SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549





FORM
10-Q





(Mark
One)


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





For the quarterly period ended
September 30, 2010 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.
      Employeror
      organization)
                
                Identification
      Number)





9204
      Columbia AvenueMunster, Indiana
                
                46321(Address
      of principal executive offices)
                
                (ZIP
      code)





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





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





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





Indicate
by check mark 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 2,825,054 shares of the registrant’s Common Stock, without par value,
outstanding at September 30, 2010.





NorthWest
Indiana Bancorp


Index





PageNumberPART
      I. Financial InformationItem
      1.
                      Unaudited
      Financial StatementsConsolidated
      Balance Sheets, September 30, 2010 and December 31, 2009
                      
                      1Consolidated
      Statements of Income, Three and Nine Months Ended September 30, 2010 and
      2009
                      
                      2Consolidated
      Statements of Changes in Stockholders' Equity, Three and Nine Months Ended
      September 30, 2010 and 2009
                      
                      3Consolidated
      Statements of Cash Flows, Nine Months Ended September 30,
      2010  and 2009
                      
                      4Notes
      to Consolidated Financial Statements
                      
                      5-14Item
      2.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      15-26Item
      3.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      
                      27Item
      4.
                      Controls
      and Procedures
                      
                      27PART
      II. Other Information
                      
                      28SIGNATURES
                      
                      29EXHIBITS31.1  Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer
                      
                      3031.2  Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer
                      
                      3132.1  Section
      1350 Certifications
                      
                      32










NorthWest Indiana Bancorp


Consolidated
Balance Sheets





September 30,
                                        
                                        December 31,2010
                                        
                                        2009(Dollars in thousands)
                                        
                                        (unaudited)ASSETSCash
      and non-interest bearing balances in financial
institutions
                                        
                                        $
                                        7,740
                                        
                                        $
                                        8,705Interest
      bearing balances in financial institutions
                                        
                                        
                                        5,285
                                        
                                        
                                        447Federal
      funds sold
                                        
                                        
                                        3,026
                                        
                                        
                                        4,070Total
      cash and cash equivalents
                                        
                                        
                                        16,051
                                        
                                        
                                        13,222Securities
      available-for-sale
                                        
                                        
                                        141,736
                                        
                                        
                                        124,776Securities
      held-to-maturity
                                        
                                        
                                        18,476
                                        
                                        
                                        19,557Loans
      held-for-sale
                                        
                                        
                                        5,662
                                        
                                        
                                        1,025Loans
      receivable
                                        
                                        
                                        428,812
                                        
                                        
                                        458,245Less:
      allowance for loan losses
                                        
                                        
                                        (8,195
                                        )
                                        
                                        (6,114
                                        )Net
      loans receivable
                                        
                                        
                                        420,617
                                        
                                        
                                        452,131Federal
      Home Loan Bank stock
                                        
                                        
                                        3,650
                                        
                                        
                                        3,650Accrued
      interest receivable
                                        
                                        
                                        2,616
                                        
                                        
                                        2,878Premises
      and equipment
                                        
                                        
                                        19,266
                                        
                                        
                                        19,590Foreclosed
      real estate
                                        
                                        
                                        5,068
                                        
                                        
                                        3,747Cash
      value of bank owned life insurance
                                        
                                        
                                        12,355
                                        
                                        
                                        12,049Prepaid
      FDIC insurance premium
                                        
                                        
                                        2,630
                                        
                                        
                                        3,282Other
      assets
                                        
                                        
                                        3,988
                                        
                                        
                                        5,899Total
      assets
                                        
                                        $
                                        652,115
                                        
                                        $
                                        661,806LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Non-interest
      bearing
                                        
                                        $
                                        53,515
                                        
                                        $
                                        42,390Interest
      bearing
                                        
                                        
                                        484,386
                                        
                                        
                                        498,137Total
                                        
                                        
                                        537,901
                                        
                                        
                                        540,527Repurchase
      agreements
                                        
                                        
                                        20,058
                                        
                                        
                                        15,893Borrowed
      funds
                                        
                                        
                                        29,671
                                        
                                        
                                        47,129Accrued
      expenses and other liabilities
                                        
                                        
                                        7,031
                                        
                                        
                                        5,179Total
      liabilities
                                        
                                        
                                        594,661
                                        
                                        
                                        608,728Stockholders'
      Equity:Preferred
      stock, no par or stated value; 10,000,000 shares authorized, none
      outstanding
                                        
                                        
                                        -
                                        
                                        
                                        -Common
      stock, no par or stated value; 10,000,000shares authorized; shares
      issued:  September 30, 2010 - 2,888,902
                                        
                                        
                                        361
                                        
                                        
                                        361December
      31, 2009 – 2,889,452shares
      outstanding: September 30, 2010 - 2,825,054December
      31, 2009 – 2,818,578Additional
      paid in capital
                                        
                                        
                                        5,131
                                        
                                        
                                        5,104Accumulated
      other comprehensive income/(loss)
                                        
                                        
                                        1,620
                                        
                                        
                                        (170
                                        )Retained
      earnings
                                        
                                        
                                        51,696
                                        
                                        
                                        49,312Treasury
      stock, common shares at cost:  September 30, 2010 -
      63,848December 31, 2009 - 70,874
                                        
                                        
                                        (1,354
                                        )
                                        
                                        (1,529
                                        )Total
      stockholders' equity
                                        
                                        
                                        57,454
                                        
                                        
                                        53,078Total
      liabilities and stockholders' equity
                                        
                                        $
                                        652,115
                                        
                                        $
                                        661,806





See
accompanying notes to consolidated financial statements.


1




NorthWest Indiana Bancorp


Consolidated
Statements of Income


(unaudited)





Three Months Ended
                    
                    
                    Nine Months Ended(Dollars in thousands, except per share data)
                    
                    September 30,
                    
                    
                    September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Interest
      income:Loans
      receivableReal
      estate loans
                    
                    $
                    4,866
                    
                    
                    $
                    5,293
                    
                    
                    $
                    15,104
                    
                    
                    $
                    16,826Commercial
      loans
                    
                    
                    1,051
                    
                    
                    
                    954
                    
                    
                    
                    3,204
                    
                    
                    
                    2,767Consumer
      loans
                    
                    
                    16
                    
                    
                    
                    29
                    
                    
                    
                    60
                    
                    
                    
                    93Total
      loan interest
                    
                    
                    5,933
                    
                    
                    
                    6,276
                    
                    
                    
                    18,368
                    
                    
                    
                    19,686Securities
                    
                    
                    1,455
                    
                    
                    
                    1,538
                    
                    
                    
                    4,549
                    
                    
                    
                    4,632Other
      interest earning assets
                    
                    
                    7
                    
                    
                    
                    3
                    
                    
                    
                    21
                    
                    
                    
                    14Total
      interest income
                    
                    
                    7,395
                    
                    
                    
                    7,817
                    
                    
                    
                    22,938
                    
                    
                    
                    24,332Interest
      expense:Deposits
                    
                    
                    880
                    
                    
                    
                    1,636
                    
                    
                    
                    3,135
                    
                    
                    
                    5,687Repurchase
      agreements
                    
                    
                    46
                    
                    
                    
                    68
                    
                    
                    
                    145
                    
                    
                    
                    200Borrowed
      funds
                    
                    
                    210
                    
                    
                    
                    369
                    
                    
                    
                    714
                    
                    
                    
                    1,184Total
      interest expense
                    
                    
                    1,136
                    
                    
                    
                    2,073
                    
                    
                    
                    3,994
                    
                    
                    
                    7,071Net
      interest income
                    
                    
                    6,259
                    
                    
                    
                    5,744
                    
                    
                    
                    18,944
                    
                    
                    
                    17,261Provision
      for loan losses
                    
                    
                    1,615
                    
                    
                    
                    4,675
                    
                    
                    
                    4,120
                    
                    
                    
                    6,490Net
      interest income after provision for loan losses
                    
                    
                    4,644
                    
                    
                    
                    1,069
                    
                    
                    
                    14,824
                    
                    
                    
                    10,771Noninterest
      income:Fees
      and service charges
                    
                    
                    652
                    
                    
                    
                    694
                    
                    
                    
                    1,896
                    
                    
                    
                    2,004Gain
      on sale of securities, net
                    
                    
                    111
                    
                    
                    
                    93
                    
                    
                    
                    853
                    
                    
                    
                    437Wealth
      management operations
                    
                    
                    353
                    
                    
                    
                    270
                    
                    
                    
                    887
                    
                    
                    
                    672Gain
      on sale of loans held-for-sale, net
                    
                    
                    335
                    
                    
                    
                    167
                    
                    
                    
                    607
                    
                    
                    
                    1,032Increase
      in cash value of bank owned life insurance
                    
                    
                    102
                    
                    
                    
                    98
                    
                    
                    
                    306
                    
                    
                    
                    306Gain/(loss)
      on foreclosed real estate, net
                    
                    
                    (266
                    )
                    
                    
                    (26
                    )
                    
                    
                    (201
                    )
                    
                    
                    (58
                    )Other-than-temporary
      impairment of securities
                    
                    
                    (80
                    )
                    
                    
                    138
                    
                    
                    
                    (99
                    )
                    
                    
                    (145
                    )Portion
      of loss recognized in other comprehensive income
                    
                    
                    65
                    
                    
                    
                    (182
                    )
                    
                    
                    (29
                    )
                    
                    
                    101Other
                    
                    
                    3
                    
                    
                    
                    11
                    
                    
                    
                    12
                    
                    
                    
                    23Total
      noninterest income
                    
                    
                    1,275
                    
                    
                    
                    1,263
                    
                    
                    
                    4,232
                    
                    
                    
                    4,372Noninterest
      expense:Compensation
      and benefits
                    
                    
                    2,426
                    
                    
                    
                    2,451
                    
                    
                    
                    7,293
                    
                    
                    
                    7,061Occupancy
      and equipment
                    
                    
                    794
                    
                    
                    
                    782
                    
                    
                    
                    2,386
                    
                    
                    
                    2,315Federal
      deposit insurance premiums
                    
                    
                    231
                    
                    
                    
                    246
                    
                    
                    
                    727
                    
                    
                    
                    986Data
      processing
                    
                    
                    236
                    
                    
                    
                    222
                    
                    
                    
                    700
                    
                    
                    
                    652Marketing
                    
                    
                    90
                    
                    
                    
                    153
                    
                    
                    
                    329
                    
                    
                    
                    368Other
                    
                    
                    1,007
                    
                    
                    
                    924
                    
                    
                    
                    2,906
                    
                    
                    
                    2,896Total
      noninterest expense
                    
                    
                    4,784
                    
                    
                    
                    4,778
                    
                    
                    
                    14,341
                    
                    
                    
                    14,278Income
      before income tax expenses
                    
                    
                    1,135
                    
                    
                    
                    (2,446
                    )
                    
                    
                    4,715
                    
                    
                    
                    865Income
      tax expenses
                    
                    
                    94
                    
                    
                    
                    (1,051
                    )
                    
                    
                    669
                    
                    
                    
                    (498
                    )Net
      income
                    
                    $
                    1,041
                    
                    
                    $
                    (1,395
                    )
                    
                    $
                    4,046
                    
                    
                    $
                    1,363Earnings
      per common share:Basic
                    
                    $
                    0.37
                    
                    
                    $
                    (0.50
                    )
                    
                    $
                    1.43
                    
                    
                    $
                    0.48Diluted
                    
                    $
                    0.37
                    
                    
                    $
                    (0.50
                    )
                    
                    $
                    1.43
                    
                    
                    $
                    0.48Dividends
      declared per common share
                    
                    $
                    0.15
                    
                    
                    $
                    0.32
                    
                    
                    $
                    0.57
                    
                    
                    $
                    1.00





See
accompanying notes to consolidated financial statements.


