SECURITIES AND EXCHANGE COMMISSION

| |  | WASHINGTON, D.C. 20549
| |  | ----------------------



FORM 10-Q



(Mark One)

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



For the quarterly period ended
June 30, 2012 or



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



For
the transition period from ______ to ______



Commission File Number: 0-26128



NorthWest Indiana Bancorp

(Exact name of registrant as specified in its
charter)





|Indiana                                       | 35-1927981            
|--------------------------------------------- | ----------------------
|(State or other jurisdiction of incorporation | (I.R.S. Employer      
|or organization)                              | Identification Number)



|9204 Columbia Avenue                     |           
|---------------------------------------- | ----------
|Munster, 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. YesxNo  ̈



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	xNo
 ̈



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



Large accelerated filer  ̈Accelerated
filer  ̈Non-accelerated filer  ̈Smaller
Reporting Company x         (Do not check if a smaller reporting company)



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



There were 2,839,224 shares of the registrant’s
Common Stock, without par value, outstanding at June 30, 2012.













NorthWest Indiana Bancorp

Index





|                                                                                                              | Page  
|------------------------------------------------------------------------------------------------------------- | ------
|                                                                                                              | Number
|PART I. Financial Information                                                                                 |       
|                                                                                                              |       
|Item 1. Unaudited Financial Statements                                                                        |       
|                                                                                                              |       
|Consolidated Balance Sheets, June 30, 2012 and December 31, 2011                                              | 1     
|                                                                                                              |       
|Consolidated Statements of Income, Three and Six Months Ended June 30, 2012 and 2011                          | 2     
|                                                                                                              |       
|Consolidated Statements of Comprehensive Income, Three and Six Months ended June 30, 2012 and 2011            | 3     
|                                                                                                              |       
|Consolidated Statements of Changes in Stockholders' Equity, Three and Six Months ended June 30, 2012 and 2011 | 4     
|                                                                                                              |       
|Consolidated Statements of Cash Flows, Six Months ended June 30, 2012 and 2011                                | 5     
|                                                                                                              |       
|Notes to Consolidated Financial Statements                                                                    | 6-20  
|                                                                                                              |       
|Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations                 | 21-33 
|                                                                                                              |       
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                            | 33    
|                                                                                                              |       
|Item 4. Controls and Procedures                                                                               | 33    
|                                                                                                              |       
|PART II. Other Information                                                                                    | 34    
|                                                                                                              |       
|SIGNATURES                                                                                                    | 35    
|                                                                                                              |       
|EXHIBITS                                                                                                      |       
|31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                        |       
|31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                        |       
|32.1 Section 1350 Certifications                                                                              |       
|101 XBRL Interactive Data File                                                                                |       















|NorthWest
    Indiana Bancorp  
|-------------------------------
|Consolidated
    Balance Sheets
|                               



|                                                                        |  | June
    30, |         |   |                  |  
|----------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | -
|                                                                        |  | 2012         |         |   | December
    31, |  
|(Dollars in
    thousands)                                              |  | (unaudited)  |         |   | 2011             |  
|                                                                        |  |              |         |   |                  |  
|ASSETS                                                                  |  |              |         |   |                  |  
|                                                                        |  |              |         |   |                  |  
|Cash
    and non-interest bearing balances in financial institutions    |  | $            | 14,283  |   |                  | $
|Interest
    bearing balances in financial institutions                 |  |              | 474     |   |                  |  
|Federal
    funds sold                                                  |  |              | 4,658   |   |                  |  
|Total
cash and cash equivalents                                         |  |              | 19,415  |   |                  |  
|                                                                        |  |              |         |   |                  |  
|Securities available-for-sale                                           |  |              | 192,705 |   |                  |  
|Loans
    receivable                                                    |  |              | 431,356 |   |                  |  
|Less:
    allowance for loan losses                                     |  |              | (8,044  | ) |                  |  
|Net
loans receivable                                                    |  |              | 423,312 |   |                  |  
|Federal
    Home Loan Bank stock                                        |  |              | 3,086   |   |                  |  
|Accrued
    interest receivable                                         |  |              | 2,547   |   |                  |  
|Premises
    and equipment                                              |  |              | 17,860  |   |                  |  
|Foreclosed
    real estate                                              |  |              | 2,245   |   |                  |  
|Cash
    value of bank owned life insurance                             |  |              | 13,043  |   |                  |  
|Prepaid
    FDIC insurance premium                                      |  |              | 1,252   |   |                  |  
|Other
    assets                                                        |  |              | 4,616   |   |                  |  
|                                                                        |  |              |         |   |                  |  
|Total
assets                                                            |  | $            | 680,081 |   |                  | $
|                                                                        |  |              |         |   |                  |  
|LIABILITIES
    AND STOCKHOLDERS' EQUITY                                |  |              |         |   |                  |  
|                                                                        |  |              |         |   |                  |  
|Deposits:                                                               |  |              |         |   |                  |  
|Non-interest
    bearing                                                |  | $            | 59,710  |   |                  | $
|Interest
bearing                                                        |  |              | 487,790 |   |                  |  
|Total                                                                   |  |              | 547,500 |   |                  |  
|Repurchase
    agreements                                               |  |              | 21,010  |   |                  |  
|Borrowed
    funds                                                      |  |              | 38,054  |   |                  |  
|Accrued
    expenses and other liabilities                              |  |              | 8,596   |   |                  |  
|                                                                        |  |              |         |   |                  |  
|Total
liabilities                                                       |  |              | 615,160 |   |                  |  
|                                                                        |  |              |         |   |                  |  
|Stockholders'
    Equity:                                               |  |              |         |   |                  |  
|Preferred
    stock, no par or stated value;                            |  |              |         |   |                  |  
|10,000,000
shares authorized, none outstanding                          |  |              | -       |   |                  |  
|Common
    stock, no par or stated value; 10,000,000 shares authorized; |  |              |         |   |                  |  
|shares issued: 
    June 30, 2012 - 2,888,902                           |  |              | 361     |   |                  |  
|December 31,
    2011 - 2,888,902                                       |  |              |         |   |                  |  
|shares outstanding: 
    June 30, 2012 - 2,839,224                      |  |              |         |   |                  |  
|December 31,
    2011 - 2,835,403                                       |  |              |         |   |                  |  
|Additional
    paid in capital                                          |  |              | 5,181   |   |                  |  
|Accumulated
    other comprehensive income                              |  |              | 2,416   |   |                  |  
|Retained
    earnings                                                   |  |              | 58,026  |   |                  |  
|Treasury
    stock, common shares at cost:  June 30, 2012 - 49,678      |  |              |         |   |                  |  
|December 31,
    2011 - 53,499                                          |  |              | (1,063  | ) |                  |  
|                                                                        |  |              |         |   |                  |  
|Total
    stockholders' equity                                          |  |              | 64,921  |   |                  |  
|                                                                        |  |              |         |   |                  |  
|Total
liabilities and stockholders' equity                              |  | $            | 680,081 |   |                  | $



|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,         |  
|                                                                       |  | 2012                   |       |   | 2011                 |  
|Interest
    income:                                                   |  |                        |       |   |                      |  
|Loans
receivable                                                       |  |                        |       |   |                      |  
|Real
estate loans                                                      |  | $                      | 4,276 |   |                      | $
|Commercial
loans                                                       |  |                        | 876   |   |                      |  
|Consumer
loans                                                         |  |                        | 9     |   |                      |  
|Total
loan interest                                                    |  |                        | 5,161 |   |                      |  
|                                                                       |  |                        |       |   |                      |  
|Securities                                                             |  |                        | 1,386 |   |                      |  
|Other
interest earning assets                                          |  |                        | 7     |   |                      |  
|                                                                       |  |                        |       |   |                      |  
|Total
interest income                                                  |  |                        | 6,554 |   |                      |  
|                                                                       |  |                        |       |   |                      |  
|Interest
    expense:                                                  |  |                        |       |   |                      |  
|Deposits                                                               |  |                        | 410   |   |                      |  
|Repurchase
    agreements                                              |  |                        | 21    |   |                      |  
|Borrowed
    funds                                                     |  |                        | 183   |   |                      |  
|                                                                       |  |                        |       |   |                      |  
|Total
interest expense                                                 |  |                        | 614   |   |                      |  
|                                                                       |  |                        |       |   |                      |  
|Net
    interest income                                                |  |                        | 5,940 |   |                      |  
|Provision
    for loan losses                                          |  |                        | 550   |   |                      |  
|                                                                       |  |                        |       |   |                      |  
|Net
    interest income after provision for loan losses                |  |                        | 5,390 |   |                      |  
|                                                                       |  |                        |       |   |                      |  
|Noninterest
    income:                                                |  |                        |       |   |                      |  
|Fees
    and service charges                                           |  |                        | 610   |   |                      |  
|Wealth
    management operations                                       |  |                        | 314   |   |                      |  
|Gain
    on sale of securities, net                                    |  |                        | 251   |   |                      |  
|Gain
    on sale of loans held-for-sale, net                           |  |                        | 272   |   |                      |  
|Increase
    in cash value of bank owned life insurance                |  |                        | 97    |   |                      |  
|(Loss)/Gain
    on foreclosed real estate, net                         |  |                        | (120  | ) |                      |  
|Other-than-temporary
    credit impairment of debt securities          |  |                        | (6    | ) |                      |  
|Noncredit
    portion of other-than-tmporary                           |  |                        |       |   |                      |  
|impairment
of debt securities recognized in other comprehensive income |  |                        | -     |   |                      |  
|Other                                                                  |  |                        | 5     |   |                      |  
|                                                                       |  |                        |       |   |                      |  
|Total
noninterest income                                               |  |                        | 1,423 |   |                      |  
|                                                                       |  |                        |       |   |                      |  
|Noninterest
    expense:                                               |  |                        |       |   |                      |  
|Compensation
and benefits                                              |  |                        | 2,507 |   |                      |  
|Occupancy
and equipment                                                |  |                        | 763   |   |                      |  
|Data
processing                                                        |  |                        | 277   |   |                      |  
|Federal
deposit insurance premiums                                     |  |                        | 147   |   |                      |  
|Marketing                                                              |  |                        | 83    |   |                      |  
|Other                                                                  |  |                        | 928   |   |                      |  
|                                                                       |  |                        |       |   |                      |  
|Total
noninterest expense                                              |  |                        | 4,705 |   |                      |  
|                                                                       |  |                        |       |   |                      |  
|Income
    before income tax expenses                                  |  |                        | 2,108 |   |                      |  
|Income
    tax expenses                                                |  |                        | 488   |   |                      |  
|                                                                       |  |                        |       |   |                      |  
|Net
    income                                                         |  | $                      | 1,620 |   |                      | $
|                                                                       |  |                        |       |   |                      |  
|Earnings per
    common share:                                         |  |                        |       |   |                      |  
|Basic                                                                  |  | $                      | 0.57  |   |                      | $
|Diluted                                                                |  | $                      | 0.57  |   |                      | $
|                                                                       |  |                        |       |   |                      |  
|Dividends declared
    per common share                                |  | $                      | 0.19  |   |                      | $



|See accompanying
    notes to consolidated financial statements. |  |  | 
|---------------------------------------------------------------- |  |  | 



2









|NorthWest Indiana Bancorp                      
|-----------------------------------------------
|Consolidated Statements of Comprehensive Income
|(unaudited)                                    







|                                                                   |  | Three Months Ended |       |   | Six Months Ended |  
|------------------------------------------------------------------ |  | ------------------ | ----- | - | ---------------- | -
|(Dollars in thousands)                                             |  | June 30,           |       |   | June 30,         |  
|                                                                   |  | 2012               |       |   | 2011             |  
|                                                                   |  |                    |       |   |                  |  
|Net income                                                         |  | $                  | 1,620 |   |                  | $
|                                                                   |  |                    |       |   |                  |  
|Net change in net unrealized gains and losses:                     |  |                    |       |   |                  |  
|on securities available-for-sale:                                  |  |                    |       |   |                  |  
|Unrealized gains arising during the period                         |  |                    | 318   |   |                  |  
|Less: reclassification adjustment for gains included in net income |  |                    | (245  | ) |                  |  
|Net securities (loss)/gain during the period                       |  |                    | 73    |   |                  |  
|Tax effect                                                         |  |                    | (23   | ) |                  |  
|Net of tax amount                                                  |  |                    | 50    |   |                  |  
|                                                                   |  |                    |       |   |                  |  
|Net change in unrecognized gain on postretirement benefit:         |  |                    |       |   |                  |  
|Net loss on post retirement benefit                                |  |                    | -     |   |                  |  
|Amortization of net actuarial gain                                 |  |                    | (1    | ) |                  |  
|Net loss during the period                                         |  |                    | (1    | ) |                  |  
|Tax effect                                                         |  |                    | -     |   |                  |  
|Net of tax amount                                                  |  |                    | (1    | ) |                  |  
|Other comprehensive (loss)/income, net of tax                      |  |                    | 49    |   |                  |  
|                                                                   |  |                    |       |   |                  |  
|Comprehensive income, net of tax                                   |  | $                  | 1,669 |   |                  | $





|See accompanying notes to consolidated financial statements.
|------------------------------------------------------------





