chicago (the Reserve Bank) notified the Bancorp’s management
that future shareholder dividend payments would require Reserve Bank permission
in accordance with Supervisory Letter 09-4. The Reserve Bank’s
requirement to approve future dividend payments was a result of the
Bancorp’s $1.4 million net loss recorded during the third quarter of
2009.  On May 27, 2010 the Reserve Bank approved the Bancorp’s second
quarter dividend that was paid to shareholders on July 2,
2010.  Management anticipates the Bancorp will generate sufficient
earnings to maintain its current dividend policy.





Results
of Operations - Comparison of the Quarter Ended June 30, 2010 to the Quarter
Ended June 30, 2009





For the
quarter ended June 30, 2010, the Bancorp reported net income of $1.6 million,
compared to net income of $1.1 million for the quarter ended June 30, 2009, an
increase of $563 thousand (53.5%). For the current quarter the ROA was 0.95%,
compared to 0.63% for the quarter ended June 30, 2009. The ROE was 11.44% for
the quarter ended June 30, 2010, compared to 7.71% for the quarter ended June
30, 2009.





Net
interest income for the three months ended June 30, 2010 was $6.5 million, an
increase of $730 thousand (12.7%), compared to $5.7 million for the quarter
ended June 30, 2009. During the current quarter, the Bancorp’s cost of funds
continue to be positively impacted by the Federal Reserve’s continued action in
maintaining a low short-term interest rate environment. The weighted-average
yield on interest-earning assets was 4.91% for the three months ended June 30,
2010, compared to 5.13% for the three months ended June 30, 2009. The
weighted-average cost of funds for the quarter ended June 30, 2010, was 0.86%
compared to 1.53% for the quarter ended June 30, 2009. The impact of the 4.91%
return on interest earning assets and the 0.86% cost of funds resulted in an
interest rate spread of 4.05% for the current quarter compared to 3.60% for the
quarter ended June 30, 2009. During the current quarter, total interest income
decreased by $279 thousand (3.5 %) while total interest expense decreased by
$1.0 million (43.0%). The net interest margin was 4.07% for the three months
ended June 30, 2010, compared to 3.64% for the quarter ended June 30, 2009. On a
tax equivalent basis, the Bancorp’s net interest margin was 4.29% for the three
months ended June 30, 2010, compared to 3.86% for the quarter ended June 30,
2009.  Comparing the net interest margin on a tax equivalent basis
more accurately compares the returns on tax-exempt loans and securities to those
on taxable interest-earning assets.


22




During
the three months ended June 30, 2010, interest income from loans decreased by
$333 thousand (5.1%), compared to the three months ended June 30, 2009. 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 5.40% for the current quarter, compared to 5.54% for the three
months ended June 30, 2009. Loan balances averaged $460.6 million for the
current quarter, a decrease of $12.8 million (2.7%) from $473.4 million for the
three months ended June 30, 2009. During the three months ended June 30, 2010,
interest income on securities and other interest bearing balances increased by
$54 thousand (3.6%), compared to the quarter ended June 30, 2009. The increase
was due to an increase in average balances. The weighted-average yield on
securities and other interest bearing balances was 3.60%, for the current
quarter, compared to 4.40% for the three months ended June 30, 2009. Securities
balances averaged $158.5 million for the current quarter, up $21.1 million
(15.4%) from $137.4 million for the three months ended June 30, 2009. The
increase in security average balances is a result of consistent investment
growth. Other interest bearing balances averaged $16.3 million for the current
period, down $2.0 million (10.9%) from $18.3 million for the three months ended
June 30, 2009. The increase in other interest bearing balances is a result of
additional liquidity primarily generated by deposit growth.





Interest
expense on deposits decreased by $830 thousand (44.0%) during the current
quarter compared to the three months ended June 30, 2009. The change was
primarily due to a decrease in the weighted-average rate paid on deposits. The
weighted-average rate paid on deposits for the three months ended June 30, 2010
was 0.74%, compared to 1.39%, for the quarter ended June 30, 2009. Total deposit
balances averaged $567.1 million for the current quarter, up $23.8 million
(4.4%) from $543.3 million for the quarter ended June 30, 2009. Interest expense
on borrowed funds decreased by $179 thousand (38.8%) during the current quarter
due to a decrease in average daily balances and a decrease in the weighted
average rate paid for borrowing funds. The weighted-average cost of borrowed
funds was 2.13% for the current quarter compared to 2.68% for the three months
ended June 30, 2009. Borrowed funds averaged $53.0 million during the quarter
ended June 30, 2010, a decrease of $15.7 million (22.9%) from $68.7 million for
the quarter ended June 30, 2009.