2




NorthWest Indiana Bancorp


Consolidated
Statements of Changes in Stockholders' Equity


(unaudited)





Three Months Ended
                
                
                Nine Months Ended(Dollars in thousands)
                
                September 30,
                
                
                September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Balance
      at beginning of period
                
                $
                56,307
                
                
                $
                53,274
                
                
                $
                53,078
                
                
                $
                52,773Comprehensive
      income:Net
      income
                
                
                1,041
                
                
                
                (1,395
                )
                
                
                4,046
                
                
                
                1,363Net
      unrealized change on securities available-for-sale, net of
      reclassifications and tax effects
                
                
                483
                
                
                
                2,283
                
                
                
                1,796
                
                
                
                1,948Amortization
      of unrecognized gain
                
                
                (2
                )
                
                
                (2
                )
                
                
                (6
                )
                
                
                (6
                )Comprehensive
      income
                
                
                1,522
                
                
                
                886
                
                
                
                5,836
                
                
                
                3,305Issuance
      of common stock, under stock based compensation plan, including tax
      effects
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4Stock
      based compensation expense
                
                
                8
                
                
                
                9
                
                
                
                27
                
                
                
                33Sale
      of treasury stock
                
                
                41
                
                
                
                52
                
                
                
                122
                
                
                
                101Adjustment
      to retained earnings for Topic 715
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (84
                )Cash
      dividends
                
                
                (424
                )
                
                
                (902
                )
                
                
                (1,609
                )
                
                
                (2,813
                )Balance
      at end of period
                
                $
                57,454
                
                
                $
                53,319
                
                
                $
                57,454
                
                
                $
                53,319





See
accompanying notes to consolidated financial statements.


3




NorthWest
Indiana Bancorp


Consolidated
Statements of Cash Flows


(unaudited)





Nine
      Months Ended(Dollars
      in thousands)
                  
                  September 30,2010
                  
                  
                  2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  4,046
                  
                  
                  $
                  1,363Adjustments
      to reconcile net income to net cash provided by operating
      activities:Origination
      of loans for sale
                  
                  
                  (22,296
                  )
                  
                  
                  (44,961
                  )Sale
      of loans originated for sale
                  
                  
                  23,366
                  
                  
                  
                  44,771Depreciation
      and amortization, net of accretion
                  
                  
                  1,570
                  
                  
                  
                  1,095Amortization
      of mortgage servicing rights
                  
                  
                  81
                  
                  
                  
                  113Amortization
      of investment in real estate limited partnerships
                  
                  
                  113
                  
                  
                  
                  142Stock
      based compensation expense
                  
                  
                  27
                  
                  
                  
                  33Gain
      on sale of securities, net
                  
                  
                  (853
                  )
                  
                  
                  (437
                  )Gain
      on sale of loans held-for-sale, net
                  
                  
                  (607
                  )
                  
                  
                  (1,032
                  )Net
      losses due to other-than-temporary impairment of
securities
                  
                  
                  128
                  
                  
                  
                  44Gain/(loss)
      on foreclosed real estate, net
                  
                  
                  (201
                  )
                  
                  
                  58Provision
      for loan losses
                  
                  
                  4,120
                  
                  
                  
                  6,490Net
      change in:Interest
      receivable
                  
                  
                  262
                  
                  
                  
                  267Other
      assets
                  
                  
                  1,477
                  
                  
                  
                  (1,363
                  )Cash
      value of bank owned life insurance
                  
                  
                  (306
                  )
                  
                  
                  (306
                  )Accrued
      expenses and other liabilities
                  
                  
                  2,018
                  
                  
                  
                  (2,442
                  )Total
      adjustments
                  
                  
                  8,899
                  
                  
                  
                  2,472Net
      cash - operating activities
                  
                  
                  12,945
                  
                  
                  
                  3,835CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from maturities and pay downs of securities
    available-for-sale
                  
                  
                  22,743
                  
                  
                  
                  17,254Proceeds
      from sales of securities available-for-sale
                  
                  
                  16,630
                  
                  
                  
                  21,023Purchase
      of securities available-for-sale
                  
                  
                  (53,240
                  )
                  
                  
                  (48,914
                  )Purchase
      of securities held-to-maturity
                  
                  
                  -
                  
                  
                  
                  (3,860
                  )Proceeds
      from maturities and pay downs of securities
    held-to-maturity
                  
                  
                  1,063
                  
                  
                  
                  1,073Proceeds
      from sale of loans transferred to held-for-sale
                  
                  
                  -
                  
                  
                  
                  10,651Net
      change in loans receivable
                  
                  
                  19,612
                  
                  
                  
                  5,578Purchase
      of premises and equipment, net
                  
                  
                  (847
                  )
                  
                  
                  (1,566
                  )Proceeds
      from sale of foreclosed real estate
                  
                  
                  1,495
                  
                  
                  
                  -Net
      cash - investing activities
                  
                  
                  7,456
                  
                  
                  
                  1,239CASH
      FLOWS FROM FINANCING ACTIVITIES:Change
      in deposits
                  
                  
                  (2,626
                  )
                  
                  
                  29,122Proceeds
      from  FHLB advances
                  
                  
                  13,000
                  
                  
                  
                  6,000Repayment
      of FHLB advances
                  
                  
                  (22,000
                  )
                  
                  
                  (13,000
                  )Change
      in other borrowed funds
                  
                  
                  (4,293
                  )
                  
                  
                  (6,745
                  )Proceeds
      from issuance of common stock
                  
                  
                  -
                  
                  
                  
                  4Proceeds
      from sale of treasury stock
                  
                  
                  122
                  
                  
                  
                  101Dividends
      paid
                  
                  
                  (1,775
                  )
                  
                  
                  (2,813
                  )Net
      cash - financing activities
                  
                  
                  (17,572
                  )
                  
                  
                  12,669Net
      change in cash and cash equivalents
                  
                  
                  2,829
                  
                  
                  
                  17,743Cash
      and cash equivalents at beginning of period
                  
                  
                  13,222
                  
                  
                  
                  11,296Cash
      and cash equivalents at end of period
                  
                  $
                  16,051
                  
                  
                  $
                  29,039SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
                  
                  $
                  4,035
                  
                  
                  $
                  7,128Income
      taxes
                  
                  $
                  1,185
                  
                  
                  $
                  990SUPPLEMENTAL
      NONCASH INFORMATION:Transfers
      from loans to foreclosed real estate
                  
                  $
                  3,573
                  
                  
                  $
                  3,529Transfers
      from loans to loans held for sale
                  
                  $
                  5,167
                  
                  
                  $
                  10,493





See
accompanying notes to consolidated financial statements.


4




NorthWest
Indiana Bancorp




Notes
to Consolidated Financial Statements





Note
1 - Basis of Presentation


The consolidated financial statements
include the accounts of NorthWest Indiana Bancorp (the “Bancorp”), its
wholly-owned subsidiary, Peoples Bank SB (the “Bank”), and the Bank’s
wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC and NWIN
Funding, Inc. The Bancorp has no other business activity other than being a
holding company for the Bank. The Bancorp’s earnings are dependent upon the
earnings of the Bank. The accompanying unaudited consolidated financial
statements were prepared in accordance with instructions for Form 10-Q and,
therefore, do not include all disclosures required by U.S. generally accepted
accounting principles for complete presentation of financial statements. In the
opinion of management, the consolidated financial statements contain all
adjustments necessary to present fairly the consolidated balance sheets of the
Bancorp as of September 30, 2010 and December 31, 2009, and the consolidated
statements of income, changes in stockholders’ equity, for the three and nine
months ended September 30, 2010 and 2009, and cash flows for the nine months
ended September 30, 2010 and 2009. The income reported for the nine month period
ended September 30, 2010 is not necessarily indicative of the results to be
expected for the full year. Subsequent events have been evaluated through
October 29, 2010, which is


the date
the financial statements were issued.