3









|NorthWest Indiana Bancorp                                 
|----------------------------------------------------------
|Consolidated Statements of Changes in Stockholders' Equity
|(unaudited)                                               



|                                                                 |  | Three
    Months Ended |        |   | Six
    Months Ended |  
|---------------------------------------------------------------- |  | ---------------------- | ------ | - | -------------------- | -
|(Dollars in thousands)                                           |  | June
    30,           |        |   | June
    30,         |  
|                                                                 |  | 2012                   |        |   | 2011                 |  
|                                                                 |  |                        |        |   |                      |  
|Balance at beginning
    of period                               |  | $                      | 63,755 |   |                      | $
|                                                                 |  |                        |        |   |                      |  
|Comprehensive
    income:                                        |  |                        |        |   |                      |  
|Net income                                                       |  |                        | 1,620  |   |                      |  
|Net unrealized
    change on securities                          |  |                        |        |   |                      |  
|available-for-sale,
    net of reclassifications and tax effects |  |                        | 50     |   |                      |  
|Amortization
    of unrecognized gain on postretirement benefit  |  |                        | (1     | ) |                      |  
|Comprehensive
    income                                         |  |                        | 1,669  |   |                      |  
|                                                                 |  |                        |        |   |                      |  
|Stock based
    compensation expense                             |  |                        | 4      |   |                      |  
|                                                                 |  |                        |        |   |                      |  
|Sale of treasury
    stock                                       |  |                        | 32     |   |                      |  
|                                                                 |  |                        |        |   |                      |  
|Cash dividends                                                   |  |                        | (539   | ) |                      |  
|                                                                 |  |                        |        |   |                      |  
|Balance at end of period                                         |  | $                      | 64,921 |   |                      | $



|See accompanying
    notes to consolidated financial statements. |  |  |  |  |  |  | 
|---------------------------------------------------------------- |  |  |  |  |  |  | 





4









|NorthWest Indiana Bancorp            
|-------------------------------------
|Consolidated Statements of Cash Flows
|(unaudited)                          









|                                                                          |  | Six Months Ended |        
|------------------------------------------------------------------------- |  | ---------------- | -------
|(Dollars in thousands)                                                    |  | June 30,         |        
|                                                                          |  | 2012             |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                     |  |                  |        
|Net income                                                                |  | $                | 2,974  
|Adjustments to reconcile net income to                                    |  |                  |        
|net cash provided by operating activities:                                |  |                  |        
|Origination of loans for sale                                             |  |                  | (5,926 
|Sale of loans originated for sale                                         |  |                  | 6,055  
|Depreciation and amortization, net of accretion                           |  |                  | 1,173  
|Amortization of mortgage servicing rights                                 |  |                  | 57     
|Stock based compensation expense                                          |  |                  | 8      
|Gain on sale of securities, net                                           |  |                  | (617   
|Gain on sale of loans held-for-sale, net                                  |  |                  | (347   
|Other-than-temporary credit impairment of debt securities                 |  |                  | 6      
|Loss/(gain) on foreclosed real estate, net                                |  |                  | 84     
|Provision for loan losses                                                 |  |                  | 1,075  
|Net change in:                                                            |  |                  |        
|Interest receivable                                                       |  |                  | 7      
|Other assets                                                              |  |                  | 32     
|Accrued expenses and other liabilities                                    |  |                  | (1,421 
|Total adjustments                                                         |  |                  | 186    
|Net cash - operating activities                                           |  |                  | 3,160  
|                                                                          |  |                  |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                     |  |                  |        
|Proceeds from maturities and pay downs of securities available-for-sale   |  |                  | 30,137 
|Proceeds from sales of securities available-for-sale                      |  |                  | 13,283 
|Purchases of securities available-for-sale                                |  |                  | (49,198
|Proceeds from maturities and pay downs of securities held-to-maturity     |  |                  | -      
|Proceeds from sale of loans receivable transferred to loans held-for-sale |  |                  | 3,591  
|Proceeds from sale of Federal Home Loan Bank Stock                        |  |                  | -      
|Loan participations purchased                                             |  |                  | (9,393 
|Net change in loans receivable                                            |  |                  | (25,707
|Proceeds from sales of foreclosed real estate                             |  |                  | 809    
|Purchase of premises and equipment, net                                   |  |                  | (323   
|Cash value of bank owned life insurance                                   |  |                  | (194   
|Net cash - investing activities                                           |  |                  | (36,995
|                                                                          |  |                  |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                     |  |                  |        
|Net change in deposits                                                    |  |                  | 20,619 
|Proceeds from  FHLB advances                                              |  |                  | 2,000  
|Repayment of FHLB advances                                                |  |                  | (2,000 
|Change in other borrowed funds                                            |  |                  | 7,051  
|Proceeds from sale of treasury stock                                      |  |                  | 63     
|Dividends paid                                                            |  |                  | (850   
|Net cash - financing activities                                           |  |                  | 26,883 
|Net change in cash and cash equivalents                                   |  |                  | (6,952 
|Cash and cash equivalents at beginning of period                          |  |                  | 26,367 
|Cash and cash equivalents at end of period                                |  | $                | 19,415 
|                                                                          |  |                  |        
|SUPPLEMENTAL CASH FLOW INFORMATION:                                       |  |                  |        
|Cash paid during the period for:                                          |  |                  |        
|Interest                                                                  |  | $                | 1,261  
|Income taxes                                                              |  |                  | 1,263  
|SUPPLEMENTAL NONCASH INFORMATION:                                         |  |                  |        
|Transfers from loans to foreclosed real estate                            |  | $                | 930    
|Transfers from loans receivable to loans held-for-sale                    |  |                  | 3,428  





|See accompanying notes to consolidated financial statements. |  |  |  |  |  | 
|------------------------------------------------------------ |  |  |  |  |  | 







5





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, NWIN Funding, Inc, and Columbia Development
Company, LLC. The Bancorp has no other business activity other than being a holding company for the Bank. The Bancorp’s earnings
are dependent upon the earnings of the Bank. The accompanying unaudited consolidated financial statements were prepared in accordance
with instructions for Form 10-Q and, therefore, do not include all disclosures required by U.S. generally accepted accounting principles
for complete presentation of consolidated 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, 2012 and December
31, 2011, and the consolidated statements of income, comprehensive income, and changes in stockholders’ equity, for the three
and six months ended June 30, 2012 and 2011, and consolidated statements of cash flows for the six months ended June 30, 2012 and
2011. The income reported for the six month period ended June 30, 2012 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, investment securities, deferred tax assets, and the 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) |        
|------------------------------------------- |  | -------------------------- | -------
|                                            |  |                            |        
|                                            |  | Cost                       |        
|                                            |  | Basis                      |        
|June
    30, 2012                           |  |                            |        
|U.S.
    government sponsored entities      |  | $                          | 15,850 
|Collateralized
    mortgage obligations and |  |                            |        
|residential
    mortgage-backed securities  |  |                            | 113,097
|Municipal
    securities                    |  |                            | 54,903 
|Collateralized
    debt obligations         |  |                            | 5,207  
|Total
    securities available-for-sale     |  | $                          | 189,057
|                                            |  |                            |        
|December
    31, 2011                       |  |                            |        
|U.S.
    government sponsored entities      |  | $                          | 15,610 
|Collateralized
    mortgage obligations and |  |                            |        
|residential
    mortgage-backed securities  |  |                            | 107,569
|Municipal
    securities                    |  |                            | 54,738 
|Collateralized
    debt obligations         |  |                            | 5,214  
|Total
    securities available-for-sale     |  | $                          | 183,131



6









The fair value of available-for-sale debt
securities and carrying amount, if different, at June 30, 2012 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     |        
|                                           |  | Estimated              |        
|                                           |  | Fair                   |        
|June 30, 2012                              |  | Value                  |        
|Due in one year or less                    |  | $                      | 987    
|Due from one to five years                 |  |                        | 9,272  
|Due from five to ten years                 |  |                        | 35,848 
|Due over ten years                         |  |                        | 29,793 
|Collateralized mortgage obligations and    |  |                        |        
|residential mortgage-backed
    securities |  |                        | 116,805
|Total                                      |  | $                      | 192,705



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





|             |  | (Dollars in thousands) |       
|------------ |  | ---------------------- | ------
|             |  | June 30,               |       
|             |  | 2012                   |       
|             |  |                        |       
|Proceeds     |  | $                      | 13,283
|Gross gains  |  |                        | 617   
|Gross losses |  |                        | -     



Accumulated other comprehensive income/(loss)
balances, net of tax, related to available-for-sale securities, were as follows:





| |                                      |  | (Dollars in thousands) |  
| | ------------------------------------ |  | ---------------------- | -
| |                                      |  | Unrealized gain/(loss) |  
| | Beginning balance, December 31, 2011 |  |                        | $
| | Current period change                |  |                        |  
| | Ending balance, June 30, 2012        |  |                        | $



Securities with carrying values of approximately
$33,858,000 and $70,412,000 were pledged as of June 30, 2012 and December 31, 2011, respectively, as collateral for repurchase
agreements, public funds, and for other purposes as permitted or required by law. At June 30, 2012, the Bancorp was no longer required
to pledge securities for public funds on deposit.





7







Securities with unrealized losses at June 30, 2012 and December
31, 2011 not recognized in income are as follows:





|                                            |  | (Dollars
    in thousands) |      
|------------------------------------------- |  | -------------------------- | -----
|                                            |  | Less
    than 12 months    |      
|                                            |  | Estimated                  |      
|                                            |  | Fair                       |      
|                                            |  | Value                      |      
|June 30, 2012                               |  |                            |      
|U.S.
    government sponsored entities      |  | $                          | 998  
|Collateralized
    mortgage obligations and |  |                            |      
|residential
    mortgage-backed securities  |  |                            | 2,138
|Municipal
    securities                    |  |                            | 2,415
|Collateralized
    debt obligations         |  |                            | -    
|Total
    temporarily impaired              |  | $                          | 5,551
|Number of securities                        |  |                            |      







|                                            |  | (Dollars
    in thousands) |      
|------------------------------------------- |  | -------------------------- | -----
|                                            |  | Less
    than 12 months    |      
|                                            |  | Estimated                  |      
|                                            |  | Fair                       |      
|                                            |  | Value                      |      
|December
    31, 2011                       |  |                            |      
|U.S.
    government sponsored entities      |  | $                          | 1,287
|Collateralized
    mortgage obligations and |  |                            |      
|residential
    mortgage-backed securities  |  |                            | 2,030
|Municipal
    securities                    |  |                            | -    
|Collateralized
    debt obligations         |  |                            | -    
|Total
    temporarily impaired              |  | $                          | 3,317
|Number of securities                        |  |                            |      



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 those securities for the foreseeable future, and the decline in fair value is largely due to changes
in interest rates and volatility in securities markets. The fair value is expected to recover as the securities approach maturity.



Note 4 - Loans Receivable





|                                              |  | (Dollars in thousands) |        
|--------------------------------------------- |  | ---------------------- | -------
|                                              |  | June
    30, 2012      |        
|Loans secured by real estate:                 |  |                        |        
|Construction and land development             |  | $                      | 20,618 
|Residential, including home equity            |  |                        | 156,783
|Commercial real estate and
    other dwelling |  |                        | 177,465
|Total loans secured by real
    estate        |  |                        | 354,866
|Consumer loans                                |  |                        | 482    
|Commercial business                           |  |                        | 68,688 
|Government and other                          |  |                        | 7,661  
|Subtotal                                      |  |                        | 431,697
|Less:                                         |  |                        |        
|Net deferred loan origination fees            |  |                        | (282   
|Undisbursed loan funds                        |  |                        | (59    
|Loans receivable                              |  | $                      | 431,356