Noninterest
income for the quarter ended June 30, 2010 was $1.6 million, an increase of $159
thousand (10.6%) from $1.5 million for the quarter ended June 30, 2009. During
the current quarter, fees and service charges totaled $635 thousand, a decrease
of $36 thousand (5.4%) from $671 thousand for the quarter ended June 30, 2009.
The decrease in fees and service charges is a result of a reduction in fees
related to checking accounts. Gains from loan sales totaled $163 thousand for
the current quarter, a decrease of $136 thousand (45.5%), compared to $299
thousand for the quarter ended June 30, 2009. The decrease in gains from the
sale of loans is a result of decreased customer refinance activity to low rate
fixed rate mortgages. Fees from Wealth Management operations totaled $253
thousand for the quarter ended June 30, 2010, an increase of $48 thousand
(23.4%) from $205 thousand for the quarter ended June 30, 2009. The increase in
Wealth Management income is related to growth in assets under management and
market value changes. Gains from the sale of securities totaled $452 thousand
for the current quarter, an increase of $248 thousand (121.6%) from $204
thousand for the quarter ended June 30, 2009. Current market conditions provided
opportunities to manage securities cash flows, while recognizing gains from the
sales of securities. Income from an increase in the cash value of bank owned
life insurance totaled $104 thousand for the quarter ended June 30, 2010,
representing no change, compared to the quarter ended June 30, 2009. For the
quarter ended June 30, 2010, a gain of $44 thousand on foreclosed real estate
was realized, compared to a $6 thousand gain for the quarter ended June 30,
2009. During the current quarter, other noninterest income totaled $4 thousand
compared to $7 thousand for the quarter ended June 30, 2009.





Noninterest
expense for the quarter ended June 30, 2010 was $4.9 million, a decrease of $71
thousand (1.4%) from $5.0 million for the three months ended June 30, 2009.
During the current quarter, compensation and benefits totaled $2.5 million, an
increase of $213 thousand (9.5%) from $2.2 million for the quarter ended June
30, 2009. Occupancy and equipment totaled $808 thousand for the current quarter,
an increase of $58 thousand (7.7%) compared to $750 thousand for the quarter
ended June 30, 2009. The increase in compensation and benefits, and occupancy
and equipment expense is related to the opening of the Valparaiso, IN Banking
Center in June 2009. Federal deposit insurance premium expense totaled $265
thousand for the three months ended June 30, 2010, a decrease of $288 thousand
(52.1%) from $553 thousand for the three months ended June 30, 2009. The
decrease was the result of an industry wide FDIC special assessment at June 30,
2009 that was not repeated in 2010. Data processing expense totaled $231
thousand for the three months ended June 30, 2010, an increase of $16 thousand
(7.4%) from $215 thousand for the three months ended June 30, 2009. Marketing
expense related to banking products totaled $114 thousand for the current
quarter, a decrease of $33 thousand (22.4%) from $147 thousand for the three
months ended June 30, 2009. Other expenses related to banking operations totaled
$1.0 million for the quarter ended June 30, 2010, a decrease of $37 thousand
(3.6%) from $1.0 million for the quarter ended June 30, 2009. The Bancorp’s
efficiency ratio was 60.2% for the quarter ended June 30, 2010, compared to
68.6% for the three months ended June 30, 2009. The ratio is determined by
dividing total noninterest expense by the sum of net interest income and total
noninterest income for the period.


23




Income
tax expenses for the three months ended June 30, 2010 totaled $346 thousand,
compared to income tax expense of $104 thousand for the three months ended June
30, 2009, an increase of $242 thousand (232.7%). The combined effective federal
and state tax rates for the Bancorp was 17.6% for the three months ended June
30, 2010, compared to 9.0% for the three months ended June 30, 2009. The
Bancorp’s higher current quarter effective tax rate is a result of the Bank’s
improved before tax results.





Results
of Operations - Comparison of the Six Months Ended June 30, 2010 to the Six
Months Ended June 30, 2009





For the
six months ended June 30, 2010, the Bancorp reported net income of $3.0 million,
compared to net income of $2.8 million for the six months ended June 30, 2009,
an increase of $247 thousand (9.0%). For the current six months the ROA was
0.88%, compared to 0.82% for the six months ended June 30, 2009. The ROE was
10.76% for the six months ended June 30, 2010, compared to 10.16% for the six
months ended June 30, 2009.