Note
2 - Use of Estimates


Preparing financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period, as well as the disclosures
provided. Actual results could differ from those estimates. Estimates associated
with the allowance for loan losses, fair values of foreclosed real estate, loan
servicing rights, and investment securities and 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)Gross
                                    
                                    
                                    GrossCost
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Unrealized
                                    
                                    
                                    FairBasis
                                    
                                    
                                    Gains
                                    
                                    
                                    Losses
                                    
                                    
                                    ValueSeptember
      30, 2010U.S.
      government sponsored entities
                                    
                                    $
                                    6,209
                                    
                                    
                                    $
                                    2
                                    
                                    
                                    $
                                    (4
                                    )
                                    
                                    $
                                    6,207CMO
      and residential mortgage-backed securities
                                    
                                    
                                    54,867
                                    
                                    
                                    
                                    2,006
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    56,873Municipal
      securities
                                    
                                    
                                    34,596
                                    
                                    
                                    
                                    2,798
                                    
                                    
                                    
                                    (4
                                    )
                                    
                                    
                                    37,390CMO
      government sponsored entities
                                    
                                    
                                    38,442
                                    
                                    
                                    
                                    1,573
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    40,015Collateralized
      debt obligations
                                    
                                    
                                    5,215
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (3,964
                                    )
                                    
                                    
                                    1,251Total
      securities available-for-sale
                                    
                                    $
                                    139,329
                                    
                                    
                                    $
                                    6,379
                                    
                                    
                                    $
                                    (3,972
                                    )
                                    
                                    $
                                    141,736December
      31, 2009U.S.
      government sponsored entities
                                    
                                    $
                                    1,993
                                    
                                    
                                    $
                                    52
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    2,045CMO
      and residential mortgage-backed securities
                                    
                                    
                                    61,095
                                    
                                    
                                    
                                    2,302
                                    
                                    
                                    
                                    (82
                                    )
                                    
                                    
                                    63,315Municipal
      securities
                                    
                                    
                                    34,151
                                    
                                    
                                    
                                    1,516
                                    
                                    
                                    
                                    (94
                                    )
                                    
                                    
                                    35,573CMO
      government sponsored entities
                                    
                                    
                                    22,534
                                    
                                    
                                    
                                    168
                                    
                                    
                                    
                                    (209
                                    )
                                    
                                    
                                    22,493Collateralized
      debt obligations
                                    
                                    
                                    5,343
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (3,993
                                    )
                                    
                                    
                                    1,350Total
      securities available-for-sale
                                    
                                    $
                                    125,116
                                    
                                    
                                    $
                                    4,038
                                    
                                    
                                    $
                                    (4,378
                                    )
                                    
                                    $
                                    124,776
 5





The carrying amount (cost basis),
unrecognized gains and losses, and fair value of securities held-to-maturity
were as follows:





(Dollars in thousands)Gross
                          
                          
                          GrossCost
                          
                          
                          Unrecognized
                          
                          
                          Unrecognized
                          
                          
                          FairBasis
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          ValueSeptember
      30, 2010Municipal
      securities
                          
                          $
                          17,596
                          
                          
                          $
                          1,143
                          
                          
                          $
                          -
                          
                          
                          $
                          18,739Residential
      mortgage-backed securities
                          
                          
                          880
                          
                          
                          
                          59
                          
                          
                          
                          -
                          
                          
                          
                          939Total
      securities heald-to-maturity
                          
                          $
                          18,476
                          
                          
                          $
                          1,202
                          
                          
                          $
                          -
                          
                          
                          $
                          19,678December
      31, 2009Municipal
      securities
                          
                          $
                          18,539
                          
                          
                          $
                          724
                          
                          
                          $
                          -
                          
                          
                          $
                          19,263Residential
      mortgage-backed securities
                          
                          
                          1,018
                          
                          
                          
                          28
                          
                          
                          
                          (6
                          )
                          
                          
                          1,040Total
      securities heald-to-maturity
                          
                          $
                          19,557
                          
                          
                          $
                          752
                          
                          
                          $
                          (6
                          )
                          
                          $
                          20,303





The fair value of debt securities and
carrying amount, if different, at September 30, 2010, by contractual maturity,
were as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.





(Dollars in thousands)Available-for-sale
                    
                    
                    Held-to-maturityFair
                    
                    
                    Tax-Equivalent
                    
                    
                    Carrying
                    
                    
                    Fair
                    
                    
                    Tax-EquivalentValue
                    
                    
                    Yield
                    
                    
                    Amount
                    
                    
                    Value
                    
                    
                    YieldDue
      in one year or less
                    
                    $
                    193
                    
                    
                    
                    7.07
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -Due
      from one to five years
                    
                    
                    4,805
                    
                    
                    
                    3.92
                    
                    
                    
                    1,876
                    
                    
                    
                    2,020
                    
                    
                    
                    6.34Due
      over five years
                    
                    
                    39,850
                    
                    
                    
                    5.60
                    
                    
                    
                    15,720
                    
                    
                    
                    16,720
                    
                    
                    
                    6.02CMO
      and residential mortgage-backed securities
                    
                    
                    96,888
                    
                    
                    
                    3.98
                    
                    
                    
                    880
                    
                    
                    
                    938
                    
                    
                    
                    4.79Total
                    
                    $
                    141,736
                    
                    
                    
                    4.44
                    
                    
                    $
                    18,476
                    
                    
                    $
                    19,678
                    
                    
                    
                    6.00





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





(Dollars in thousands)September 30,
                    
                    
                    September 30,2010
                    
                    
                    2009Proceeds
                    
                    $
                    16,630
                    
                    
                    
                    21,023Gross
      gains
                    
                    
                    853
                    
                    
                    
                    437Gross
      losses
                    
                    
                    -
                    
                    
                    
                    -





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





(Dollars in thousands)Unrealized gainsBeginning
      balance, December 31, 2009
                                          
                                          $
                                          (247
                                          )Current
      period change
                                          
                                          
                                          1,796Ending
      balance, September 30, 2010
                                          
                                          $
                                          1,549





Securities with carrying values of
$23,742,000 and $27,394,000 were pledged as of September 30, 2010 and December
31, 2009, respectively, as collateral for repurchase agreements and public funds
and for other purposes as permitted or required by law.


6





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


(Dollars
      in thousands)Less
      than 12 months
                                    
                                    
                                    12
      months or longer
                                    
                                    
                                    TotalFair
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Fair
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Fair
                                    
                                    
                                    UnrealizedValue
                                    
                                    
                                    Losses
                                    
                                    
                                    Value
                                    
                                    
                                    Losses
                                    
                                    
                                    Value
                                    
                                    
                                    LossesSeptember
      30, 2010Description
      of Securities:U.S.
      government sponsored entities
                                    
                                    $
                                    1,525
                                    
                                    
                                    $
                                    (4
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    1,525
                                    
                                    
                                    $
                                    (4
                                    )CMO
      and residential mortgage-backed securities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Municipal
      securities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    412
                                    
                                    
                                    
                                    (4
                                    )
                                    
                                    
                                    412
                                    
                                    
                                    
                                    (4
                                    )Collateralized
      debt obligations
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,251
                                    
                                    
                                    
                                    (3,964
                                    )
                                    
                                    
                                    1,251
                                    
                                    
                                    
                                    (3,964
                                    )Total
      temporarily impaired
                                    
                                    $
                                    1,525
                                    
                                    
                                    $
                                    (4
                                    )
                                    
                                    $
                                    1,663
                                    
                                    
                                    $
                                    (3,968
                                    )
                                    
                                    $
                                    3,188
                                    
                                    
                                    $
                                    (3,972
                                    )Number
      of securities
                                    
                                    
                                    
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    5
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    6
  (Dollars
      in thousands)Less
      than 12 months
                                    
                                    
                                    12
      months or longer
                                    
                                    
                                    TotalFair
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Fair
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Fair
                                    
                                    
                                    UnrealizedValue
                                    
                                    
                                    Losses
                                    
                                    
                                    Value
                                    
                                    
                                    Losses
                                    
                                    
                                    Value
                                    
                                    
                                    LossesDecember
      31, 2009Description
      of Securities:U.S.
      government sponsored entities
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -CMO
      and residential mortgage-backed securities
                                    
                                    
                                    15,604
                                    
                                    
                                    
                                    (297
                                    )
                                    
                                    
                                    13
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    15,617
                                    
                                    
                                    
                                    (297
                                    )Municipal
      securities
                                    
                                    
                                    2,443
                                    
                                    
                                    
                                    (15
                                    )
                                    
                                    
                                    1,476
                                    
                                    
                                    
                                    (79
                                    )
                                    
                                    
                                    3,919
                                    
                                    
                                    
                                    (94
                                    )Collateralized
      debt obligations
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,350
                                    
                                    
                                    
                                    (3,993
                                    )
                                    
                                    
                                    1,350
                                    
                                    
                                    
                                    (3,993
                                    )Total
      temporarily impaired
                                    
                                    $
                                    18,047
                                    
                                    
                                    $
                                    (312
                                    )
                                    
                                    $
                                    2,839
                                    
                                    
                                    $
                                    (4,072
                                    )
                                    
                                    $
                                    20,886
                                    
                                    
                                    $
                                    (4,384
                                    )Number
      of securities
                                    
                                    
                                    
                                    
                                    
                                    
                                    16
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    7
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    23


Unrealized losses on securities have not been recognized into income
because the securities are of high credit quality or have undisrupted cash
flows. Management has the intent and ability to hold these securities for the
foreseeable future, and the decline in fair value is largely due to changes in
interest rates and market volatility. The fair value is expected to recover as
the securities approach maturity.





Note
4 – Loans Receivable


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





(Dollars in thousands)September 30,
                    
                    
                    September 30,2010
                    
                    
                    2009Loans
      past due over 90 days still on accrual
                    
                    $
                    296
                    
                    
                    $
                    1,491Non-accrual
      loans
                    
                    
                    23,238
                    
                    
                    
                    17,074





Impaired
loans at period-end were as follows:





(Dollars in thousands)September 30,
                    
                    
                    September 30,2010
                    
                    
                    2009Period-end
      loans with no allocated allowance for loan losses (including troubled debt
      restructurings of $6,326 and $0)
                    
                    $
                    16,850
                    
                    
                    $
                    3,853Period-end
      loans with allocated allowance for loan losses (including troubled debt
      restructurings of $5,554 and $7,199)
                    
                    
                    10,653
                    
                    
                    
                    13,112Total
                    
                    $
                    27,503
                    
                    
                    $
                    16,965Amount
      of the allowance for loan losses allocated
                    
                    $
                    1,041
                    
                    
                    $
                    1,179Average
      of impaired loans during the period
                    
                    
                    21,531
                    
                    
                    
                    12,820Interest
      income recognized during impairment
                    
                    
                    19
                    
                    
                    
                    10Cash-basis
      interest income recognized during impairment
                    
                    
                    409
                    
                    
                    
                    95




7


Note
5 – Foreclosed Real Estate





Foreclosed
real estate at period-end is summarized below:





(Dollars in thousands)September 30,
                
                
                September 30,2010
                
                
                2009Construction
      and land development
                
                $
                1,940
                
                
                $
                768Commercial
      real estate and other dwelling
                
                
                1,598
                
                
                