8









|(Dollars
    in thousands)                                                                                              |  | Residential
    Real Estate, Including Home Equity |         |   | Consumer
    Loans |   |     | Commercial
    Real Estate, Construction & Land Development, and Other Dwellings |  |   | Commercial
    Participations Purchased |   |  | Commercial
    Business Loans |        |   | Government |   |        | Total | 
|----------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | ------- | - | ------------------ | - | --- | -------------------------------------------------------------------------------- |  | - | --------------------------------------- | - |  | ----------------------------- | ------ | - | ---------- | - | ------ | ----- | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|The
    Bancorp's activity in the allowance for loan losses is summarized below for the six months ended June 30, 2012:
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Allowance
    for loan losses:                                                                                          |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Beginning
    Balance                                                                                                   |  | $                                                  | 1,161   |   |                    | $ | 15  |                                                                                  |  | $ | 3,329                                   |   |  | $                             | 2,399  |   |            | $ | 1,101  |       | 
|Charge-offs                                                                                                             |  |                                                    | (205    | ) |                    |   | (9  | )                                                                                |  |   | (381                                    | ) |  |                               | (484   | ) |            |   | -      |       | 
|Recoveries                                                                                                              |  |                                                    | -       |   |                    |   | 4   |                                                                                  |  |   | 9                                       |   |  |                               | -      |   |            |   | 30     |       | 
|Provisions                                                                                                              |  |                                                    | 210     |   |                    |   | 22  |                                                                                  |  |   | 978                                     |   |  |                               | 121    |   |            |   | (256   | )     | 
|Ending Balance                                                                                                          |  | $                                                  | 1,166   |   |                    | $ | 32  |                                                                                  |  | $ | 3,935                                   |   |  | $                             | 2,036  |   |            | $ | 875    |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|The Bancorp's activity in the allowance for loan losses is summarized below for the six months ended June 30, 2011:     |  |                                                   
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Allowance
    for loan losses:                                                                                          |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Beginning
    Balance                                                                                                   |  | $                                                  | 994     |   |                    | $ | 30  |                                                                                  |  | $ | 2,773                                   |   |  | $                             | 4,704  |   |            | $ | 620    |       | 
|Charge-offs                                                                                                             |  |                                                    | (235    | ) |                    |   | (4  | )                                                                                |  |   | (567                                    | ) |  |                               | (2,417 | ) |            |   | (111   | )     | 
|Recoveries                                                                                                              |  |                                                    | 102     |   |                    |   | 10  |                                                                                  |  |   | 174                                     |   |  |                               | -      |   |            |   | -      |       | 
|Provisions                                                                                                              |  |                                                    | 245     |   |                    |   | (18 | )                                                                                |  |   | 682                                     |   |  |                               | 950    |   |            |   | 206    |       | 
|Ending Balance                                                                                                          |  | $                                                  | 1,106   |   |                    | $ | 18  |                                                                                  |  | $ | 3,062                                   |   |  | $                             | 3,237  |   |            | $ | 715    |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|The Bancorp's allowance for loan losses impairment evaluation at June 30, 2012:                                         |  |                                                   
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Ending balance:
    individually                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|evaluated
    for impairment                                                                                            |  | $                                                  | 14      |   |                    | $ | -   |                                                                                  |  | $ | 1,144                                   |   |  | $                             | -      |   |            | $ | 136    |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Ending balance:
    collectively                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|evaluated
    for impairment                                                                                            |  | $                                                  | 1,152   |   |                    | $ | 32  |                                                                                  |  | $ | 2,791                                   |   |  | $                             | 2,036  |   |            | $ | 739    |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Ending
    balance: loans acquired                                                                                      |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|with
    deteriorated credit quality                                                                                    |  | $                                                  | -       |   |                    | $ | -   |                                                                                  |  | $ | -                                       |   |  | $                             | -      |   |            | $ | -      |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|FINANCING
    RECEIVABLES                                                                                               |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Ending balance                                                                                                          |  | $                                                  | 156,470 |   |                    | $ | 481 |                                                                                  |  | $ | 169,749                                 |   |  | $                             | 28,334 |   |            | $ | 68,661 |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Ending balance:
    individually                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|evaluated
    for impairment                                                                                            |  | $                                                  | 935     |   |                    | $ | -   |                                                                                  |  | $ | 10,990                                  |   |  | $                             | 6,632  |   |            | $ | 1,734  |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Ending balance:
    collectively                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|evaluated
    for impairment                                                                                            |  | $                                                  | 155,535 |   |                    | $ | 481 |                                                                                  |  | $ | 158,759                                 |   |  | $                             | 21,702 |   |            | $ | 66,927 |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|The Bancorp's allowance for loan losses impairment evaluation at December 31, 2011:                                     |  |                                                   
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Ending balance:
    individually                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|evaluated
    for impairment                                                                                            |  | $                                                  | 10      |   |                    | $ | -   |                                                                                  |  | $ | 1,043                                   |   |  | $                             | 252    |   |            | $ | 304    |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Ending balance:
    collectively                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|evaluated
    for impairment                                                                                            |  | $                                                  | 1,151   |   |                    | $ | 15  |                                                                                  |  | $ | 2,286                                   |   |  | $                             | 2,147  |   |            | $ | 797    |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Ending
    balance: loans acquired                                                                                      |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|with
    deteriorated credit quality                                                                                    |  | $                                                  | -       |   |                    | $ | -   |                                                                                  |  | $ | -                                       |   |  | $                             | -      |   |            | $ | -      |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|FINANCING
    RECEIVABLES                                                                                               |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Ending balance                                                                                                          |  | $                                                  | 154,135 |   |                    | $ | 472 |                                                                                  |  | $ | 154,618                                 |   |  | $                             | 20,240 |   |            | $ | 63,293 |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Ending balance:
    individually                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|evaluated
    for impairment                                                                                            |  | $                                                  | 1,282   |   |                    | $ | -   |                                                                                  |  | $ | 11,007                                  |   |  | $                             | 7,170  |   |            | $ | 2,214  |       | 
|                                                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|Ending balance:
    collectively                                                                                        |  |                                                    |         |   |                    |   |     |                                                                                  |  |   |                                         |   |  |                               |        |   |            |   |        |       | 
|evaluated
    for impairment                                                                                            |  | $                                                  | 152,853 |   |                    | $ | 472 |                                                                                  |  | $ | 143,611                                 |   |  | $                             | 13,070 |   |            | $ | 61,079 |       | 







9









|The Bancorp's credit quality indicators, are summarized below at June 30, 2012 and December 31, 2011:
|-----------------------------------------------------------------------------------------------------





|                                |  | (Dollars
    in thousands)                                                         |        
|------------------------------- |  | ---------------------------------------------------------------------------------- | -------
|                                |  | Corporate
    Credit Exposure - Credit Risk Portfolio By Creditworthiness Category |        
|                                |  | Commercial
    Real Estate, Construction & Land Development, and Other Dwellings   |        
|Loan
    Grades                 |  | 2012                                                                               |        
|2 
     Moderate risk           |  | $                                                                                  | 22     
|3 
     Acceptable risk         |  |                                                                                    | 104,445
|4   Pass/monitor                |  |                                                                                    | 50,835 
|5 
     Special mention (watch) |  |                                                                                    | 3,348  
|6   Substandard                 |  |                                                                                    | 11,099 
|7   Doubtful                    |  |                                                                                    | -      
|Total                           |  | $                                                                                  | 169,749



| |               |  | (Dollars in thousands)                                                   |  
| | ------------- |  | ------------------------------------------------------------------------ | -
| |               |  | Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity |  
| |               |  | Residential Real Estate, Including Home Equity                           |  
| |               |  | 2012                                                                     |  
| | Performing    |  |                                                                          | $
| | Nonperforming |  |                                                                          |  
| | Total         |  |                                                                          | $







The Bancorp has established a standard
loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio.
The use and application of theses grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system
is as follows:



2 - Moderate risk

Borrower consistently internally generates sufficient cash flow
to fund debt service, working assets, and some capital expenditures. Risk of default considered low.





3 – Acceptable risk

Borrower generates sufficient cash flow to fund debt service,
but most working asset and all capital expansion needs are provided from external sources. Profitability ratios and key balance
sheet ratios are usually close to peers but one or more ratios (e.g. leverage) may be higher than peer. Earnings may be trending
down over the last three years. Borrower may be able to obtain similar financing from other banks with comparable or less favorable
terms. Risk of default is acceptable but requires collateral protection.



4 – Pass/monitor

The borrower has significant weaknesses resulting from performance
trends or management concerns. The financial condition of the company has taken a negative turn and may be temporarily strained.
Cash flow may be weak but cash reserves remain adequate to meet debt service. Management weaknesses are evident. Borrowers in this
category will warrant more than the normal level of supervision and more frequent reporting.



5 – Special mention (watch)

Special mention credits are considered bankable assets with
no apparent loss of principal or interest envisioned but requiring a high level of management attention. Assets in this category
are currently protected but are potentially weak. These borrowers are subject to economic, industry, or management factors having
an adverse impact upon their prospects for orderly service of debt. The perceived risk in continued lending is considered to have
increased beyond the level where such loans would normally be granted. These assets constitute an undue and unwarranted credit
risk, but not to the point of justifying a classification of Substandard.





6 – Substandard

This classification consists of loans which are inadequately
protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Financial statements normally
reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence
of creditor protection. Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit,
some loss could be incurred in collection if the deficiencies are not corrected.



7 – Doubtful

This classification consists of loans where the possibility
of loss is high after collateral liquidation based upon existing facts, market conditions, and value. Loss is deferred until certain
important and reasonably specific pending factors which may strengthen the credit can be exactly determined. These factors may
include proposed acquisitions, liquidation procedures, capital injection and receipt of additional collateral, mergers or refinancing
plans.



Performing loans are loans that are paying as agreed and are
less than ninety days past due on payments of interest and principal.





10









|The Bancorp's cumulative outstanding troubled debt restructurings are summarized below:
|---------------------------------------------------------------------------------------



|                                                   |  | (Dollars
    in thousands) |  
|-------------------------------------------------- |  | -------------------------- | -
|                                                   |  | Number
    of Contracts    |  
|                                                   |  | June
    30, 2012          |  
|Troubled
    debt restructurings outstanding at    |  |                            |  
|the
    end of the periods presented:              |  |                            |  
|Residential
    real estate, including home equity |  |                            | 9
|Consumer
    loans                                 |  |                            | -
|Commercial
    real estate, construction & land    |  |                            |  
|development,
    and other dwellings               |  |                            | 5
|Commercial
    participations purchased            |  |                            | 2
|Commercial
    business loans                      |  |                            | -
|Government                                         |  |                            | -





|                                                   |  | Number
    of Contracts |   |  | Recorded
    Investment |   |   | Number
    of Contracts |  |  | Recorded
    Investment | 
|-------------------------------------------------- |  | ----------------------- | - |  | ----------------------- | - | - | ----------------------- |  |  | ----------------------- | 
|                                                   |  | June
    30, 2012       |   |  | December
    31, 2011   |  
|Troubled
    debt restructurings that subsequently |  |                         |   |  |                         |   |   |                         |  |  |                         | 
|defaulted
    during the periods presented:        |  |                         |   |  |                         |   |   |                         |  |  |                         | 
|Residential
    real estate, including home equity |  |                         | - |  |                         | $ | - |                         |  |  | -                       | 
|Consumer
    loans                                 |  |                         | - |  |                         |   | - |                         |  |  | -                       | 
|Commercial
    real estate, construction & land    |  |                         |   |  |                         |   |   |                         |  |  |                         | 
|development,
    and other dwellings               |  |                         | - |  |                         |   | - |                         |  |  | 1                       | 
|Commercial
    participations purchased            |  |                         | - |  |                         |   | - |                         |  |  | -                       | 
|Commercial
    business loans                      |  |                         | - |  |                         |   | - |                         |  |  | -                       | 
|Government                                         |  |                         | - |  |                         |   | - |                         |  |  | -                       | 



Troubled debt restructurings that subsequently defaulted during the period are loans that were restructured
and, subsequent to restructuring, were unable perform within the guidelines of the restructured note. Troubled debt restructurings
that subsequently defaulted are presented for comparison purposes and are relevant only to the period in which the subsequent default
occurred.



11









|The Bancorp's individually evaluated impaired loans are summarized below: |  |  |  |  | 
|------------------------------------------------------------------------- |  |  |  |  | 



|                                                   |  | As
    of June 30, 2012 |        |  | For
    the six months ended June 30, 2012 |  
|-------------------------------------------------- |  | ----------------------- | ------ |  | ------------------------------------------ | -
|(Dollars
    in thousands)                         |  | Recorded
    Investment |        |  | Unpaid
    Principal Balance               |  
|With
    no related allowance recorded:            |  |                         |        |  |                                            |  
|                                                   |  |                         |        |  |                                            |  
|Residential
    real estate, including home equity |  | $                       | -      |  |                                            | $
|Commercial
    real estate, construction & land    |  |                         |        |  |                                            |  
|development,
    and other dwellings               |  |                         | 1,095  |  |                                            |  
|Commercial
    participations purchased            |  |                         | 6,632  |  |                                            |  
|Commercial
    business loans                      |  |                         | 1,039  |  |                                            |  
|With
    an allowance recorded:                    |  |                         |        |  |                                            |  
|Residential
    real estate, including home equity |  |                         | 935    |  |                                            |  
|Commercial
    real estate, construction & land    |  |                         |        |  |                                            |  
|development,
    and other dwellings               |  |                         | 9,895  |  |                                            |  
|Commercial
    participations purchased            |  |                         | -      |  |                                            |  
|Commercial
    business loans                      |  |                         | 695    |  |                                            |  
|Total:                                             |  |                         |        |  |                                            |  
|Residential
    real estate, including home equity |  | $                       | 935    |  |                                            | $
|Commercial
    real estate, construction & land    |  |                         |        |  |                                            |  
|development,
    and other dwellings               |  | $                       | 10,990 |  |                                            | $
|Commercial
    participations purchased            |  | $                       | 6,632  |  |                                            | $
|Commercial
    business loans                      |  | $                       | 1,734  |  |                                            | $





|                                                   |  | As
    of December 31, 2011 |        |  | For
    the six months ended June 30, 2011 |  
|-------------------------------------------------- |  | --------------------------- | ------ |  | ------------------------------------------ | -
|(Dollars
    in thousands)                         |  | Recorded
    investment     |        |  | Unpaid
    principal balance               |  
|With
    no related allowance recorded:            |  |                             |        |  |                                            |  
|                                                   |  |                             |        |  |                                            |  
|Residential
    real estate, including home equity |  | $                           | -      |  |                                            | $
|Commercial
    real estate, construction & land    |  |                             |        |  |                                            |  
|development,
    and other dwellings               |  |                             | 690    |  |                                            |  
|Commercial
    participations purchased            |  |                             | 2,483  |  |                                            |  
|Commercial
    business loans                      |  |                             | 793    |  |                                            |  
|With
    an allowance recorded:                    |  |                             |        |  |                                            |  
|Residential
    real estate, including home equity |  |                             | 1,282  |  |                                            |  
|Commercial
    real estate, construction & land    |  |                             |        |  |                                            |  
|development,
    and other dwellings               |  |                             | 10,317 |  |                                            |  
|Commercial
    participations purchased            |  |                             | 4,687  |  |                                            |  
|Commercial
    business loans                      |  |                             | 1,421  |  |                                            |  
|Total:                                             |  |                             |        |  |                                            |  
|Residential
    real estate, including home equity |  | $                           | 1,282  |  |                                            | $
|Commercial
    real estate, construction & land    |  |                             |        |  |                                            |  
|development,
    and other dwellings               |  | $                           | 11,007 |  |                                            | $
|Commercial
    participations purchased            |  | $                           | 7,170  |  |                                            | $
|Commercial
    business loans                      |  | $                           | 2,214  |  |                                            | $







12









|The Bancorp's age analysis of past due financing receivables is summarized below:
|---------------------------------------------------------------------------------



|(Dollars
    in thousands)                        
|--------------------------------------------------
|                                                  
|June 30, 2012                                     
|Residential
    real estate, including home equity
|Consumer
    loans                                
|Commercial
    real estate, construction & land   
|development,
    and other dwellings              
|Commercial
    participations purchased           
|Commercial
    business loans                     
|Government                                        
|Total                                             
|                                                  
|December 31,
    2011                             
|Residential
    real estate, including home equity
|Consumer
    loans                                
|Commercial
    real estate, construction & land   
|development,
    and other dwellings              
|Commercial
    participations purchased           
|Commercial
    business loans                     
|Government                                        
|Total                                             





|The Bancorp's financing receivables on nonaccrual status are summarized below:
|------------------------------------------------------------------------------



|                                               |  | (Dollars in thousands) |       
|---------------------------------------------- |  | ---------------------- | ------
|                                               |  | June 30, 2012          |       
|Residential real estate, including home equity |  | $                      | 1,993 
|Consumer loans                                 |  |                        | -     
|Commercial real estate, construction & land    |  |                        |       
|development, and other dwellings               |  |                        | 2,686 
|Commercial participations purchased            |  |                        | 6,633 
|Commercial business loans                      |  |                        | 507   
|Government                                     |  |                        | -     
|Total                                          |  | $                      | 11,819



Note 5 - Foreclosed Real Estate



Foreclosed real estate at period-end is
summarized below:





|                                              |  | (Dollars in thousands) |      
|--------------------------------------------- |  | ---------------------- | -----
|                                              |  | June 30,               |      
|                                              |  | 2012                   |      
|Construction
    & land development           |  | $                      | 1,235
|Commercial
    real estate and other dwelling |  |                        | 826  
|Residential
    real estate                   |  |                        | 184  
|Total                                         |  | $                      | 2,245



Note 6 - Lease Obligations



During the fourth quarter of 2011, the
Bancorp entered into an agreement to lease commercial loan document preparation and credit management software under an operating
lease that expires in 2016. No contract fees have yet been paid out during 2012. As of June 30, 2012, future minimum annual payments
under this lease are expected to be as follows:





| |       |  |  | (Dollars in thousands) |    
| | ----- |  |  | ---------------------- | ---
| | 2012  |  |  | $                      | 19 
| | 2013  |  |  |                        | 38 
| | 2014  |  |  |                        | 38 
| | 2015  |  |  |                        | 38 
| | 2016  |  |  |                        | 38 
| | 2017  |  |  |                        | 19 
| | Total |  |  | $                      | 190





Note 7 - 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.