Net
interest income for the six months ended June 30, 2010 was $12.7 million, an
increase of $1.2 million (10.1%), compared to $11.5 million for the six months
ended June 30, 2009. During the current six months, the Bancorp’s cost of funds
continue to be positively impacted by the Federal Reserve’s continued action in
maintaining a low short-term interest rate environment. The weighted-average
yield on interest-earning assets was 4.92% for the six months ended June 30,
2010, compared to 5.27% for the six months ended June 30, 2009. The
weighted-average cost of funds for the six months ended June 30, 2010, was 0.93%
compared to 1.64% for the six months ended June 30, 2009. The impact of the
4.92% return on interest earning assets and the 0.93% cost of funds resulted in
an interest rate spread of 3.99% for the current six months compared to 3.63%
for the six months ended June 30, 2009. During the current six months, total
interest income decreased by $972 thousand (5.9%) while total interest expense
decreased by $2.1 million (42.8%). The net interest margin was 4.02% for the six
months ended June 30, 2010, compared to 3.67% for the six months ended June 30,
2009. On a tax equivalent basis, the Bancorp’s net interest margin was 4.24% for
the six months ended June 30, 2010, compared to 3.89% for the six months ended
June 30, 2009.  Comparing the net interest margin on a tax equivalent
basis more accurately compares the returns on tax-exempt loans and securities to
those on taxable interest-earning assets.





During
the six months ended June 30, 2010, interest income from loans decreased by $974
thousand (7.3%), compared to the six months ended June 30, 2009. 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
5.41% for the current six months, compared to 5.59% for the six months ended
June 30, 2009. Loan balances averaged $460.1 million for the current six months,
a decrease of $19.3 million (4.0%) from $479.4 million for the six months ended
June 30, 2009. During the six months ended June 30, 2010, interest income on
securities and other interest bearing balances increased by $2 thousand (0.1%),
compared to the six months ended June 30, 2009. The increase was due to an
increase in the weighted average balances. The weighted-average yield on
securities and other interest bearing balances was 3.62%, for the current six
months, compared to 4.20% for the six months ended June 30, 2009. Securities
balances averaged $153.7 million for the current six months, up $5.8 million
(3.9%) from $147.9 million for the six months ended June 30, 2009. The increase
in security average balances is a result of ongoing, consistent investment
growth. Other interest bearing balances averaged $17.8 million for the current
period, up $3.0 million (20.3%) from $14.8 million for the six months ended June
30, 2009. The increase in other interest bearing balances is a result of
additional liquidity primarily generated by deposit growth.





Interest
expense on deposits decreased by $1.8 million (44.3%) during the current six
months compared to the six months ended June 30, 2009. The change was primarily
due to a decrease in the weighted-average rate paid on deposits. The
weighted-average rate paid on deposits for the six months ended June 30, 2010
was 0.80%, compared to 1.51%, for the six months ended June 30, 2009. Total
deposit balances averaged $563.6 million for the current six months, up $25.4
million (4.7%) from $538.2 million for the six months ended June 30, 2009.
Interest expense on borrowed funds decreased by $343 thousand (36.2%) during the
current six months due to a decrease in average daily balances and a decrease in
the weighted average rate paid for borrowing funds. The weighted-average cost of
borrowed funds was 2.22% for the current six months compared to 2.63% for the
six months ended June 30, 2009. Borrowed funds averaged $54.4 million during the
six months ended June 30, 2010, a decrease of $17.7 million (24.5%) from $72.1
million for the six months ended June 30, 2009.


24


Noninterest
income for the six months ended June 30, 2010 was $3.0 million, a decrease of
$152 thousand (4.9%) from $3.1 million for the six months ended June 30, 2009.
During the current six months, fees and service charges totaled $1.2 million, a
decrease of $66 thousand (5.0%) from $1.3 million for the six months ended June
30, 2009. The decrease in fees and service charges is a result of a reduction in
fees related to checking accounts. Gains from loan sales totaled $272 thousand
for the current six months, a decrease of $593 thousand (68.6%), compared to
$865 thousand for the six months ended June 30, 2009. The decrease in gains from
the sale of loans is a result of decreased customer refinance activity to low
rate fixed rate mortgages. Fees from Wealth Management operations totaled $534
thousand for the six months ended June 30, 2010, an increase of $132 thousand
(32.8%) from $402 thousand for the six months ended June 30, 2009. The increase
in Wealth Management income is related to growth in assets under management and
market value changes. Gains from the sale of securities totaled $742 thousand
for the current six months, an increase of $398 thousand (115.7%) from $344
thousand for the six months ended June 30, 2009. Current market conditions
provided opportunities to manage securities cash flows, while recognizing gains
from the sales of securities. Income from an increase in the cash value of bank
owned life insurance totaled $205 thousand for the six months ended June 30,
2010, a decrease of $3 thousand (1.4%), compared to $208 thousand for the six
months ended June 30, 2009. During the first quarter of 2010, the Bancorp
recognized a $113 thousand other-than-temporary impairment for one of its trust
preferred securities. No additional impairments where required during the second
quarter of 2010. For the six months ended June 30, 2010, a gain of $65 thousand
on foreclosed real estate was realized, compared to a $31 thousand loss for the
six months ended June 30, 2009. Other noninterest income totaled $8 thousand for
the six months ended June 30, 2010 and $11 thousand for the six months ended
June 30, 2009.