                1,897Residential
      real estate
                
                
                1,386
                
                
                
                1,082Commercial
      and industrial
                
                
                144
                
                
                
                -Total
                
                $
                5,068
                
                
                $
                3,747





Note
6 - Concentrations of Credit Risk


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





Note
7 – Earnings Per Share


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





(Dollars
in thousands, except per share data)


Three Months Ended
                                            
                                            
                                            Nine Months EndedSeptember 30,
                                            
                                            
                                            September 30,2010
                                            
                                            
                                            2009
                                            
                                            
                                            2010
                                            
                                            
                                            2009Basic
      earnings per common share:Net
      income as reported
                                            
                                            $
                                            1,041
                                            
                                            
                                            $
                                            (1,395
                                            )
                                            
                                            $
                                            4,046
                                            
                                            
                                            $
                                            1,363Weighted
      average common shares outstanding:
                                            
                                            
                                            2,823,684
                                            
                                            
                                            
                                            2,816,600
                                            
                                            
                                            
                                            2,822,522
                                            
                                            
                                            
                                            2,813,031Basic
      earnings per common share:
                                            
                                            $
                                            0.37
                                            
                                            
                                            $
                                            (0.50
                                            )
                                            
                                            $
                                            1.43
                                            
                                            
                                            $
                                            0.48Diluted
      earnings per common share:Net
      income as reported
                                            
                                            $
                                            1,041
                                            
                                            
                                            $
                                            (1,395
                                            )
                                            
                                            $
                                            4,046
                                            
                                            
                                            $
                                            1,363Weighted
      average common shares outstanding:
                                            
                                            
                                            2,823,684
                                            
                                            
                                            
                                            2,816,600
                                            
                                            
                                            
                                            2,822,522
                                            
                                            
                                            
                                            2,813,031Add:  Dilutive
      effect of assumed stock option exercises:
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Weighted
      average common and dilutivepotential
      common shares outstanding:
                                            
                                            
                                            2,823,684
                                            
                                            
                                            
                                            2,816,600
                                            
                                            
                                            
                                            2,822,522
                                            
                                            
                                            
                                            2,813,031Diluted
      earnings per common share:
                                            
                                            $
                                            0.37
                                            
                                            
                                            $
                                            (0.50
                                            )
                                            
                                            $
                                            1.43
                                            
                                            
                                            $
                                            0.48





Note
8 – Stock Based Compensation


The Bancorp’s 2004 Stock Option Plan
(the “Plan”), which is stockholder-approved, permits the granting of share
options to its employees for up to 250,000 shares of common stock. Awards
granted under the Plan may be in the form of incentive stock options,
non-incentive stock options, or restricted stock. As required by the
Compensation – Stock Compensation Topic (formerly Financial Accounting Standards
No. 123R (FAS 123R), “Share-Based Payments”), companies are required to record
compensation cost for stock options provided to employees in return for
employment service. The cost is measured at the fair value of the options when
granted, and this cost is expensed over the employment service period, which is
normally the vesting period of the options. Compensation cost will also be
recorded for prior option grants that vest after the date of adoption. For the
nine months ended September 30, 2010, stock based compensation expense of
$27,000 was recorded, compared to $33,000 for the nine months ended September
30, 2009. It is anticipated that current outstanding vested and unvested options
will result in additional compensation expense of approximately $9,000 in 2010
and $33,000 in 2011.


There were 300 shares of restricted
stock granted during the first nine months of 2010, compared to 2,500 shares
during the first nine months of 2009.


8





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





Weighted-Weighted-
                            
                            AverageAverage
                            
                            Remaining
                            
                            AggregateExercise
                            
                            Contractual
                            
                            IntrinsicOptions
                            
                            Shares
                            
                            
                            Price
                            
                            Term
                            
                            ValueOutstanding
      at January 1, 2010
                            
                            
                            65,747
                            
                            
                            $
                            23.69Granted
                            
                            
                            -
                            
                            
                            $
                            -Exercised
                            
                            
                            -
                            
                            
                            $
                            -Forfeited
                            
                            
                            (4,800
                            )
                            
                            $
                            24.04Expired
                            
                            
                            (11,700
                            )
                            
                            $
                            21.13Outstanding
      at September 30, 2010
                            
                            
                            49,247
                            
                            
                            $
                            24.27
                            
                            2.0
                            
                            -Exercisable
      at September 30, 2010
                            
                            
                            48,247
                            
                            
                            $
                            24.18
                            
                            1.9
                            
                            -





Note 9 – Adoption of New Accounting
Standards


The Transfers and Servicing Topic was
updated to remove the concept of a qualifying special-purpose entity from the
Topic and removes the exception from applying the Consolidations Topic (formerly
FASB Interpretation No. 46R).  The objective in issuing this update is
to improve the relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its financial statements
about a transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement, if any, in transferred financial assets. This update must be
applied as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods
thereafter. The impact of adoption was not material.





The Consolidations Topic was amended to
improve financial reporting by enterprises involved with variable interest
entities. The amendment addresses (1) the effects on certain provisions of the
Topic as they relate to the elimination of the qualifying special-purpose entity
concept in the Transfers and Servicing Topic and (2) constituent concerns about
the application of certain key provisions of the Topic including those in which
the accounting and disclosures under the Topic do not always provide timely and
useful information about an enterprise’s involvement in a variable interest
entity. This amendment shall be effective as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and
annual reporting periods thereafter. The impact of adoption was not
material.





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





In July 2010, FASB issued a statement
which expands disclosures about credit quality of financing receivables and
allowance for credit losses.  The standard will require the Bancorp to
expand disclosures about the credit quality of loans and the related reserves
against them.  The objective of this standard is to assist the users
of the financial statements in evaluating the nature of the credit risk inherent
in our loans receivable portfolio, how risk is analyzed to determine the
allowance for loan losses, and reasons for changes in the allowance for loan
losses. These disclosures are effective for fiscal years beginning after
December 15, 2010. Adoption of this standard is not expected to change the
current methodology used to determine the allowance for loan
losses.


9





Note 10 – Fair
Value


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





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





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





Level 3:
Significant unobservable inputs that reflect a reporting entity’s own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.





The fair values of securities available
for sale are determined on a recurring basis by obtaining quoted prices on
nationally recognized securities exchanges or pricing models utilizing
significant observable inputs such as matrix pricing, which is a mathematical
technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying
on the securities’ relationship to other benchmark quoted securities. Different
judgment and assumptions used in pricing could result in different estimates of
value. In certain cases where market data is not readily available because of 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.  Significant judgments are required in determining impairment,
which include making assumptions regarding the estimated prepayments, loss
assumptions and the change in interest rates. We consider the following factors
when determining an other-than-temporary impairment for a security: the length
of time and the extent to which the market value has been less than amortized
cost; the financial condition and near-term prospects of the issuer; the
underlying fundamentals of the relevant market and the outlook for such market
for the near future; an assessment of whether the Bancorp has (1) the intent to
sell the debt securities or (2) more likely than not will be required to sell
the debt securities before 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.





For the period ended September 30,
2010, the Bancorp’s management utilized a specialist to perform an
other-than-temporary impairment analysis for each of its four pooled trust
preferred securities. The analysis utilizes analytical models used to project
future cash flows for the pooled trust preferred securities based on current
assumptions for prepayments, default and deferral rates, and recoveries. The
projected cash flows are then tested for impairment consistent with the
Investments – Other Topic (formerly FSP EITF 99-20-1) and the Investments – Debt
and Equity Securities Topic (formerly FSP FAS 115-2 and FAS 124-2). The
other-than-temporary impairment testing compares the present value of the cash
flows from quarter to quarter to determine if there is a “favorable” or
“adverse” change. Other-than-temporary impairment is recorded if the projected
present value of cash flows is lower than the book value of the security. To
perform the quarterly other-than-temporary impairment analysis, management
utilizes current reports issued by the trustee, which 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 GAAP financial statements for public companies
(annual and quarterly reports on Forms 10-K and 10-Q, respectively), as well as
regulatory reports for private companies, including consolidated financial
statements for bank holding companies (FR Y-9C reports) and parent company-only
financial statements for bank holding companies (FR Y-9LP reports) filed with
the Federal Reserve, bank call reports filed with the FDIC and thrift financial
reports provided by the Office of Thrift Supervision. Using the information
sources described above, for each bank and thrift examined the following items
were examined: nature of the issuer’s business, years of operating history,
corporate structure, loan composition and loan concentrations, deposit mix,
asset growth rates, geographic footprint and local economic environment. The
issuers’ historical financial performance was reviewed and their financial
ratios were compared to appropriate peer groups of regional banks or thrifts
with similar asset sizes. The analysis focused on nine broad categories:
profitability (revenue streams and earnings quality, return on assets and
shareholder’s equity, net interest margin and interest rate sensitivity), credit
quality (charge-offs and recoveries, non-current loans and total non-performing
assets as a percentage of total loans, loan loss reserve coverage and the
adequacy of the loan loss provision), operating efficiency (non-interest expense
compared to total revenue), capital adequacy (Tier-1, total capital and leverage
ratios and equity capital growth), leverage (tangible equity as a percentage of
tangible assets, short-term and long-term borrowings and double leverage at the
holding company) and liquidity (the nature and availability of funding sources,
net non-core funding dependence and quality of deposits). In addition, for
publicly traded companies’ stock price movements were reviewed and the market
price of publicly traded debt instruments was examined. The other-than-temporary
impairment analysis indicated that the Bancorp’s four pooled trust preferred
securities had other-than-temporary impairment in the amount of $264,000, as of
September 30, 2010.