13









Note 8 - 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 computations for the six and three months ended June 30, 2012
and 2011 are as follows:





|(Dollars in thousands, except per
    share data)
|-------------------------------------------------
|                                                 
|                                                 
|                                                 
|                                                 
|Basic earnings per common share:                 
|Net income
    as reported                       
|Weighted average common shares outstanding       
|Basic earnings per common share                  
|Diluted earnings per common share:               
|Net income as reported                           
|Weighted average common shares outstanding       
|Add:  Dilutive effect of assumed stock           
|option exercises                                 
|Weighted average common and dilutive             
|potential common shares
    outstanding          
|Diluted earnings per common share                





Note 9 - 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, 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, 2012, stock based compensation expense of $8 thousand was recorded, compared to $18 thousand for the six months ended
June 30, 2011. It is anticipated that current outstanding vested and unvested options will result in additional compensation expense
of approximately $7 thousand in 2012 and $12 thousand in 2013.



There were no shares of restricted stock
granted during the first six months of either 2012 or 2011.



A summary of option activity under the Bancorp’s incentive
stock option plan for the six months ended June 30, 2012 follows:





|        |                                                                                                                              |  |        |  |         |           |  |   | Weighted-   |  |  |           |    
|------- | ---------------------------------------------------------------------------------------------------------------------------- |  | ------ |  | ------- | --------- |  | - | ----------- |  |  | --------- | ---
|        |                                                                                                                              |  |        |  |         | Weighted- |  |   | Average     |  |  |           |    
|        |                                                                                                                              |  |        |  |         | Average   |  |   | Remaining   |  |  | Aggregate |    
|        |                                                                                                                              |  |        |  |         | Exercise  |  |   | Contractual |  |  | Intrinsic |    
|Options |                                                                                                                              |  | Shares |  |         | Price     |  |   | Term        |  |  | Value     |    
|        | Outstanding
                                                                        at January 1, 2012                       |  |        |  | 40,500  |           |  | $ | 25.30       |  |  |           |    
|        | Granted                                                                                                                      |  |        |  | -       |           |  |   | -           |  |  |           |    
|        | Exercised                                                                                                                    |  |        |  | -       |           |  |   | -           |  |  |           |    
|        | Forfeited                                                                                                                    |  |        |  | -       |           |  |   | -           |  |  |           |    
|        | Expired                                                                                                                      |  |        |  | (14,550 | )         |  | $ | 22.15       |  |  |           |    
|        | Outstanding
                                                                                                at June 30, 2012 |  |        |  | 25,950  |           |  | $ | 27.06       |  |  |           | 1.2
|        | Exercisable
                                                                                                at June 30, 2012 |  |        |  | 24,950  |           |  | $ | 27.01       |  |  |           | 1.0







14







Note 10 - Adoption of New Accounting Standards





Update Number 2011-04 – Fair Value
Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.
This update to Fair Value Measurement (Topic 820) results in common fair value measurement and disclosure requirements in U.S.
GAAP and IFRS. The amendments in this update explain how to measure fair value. They do not require additional fair value measurements
and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments
in this update are to be applied prospectively and are effective during interim and annual periods beginning after December 15,
2011. The Bancorp has adopted this update as of January 1, 2012. Adoption had not resulted in any changes in valuation techniques
nor related inputs. Note 11 - Fair Value contains expanded disclosure of the level in the fair value hierarchy of inputs that are
used in estimating and measuring fair value.





Update Number 2011-05 – Comprehensive
Income (Topic 220): Presentation of Comprehensive Income. This accounting standard update was issued to increase the prominence
of items reported in other comprehensive income and to facilitate the convergence of U.S. GAAP and IFRS. Current U.S. GAAP allows
the Bancorp to present other comprehensive income as part of the statement of changes in stockholders’ equity. This accounting
standard update eliminates that option and requires consecutive presentation of the statement of net income and the statement of
comprehensive income. The requirement to report comprehensive income either in a single continuous financial statement or in two
separate but consecutive financial statements are effective for public entities for reporting periods beginning after December
15, 2011 and will be applied retrospectively. A Consolidated Statement of Comprehensive Income has been included as part of the
company’s unaudited financial statements, for the three months and six months ended June 30, 2012 and 2011.





Update Number 2011-12 – Comprehensive
Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated
Other Comprehensive Income in Accounting Standards update No. 2011-05. This update to Comprehensive Income (Topic 220) defers
the requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with
their respective components of net income and other comprehensive income. The deferral supersedes only the paragraphs pertaining
to how and where reclassification adjustments are presented. The amendments in this update are effective for public entities for
reporting periods beginning after December 15, 2011.



Note 11 - 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 judgments and assumptions used in pricing could result in different
estimates of value. In certain cases where market data is not readily available because of a 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. Impairment is other-than-temporary if the decline in the fair value
is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will
not be received. Significant judgments are required in determining impairment, which include making assumptions regarding the estimated
prepayments, loss assumptions and the change in interest rates. The Bancorp considers 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 (1) has the intent to sell the debt securities
or (2) more likely than not will be required to sell the debt securities before their 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.





15









For the quarter ended June 30, 2012, 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 and the Investments – Debt and Equity Securities
Topic. 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 contain 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
U.S. 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 the Comptroller of Currency. 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 sizes. 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 $6 thousand of additional other-than-temporary impairment during the quarter ended June
30, 2012.





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





|                                    |  | (Dollars in thousands)          |    
|----------------------------------- |  | ------------------------------- | ---
|                                    |  | Other-than-temporary impairment |    
|Ending balance, December 31, 2011   |  | $                               | 265
|Additions not previously recognized |  |                                 | 6  
|Ending balance, June 30, 2012       |  | $                               | 271







16









The following table contains information
regarding the Bancorp’s pooled trust preferred securities as of June 30, 2012:





|Cusip                                                                        |  |   | 74043CAC1                                                                                 |   |  |   | 74042TAJ0                                                                                  |   |  |   | 01449TAB9                                                                               |   |  |   | 01450NAC6                                                                                 |  
|---------------------------------------------------------------------------- |  | - | ----------------------------------------------------------------------------------------- | - |  | - | ------------------------------------------------------------------------------------------ | - |  | - | --------------------------------------------------------------------------------------- | - |  | - | ----------------------------------------------------------------------------------------- | -
|Deal name                                                                    |  |   | PreTSL
                                                                              XXIV |   |  |   | PreTSL
                                                                              XXVII |   |  |   | Alesco
                                                                              IX |   |  |   | Alesco
                                                                              XVII |  
|Class                                                                        |  |   | B-1                                                                                       |   |  |   | C-1                                                                                        |   |  |   | A-2A                                                                                    |   |  |   | B                                                                                         |  
|Book value                                                                   |  | $ | 1,256,972                                                                                 |   |  | $ | 1,296,077                                                                                  |   |  | $ | 1,302,536                                                                               |   |  | $ | 1,351,903                                                                                 |  
|Fair value                                                                   |  |   | 217,756                                                                                   |   |  |   | 186,525                                                                                    |   |  |   | 544,350                                                                                 |   |  |   | 298,791                                                                                   |  
|Unrealized gains/(losses)                                                    |  |   | (1,039,215                                                                                | ) |  |   | (1,109,552                                                                                 | ) |  |   | (758,186                                                                                | ) |  |   | (1,053,112                                                                                | )
|Lowest credit rating assigned                                                |  |   | Caa3                                                                                      |   |  |   | C                                                                                          |   |  |   | B2                                                                                      |   |  |   | C                                                                                         |  
|Number of performing banks                                                   |  |   | 50                                                                                        |   |  |   | 26                                                                                         |   |  |   | 53                                                                                      |   |  |   | 43                                                                                        |  
|Number of performing insurance
    companies                                 |  |   | 13                                                                                        |   |  |   | 7                                                                                          |   |  |   | 10                                                                                      |   |  |   | n/a                                                                                       |  
|Number of issuers in default                                                 |  |   | 17                                                                                        |   |  |   | 9                                                                                          |   |  |   | 2                                                                                       |   |  |   | 1                                                                                         |  
|Number of issuers in deferral                                                |  |   | 13                                                                                        |   |  |   | 7                                                                                          |   |  |   | 11                                                                                      |   |  |   | 12                                                                                        |  
|Defaults & deferrals as a
    % of performing collateral                     |  |   | 48.89                                                                                     | % |  |   | 39.16                                                                                      | % |  |   | 22.16                                                                                   | % |  |   | 37.46                                                                                     | %
|Subordination:                                                               |  |   |                                                                                           |   |  |   |                                                                                            |   |  |   |                                                                                         |   |  |   |                                                                                           |  
|As a % of performing collateral                                              |  |   | -6.42                                                                                     | % |  |   | -22.78                                                                                     | % |  |   | 31.65                                                                                   | % |  |   | 0.89                                                                                      | %
|As a % of performing collateral
    - adjusted for projected future defaults |  |   | -13.58                                                                                    | % |  |   | -32.31                                                                                     | % |  |   | 26.11                                                                                   | % |  |   | -9.27                                                                                     | %
|Other-than-temporary impairment
    model assumptions:                       |  |   |                                                                                           |   |  |   |                                                                                            |   |  |   |                                                                                         |   |  |   |                                                                                           |  
|Defaults:                                                                    |  |   |                                                                                           |   |  |   |                                                                                            |   |  |   |                                                                                         |   |  |   |                                                                                           |  
|Year 1 - issuer average                                                      |  |   | 2.10                                                                                      | % |  |   | 2.40                                                                                       | % |  |   | 2.50                                                                                    | % |  |   | 3.10                                                                                      | %
|Year 2 - issuer average                                                      |  |   | 2.10                                                                                      | % |  |   | 2.40                                                                                       | % |  |   | 2.50                                                                                    | % |  |   | 3.10                                                                                      | %
|Year 3 - issuer average                                                      |  |   | 2.10                                                                                      | % |  |   | 2.40                                                                                       | % |  |   | 2.50                                                                                    | % |  |   | 3.10                                                                                      | %
|> 3 Years - issuer average                                                   |  |   | (1                                                                                        | ) |  |   | (1                                                                                         | ) |  |   | (1                                                                                      | ) |  |   | (1                                                                                        | )
|Discount rate - 3 month Libor,
    plus implicit yield spread at purchase    |  |   | 1.48                                                                                      | % |  |   | 1.23                                                                                       | % |  |   | 1.27                                                                                    | % |  |   | 1.44                                                                                      | %
|Recovery assumptions                                                         |  |   | (2                                                                                        | ) |  |   | (2                                                                                         | ) |  |   | (2                                                                                      | ) |  |   | (2                                                                                        | )
|Prepayments                                                                  |  |   | 0.00                                                                                      | % |  |   | 0.00                                                                                       | % |  |   | 0.00                                                                                    | % |  |   | 0.00                                                                                      | %
|Other-than-temporary impairment                                              |  | $ | 41,100                                                                                    |   |  | $ | 132,000                                                                                    |   |  | $ | 36,600                                                                                  |   |  | $ | 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, 2012, management reviewed the subordination levels for each security in context of the level of current collateral defaults
and deferrals within each security; the potential for additional defaults and deferrals within each security; the length of time
that the security has been in “payment in kind” status; and the Bancorp’s class position within each security.



Management calculated the other-than-temporary
impairment model assumptions based on the specific collateral underlying each individual security. The following assumption methodology
was applied consistently to each of the four pooled trust preferred securities: For collateral that has already defaulted, no recovery
was assumed; no cash flows were assumed from collateral currently in deferral, with the exception of the recovery assumptions.
The default and recovery assumptions were calculated based on 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, 2012, 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.