Noninterest
expense for the six months ended June 30, 2010 was $9.6 million, an increase of
$57 thousand (0.6%) from $9.5 million for the six months ended June 30, 2009.
During the current six months, compensation and benefits totaled $4.9 million,
an increase of $257 thousand (5.6%) from $4.6 million for the six months ended
June 30, 2009. Occupancy and equipment totaled $1.6 million for the current six
months, an increase of $60 thousand (3.9%) compared to $1.5 million for the six
months ended June 30, 2009.  The increase in compensation and
benefits, and occupancy and equipment expense is related to the opening of the
Valparaiso, IN Banking Center in June 2009. Federal deposit insurance premium
expense totaled $496 thousand for the six months ended June 30, 2010, a decrease
of $244 thousand (33.0%) from $740 thousand for the six months ended June 30,
2009. The decrease was the result of an industry wide FDIC special assessment at
June 30, 2009 that was not repeated in 2010.  Data processing expense
totaled $463 thousand for the six months ended June 30, 2010, an increase of $33
thousand (7.7%) from $430 thousand for the six months ended June 30, 2009.
Marketing expense related to banking products totaled $239 thousand for the
current six months, an increase of $25 thousand (11.7%) from $214 thousand for
the six months ended June 30, 2009. The increase in marketing expense was a
result of additional brand and product advertising during the current six
months. Other expenses related to banking operations totaled $1.9 million for
the six months ended June 30, 2010, a decrease of $74 thousand (3.8%) from $2.0
million for the six months ended June 30, 2009. The Bancorp’s efficiency ratio
was 61.1% for the six months ended June 30, 2010, compared to 65.0% for the six
months ended June 30, 2009. The ratio is determined by dividing total
noninterest expense by the sum of net interest income and total noninterest
income for the period.





Income
tax expenses for the six months ended June 30, 2010 totaled $574 thousand,
compared to income tax expense of $553 thousand for the six months ended June
30, 2009, an increase of $21 thousand (3.8%). The combined effective federal and
state tax rates for the Bancorp was 16.0% for the six months ended June 30,
2010, compared to 16.7% for the six months ended June 30, 2009. The Bancorp’s
higher current quarter effective tax rate is a result of the Bank’s improved
before tax results.





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 critical accounting policies from December 31, 2009 remain
unchanged.





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, including those identified in
the Bancorp’s 2009 Form 10-K.


25





Item 3. Quantitative and Qualitative
Disclosures About Market Risk





Not
Applicable.





Item
4.  Controls and Procedures





(a)
            Evaluation of
      Disclosure Controls and
Procedures.





The Bancorp maintains disclosure
controls and procedures (as defined in Sections 13a – 15(e) and 15d – 15(e)) of
regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange
Act”) that are designed to ensure that information required to be disclosed by
the Bancorp in the reports that it files or submits under the "Exchange Act" is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. These disclosure controls and procedures include
controls and procedures designed to ensure that information required to be
disclosed by the Bancorp in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Bancorp's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure. The
Bancorp's chief executive officer and chief financial officer evaluate the
effectiveness of the Bancorp's disclosure controls and procedures as of the end
of each quarter. Based on that evaluation as of June 30, 2010, the Bancorp’s
chief executive officer and chief financial officer have concluded that such
disclosure controls and procedures were effective as of that date in ensuring that information required to be disclosed by
the Bancorp under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and
forms.





(b)      Changes in Internal Control
Over Financial Reporting.





There was no change in the Bancorp's
internal control over financial reporting identified in connection with the Bancorp’s evaluation
of controls that occurred during the three months ended June 30, 2010
that has materially affected, or is reasonably likely to materially affect, the
Bancorp's internal control over financial reporting.


26





PART II - Other
Information





Item
1.        Legal
Proceedings


The
Bancorp is not party to any material legal proceedings. From time to time, the
Bank is a party to ordinary routine litigation incidental to its business,
including foreclosures.





Item
1A.     Risk
Factors


Not
Applicable.





Item
2.        Unregistered Sales of Equity
Securities and Use of Proceeds


There are
no matters reportable under this item.





Item
3.        Defaults Upon Senior
Securities


There are
no matters reportable under this item.





Item
4.        (Removed and
Reserved)





Item
5.        Other
Information


There are
no matters reportable under this item.





Item
6.        Exhibits





ExhibitNumber
            
            Description31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.1
            
            Section
      1350 Certifications


27





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





NORTHWEST INDIANA BANCORPDate:  July 22, 2010
                /s/ David A. BochnowskiDavid A. BochnowskiChairman of the Board and Chief Executive OfficerDate:  July 22, 2010
                /s/ Robert T. LowryRobert T. LowrySenior Vice President, Chief Financial Officerand Treasurer


28