10





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)Collateralized debt obligationsEnding balance, December 31, 2009
                      
                      $
                      136Additions
      not previously recognized
                      
                      
                      128Ending
      balance, September 30, 2010
                      
                      $
                      264





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





Deal name
                            
                            PreTSL XXIV
                            
                            
                            PreTSL XXVII
                            
                            
                            Alesco IX
                            
                            
                            Alesco XVIIClass
                            
                            Caaa3
                            
                            
                            Ca
                            
                            
                            CCC-
                            
                            
                            CaBook
      value
                            
                            1,256,972
                            
                            
                            1,296,077
                            
                            
                            1,309,886
                            
                            
                            1,351,903Fair
      value
                            
                            229,878
                            
                            
                            191,557
                            
                            
                            580,200
                            
                            
                            249,267Unrealized
      gains/(losses)
                            
                            (1,027,093
                            )
                            
                            (1,104,521
                            )
                            
                            (729,686
                            )
                            
                            (1,102,635
                            )Lowest
      credit rating assigned
                            
                            Caa3
                            
                            
                            Ca
                            
                            
                            BB
                            
                            
                            CaNumber
      of performing banks
                            
                            51
                            
                            
                            26
                            
                            
                            44
                            
                            
                            37Number
      of performing insurance companies
                            
                            12
                            
                            
                            7
                            
                            
                            10
                            
                            
                            n/aNumber
      of issuers in default
                            
                            13
                            
                            
                            6
                            
                            
                            8
                            
                            
                            7Number
      of issuers in deferral
                            
                            18
                            
                            
                            10
                            
                            
                            14
                            
                            
                            12Defaults
      & deferrals as a % of performing collateral
                            
                            55.13
                            %
                            
                            41.58
                            %
                            
                            46.63
                            %
                            
                            53.69
                            %Subordination:As
      a % of performing collateral
                            
                            -19.35
                            %
                            
                            -25.48
                            %
                            
                            14.65
                            %
                            
                            -4.25
                            %As
      a % of performing collateral - adjusted for projected future
      defaults
                            
                            -24.58
                            %
                            
                            -30.98
                            %
                            
                            10.45
                            %
                            
                            -8.71
                            %Other-than-temporary
      impairment model assumptions:Defaults:Year
      1
                            
                            2.90
                            %
                            
                            2.70
                            %
                            
                            3.20
                            %
                            
                            3.00
                            %Year
      2
                            
                            0.70
                            %
                            
                            0.80
                            %
                            
                            0.80
                            %
                            
                            0.60
                            %Year
      3
                            
                            0.60
                            %
                            
                            0.70
                            %
                            
                            0.70
                            %
                            
                            0.50
                            %>
      3 Years
                            
                            (1
                            )
                            
                            (1
                            )
                            
                            (1
                            )
                            
                            (1
                            )Discount
      rate - 3 month Libor, plus implicit yield spread at
    purchase
                            
                            1.48
                            %
                            
                            1.23
                            %
                            
                            1.27
                            %
                            
                            1.44
                            %Recovery
      assumptions
                            
                            (2
                            )
                            
                            (2
                            )
                            
                            (2
                            )
                            
                            (2
                            )Prepayments
                            
                            0.00
                            %
                            
                            0.00
                            %
                            
                            0.00
                            %
                            
                            0.00
                            %Other-than-temporary
      impairment
                            
                            41,100
                            
                            
                            132,000
                            
                            
                            29,250
                            
                            
                            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 September 30, 2010, management reviewed the subordination levels for each
security in context of the level of current collateral defaults and deferrals
within each security; the potential for additional defaults and deferrals within
each security; the length of time that the security has been in “payment in
kind” status; and the Bancorp’s class position within each
security.


11




Management calculated the
other-than-temporary impairment model assumptions based on the specific
collateral underlying each individual security. The following assumption
methodology was applied consistently to each of the four pooled trust preferred
securities:  For collateral that has already defaulted, no recovery
was assumed; no cash flows were assumed from collateral currently in deferral,
with the exception of the recovery assumptions. The default and recovery
assumptions were calculated based on a detailed collateral review. The discount
rate assumption used in the calculation of the present value of cash flows is
based on the discount margin (i.e., credit spread) at the time each security was
purchased using the original purchase price. The discount margin is then added
to the appropriate 3-month LIBOR forward rate obtained from the forward LIBOR
curve.




At September 30, 2010, three of the
trust preferred securities with a cost basis of $3.9 million have been placed in
“payment in kind” status.  The Bancorp’s securities that are
classified as “payment in kind” are a result of not receiving the scheduled
quarterly interest payments. For the securities in “payment in kind” status,
management anticipates to receive the unpaid contractual interest payments from
the issuer, because of the self correcting cash flow waterfall provisions within
the structure of the securities. When a tranche senior to the Bancorp’s position
fails the coverage test, the Bancorp’s interest cash flows are paid to the
senior tranche and recorded as a reduction of principal. The coverage test
represents an over collateralization target by stating the balance of the
performing collateral as a percentage of the balance of the Bancorp’s tranche,
plus the balance of all senior tranches. The principal reduction in the senior
tranche continues until the appropriate coverage test is passed. As a result of
the principal reduction in the senior tranche, more cash is available for future
payments to the Bancorp’s tranche. Consistent with the Investments – Debt and
Equity Securities Topic, management considered the failure of the issuer of the
security to make scheduled interest payments in determining whether a credit
loss existed. Management will not capitalize the “payment in kind” interest
payments to the book value of the securities and will keep these securities in
non-accrual status until the quarterly interest payments resume.




Assets
and Liabilities Measured on a Recurring Basis




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





(Dollars in thousands)
                  
                  
                  
                  
                  Fair Value Measurements at September 30, 2010 UsingSeptember30,
                    2010
                  
                  
                  Quoted Prices in
                    Active Markets for
                    Identical Assets
                    (Level 1)
                  
                  
                  Significant Other
                    Observable Inputs
                    (Level 2)
                  
                  
                  Significant
                    UnobservableInputs
                    (Level 3)Assets:Available-for-sale
      debt securitiesU.S.
      government sponsored entities
                  
                  $
                  6,207
                  
                  
                  $
                  -
                  
                  
                  $
                  6,207
                  
                  
                  $
                  -CMO
      and residential mortgage-backed securities
                  
                  
                  56,873
                  
                  
                  
                  -
                  
                  
                  
                  56,873
                  
                  
                  
                  -Municipal
      securities
                  
                  
                  37,390
                  
                  
                  
                  -
                  
                  
                  
                  37,390
                  
                  
                  
                  -CMO
      government sponsored entities
                  
                  
                  40,015
                  
                  
                  
                  -
                  
                  
                  
                  40,015
                  
                  
                  
                  -Collateralized
      debt obligations
                  
                  
                  1,251
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,251Total
      available for sale debt securities
                  
                  $
                  141,736
                  
                  
                  $
                  -
                  
                  
                  $
                  140,485
                  
                  
                  $
                  1,251





(Dollars in thousands)
                  
                  
                  
                  
                  Fair Value Measurements at December 31, 2009 UsingDecember31,
                    2009
                  
                  
                  Quoted Prices in
                    Active Markets for
                    Identical Assets
                    (Level 1)
                  
                  
                  Significant Other
                    Observable Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable Inputs
                    (Level 3)Assets:Available-for-sale
      debt securitiesU.S.
      government sponsored entities
                  
                  $
                  2,045
                  
                  
                  $
                  -
                  
                  
                  $
                  2,045
                  
                  
                  $
                  -CMO
      and residential mortgage-backed securities
                  
                  
                  63,315
                  
                  
                  
                  -
                  
                  
                  
                  63,315
                  
                  
                  
                  -Municipal
      securities
                  
                  
                  35,573
                  
                  
                  
                  -
                  
                  
                  
                  35,573
                  
                  
                  
                  -CMO
      government sponsored entities
                  
                  
                  22,493
                  
                  
                  
                  -
                  
                  
                  
                  22,493
                  
                  
                  
                  -Collateralized
      debt obligations
                  
                  
                  1,350
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,350Total
      available for sale debt securities
                  
                  $
                  124,776
                  
                  
                  $
                  -
                  
                  
                  $
                  123,426
                  
                  
                  $
                  1,350




12





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





(Dollars in thousands)
                  
                  Fair Value Measurements at
                    September 30, 2010 Using
                    Significant Unobservable
                    Inputs
                    (Level 3)Available for
                    sale debt securitiesCollateralized DebtObligationsBeginning
      balance, December 31, 2009
                  
                  $
                  1,350Transfers
      in and/or (out) of Level 3
                  
                  
                  -Total
      gains or (losses)Included
      in earnings
                  
                  
                  (128
                  )Included
      in other comprehensive income
                  
                  
                  29Purchases,
      issuances, sales, and settlementsPurchases
                  
                  
                  -Issuances
                  
                  
                  -Sales
                  
                  
                  -Settlements
                  
                  
                  -Ending
      balance, September 30, 2010
                  
                  $
                  1,251





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





(Dollars in thousands)
                  
                  
                  
                  
                  Fair Value Measurements at September 30, 2010 UsingSeptember30,
                    2010
                  
                  
                  Quoted Prices in
                    Active Markets for
                    Identical Assets
                    (Level 1)
                  
                  
                  Significant Other
                    Observable Inputs
                    (Level 2)
                  
                  
                  Significant
                    UnobservableInputs
                    (Level 3)Assets:Impaired
      loans
                  
                  $
                  9,612
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  9,612Foreclosed
      real estate
                  
                  
                  5,068
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,068





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




The fair
value of impaired loans with specific allocations of the allowance for loan
losses and foreclosed real estate, which has been written down to fair value, is
generally based on recent real estate appraisals. These appraisals may utilize a
single valuation approach or a combination of approaches including comparable
sales and the income approach. Impaired loans, which are measured for impairment
using the fair value of the collateral for collateral dependent loans, had a
fair value of $9.6 million, with a valuation allowance of $1.0 million,
resulting in an additional provision of $383 thousand for the quarter-ended
September 30, 2010. Fair value is determined, where possible, using market
prices derived from an appraisal or evaluation, which are considered to be Level
2. However, certain assumptions and unobservable inputs are often used by the
appraiser, therefore, qualifying the assets as Level 3 in the fair value
hierarchy.


13





The
following table shows fair values and the related carrying values of financial
instruments as of the dates indicated. Items that are not financial instruments
are not included.