17







Assets and Liabilities Measured on a Recurring Basis



There were no transfers to or from Levels
1 and 2 during the six months ended June 30, 2012. Assets measured at fair value on a recurring basis are summarized below:



|                                            |  |                   |         |  | (Dollars
    in thousands)                                         |  
|------------------------------------------- |  | ----------------- | ------- |  | ------------------------------------------------------------------ | -
|                                            |  |                   |         |  | Fair
    Value Measurements at June 30, 2012 Using                 |  
|                                            |  | June
    30, 2012 |         |  | Quoted
    Prices in Active Markets for Identical Assets (Level 1) |  
|Available-for-sale
    debt securities      |  |                   |         |  |                                                                    |  
|U.S.
    government sponsored entities      |  | $                 | 15,940  |  |                                                                    | $
|Collateralized
    mortgage obligations and |  |                   |         |  |                                                                    |  
|residential
mortgage-backed securities      |  |                   | 116,805 |  |                                                                    |  
|Municipal
    securities                    |  |                   | 58,713  |  |                                                                    |  
|Collateralized
    debt obligations         |  |                   | 1,247   |  |                                                                    |  
|Total
securities available-for-sale         |  | $                 | 192,705 |  |                                                                    | $





|                                            |  |                       |         |  | (Dollars in thousands)                                             |  
|------------------------------------------- |  | --------------------- | ------- |  | ------------------------------------------------------------------ | -
|                                            |  |                       |         |  | Fair
    Value Measurements at December 31, 2011 Using             |  
|                                            |  | December
    31, 2011 |         |  | Quoted
    Prices in Active Markets for Identical Assets (Level 1) |  
|Available-for-sale debt securities          |  |                       |         |  |                                                                    |  
|U.S.
    government sponsored entities      |  | $                     | 15,648  |  |                                                                    | $
|Collateralized
    mortgage obligations and |  |                       |         |  |                                                                    |  
|residential
mortgage-backed securities      |  |                       | 111,197 |  |                                                                    |  
|Municipal
    securities                    |  |                       | 58,756  |  |                                                                    |  
|Collateralized
    debt obligations         |  |                       | 1,361   |  |                                                                    |  
|Total
securities available-for-sale         |  | $                     | 186,962 |  |                                                                    | $



A roll forward of available-for-sale securities,
which require significant adjustment based on unobservable data, are presented in the following table:





|(Dollars in thousands)                       |  | Fair Value Measurements at June 30, 2012 Using Significant Unobservable Inputs (Level 3) |      
|-------------------------------------------- |  | ---------------------------------------------------------------------------------------- | -----
|                                             |  | Available-for- sale securities                                                           |      
|                                             |  | Collateralized Debt Obligations                                                          |      
|Beginning balance, December 31, 2011         |  | $                                                                                        | 1,361
|Transfers in and/or (out) of Level 3         |  |                                                                                          | -    
|Total gains or (losses)                      |  |                                                                                          |      
|Included in earnings                         |  |                                                                                          | (6   
|Included in other comprehensive income       |  |                                                                                          | (108 
|Purchases, issuances, sales, and settlements |  |                                                                                          |      
|Purchases                                    |  |                                                                                          | -    
|Issuances                                    |  |                                                                                          | -    
|Sales                                        |  |                                                                                          | -    
|Settlements                                  |  |                                                                                          | -    
|Ending balance, June 30, 2012                |  | $                                                                                        | 1,247





18







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





|                           |  |                   |        |  | (Dollars in thousands)                                             |  
|-------------------------- |  | ----------------- | ------ |  | ------------------------------------------------------------------ | -
|                           |  |                   |        |  | Fair
    Value Measurements at June 30, 2012 Using                 |  
|                           |  | June
    30, 2012 |        |  | Quoted
    Prices in Active Markets for Identical Assets (Level 1) |  
|Impaired
    loans         |  | $                 | 18,997 |  |                                                                    | $
|Foreclosed
    real estate |  |                   | 1,807  |  |                                                                    |  







|                           |  |                       |        |  | (Dollars in thousands)                                             |  
|-------------------------- |  | --------------------- | ------ |  | ------------------------------------------------------------------ | -
|                           |  |                       |        |  | Fair
    Value Measurements at December 31, 2011 Using             |  
|                           |  | December
    31, 2011 |        |  | Quoted
    Prices in Active Markets for Identical Assets (Level 1) |  
|Impaired
    loans         |  | $                     | 20,064 |  |                                                                    | $
|Foreclosed
    real estate |  |                       | 2,217  |  |                                                                    |  



The
fair value of impaired loans with specific allocations of the allowance for loan losses or loans for which charge-offs have been
taken is generally based on a present value of cash flows or, for collateral dependent loans, based on recent real estate appraisals.
Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.
The unpaid principal balance of impaired loans was $20.3 million and the related specific reserves totaled $1.3 million, resulting
in a fair value of impaired loans totaling $19.0 million, at June 30, 2012. The unpaid principal balance of impaired loans was
$21.7 million and the related specific reserves totaled $1.6 million, resulting in a fair value of impaired loans totaling $20.1
million, at December 31, 2011. 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. The fair value of foreclosed real estate is similarly determined
by using the results of recent real estate appraisals.





19







The following table shows carrying values
and related estimated fair values of financial instruments as of the dates indicated. Estimated fair values are further categorized
by the inputs used to measure fair value. Items that are not financial instruments are not included.







|                              |  | (Dollars in thousands) |         |  |                                                              |  
|----------------------------- |  | ---------------------- | ------- |  | ------------------------------------------------------------ | -
|                              |  | June
    30, 2012      |         |  | Estimated
    Fair Value Measurements at June 30, 2012 Using |  
|                              |  | Carrying
    Value     |         |  | Estimated
    Fair Value                                     |  
|Financial assets:             |  |                        |         |  |                                                              |  
|Cash and cash equivalents     |  | $                      | 19,415  |  |                                                              | $
|Securities available-for-sale |  |                        | 192,705 |  |                                                              |  
|Loans receivable, net         |  |                        | 423,312 |  |                                                              |  
|Federal Home Loan Bank stock  |  |                        | 3,086   |  |                                                              |  
|Accrued interest receivable   |  |                        | 2,547   |  |                                                              |  
|                              |  |                        |         |  |                                                              |  
|Financial liabilities:        |  |                        |         |  |                                                              |  
|Non-interest bearing deposits |  |                        | 59,710  |  |                                                              |  
|Interest bearing deposits     |  |                        | 487,790 |  |                                                              |  
|Repurchase agreements         |  |                        | 21,010  |  |                                                              |  
|Borrowed funds                |  |                        | 38,054  |  |                                                              |  
|Accrued interest payable      |  |                        | 65      |  |                                                              |  





|                              |  | (Dollars in thousands) |         |  |                                                                  |  
|----------------------------- |  | ---------------------- | ------- |  | ---------------------------------------------------------------- | -
|                              |  | December
    31, 2011  |         |  | Estimated
    Fair Value Measurements at December 31, 2011 Using |  
|                              |  | Carrying
    Value     |         |  | Estimated
    Fair Value                                         |  
|Financial assets:             |  |                        |         |  |                                                                  |  
|Cash and cash equivalents     |  | $                      | 26,367  |  |                                                                  | $
|Securities available-for-sale |  |                        | 186,962 |  |                                                                  |  
|Loans receivable, net         |  |                        | 393,396 |  |                                                                  |  
|Federal Home Loan Bank stock  |  |                        | 3,086   |  |                                                                  |  
|Accrued interest receivable   |  |                        | 2,554   |  |                                                                  |  
|                              |  |                        |         |  |                                                                  |  
|Financial liabilities:        |  |                        |         |  |                                                                  |  
|Non-interest bearing deposits |  |                        | 55,577  |  |                                                                  |  
|Interest bearing deposits     |  |                        | 471,304 |  |                                                                  |  
|Repurchase agreements         |  |                        | 15,395  |  |                                                                  |  
|Borrowed funds                |  |                        | 36,618  |  |                                                                  |  
|Accrued interest payable      |  |                        | 67      |  |                                                                  |  







The following methods were used to estimate the fair value financial
instruments presented in the preceding table for the periods ended June 30, 2012 and December 31, 2011:



Cash and cash equivalent carrying amounts
approximate fair value. The fair values of securities available-for-sale are obtained from broker pricing (Level 2), with the exception
of collateralized debt obligations, which are valued by a third-party specialist (Level 3). The estimated fair value for net loans
receivable is based on estimates of the rate the Bancorp would charge for similar such loans, applied for the time period until
estimated repayment, in addition to appraisals which may utilize a single valuation approach or a combination of approaches including
comparable sales and the income approach. Federal Home Loan Bank stock is estimated at book value due to restrictions that limit
the sale or transfer the security. Fair value of accrued interest receivable and payable approximates book value, as the carrying
values are determined using the observable interest rate, balance, and last payment date.



Non-interest and interest bearing deposits, which include checking, saving, and money market deposits,
are estimated to have fair values based on the amount payable as of the reporting date (Level 1). The fair value of fixed-maturity
certificates of deposit (included in interest bearing deposits) are based on estimates of the rate the Bancorp would pay on similar
deposits, applied for the time period until maturity (Level 2). Estimated fair values for short-term repurchase agreements, which
represent sweeps from demand deposits to accounts secured by pledged securities, are estimated based on the amount payable as of
the reporting date (Level 1). Longer-term repurchase agreements, with contractual maturity dates of three months or more, are based
on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Short-term
borrowings are generally only held overnight, therefore, their carrying amount is a reasonable estimate of fair value (Level 1).
The fair value of FHLB Advances are estimated by discounting the future cash flows quoted rates from the FHLB of similar advances
with similar maturities. The estimated fair value of other financial instruments, and off-balance sheet loan commitments approximate
cost and are not considered significant to this presentation.







20







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 (“the Bank”),
an Indiana savings bank, is a wholly-owned subsidiary of the Bancorp. The Bancorp has no other business activity other than being
the holding company for the Bank.



At June 30, 2012, the Bancorp had total
assets of $680.1 million, total loans of $431.4 million and total deposits of $547.5 million. Stockholders' equity totaled $64.9
million or 9.54% of total assets, with book value per share at $22.87. Net income for the quarter ended June 30, 2012, was $1.6
million, or $0.57 earnings per common share for both basic and diluted calculations. For the quarter ended June 30, 2012, the return
on average assets (ROA) was 0.97%, while the return on average stockholders’ equity (ROE) was 9.91%. For the six months ended
June 30, 2012, the Bancorp recorded net income of $3.0 million, or $1.05 earnings per basic and diluted share. For the six months
ended June 30, 2012, the ROA was 0.90%, while the ROE was 9.16%.



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. Overall economic growth continues to be slow and national and regional unemployment rates remain
at elevated levels. The risks associated with our business remain acute in periods of slow economic growth and high unemployment.
Moreover, financial institutions continue to be affected by a sluggish 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 Legislation. Over the
last four years, Congress and the U.S. Department of the Treasury have enacted legislation and taken actions to address the disruptions
in the financial system, declines in the housing market, and the overall regulation of financial institutions and the financial
system. In this regard, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”),
includes provisions affecting large and small financial institutions alike, including several provisions that profoundly affect
the regulation of community banks, thrifts, and small bank and thrift holding companies, such as the Bancorp. Among other things,
the Dodd-Frank Act abolished the Office of Thrift Supervision effective July 21, 2011 and transferred its functions to the Office
of the Comptroller of the Currency (“OCC”), FDIC, and Federal Reserve. The Dodd-Frank Act also relaxes rules regarding
interstate branching, allows financial institutions to pay interest on business checking accounts, changes the scope of federal
deposit insurance coverage, imposes new capital requirements on bank and thrift holding companies, and imposes limits on debit
card interchange fees charged by issuer banks (commonly known as the Durbin Amendment).



The Dodd-Frank Act also established the
Consumer Financial Protection Bureau (the “CFPB”) within the Federal Reserve, which has broad authority to regulate
consumer financial products and services and entities offering such products and services, including banks. Many of the consumer
financial protection functions formerly assigned to the federal banking and other designated agencies are now preformed by the
CFPB. The CFPB has a large budget and staff, and has broad rulemaking authority over providers of credit, savings, and payment
services and products. In this regard, the CFPB has the authority to implement regulations under federal consumer protection laws
and enforce those laws against, and examine, financial institutions. State officials also will be authorized to enforce consumer
protection rules issued by the CFPB. This bureau also is authorized to collect fines and provide consumer restitution in the event
of violations, engage in consumer financial education, track consumer complaints, request data, and promote the availability of
financial services to underserved consumers and communities. The CFPB also is directed to prevent “unfair, deceptive or abusive
practices” and ensure that all consumers have access to markets for consumer financial products and services, and that such
markets are fair, transparent, and competitive.



The CFPB has indicated that mortgage lending
is an area of supervisory focus and that it will concentrate its examination and rulemaking efforts on the variety of mortgage-related
topics required under the Dodd-Frank Act, including steering consumers to less-favorable products, discrimination, abusive or unfair
lending practices, predatory lending, origination disclosures, minimum mortgage underwriting standards, mortgage loan originator
compensation, and servicing practices. The CFPB has published proposed regulations on several of these topics, including minimum
mortgage underwriting standards. In addition, the Federal Reserve and other federal bank regulatory agencies have issued a proposed
rule under the Dodd-Frank Act that would exempt “qualified residential mortgages” from the securitization risk retention
requirements of the Dodd-Frank Act. Although the Bancorp is primarily a portfolio lender, the final definition of what constitutes
a “qualified residential mortgage” may impact the pricing and depth of the secondary market into which we may sell
mortgages we originate. At this time, we cannot predict the content of final CFPB and other federal agency regulations or the impact
they might have on the Bancorp’s financial results. The CFPB’s authority over mortgage lending, and its authority to
change regulations adopted in the past by other regulators (i.e., regulations issued under the Truth in Lending Act, for example),
or to rescind or ignore past regulatory guidance, could increase the Bancorp’s compliance costs and litigation exposure.











21









In addition to the CFPB’s authority
over mortgage lending, 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. Moreover, the Dodd-Frank Act requires
public companies like the Bancorp to hold shareholder advisory “say-on-pay” votes on executive compensation at least
once every three years and submit related proposals to a vote of shareholders. However, the SEC has provided a temporary exemption
for smaller reporting companies, such as the Bancorp, from the requirement to hold “say-on-pay” votes until the first
annual or other shareholder meeting occurring on or after January 21, 2013. 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 expected to increase 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
Bancorp’s management continues to actively monitor the implementation of the Dodd-Frank Act and the regulations promulgated
thereunder and assess 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, continues
to be uncertain.