(Dollars in thousands)September 30, 2010Carrying
                        
                        
                        EstimatedValue
                        
                        
                        Fair ValueFinancial assets:Cash
      and cash equivalents
                        
                        $
                        16,051
                        
                        
                        $
                        16,051Securities
      available-for-sale
                        
                        
                        141,736
                        
                        
                        
                        141,736Securities
      held-to-maturity
                        
                        
                        18,476
                        
                        
                        
                        19,678Loans
      held-for-sale
                        
                        
                        5,662
                        
                        
                        
                        5,922Loans
      receivable, net
                        
                        
                        420,617
                        
                        
                        
                        477,045Federal
      Home Loan Bank stock
                        
                        
                        3,650
                        
                        
                        
                        3,650Accrued
      interest receivable
                        
                        
                        2,616
                        
                        
                        
                        2,616Financial liabilities:Demand
      and savings deposits
                        
                        
                        334,628
                        
                        
                        
                        334,628Certificates
      of deposit
                        
                        
                        203,273
                        
                        
                        
                        204,066Repurchase
      agreements
                        
                        
                        20,058
                        
                        
                        
                        19,650Borrowed
      funds
                        
                        
                        29,671
                        
                        
                        
                        30,411Accrued
      interest payable
                        
                        
                        109
                        
                        
                        
                        109





(Dollars in thousands)December 31, 2009Carrying
                        
                        
                        EstimatedValue
                        
                        
                        Fair ValueFinancial assets:Cash
      and cash equivalents
                        
                        $
                        13,222
                        
                        
                        $
                        13,222Securities
      available-for-sale
                        
                        
                        124,776
                        
                        
                        
                        124,776Securities
      held-to-maturity
                        
                        
                        19,557
                        
                        
                        
                        20,303Loans
      held-for-sale
                        
                        
                        1,025
                        
                        
                        
                        1,025Loans
      receivable, net
                        
                        
                        452,131
                        
                        
                        
                        498,005Federal
      Home Loan Bank stock
                        
                        
                        3,650
                        
                        
                        
                        3,650Accrued
      interest receivable
                        
                        
                        2,878
                        
                        
                        
                        2,878Financial liabilities:Demand
      and savings deposits
                        
                        
                        313,669
                        
                        
                        
                        313,669Certificates
      of deposit
                        
                        
                        226,858
                        
                        
                        
                        227,672Repurchase
      agreements
                        
                        
                        15,893
                        
                        
                        
                        15,525Borrowed
      funds
                        
                        
                        47,129
                        
                        
                        
                        47,396Accrued
      interest payable
                        
                        
                        150
                        
                        
                        
                        150





For
purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 2010 and December 31, 2009. The
estimated fair value for cash and cash equivalents, Federal Home Loan Bank
stock, and accrued interest receivable and payable are considered to approximate
carrying book value. The estimated fair value for loans is based on estimates of
the rate the Bancorp would charge for similar loans at September 30, 2010 and
December 31, 2009, applied for the time period until estimated repayment. For
commercial loans, the fair value includes a liquidity adjustment to reflect
current market conditions. The estimated fair value for demand and savings
deposits is based on their carrying value. The estimated fair value for
certificates of deposits is based on estimates of the rate the Bancorp would pay
on such deposits at September 30, 2010 and December 31, 2009, applied for the
time period until maturity. The estimated fair value for repurchase agreements
and borrowed funds is based on current rates for similar financings. The
estimated fair value of other financial instruments, and off-balance sheet loan
commitments approximate cost and are not considered significant to this
presentation.


14




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





Summary





NorthWest
Indiana Bancorp (the “Bancorp”) is a bank holding company registered with the
Board of Governors of the Federal Reserve System. Peoples Bank SB (the “Bank”),
an Indiana savings bank, is a wholly-owned subsidiary of the Bancorp. The
consolidated financial statements include the Bancorp, the Bank, and the Bank’s
wholly owned subsidiaries, Peoples Service Corporation and NWIN, LLC. The
Bancorp has no other business activity other than being the holding company for
the Bank.





At
September 30, 2010, the Bancorp had total assets of $652.1 million, total loans
of $428.8 million and total deposits of $537.9 million. Stockholders' equity
totaled $57.5 million or 8.81% of total assets, with book value per share at
$20.49.  Net income for the quarter ended September 30, 2010, was $1.0
million, or $0.37 earnings per common share for both basic and diluted
calculations.  For the quarter ended September 30, 2010, the return on
average assets (ROA) was 0.62%, while the return on average stockholders’ equity
(ROE) was 7.09%.  For the nine months ended September 30, 2010, the
Bancorp recorded net income of $4.0 million, or $1.43 earnings per basic share
or $1.43 earnings per diluted share.  For the nine months ended
September 30, 2010, the return on average assets (ROA) was 0.80%, while the
return on average stockholders’ equity (ROE) was 9.50%.





Recent
Developments





The Current Economic
Environment.  We continue to operate in a challenging and
uncertain economic environment, including generally uncertain national
conditions and local conditions in our markets.  The capital and
credit markets have been experiencing volatility and disruption for more than 33
months.  The risks associated with our business become more acute in
periods of a slowing economy or slow growth.  Financial institutions
continue to be affected by sharp declines in the real estate market and
constrained financial markets.  While we are continuing to take steps
to decrease and limit our exposure to problem loans, we nonetheless retain
direct exposure to the residential and commercial real estate markets, and we
are affected by these events.





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





Impact of Recent and Future
Legislation.  Over the last 24 months, Congress and the U.S.
Department of the Treasury (“Treasury”) have  adopted legislation and
taken actions to address the disruptions in the financial system and declines in
the housing market, including the passage and implementation of the Emergency
Economic Stabilization Act of 2008 (“EESA”), the Troubled Asset Relief Program
(“TARP”), and the American Recovery and Reinvestment Act of 2009
(“ARRA”).  In addition, on July 21, 2010, President Obama signed into
law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”), which significantly changes the regulation of financial
institutions and the financial services industry.  The Dodd-Frank Act
includes provisions affecting large and small financial institutions alike,
including several provisions that will profoundly affect how community banks,
thrifts, and small bank and thrift holding companies, such as the Bancorp, will
be regulated in the future.  Among other things, these provisions
abolish the Office of Thrift Supervision and transfer its functions to the other
federal banking agencies, relax rules regarding interstate branching, allow
financial institutions to pay interest on business checking accounts, change the
scope of federal deposit insurance coverage, and impose new capital requirements
on bank and thrift holding companies.  The Dodd-Frank Act also
establishes the Bureau of Consumer Financial Protection as an independent entity
within the FRB, which will be given the authority to promulgate consumer
protection regulations applicable to all entities offering consumer financial
services or products, including banks.  Additionally, the Dodd-Frank
Act includes a series of provisions covering mortgage loan origination standards
affecting, among other things, originator compensation, minimum repayment
standards, and pre-payments. 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. Public companies are required to hold
“say-on-pay” votes at any annual or other shareholder meeting occurring on or
after January 21, 2011. The Dodd-Frank Act contains numerous other provisions
affecting financial institutions of all types, many of which may have an impact
on the operating environment of the Bancorp in substantial and unpredictable
ways.  Consequently, the Dodd-Frank Act is likely to affect our cost
of doing business, it may limit or expand our permissible activities, and it may
affect the competitive balance within our industry and market
areas.  The nature and extent of future legislative and regulatory
changes affecting financial institutions, including as a result of the
Dodd-Frank Act, is very unpredictable at this time.  The Bancorp’s
management continues to actively review the provisions of the Dodd-Frank Act,
many of which are phased-in over the next several months and years, 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, is uncertain at this time.


15





Moreover, it is not clear at this time
what long-term impact the EESA,  TARP, the ARRA, other liquidity and
funding initiatives of the Treasury and other bank regulatory agencies that have
been previously announced, and any additional programs that may be initiated in
the future, will have on the financial markets and the financial services
industry.  The actual impact that EESA and such related measures
undertaken to alleviate the credit crisis will have generally on the financial
markets, including the levels of volatility and limited credit availability
currently being experienced, is unknown.  The failure of such measures
to help provide long-term stability to the financial markets and a continuation
or worsening of current financial market conditions could materially and
adversely affect our business, financial condition, results of operations,
access to credit or the trading price of our common stock.  Finally,
there can be no assurance regarding the specific impact that such measures may
have on the Bancorp, or whether (or to what extent) the Bancorp will be able to
benefit from such programs.  In addition to the legislation mentioned
above, federal and state governments could pass additional legislation
responsive to current credit conditions.  For example, the Bancorp
could experience higher credit losses because of federal or state legislation or
regulatory action that reduces the amount the Bancorp’s borrowers are otherwise
contractually required to pay under existing loan contracts.  Also,
the Bancorp could experience higher credit losses because of federal or state
legislation or regulatory action that limits its ability to foreclose on
property or other collateral or makes foreclosure less economically
feasible.





Difficult Market Conditions Have
Adversely Affected Our Industry.We are particularly exposed to downturns
in the U.S. housing market.  Dramatic declines in the housing market
over the past three 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 reduced or ceased providing
funding to borrowers, including to other financial institutions.  This
market turmoil and tightening of credit have led to an increased level of
commercial and consumer delinquencies, lack of consumer confidence, increased
market volatility and widespread reduction of business activity
generally.  We do not expect that the difficult conditions in the
financial markets are likely to improve in the near future.  A
worsening of these conditions would likely exacerbate the adverse effects of
these difficult market conditions on the Bancorp and others in the financial
institutions industry.  In particular, the Bancorp may face the
following risks in connection with these events:





·
            We
      expect to face increased regulation of our industry, particularly in
      connection with the regulatory overhaul provisions of the Dodd-Frank
      Act.  Compliance with such regulation may increase our costs and
      limit our ability to pursue business
  opportunities.





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





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





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





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





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


16





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





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





Financial
Condition





During
the nine months ended September 30, 2010, total assets decreased by $9.7 million
(1.5%), with interest-earning assets decreasing by $5.1 million (0.8%). At
September 30, 2010, interest-earning assets totaled $606.6 million and
represented 93.0% of total assets.





Loans
receivable totaled $428.8 million at September 30, 2010, compared to $458.2
million at December 31, 2009, a decrease of $29.4 million (6.4%).  The
decrease in loan balances was a result of the sale of fixed rate mortgage loans
and a decrease in loan demand.  At September 30, 2010, loans
receivable represented 70.7% of interest earning assets, 65.8% of total assets
and 79.7% of total deposits. The loan portfolio, which is the Bancorp’s largest
asset, is a significant source of both interest and fee income. The Bancorp’s
lending strategy stresses quality loan growth, product diversification, and
competitive and profitable pricing. The loan portfolio includes $48.2 million
(11.1%) in construction and development loans, $133.3 million (30.7%) in
residential mortgage loans, $8.0 million (1.8%) in multifamily loans, $135.7
million (31.2%) in commercial real estate loans, $870 thousand (0.2%) in
consumer loans, $65.4 million (15.0%) in commercial business loans and $11.2
million (2.6%) in government and other loans. Adjustable rate loans comprised
40.6% of total loans at September 30, 2010.