New Proposed Capital Rules. On June
7, 2012, the Federal Reserve approved proposed rules that would substantially amend the regulatory risk-based capital rules applicable
to the Bancorp and the Bank. The FDIC and the OCC subsequently approved these proposed rules on June 12, 2012. The proposed rules
implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III”
refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released
in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage
and liquidity requirements. The proposed rules are subject to a comment period running through September 7, 2012.



The proposed rules include new risk-based
capital and leverage ratios, which would be phased in from 2013 to 2019, and would refine the definition of what constitutes “capital”
for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to the Bancorp and the
Bank under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased
from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions.
The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital
requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i)
a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The
new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and
would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations
on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer
amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.



Basel III provided discretion for regulators
to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take
into account the macro-financial environment and periods of excessive credit growth. However, the proposed rules permit the countercyclical
buffer to be applied only to “advanced approach banks” ( i.e. , banks with $250 billion or more in total assets or
$10 billion or more in total foreign exposures), which currently excludes the Bancorp and the Bank. The proposed rules also implement
revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity,
unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which would
be phased out over time.



The federal bank regulatory agencies also
proposed revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions,
including the Bank, if their capital levels begin to show signs of weakness. These revisions would take effect January 1, 2015.
Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository
institutions would be required to meet the following increased capital level requirements in order to qualify as “well capitalized:”
(i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital
ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).



The proposed rules set forth certain changes
for the calculation of risk-weighted assets, which we would be required to utilize beginning January 1, 2015. The standardized
approach proposed rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i)
a proposed alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act Act; (ii) revisions to recognition
of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment
for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion
or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than
$250 billion in consolidated assets.



Based on our current capital composition
and levels, we believe that we would be in compliance with the requirements as set forth in the proposed rules if they were presently
in effect.











22











Difficult Market Conditions Continue
to Affect Our Industry. We are particularly exposed to downturns in the U.S. housing market. Dramatic declines in the housing
market over the past four-and-a-half 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 continued to observe tight lending standards, including with respect
to other financial institutions, although there have been signs that lending is beginning to increase. These market conditions
have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, and increased market volatility.
A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on the Bancorp
and others in the financial institutions industry. In particular, the Bancorp may face the following risks in connection with these
events:





| | · | We are experiencing, and expect to continue experiencing increased regulation of our
                                                                                                               industry, particularly as a result of the Dodd-Frank Act and the CFPB. Compliance with such regulation is expected to increase our costs
                                                                                                               and may 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 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 (FDIC) and reduced the ratio of reserves
to insured deposits.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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



Concentrations of Real Estate Loans
Subjects the Bancorp to Increased Risks as a Result 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 almost all regions of the country, including the Midwest, have shown signs of stabilizing, the overall real estate market on
a national level continues to show weakness indicative of a protracted real estate recession. 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.







23







Financial Condition



During the six months ended June 30, 2012,
total assets increased by $28.3 million (4.3%), with interest-earning assets increasing by $24.3 million (4.0%). At June 30, 2012,
interest-earning assets totaled $632.3 million compared to $607.9 million at December 31, 2011. Earning assets represented 93.0%
of total assets at June 30, 2012, compared to 93.3% at December 31, 2011.



Loans receivable totaled $431.4 million at June 30, 2012, compared
to $401.4 million at December 31, 2011. 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 Bancorp’s end-of-period loan balances were as follows:





|                                        |  | June
    30, |         |  |                  |  |       |         | 
|--------------------------------------- |  | ------------ | ------- |  | ---------------- |  | ----- | ------- | 
|                                        |  | 2012         |         |  | December
    31, | 
|(Dollars in
    thousands)              |  | (unaudited)  |         |  | 2011             | 
|                                        |  | Balance      |         |  | %
    Loans      |  |       | Balance | 
|                                        |  |              |         |  |                  |  |       |         | 
|Construction
    & land development     |  | $            | 20,618  |  |                  |  | 4.8   | %       | 
|1-4
    first liens                     |  |              | 136,103 |  |                  |  | 31.6  | %       | 
|Multifamily                             |  |              | 21,243  |  |                  |  | 4.9   | %       | 
|Commercial
    real estate              |  |              | 156,223 |  |                  |  | 36.2  | %       | 
|Commercial
    business                 |  |              | 68,661  |  |                  |  | 15.9  | %       | 
|1-4
    Junior Liens                    |  |              | 1,718   |  |                  |  | 0.4   | %       | 
|HELOC                                   |  |              | 15,944  |  |                  |  | 3.7   | %       | 
|Lot
    loans                           |  |              | 2,706   |  |                  |  | 0.6   | %       | 
|Consumer                                |  |              | 481     |  |                  |  | 0.1   | %       | 
|Government
    and other                |  |              | 7,659   |  |                  |  | 1.8   | %       | 
|Total
    loans                         |  | $            | 431,356 |  |                  |  | 100.0 | %       | 
|                                        |  |              |         |  |                  |  |       |         | 
|Adjustable
    rate loans / total loans |  | $            | 257,400 |  |                  |  | 59.7  | %       | 







|                                  |  | June
    30, |      |   |                  | 
|--------------------------------- |  | ------------ | ---- | - | ---------------- | 
|                                  |  | 2012         |      |   | December
    31, | 
|                                  |  | (unaudited)  |      |   | 2011             | 
|                                  |  |              |      |   |                  | 
|Total
    loans to total assets   |  |              | 63.4 | % |                  | 
|Total loans
    to earning assets |  |              | 68.2 | % |                  | 
|Total loans
    to total deposits |  |              | 78.8 | % |                  | 





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, during the second quarter of 2012, as a result of the low interest rate environment, management began selling
all newly originated fixed rate mortgage loans with contractual maturities greater than 10 years in an effort to reduce interest
rate risk.  These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary
market.  During the six months ended June 30, 2012, the Bancorp sold $5.9 million in newly originated fixed rate mortgage
loans, compared to $3.9 million during the six months ended June 30, 2011. Net gains realized from the mortgage loan sales totaled
$164 thousand for the six months ended June 30, 2012, compared to $110 thousand for the six months ended June 30, 2011.

Also, during the second quarter of 2012, the Bancorp conducted
a $3.4 million one-time sale of portfolio fixed rate mortgage loans, which the Bancorp’s management
considers an interest rate risk mitigation strategy to reduce loan prepayment risk. The segment of loans that were sold had a higher
premium value and were projected to prepay significantly faster than the mortgage portfolio's average repayment speed. Thegain
realized from the prepayment risk reduction strategy totaled $183 thousand and was recorded during the second quarter of 2012.
The proceeds from the loan sale were used to fund loans with longer durations and similar yields to the loans that were included
in the sales strategy. At June 30, 2012, the Bancorp had no loans that were classified as held for sale.







24







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
net of 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 lending area. However, beginning in the fourth quarter of 2005, in 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 lending
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 out of market strategy during the third quarter of 2007. As of June
30, 2012, the Bancorp’s commercial real estate participation loan portfolio carried an aggregate balance of $28.3 million.
During the second quarter of 2012, management purchased two in-market commercial real estate loans totaling $9.4 million from a
local financial institution. The first loan is a seasoned $6.2 million apartment loan with historically strong occupancy rates
and net operating income. The second loan for $3.2 million is secured by real estate mortgages and seasoned lease assignments of
a nationally recognized drug store chain. Of the $28.3 million in commercial real estate participation loans, $14.5 million has
been purchased within the Bancorp’s primary lending area and $13.8 million outside of the primary lending area. At June 30,
2012, $6.6 million, or 23.3%, of the Bancorp’s commercial real estate participation loans have been internally classified
as substandard and have been placed on non-accrual status. All $6.6 million in substandard commercial real estate participation
loans placed on non-accrual status are located outside of the Bancorp’s primary lending area. The discussion in the paragraphs
that follow regarding non-performing loans, internally classified loans and impaired loans includes loans from the Bancorp’s
commercial real estate participation loan portfolio.





For all of its commercial real estate participation
loans, consistent with current regulatory guidelines the Bancorp’s management requires that the lead lenders obtain external
appraisals to determine the fair value of the underlying collateral for any 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. 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 hired 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. The Bancorp’s management relies on up-to-date external appraisals to determine the current
value of its impaired commercial real estate participation loans. These values are appropriately adjusted to reflect changes in
market value and, when necessary, is the basis for establishing the appropriate allowance for loan losses (ALL). 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 or income approach 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 on non-accrual status. Non-performing loans totaled $11.8
million at June 30, 2012, compared to $14.3 million at December 31, 2011, a decrease of $2.5 million or 17.5%. The ratio of non-performing
loans to total loans was 2.74% at June 30, 2012, compared to 3.56% at December 31, 2011. The ratio of non-performing loans to total
assets was 1.74% at June 30, 2012, compared to 2.19% at December 31, 2011. The decrease in non-performing loans is related to loans
moving off of non-accrual status, pay downs and charge-offs during the first six months of 2012. At June 30, 2012, all non-performing
loans are also accounted for on a non-accrual basis, except for one loan totaling $7 thousand that is classified as accruing and
90 days past due. The current level of non-performing loans is concentrated in three previously reported out of market commercial
real estate participation loans totaling $6.6 million in the aggregate. Two of the non-performing commercial real estate participation
loans are hotel loans that have been charged down to their fair value based on the current fair value of the respective project’s
collateral, less estimated selling costs. The third non-performing commercial real estate participation loan is a hotel loan with
a carrying value based on the current fair value of the hotel, less estimated selling costs. 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.





25







Loans, internally classified as substandard,
totaled $22.1 million at June 30, 2012, compared to $24.6 million at December 31, 2011 a decrease of $2.5 million or 10.2%. The
current level of substandard loans is concentrated in the previously mentioned three non-performing commercial real estate participation
loans and one accruing commercial real estate hotel loan in the amount of $4.7 million, which is the largest loan in this group.
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. No loans
were internally classified as doubtful or loss at June 30, 2012 or December 31, 2011. 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 $16.1 million at
June 30, 2012, compared to $16.6 million at December 31, 2011 a decrease of $500 thousand or 3.0%.



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, 2012, impaired loans totaled $20.3 million, compared to $21.7 million at December 31,
2011 a decrease of $1.4 million or 6.5%. The June 30, 2012, impaired loan balances consist of twenty-five commercial real estate
and commercial business loans totaling $19.4 million that are secured by business assets and real estate, and are personally guaranteed
by the owners of the businesses. In addition, nine mortgage loans totaling $935 thousand, which are troubled debt restructurings
have also been classified as impaired. The June 30, 2012 ALL contained $1.3 million in specific allowances for collateral deficiencies,
compared to $1.6 million at December 31, 2011. During the second quarter of 2012, one development loan totaling $697 thousand was
newly classified as impaired. Management’s current estimates indicate no collateral deficiency for this loan. In addition,
during the second quarter of 2012, three construction loans totaling $228 thousand and one commercial real estate loan totaling
$322 thousand were transferred to foreclosed real estate. Also, three impaired loans totaling $235 were paid-off during the second
quarter. As of June 30, 2012, 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, 2012. Typically, management does not individually
classify smaller-balance homogeneous loans, such as residential mortgages or consumer loans, as impaired, unless they are troubled
debt restructurings.





At June 30, 2012, the Bancorp classified
sixteen loans totaling $15.0 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, or materially
extending the maturity date of a loan. All of the loans classified as troubled debt restructurings are also considered impaired.
The Bancorp’s troubled debt restructurings include two commercial real estate participation hotel loans in the amount of
$5.5 million and one commercial real estate hotel loan in the amount of $4.9 million, for which significant deferrals of principal
repayments were granted; one commercial real estate loan in the amount of $2.4 million for which a significant deferral of principal
and interest repayment was granted; one commercial real estate loan in which the borrower is in bankruptcy in the amount of $433
thousand, for which a significant deferral of principal and interest repayment was granted by the Bank as required by the bankruptcy
plan; one development loan in the amount of $697 thousand for which an interest rate concession was granted; and nine mortgage
loans totaling $935 thousand, for which maturity dates were materially extended. At June 30, 2012, $8.8 million of the Bancorp’s
loans classified as troubled debt restructurings are accruing loans. The valuation basis for the Bancorp’s troubled debt
restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of
the collateral securing the loan is the basis for valuation.





At June 30, 2012, management is of the
opinion that there are no loans, except those discussed above, where known information about possible credit problems of borrowers
causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and
which will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure. Management
does not presently anticipate that any of the non-performing loans or classified loans would materially impact future operations,
liquidity or capital resources.





26







For the three months ended June 30, 2012,
$550 thousand in provisions to the ALL were required, compared to $955 thousand for the three months ended June 30, 2011. For the
six months ended June 30, 2012, $1.1 million in provisions to the ALL were required, compared to $2.1 million for the six months
ended June 30, 2011. The ALL provision decrease for both the three and six month periods are primarily a result of improved asset
quality. The current year ALL provisions were primarily related to the current credit risk in the commercial real estate loan portfolio.
For the six months ended June 30, 2012, charge-offs, net of recoveries, totaled $1.0 million, compared to $3.0 million for the
six months ended June 30, 2011. The 2012 net loan charge-offs of $1.0 million were comprised of $484 thousand in commercial real
estate participation loans, $372 thousand in commercial real estate loans, $205 thousand in residential real estate loans, and
$5 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 historically elevated risks associated
with the local economy, changes in loan balances and mix, and asset quality.



The ALL to total loans was 1.86% at June
30, 2012, compared to 1.99% at December 31, 2011. The ALL to non-performing loans (coverage ratio) was 68.02% at June 30, 2012,
compared to 56.03% at December 31, 2011. The June 30, 2012 balance in the ALL account of $8.0 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.



At June 30, 2012, foreclosed real estate totaled
$2.2 million, which was comprised of twelve properties, compared to $2.5 million and eleven properties at December 31, 2011. At
the end of June 2012 all 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 increase in securities is a result of investing excess liquidity in the securities portfolio. The securities portfolio, all
of which is designated as available-for-sale, totaled $192.7 million at June 30, 2012, compared to $187.0 million at December 31,
2011, an increase of $5.7 million (3.1%). At June 30, 2012, the securities portfolio represented 30.5% of interest-earning assets
and 28.3% of total assets compared to 30.8% of interest-earning assets and 28.7% of total assets at December 31, 2011. The Bancorp’s
end-of-period investment portfolio and other short-term investments and stock balances were as follows:





|                                            |  | June
    30, |         |  |                  |  |       |         | 
|------------------------------------------- |  | ------------ | ------- |  | ---------------- |  | ----- | ------- | 
|                                            |  | 2012         |         |  | December
    31, | 
|(Dollars in
    thousands)                  |  | (unaudited)  |         |  | 2011             | 
|                                            |  | Balance      |         |  | %
    Securities |  |       | Balance | 
|                                            |  |              |         |  |                  |  |       |         | 
|U.S.
    government sponsored entities      |  | $            | 15,940  |  |                  |  | 8.3   | %       | 
|Collateralized
    Mortgage Obligations and |  |              |         |  |                  |  |       |         | 
|residential
    mortgage-backed securities  |  |              | 116,805 |  |                  |  | 60.6  | %       | 
|Municipal
    securities                    |  |              | 58,713  |  |                  |  | 30.5  | %       | 
|Collateralized
    debt obligations         |  |              | 1,247   |  |                  |  | 0.6   | %       | 
|Total
    securities                        |  | $            | 192,705 |  |                  |  | 100.0 | %       | 









|                                                        |  | June
    30, |       |  |                  |   |        |        |  |   |         |  
|------------------------------------------------------- |  | ------------ | ----- |  | ---------------- | - | ------ | ------ |  | - | ------- | -
|                                                        |  | 2012         |       |  | December
    31, |   |        | YTD    | 
|(Dollars in thousands)                                  |  | (unaudited)  |       |  | 2011             |   |        | Change | 
|                                                        |  | Balance      |       |  | Balance          |   |        | $      |  |   | %       |  
|                                                        |  |              |       |  |                  |   |        |        |  |   |         |  
|Interest
    bearing balances in financial institutions |  | $            | 474   |  |                  | $ | 10,676 |        |  | $ | (10,202 | )
|Fed funds
    sold                                      |  |              | 4,658 |  |                  |   | 5,816  |        |  |   | (1,158  | )
|Federal Home
    Loan Bank stock                        |  |              | 3,086 |  |                  |   | 3,086  |        |  |   | -       |  



The decrease in interest bearing balances
in financial institutions and fed funds sold is a result of strong loan and securities growth.





27







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. The Bancorp’s end-of-period deposit portfolio
balances were as follows:





|                            |  | June
    30, |         |  |                  |   |         |        |  |   |        | 
|--------------------------- |  | ------------ | ------- |  | ---------------- | - | ------- | ------ |  | - | ------ | 
|                            |  | 2012         |         |  | December
    31, |   |         | YTD    | 
|(Dollars in
    thousands)  |  | (unaudited)  |         |  | 2011             |   |         | Change | 
|                            |  | Balance      |         |  | Balance          |   |         | $      |  |   | %      | 
|                            |  |              |         |  |                  |   |         |        |  |   |        | 
|Checking                    |  | $            | 165,056 |  |                  | $ | 157,871 |        |  | $ | 7,185  | 
|Savings                     |  |              | 75,094  |  |                  |   | 71,417  |        |  |   | 3,677  | 
|Money
    market            |  |              | 128,100 |  |                  |   | 120,671 |        |  |   | 7,429  | 
|Certificates
    of deposit |  |              | 179,250 |  |                  |   | 176,922 |        |  |   | 2,328  | 
|Total
    deposits          |  | $            | 547,500 |  |                  | $ | 526,881 |        |  | $ | 20,619 | 



The Bancorp core deposits include checking,
savings, and money market accounts. The increase in core deposits is a result of managements’ sales efforts along with current
customer preferences for short-term, liquid investment alternatives.



The Bancorp’s borrowed funds are
primarily used to fund asset growth not supported by deposit generation. The Bancorp’s end-of-period borrowing balances
were as follows:





|                           |  | June
    30, |        |  |                  |   |        |        |  |   |       | 
|-------------------------- |  | ------------ | ------ |  | ---------------- | - | ------ | ------ |  | - | ----- | 
|                           |  | 2012         |        |  | December
    31, |   |        | YTD    | 
|(Dollars in
    thousands) |  | (unaudited)  |        |  | 2011             |   |        | Change | 
|                           |  | Balance      |        |  | Balance          |   |        | $      |  |   | %     | 
|                           |  |              |        |  |                  |   |        |        |  |   |       | 
|Repurchase
    agreements  |  | $            | 21,010 |  |                  | $ | 15,395 |        |  | $ | 5,615 | 
|Borrowed
    funds         |  |              | 38,054 |  |                  |   | 36,618 |        |  |   | 1,436 | 
|Total
    borrowed funds   |  | $            | 59,064 |  |                  | $ | 52,013 |        |  | $ | 7,051 | 



Repurchase agreements increased as a result
of growth in the Bancorp’s business sweep accounts. The increase in borrowed funds was from the use of a line of credit at
the Federal Home Loan Bank of Indianapolis.



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.



During the six months ended June 30, 2012, cash and cash equivalents decreased by $7.0 million compared
to a $7.0 million increase for the six months endedJune 30, 2011. The primary sources of cash
were proceeds from increased deposit and borrowing balances, maturities, pay downs, and calls of available-for-sale securities,
and the sale of seasoned loans with high prepayment speeds from the loan portfolio. The primary uses of cash were loan originations,
the purchase of loan participations, the purchase of securities, and the payment of common stock dividends. Cash provided by operating
activities totaled $3.3 millionfor the six months ended June 30, 2012, compared to cash provided
of $13.1 million for the six month period ended June 30, 2011. The decrease in cash from operating
activities was primarily a result of a decrease in other cash held in Bank controlled operating accounts from the clearing of customer
checks and due to the clearing of customer ACH transactions. Cash outflows from investing activities totaled $37.0 million for
the current period, compared to cash outflows of $5.3 million for the six months ended June 30, 2011. The increased cash outflows
for the current six months were primarily related to strong loan portfolio growth. Net cash inflows from financing activities totaled
$26.8 million during the current period compared to net cash outflows of $705 thousandfor the six months ended June 30,
2011. The increase in net cash flows from financing activities was a result of increases to the Bancorp’s deposit and repurchase
agreement products as well as the use of a line of credit with the Federal Home Loan Bank of Indianapolis. The
Bancorp paid dividends on common stock of $964 thousand for the six months endedJune 30, 2012,
compared to $849 thousand for the six months endedJune 30, 2011.





28







At June 30, 2012, outstanding
commitments to fund loans totaled $69.7 million. Approximately 54.0% 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 $8.8 million at June 30, 2012. 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.



Management strongly believes that maintaining
a high level of capital enhances safety and soundness. During the six months ended June 30, 2012, stockholders' equity increased
by approximately $2.0 million (3.1%). During the six months ended June 30, 2012, stockholders’ equity was increased by net
income of $3.0 million. Decreasing stockholders’ equity was the declaration of $964 thousand in cash dividends and the net
change in the valuation of the available-for-sale securities of $117 thousand.





The Bancorp is subject to risk-based
capital guidelines adopted by the Board of Governors of the Federal Reserve Board (“FRB”), and the Bank is subject
to risk-based capital guidelines adopted by the FDIC. As applied to the Bancorp and the Bank, the FRB and FDIC capital requirements
are substantially the same. 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. See “New Proposed Capital
Rules” above for a description of the new capital ratios that are proposed to be phased-in beginning in 2013.



The following table shows that,
at June 30, 2012, and December 31, 2011, the Bancorp’s capital exceeded all regulatory capital requirements. During the six
months ended June 30, 2012, the Bancorp’s regulatory capital ratios continued 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. 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 $30.4 million of risk based assets are generated by 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, 2012 and December 31, 2011. The dollar amounts are in millions.







|(Dollars in millions)                     |  |                         |      |  |                         |  |      | Required for            |  |   | To be well | 
|----------------------------------------- |  | ----------------------- | ---- |  | ----------------------- |  | ---- | ----------------------- |  | - | ---------- | 
|                                          |  | Actual                  |      |  | adequate capital        |  |      | capitalized             | 
|At June 30, 2012                          |  | Amount            Ratio |      |  | Amount            Ratio |  |      | Amount            Ratio | 
|                                          |  |                         |      |  |                         |  |      |                         |  |   |            | 
|Total capital to risk-weighted assets     |  | $                       | 67.3 |  |                         |  | 14.0 | %                       |  | $ | 38.5       | 
|Tier 1 capital to risk-weighted assets    |  | $                       | 61.3 |  |                         |  | 12.8 | %                       |  | $ | 19.2       | 
|Tier 1 capital to adjusted average assets |  | $                       | 61.3 |  |                         |  | 9.2  | %                       |  | $ | 20.1       | 







|(Dollars in millions)                         |  |                             |      |  |                             |  |      | Required
    for            |  |   | To
    be well | 
|--------------------------------------------- |  | --------------------------- | ---- |  | --------------------------- |  | ---- | --------------------------- |  | - | -------------- | 
|                                              |  | Actual                      |      |  | adequate
    capital        |  |      | capitalized                 | 
|At
    December 31, 2011                      |  | Amount           
    Ratio |      |  | Amount           
    Ratio |  |      | Amount           
    Ratio | 
|                                              |  |                             |      |  |                             |  |      |                             |  |   |                | 
|Total
    capital to risk-weighted assets     |  | $                           | 64.9 |  |                             |  | 14.3 | %                           |  | $ | 36.2           | 
|Tier 1 capital
    to risk-weighted assets    |  | $                           | 59.2 |  |                             |  | 13.1 | %                           |  | $ | 18.1           | 
|Tier 1 capital
    to adjusted average assets |  | $                           | 59.2 |  |                             |  | 9.2  | %                           |  | $ | 19.4           | 





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 Institutions (DFI) for the payment of a dividend if the total of all dividends declared by the
Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date
plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income
as calculated for call report purposes, less all dividends declared for the applicable period. The aggregate amount of dividends
that may be declared by the Bank in 2012, with prior DFI approval is $7.7 million plus current 2012 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 25, 2012, the Bancorp announced that the
Board of Directors of the Bancorp declared a second quarter dividend of $0.19 per share, an increase of $0.04 per share from the
previous quarter ended March 31, 2012. The Bancorp’s second quarter dividend was paid to shareholders on July 6, 2012.







29







Results of Operations - Comparison of the Quarter
Ended June 30, 2012 to the Quarter Ended June 30, 2011



For the quarter ended June 30,
2012, the Bancorp reported net income of $1.6 million, compared to net income of $1.7 million for the quarter ended June 30, 2011,
a decrease of $59 thousand (3.5%). For the current quarter the ROA was 0.97%, compared to 1.05% for the quarter ended June 30,
2011. The ROE was 9.91% for the quarter ended June 30, 2012, compared to 11.32% for the quarter ended June 30, 2011.





Net interest income for the three
months ended June 30, 2012 was $5.94 million, an increase of $8 thousand (0.1%), compared to $5.93 million for the quarter ended
June 30, 2011. During the current quarter, the Bancorp’s cost of funds continues to be positively impacted by the Federal
Reserve’s continued action in maintaining a low short-term interest rate environment, however, the Bancorp’s yield
on interest earning assets is being negatively impacted by lower long-term interest rates. The weighted-average yield on interest-earning
assets was 4.17% for the three months ended June 30, 2012, compared to 4.55% for the three months ended June 30, 2011. The weighted-average
cost of funds for the quarter ended June 30, 2012, was 0.41%, compared to 0.60% for the quarter ended June 30, 2011. The impact
of the 4.17% return on interest earning assets and the 0.41% cost of funds resulted in an interest rate spread of 3.76% for the
current quarter, compared to 3.95% for the quarter ended June 30, 2011. During the current quarter, total interest income decreased
by $234 thousand (3.4%) while total interest expense decreased by $242 thousand (28.3%). The net interest margin was 3.78% for
the three months ended June 30, 2012, compared to 3.97% for the quarter ended June 30, 2011. On a tax equivalent basis, the Bancorp’s
net interest margin was 3.97% for the three months ended June 30, 2012, compared to 4.21% for the quarter ended June 30, 2011.
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 three months ended
June 30, 2012, interest income from loans decreased by $41 thousand (0.9%), compared to the three months ended June 30, 2011. The
change was primarily due to a decrease in the weighted-average yield of the loan portfolio. The weighted-average yield on loans
outstanding was 4.92% for the current quarter, compared to 5.10% for the three months ended June 30, 2011. Loan balances averaged
$419.5 million for the current quarter, an increase of $11.3 million (2.8%) from $408.2 million for the three months ended June
30, 2011. During the three months ended June 30, 2012, interest income on securities and other interest bearing balances decreased
by $193 thousand (12.2%), compared to the quarter ended June 30, 2011. The change was primarily due to a decrease in the weighted-average
yield. The weighted-average yield on securities and other interest bearing balances was 2.66%, for the current quarter, compared
to 3.36% for the three months ended June 30, 2011. Securities balances averaged $192.6 million for the current quarter, up $17.6
million (10.1%) from $175.0 million for the three months ended June 30, 2011. The increase in security average balances is a result
of consistent investment growth. Other interest bearing balances averaged $16.8 million for the current period, up $2.8 million
(20.0%) from $14.0 million for the three months ended June 30, 2011. The increase in other interest bearing balances is a result
of additional liquidity primarily generated by deposit growth.