The
Bancorp is primarily a portfolio lender. Mortgage banking activities are
generally limited to the sale of fixed rate mortgage loans with contractual
maturities greater than 15 years. However, as a result of the low interest rate
environment, management is selling all newly originated fixed rate mortgage
loans in an effort to minimize future interest rate risk.  These loans
are identified as held for sale when originated and sold, on a case-by-case
basis, in the secondary market.  During the nine months ended
September 30, 2010, the Bancorp sold $22.3 million in fixed rate mortgage loans,
compared to $45.0 million during the nine months ended September 30,
2009.  During 2009, a high level of loan sales occurred as a result of
refinancing activity associated with the Federal Reserve’s successful effort to
lower long-term interest rates.  Net gains realized from mortgage
loans originated for sale totaled $607 thousand for the nine months ended
September 30, 2010, compared to $1.0 million for the nine months ended September
30, 2009.





Also,
during the third quarter of 2010, the Bancorp entered into an agreement to
conduct a $5.2 million one-time sale of portfolio fixed rate mortgage loans,
which were sold to reduce interest rate risk.  This loan sale is
expected to settle in October 2010. Net gains realized from this one-time
mortgage loan sale are expected to total $272 thousand.   At
September 30, 2010, the Bancorp had $5.7 million in loans that were classified
as held for sale, of which $5.2 million was associated with the previously
mentioned one-time sale.





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


17





Historically,
the Bancorp has successfully originated commercial real estate loans within its
primary lending area.  However, beginning in the fourth quarter of
2005, in a response to a decrease in local loan demand and in an effort to
reduce the potential credit risk associated with geographic concentrations, a
strategy was implemented to purchase commercial real estate participation loans
outside of the Bancorp’s primary 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 strategy during the third quarter of 2007.  As of September 30,
2010, the Bancorp’s commercial real estate participation loan portfolio carried
an aggregate balance of $29.6 million, and an additional $687 thousand in
funding commitments.  Of the $29.6 million in commercial real estate
participation loans, $9.8 million has been purchased within the Bancorp’s
primary lending area and $19.8 million outside of the primary lending
area.  At September 30, 2010, $19.0 million, or 64.2%, of the
Bancorp’s commercial real estate participation loans have been internally
classified as substandard.  The $19.0 million in substandard
commercial real estate participation loans includes $14.1 million in loans
placed on non-accrual status.  Of the $14.1 million in commercial real
estate participation loans placed on non-accrual status, $12.2 million 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 include loans from the Bancorp’s commercial
real estate participation loan portfolio.





For all
of its commercial real estate participation loans, the Bancorp’s management
requires that the lead lenders obtain external appraisals to determine the fair
value of the underlying collateral for 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.  No adjustments were made to the appraisals that affected the
September 30, 2010 reporting period.  The Bancorp’s management relies
on up-to-date external appraisals to determine the current value of its
commercial real estate participation loans.  These values are
appropriately adjusted to reflect changes in market value and, when necessary,
are the basis for establishing the appropriate allowance for loan
losses.  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
$23.6 million at September 30, 2010, compared to $18.6 million at December 31,
2009, an increase of $5.0 million or 27.0%.  The current level of
non-performing loans is concentrated with five commercial real estate
participation loans in the aggregate of $13.9 million.  As previously
reported, one commercial real estate participation loan is a condominium
construction project in Orlando, Florida, with a current balance of $1.5
million, which is classified as substandard.  The carrying value of
this loan is based on the current fair value of the project’s collateral, less
estimated selling and carrying costs.  The second commercial real
estate participation loan is an end loan for a hotel located in Dundee,
Michigan, with a current balance of $1.2 million, which is classified as
substandard.  The carrying value of this loan is based on the current
fair value of the hotel, less estimated selling and carrying
costs.  The third commercial real estate participation loan is an end
loan for a hotel located in Fort Worth, Texas, with a balance of $5.1 million,
which is classified as substandard.  The carrying value of this loan
is based on the current fair value of the hotel, less estimated selling and
carrying costs.  The fourth commercial real estate participation loan
is a condominium construction project located in Chicago, Illinois, with a
balance of $1.8 million, which is classified as substandard.  The
carrying value of this loan is based on the current fair value of the project,
less estimated selling and carrying costs.  During October 2010, the
terms of this loan were renegotiated resulting in a material reduction in
principal, payment of all past due principal and interest, and establishment of
cash reserves for interest and operating expenses for a twenty-four month
period.  In addition, the new terms require quarterly principal
reductions beginning in the fourth quarter of 2010.  The fifth
commercial real estate participation loan was placed on non-accrual during the
third quarter of 2010.  This loan is a hotel construction project
located in Clearwater, Florida, with a balance of $4.4 million, which is
classified as substandard.  The carrying value of this loan is based
on the current fair value of the project, less estimated selling and carrying
costs.  For these commercial real estate participation loans, to the
extent that actual cash flows, collateral values and strength of personal
guaranties differ from current estimates, additional provisions to the allowance
for loan losses may be required.




18


The ratio
of non-performing loans to total loans was 5.50% at September 30, 2010, compared
to 4.05% at December 31, 2009.  The increase is primarily attributable
to the previously mentioned five commercial real estate participation
loans.  The ratio of non-performing loans to total assets was 3.62% at
September 30, 2010, compared to 2.81% at December 31, 2009.  The
September 30, 2010, non-performing loan balances include $23.3 million in loans
accounted for on a non-accrual basis and $296 thousand in accruing loans, which
were contractually past due 90 days or more.  Loans, internally
classified as substandard, totaled $41.0 million at September 30, 2010, compared
to $22.7 million at December 31, 2009.  The current level of
substandard loans includes the previously mentioned five non-accruing commercial
real estate participation loans and one accruing commercial real estate hotel
loan in the amount of $5.0 million.  During October 2010, a $4.9
million accruing commercial real estate participation hotel loan that was
classified as substandard received significant collateral
enhancements.  Additional liquid collateral was received in the amount
of $1.4 million along with $2.0 million in payment reserves.  As a
result of sustained performance for principal and interest payments and the
enhanced collateral position, management anticipates that the substandard
classification for this loan will be removed during the fourth quarter of
2010.  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 September 30, 2010, or December 31,
2009.  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 $18.1 million at September 30, 2010,
compared to $26.7 million at December 31, 2009.  During the current
quarter, one commercial real estate hotel loan in the amount of $5.0 million was
moved from watch to substandard status as a result of loan modifications
requested by the borrower.





A loan is
considered impaired when, based on current information and events, it is
probable that a borrower will be unable to pay all amounts due according to the
contractual terms of the loan agreement.  At September 30, 2010,
impaired loans totaled $27.5 million, compared to $17.0 million at December 31,
2009.  The September 30, 2010, impaired loan balances consist of
thirty-five commercial real estate and commercial business loans that are
secured by business assets and real estate, and are personally guaranteed by the
owners of the businesses.  The September 30, 2010, ALL contained $1.0
million in specific allowances for collateral deficiencies, compared to $1.2
million in specific allowances at December 31, 2009.  The reduction in
specific allowances is a result of loan payments and charge-offs recorded during
the nine months ended September 30, 2010.  During the third quarter of
2010, eleven additional commercial real estate loans and commercial business
loans totaling $11.1 million were newly classified as
impaired.  Management’s current estimates indicate collateral
deficiencies of $522 thousand for these loans.  In addition, during
the current quarter, the previously mentioned $1.8 million commercial real
estate participation condominium construction loan located in Chicago, Illinois
was removed from impaired status.  As of September 30, 2010, all loans
classified as impaired were also included in the previously discussed
substandard loan balances.  There were no other loans considered to be
impaired loans as of September 30, 2010.  Typically, management does
not individually classify smaller-balance homogeneous loans, such as mortgage or
consumer loans, as impaired.





At September 30, 2010, the Bancorp
classified five loans totaling $12.3 million as troubled debt restructurings,
which involves modifying the terms of a loan to forego a portion of interest or
principal or reducing the interest rate on the loan to a rate materially less
than market rates.  The troubled debt restructurings are comprised of
one construction development participation hotel loan in the amount of $1.2
million, for which a significant deferral of principal repayment was
granted.  The second troubled debt restructuring is for a commercial
real estate participation hotel loan in the amount of $5.1 million, for which a
significant deferral of principal repayment and extension in maturity was
granted.  The third is for a commercial real estate hotel loan in the
amount of $5.0 million for which a significant deferral of principal repayment
was granted.  This loan is on accrual status and classified as
impaired.  In addition, two commercial real estate troubled debt
restructurings in the total amount of $914 thousand are currently in bankruptcy
proceedings, for which a significant deferral of principal and interest
repayment was granted by the Bank as required by the bankruptcy
plan.  All of the loans classified as troubled debt restructurings are
currently on non-accrual status and classified as impaired except for the one
$5.0 commercial real estate hotel loan described above, l which is on accrual
status.  The valuation basis for the Bancorp’s troubled debt
restructurings is based on the fair value of the collateral securing these
loans.





As of September 30, 2010, the Bancorp’s
management was notified that the quarterly interest payments for three of its
four investments in trust preferred securities are in “payment in kind”
status.  Payment in kind status results in a temporary delay in the
payment of interest.  As a result of a delay in the collection of the
interest payments, management placed these securities on non-accrual
status.  At September 30, 2010, the cost basis of the three trust
preferred securities on non-accrual status totaled $3.9
million.  Current estimates indicate that the interest payment delays
may exceed ten years.  One trust preferred security with a cost basis
of $1.3 million remains on accrual status.





At September 30, 2010, management is of
the opinion that there are no loans or securities, except those discussed above,
where known information about possible credit problems of borrowers causes
management to have serious doubts as to the ability of such borrowers to comply
with the present loan repayment terms and which may result in disclosure of such
loans as non-accrual, past due or restructured loans.  Also, at
September 30, 2010, no other interest bearing assets were required to be
disclosed as non-accrual, past due or restructured.  Management does
not presently anticipate that any of the non-performing loans or classified
loans would materially impact future operations, liquidity or capital
resources.