Interest expense on deposits decreased by $264 thousand
(39.2%) during the current quarter compared to the three months ended June 30, 2011. The change was 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, 2012 was 0.31%, compared
to 0.51%, for the quarter ended June 30, 2011. Total deposit balances averaged $537.1 million for the current quarter, an increase
of $10.7 million (2.0%) from $526.4 million for the quarter ended June 30, 2011. Interest expense on borrowed funds increased
by $22 thousand (12.1%) during the current quarter due to an increase in average daily balances compared to the three months ended
June 30, 2011. The weighted-average cost of borrowed funds was 1.33% for the current quarter, compared to 1.51% for the three
months ended June 30, 2011. Borrowed funds averaged $61.2 million during the quarter ended June 30, 2012, an increase of $12.9
million (26.7%) from $48.3 million for the quarter ended June 30, 2011.





Noninterest income for the quarter
ended June 30, 2012 was $1.4 million, a decrease of $627 thousand (30.6%) from $2.1 million for the quarter ended June 30, 2011.
During the current quarter, fees and service charges totaled $610 thousand, a decrease of $27 thousand (4.2%) from $637 thousand
for the quarter ended June 30, 2011. Fees from Wealth Management operations totaled $314 thousand for the quarter ended June 30,
2012, an increase of $4 thousand (1.3%) from $310 thousand for the quarter ended June 30, 2011. 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 $251
thousand for the current quarter, an increase of $14 thousand (5.9%) from $237 thousand for the quarter ended June 30, 2011. Current
market conditions provided opportunities to maintain securities cash flows, while recognizing gains from the sales of securities.
Gains from loan sales totaled $272 thousand for the current quarter, an increase of $243 thousand (837.9%), compared to $29 thousand
for the quarter ended June 30, 2011. The increase in gains from the sale of loans is a result of increased customer refinance activity
to low rate fixed rate mortgages as well as a sale of seasoned fixed rate mortgages with high prepayment speeds, which resulted
in a onetime gain of $183 thousand for the quarter ended June 30, 2012. Income from an increase in the cash value of bank owned
life insurance totaled $97 thousand for the quarter ended June 30, 2012, a decrease of $4 thousand (4.0%) compared to the quarter
ended June 30, 2011. Losses on foreclosed real estate totaled $120 thousand for the quarter ended June 30, 2012, a decrease of
$848 thousand (116.5%) from gains of $728 thousand for the quarter ended June 30, 2011. The decrease is primarily related to the
Bancorp’s favorable settlement in its lawsuit against the lead lender of a commercial real estate participation loan during
the second quarter of 2011, as well as the revaluation of a land development loan that resulted in a loss. During the current quarter,
the Bancorp recognized a $6 thousand other-than-temporary credit impairment for one of its trust preferred securities. Other noninterest
income totaled $5 thousand for the quarter ended June 30, 2012, compared to $8 thousand for the quarter ended June 30, 2011.











30









Noninterest expense for the quarter ended
June 30, 2012 was $4.7 million, a decrease of $231 thousand (4.7%) from $4.9 million for the three months ended June 30, 2011.
During the current quarter, compensation and benefits totaled $2.5 million, a decrease of $39 thousand (1.5%) from $2.5 million
for the quarter ended June 30, 2011. The decrease in compensation and benefits is the result of the Bancorp’s continued efforts
to closely monitor and manage staffing levels. Occupancy and equipment totaled $763 thousand for the current quarter, a decrease
of $81 thousand (9.6%), compared to $844 thousand for the quarter ended June 30, 2011. The decrease in occupancy and equipment
expense is the result of lower required building repair and maintenance expenses during the second quarter. Data processing expense
totaled $277 thousand for the three months ended June 30, 2012, an increase of $28 thousand (11.2%) from $249 thousand for the
three months ended June 30, 2011. Data processing expense has increased as a result of greater system utilization. Federal deposit
insurance premium expense totaled $147 thousand for the three months ended June 30, 2012, from $265 thousand for the quarter ended
June 30, 2011. The decrease was the result of lower FDIC assessment rates. Marketing expense related to banking products totaled
$83 thousand for the current quarter, an increase of $8 thousand (10.7%) from $75 thousand for the three months ended June 30,
2011. The Bancorp continues to proactively market its products, but varies its timing based on projected benefits and needs. Other
expenses related to banking operations totaled $928 thousand for the quarter ended June 30, 2012, a decrease of $29 thousand (3.0%)
from $957 thousand for the quarter ended June 30, 2011. The Bancorp’s efficiency ratio was 63.9% for the quarter ended June
30, 2012, compared to 61.9% for the three months ended June 30, 2011. The ratio is determined by dividing total noninterest expense
by the sum of net interest income and total noninterest income for the period.





Income tax expenses for the three months
ended June 30, 2012 totaled $488 thousand, compared to income tax expense of $412 thousand for the three months ended June 30,
2011, an increase of $76 thousand (18.4%). The combined effective federal and state tax rates for the Bancorp was 23.1% for the
three months ended June 30, 2012, compared to 19.7% for the three months ended June 30, 2011. The Bancorp’s higher current
quarter effective tax rate is a result of lower tax preferred income.





Results of Operations - Comparison of the Six Months
Ended June 30, 2012 to the Six Months Ended June 30, 2011





For the six months ended June
30, 2012, the Bancorp reported net income of $3.0 million, compared to net income of $2.9 million for the six months ended June
30, 2011, an increase of $123 thousand (4.3%). For the current six months the ROA was 0.90%, compared to 0.89% for the six months
ended June 30, 2011. The ROE was 9.16% for the six months ended June 30, 2012, compared to 9.74% for the six months ended June
30, 2011.



Net interest income for the six months ended June 30, 2012 was $11.8 million, a decrease of $111 thousand
(0.9%), compared to $11.9 million for the six months ended June 30, 2011.
During the current quarter, the Bancorp’s cost of funds continues to be positively impacted by the Federal Reserve’s
continued action in maintaining a low short-term interest rate environment, however, the Bancorp’s yield on interest earning
assets is being negatively impacted by lower long-term interest rates. The weighted-average yield on interest-earning assets was
4.20% for the six months ended June 30, 2012, compared to 4.58% for the six months ended June 30, 2011. The weighted-average cost
of funds for the six months ended June 30, 2012, was 0.43%, compared to 0.61% for the six months ended June 30, 2011. The impact
of the 4.20% return on interest earning assets and the 0.43% cost of funds resulted in an interest rate spread of 3.77% for the
current six months, compared to 3.97% for the six months ended June 30, 2011. During the current six months, total interest income
decreased by $621 thousand (4.5%) while total interest expense decreased by $510 thousand (28.8%). The net interest margin was
3.80% for the six months ended June 30, 2012, compared to 3.99% for the six months ended June 30, 2011. On a tax equivalent basis,
the Bancorp’s net interest margin was 3.99% for the six months ended June 30, 2012, compared to 4.22% for the six months
ended June 30, 2011. 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.







31







During the six months ended June
30, 2012, interest income from loans decreased by $291 thousand (2.8%), compared to the six months ended June 30, 2011. The change
was primarily due to a decrease in the weighted-average yield of the loan portfolio. The weighted-average yield on loans outstanding
was 4.95% for the current six months, compared to 5.11% for the six months ended June 30, 2011. Loan balances averaged $415.0 million
for the current six months, an increase of $1.9 million (0.5%) from $413.1 million for the six months ended June 30, 2011. During
the six months ended June 30, 2012, interest income on securities and other interest bearing balances decreased by $330 thousand
(10.6%), compared to the six months ended June 30, 2011. The decrease was due to a decrease in the weighted-average yield. The
weighted-average yield on securities and other interest bearing balances was 2.70%, for the current six months, compared to 3.38%
for the six months ended June 30, 2011. Securities balances averaged $189.2 million for the current six months, up $5.2 million
(2.8%) from $184.0 million for the six months ended June 30, 2011. The increase in security average balances is a result of ongoing,
consistent investment growth. Other interest bearing balances averaged $16.7 million for the current period, up $3.2 million (23.7%)
from $13.5 million for the six months ended June 30, 2011.



Interest expense on deposits
decreased by $531 thousand (38.3%) during the current six months compared to the six months ended June 30, 2011. 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, 2012 was 0.32%, compared to 0.52%, for the six months ended June 30, 2011. Total deposit balances averaged
$530.8 million for the current six months, up $2.5 million (0.5%) from $528.3 million for the six months ended June 30, 2011. Interest
expense on borrowed funds increased by $21 thousand (5.5%) during the current six months due to increased average daily balances,
as compared to the six months ended June 30, 2011. The weighted-average cost of borrowed funds was 1.36% for the current six months,
compared to 1.58% for the six months ended June 30, 2011. Borrowed funds averaged $59.4 million during the six months ended June
30, 2012, an increase of $10.8 million (22.2%) from $48.6 million for the six months ended June 30, 2011.





Noninterest income for the six
months ended June 30, 2012 was $3.0 million, a decrease of $413 thousand (12.0%) from $3.4 million for the six months ended June
30, 2011. During the current six months, fees and service charges totaled $1.24 million, an increase of $27 thousand (2.2%) from
$1.22 million for the six months ended June 30, 2011. Fees from Wealth Management operations totaled $646 thousand for the six
months ended June 30, 2012, an increase of $62 thousand (10.6%) from $584 thousand for the six months ended June 30, 2011. 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 $617 thousand for the current six months, an increase of $117 thousand (23.4%) from $500 thousand for the
six months ended June 30, 2011. Current market conditions provided opportunities to manage securities cash flows, while recognizing
gains from the sales of securities. Gains from loan sales totaled $347 thousand for the current six months, an increase of $237
thousand (215.5%), compared to $110 thousand for the six months ended June 30, 2011. The increase in gains from the sale of loans
is a result of increased customer refinance activity to low rate fixed rate mortgages as well as a sale of seasoned fixed rate
mortgages with high prepayment speeds, which resulted in a onetime gain of $183 thousand for the six ended June 30, 2012. Income
from an increase in the cash value of bank owned life insurance totaled $194 thousand for the six months ended June 30, 2012, a
decrease of $8 thousand (4.0%), compared to $202 thousand for the six months ended June 30, 2011. Losses on foreclosed real estate
totaled $84 thousand for the six months ended June 30, 2012, a decrease of $872 thousand (110.7%) from $788 thousand in gains for
the six months ended June 30, 2011. The decrease is primarily related to the Bancorp’s favorable settlement in its lawsuit
against the lead lender of a commercial real estate participation loan during the second quarter of 2011, as well as the revaluation
of a land development loan that resulted in a loss. During the first six months of 2012, the Bancorp recognized a $6 thousand other-than-temporary
impairment for one of its trust preferred securities. Other noninterest income totaled $58 thousand for the six months ended June
30, 2012 and $28 thousand for the six months ended June 30, 2011.





Noninterest expense for the six months ended June 30, 2012 was $9.9 million, an increase of $90 thousand
(0.9%) from $9.8 million for the six months ended June 30, 2011. During the current six months, compensation and benefits totaled
$5.1 million, an increase of $221 thousand (4.5%) from $4.9 million for the six months ended June 30, 2011. The increase is the
result of increased compensation from the addition of staff and annual increases. Occupancy and equipment totaled $1.6 million
for the current six months, a decrease of $109 thousand (6.4%), compared to $1.7 million for the six months ended June 30, 2011.
The decrease in occupancy and equipment expense is the result of lower required building repair and maintenance expenses during
the first quarter. Data processing expense totaled $548 thousand for the six months ended June 30, 2012, an increase of $47 thousand
(9.4%) from $501 thousand for the six months ended June 30, 2011. Data processing expense has increased as a result of greater
system utilization. Federal deposit insurance premium expense totaled $291 thousand for the six months ended June 30, 2012, a decrease
of $305 thousand (51.2%) from $596 thousand for the six months ended June 30, 2011. The decrease was the result of lower FDIC assessment
rates. Marketing expense related to banking products totaled $158 thousand for the current six months, a decrease of $58 thousand
(26.9%) from $216 thousand for the six months ended June 30, 2011. The Bancorp continues to proactively market its products, but
varies its timing based on projected benefits and needs. Other expenses related to banking operations totaled $2.2 million for
the six months ended June 30, 2012, an increase of $294 thousand (15.3%) from $1.9 million for the six months ended June 30, 2011.
The increase to other expense was primarily the result of one time litigation costs that settled in March 2012. The Bancorp’s
efficiency ratio was 67.0% for the six months ended June 30, 2012, compared to 64.1% for the six months ended June 30, 2011.









32







Income tax expenses for the six months
ended June 30, 2012 totaled $838 thousand, compared to income tax expense of $585 thousand for the six months ended June 30, 2011,
an increase of $253 thousand (43.2%). The combined effective federal and state tax rates for the Bancorp was 22.0% for the six
months ended June 30, 2012, compared to 17.0% for the six months ended June 30, 2011. The Bancorp’s higher current year
effective tax rate is a result of higher earnings and lower tax preferred income.



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, 2011 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
2011 Form 10-K.



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, 2012, 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 reportingidentified in connection with the
Bancorp’s evaluation of controls that occurred during the three months ended June 30, 2012 that has materially
affected, or is reasonably likely to materially affect, the Bancorp's internal control over financial reporting.





33











PART II - Other Information



Item 1.	Legal Proceedings



There are no matters reportable under this item.



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.	Mine Safety Disclosures



Not Applicable.



Item 5.	Other Information



There are no matters reportable under this item.





Item 6.	Exhibits





|        |                                                                  
|------- | -----------------------------------------------------------------
|Exhibit |                                                                  
|Number  | Description                                                      
|        |                                                                  
|31.1    | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|        |                                                                  
|31.2    | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|        |                                                                  
|32.1    | Section 1350 Certifications                                      
|        |                                                                  







34











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 BANCORP                                                       
|------------------- |  | --------------------------------------------------------------------------------
|                    |  |                                                                                 
|                    |  |                                                                                 
|Date: July 23, 2012 |  | /s/ David A. Bochnowski                                                         
|                    |  | David A. Bochnowski

Chairman of the Board and Chief Executive
Officer          
|                    |  |                                                                                 
|                    |  |                                                                                 
|Date: July 23, 2012 |  | /s/ Robert T. Lowry                                                             
|                    |  | Robert T. Lowry

Executive Vice President,
Chief Financial Officer and Treasurer



35