19





For the
nine months ended September 30, 2010, $4.1 million in provisions to the ALL were
required, compared to $6.5 million for the nine months ended September 30,
2009.  The current year ALL provisions were related to the elevated
credit risk in the commercial real estate participation, commercial real estate
and commercial business loan portfolios.  Charge-offs, net of
recoveries, totaled $2.0 million for the nine months ended September 30, 2010,
compared to $7.1 million for the nine months ended September 30,
2009.  The 2010 net loan charge-offs of $2.0 million were comprised of
$868 thousand in commercial real estate participation loans, $567 thousand in
commercial real estate loans, $435 thousand in residential real estate loans,
$147 thousand in commercial business loans and $22 thousand in consumer
loans.  The ALL provisions take into consideration management’s
current judgments about the credit quality of the loan portfolio, loan portfolio
balances, changes in the portfolio mix and local economic
conditions.  In determining the provision for loan losses for the
current period, management has given consideration to increased risks associated
with the local economy, changes in loan balances and mix, and asset
quality.





The
ALL to total loans was 1.91% at September 30, 2010, compared to 1.33% at
December 31, 2009.  The increase in ALL to total loans was a result of
the increase in nonperforming loans and additional qualitative risks associated
with the current stressed economic environment.  The ALL to
non-performing loans (coverage ratio) was 34.8% at September 30, 2010, compared
to 32.9% at December 31, 2009.  The September 30, 2010, balance in the
ALL account of $8.2 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
September 30, 2010, the Bancorp had twenty properties in foreclosed real estate
totaling $5.1 million, compared to twenty-one properties totaling $3.7 million
at December 31, 2009.  Foreclosed real estate currently includes a
$1.6 million commercial real estate participation loan located in Ann Arbor,
Michigan.  During the first quarter of 2008, the Bancorp’s management
filed a lawsuit against the lead lender to actively pursue potential material
violations of the participation agreement and the underlying loan
documentation.   Management and its legal counsel continue to
actively pursue the claims asserted within the lawsuit.  During
October 2010, a letter of intent for the sale of the Ann Arbor, Michigan
property was received with a sales price that exceeds the current carrying
value.  Management anticipates that the sale of this property will
occur during the fourth quarter of 2010.  Also included in foreclosed
real estate is a $1.8 million commercial real estate condominium participation
loan located in Chicago, Illinois.  The remainder of the Bancorp’s
foreclosed real estate is located within its primary market area.





The
primary objective of the Bancorp’s investment portfolio is to provide for the
liquidity needs of the Bancorp and to contribute to profitability by providing a
stable flow of dependable earnings. Funds are generally invested in federal
funds, interest bearing balances in financial institutions, U.S. government
securities, federal agency obligations, obligations of states and local
municipalities and corporate securities. The securities portfolio totaled $160.2
million at September 30, 2010, compared to $144.3 million at December 31, 2009,
an increase of $15.9 million (11.0%). The increase in securities is a result of
investing excess liquidity in the securities portfolio. At September 30, 2010,
the securities portfolio represented 26.4% of interest-earning assets and 24.6%
of total assets. The securities portfolio was comprised of 3.9% in U.S.
government agency debt securities, 61.0% in U.S. government agency
mortgage-backed securities and collateralized mortgage obligations, 34.3% in
municipal securities, and 0.8% in pooled trust preferred securities. At
September 30, 2010, securities available-for-sale (AFS) totaled $141.7 million
or 88.5% of total securities. AFS securities are those the Bancorp may decide to
sell if needed for liquidity, asset-liability management or other reasons. In
addition, at September 30, 2010, as a result of the increased liquidity
from  mortgage loans sales, the Bancorp carried $5.3 million in
interest bearing balances in financial institutions and $3.0 million in fed
funds sold. During the current quarter interest bearing balances in financial
institutions decreased by $25.3 million, while fed funds sold decreased by $8.3
million. The balance reduction was a result of management’s focus on reducing
excess liquidity by reinvesting in the securities portfolio and reducing
reliance on non-core deposits. At September 30, 2010, the Bancorp had a Federal
Home Loan Bank (FHLB) stock balance of $3.7 million.


20





Deposits
are a fundamental and cost-effective source of funds for lending and other
investment purposes. The Bancorp offers a variety of products designed to
attract and retain customers, with the primary focus on building and expanding
relationships. At September 30, 2010, deposits totaled $537.9 million. During
the nine months ended September 30, 2010, deposits decreased by $2.6 million
(0.5%). Checking account balances increased by $12.4 million (8.6%). Savings
account balances increased by $5.9 million (10.3%) during the current period.
Money market deposit accounts (MMDA’s) increased by $2.7 million (2.4%).
Certificates of deposit decreased by $23.6 million (10.4%). The decrease is a
result of strong core account growth and the subsequent realignment of the
Bancorp’s deposit mix, resulting in less non-core balances. At September 30,
2010, the deposit base was comprised of 29.2% checking accounts, 21.3% MMDA’s,
11.7% savings accounts and 37.8% certificates of deposit.





The
Bancorp’s borrowed funds are primarily used to fund asset growth not supported
by deposit generation. At September 30, 2010, borrowed funds and repurchase
agreements totaled $49.7 million compared to $63.0 million at December 31, 2009,
a decrease of $13.3 million (21.1%). During 2010, management repaid borrowed
funds as a result of additional liquidity provided by strong core deposit
growth. As a result, the Bancorp’s borrowed funds at September 30, 2010, are
comprised of $29.0 million in Federal Home Loan Bank (FHLB) fixed advances,
$20.1 million in retail repurchase agreements, and $671 thousand in other short
term borrowings.





Liquidity
and Capital Resources





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





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





During
the nine months ended September 30, 2010, cash and cash equivalents increased by
$2.8 million compared to a $17.7 million increase for the nine months ended
September 30, 2009. The primary sources of cash were proceeds from loan sales,
pay downs and sales of securities, and loan repayments. The primary uses of cash
were the purchase of securities, loan originations, repayment of FHLB advances,
and the payment of common stock dividends. Cash provided by operating activities
totaled $12.9 million for the nine months ended September 30, 2010, compared to
$3.8 million required for the nine month period ended September 30, 2009. The
increase in cash from operating activities was a result of an increase in net
income and other liabilities due to the clearing of customer ACH transactions,
and other assets. Cash inflows from investing activities totaled $7.5 million
for the current period, compared to cash inflows of $1.2 million for the nine
months ended September 30, 2009. The increase for the current nine months was
primarily related to proceeds from maturities and pay downs of securities and
loans and the sale of foreclosed real estate.  Net cash outflows from
financing activities totaled $17.6 million during the current period compared to
$12.7 million provided for the nine months ended September 30, 2009. The change
in net cash inflows from financing activities was a result of decreased deposits
and reduced borrowings for the period.  The Bancorp paid dividends on
common stock of $1.8 million for the nine months ended September 30, 2010,
compared to $2.8 million for the nine months ended September 30,
2009.





At
September 30, 2010, outstanding commitments to fund loans totaled $82.7 million.
Approximately 38.7% of the commitments were at variable rates. Standby letters
of credit, which are conditional commitments issued by the Bancorp to guarantee
the performance of a customer to a third party, totaled $2.4 million at
September 30, 2010. Management believes that the Bancorp has sufficient cash
flow and borrowing capacity to fund all outstanding commitments and letters of
credit, while maintaining proper levels of liquidity.





During
April 2010, the Bancorp’s management entered into an agreement to begin
construction of a twelfth banking center in St. John, Indiana. The cost of the
new facility including land is expected to be approximately $2.3 million. At
September 30, 2010, disbursements for the new banking center totaled $1.4
million. The facility is expected to open in October 2010 and will not have a
material impact on noninterest expense during the current year.  The
new facility will provide opportunities to expand market share for the Bancorp’s
products and services within the town of St. John and nearby
communities.





Management
strongly believes that maintaining a high level of capital enhances safety and
soundness. During the nine months ended September 30, 2010, stockholders' equity
increased by $4.4 million (8.2%). During the nine months, stockholders’ equity
was increased by net income of $4.0 million and the net change in the valuation
of the available-for-sale securities of $1.6 million. Decreasing stockholders’
equity was the declaration of $1.6 million in cash dividends.


21


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





The
following table shows that, at September 30, 2010, and December 31, 2009, the
Bancorp’s capital exceeded all regulatory capital requirements. During the nine
months, the Bancorp’s regulatory capital ratios continue to be negatively
impacted by regulatory requirements regarding collateralized debt obligations.
The regulatory requirements state that for collateralized debt obligations that
have been downgraded below investment grade by the rating agencies, increased
risk based asset weightings are required for the downgraded investments. The
Bancorp currently holds four pooled trust preferred securities with a cost basis
of $5.2 million. These investments currently have ratings that are below
investment grade. As a result, approximately $32.8 million of risk based assets
are required for the trust preferred securities in the Bancorp’s and Bank’s
total risk based capital calculation. The Bancorp’s and the Bank’s regulatory
capital ratios were substantially the same at both September 30, 2010 and
December 31, 2009. The dollar amounts are in millions.





(Dollars
      in millions)
                  
                  
                  
                  
                  
                  
                  
                  Required
      for
                  
                  
                  To
      be wellActual
                  
                  
                  adequate
      capital
                  
                  
                  capitalizedAt September 30, 2010
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  RatioTotal
      capital to risk-weighted assets
                  
                  $
                  60.9
                  
                  
                  
                  12.5
                  %
                  
                  $
                  39.1
                  
                  
                  
                  8.0
                  %
                  
                  $
                  48.9
                  
                  
                  
                  10.0
                  %Tier
      1 capital to risk-weighted assets
                  
                  $
                  54.8
                  
                  
                  
                  11.2
                  %
                  
                  $
                  19.7
                  
                  
                  
                  4.0
                  %
                  
                  $
                  29.4
                  
                  
                  
                  6.0
                  %Tier
      1 capital to adjusted average assets
                  
                  $
                  54.8
                  
                  
                  
                  8.2
                  %
                  
                  $
                  20.0
                  
                  
                  
                  3.0
                  %
                  
                  $
                  33.4
                  
                  
                  
                  5.0
                  %





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





The Bancorp’s ability to pay dividends
to its shareholders is entirely dependent upon the Bank’s ability to pay
dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its
undivided profits (generally, earnings less losses, bad debts, taxes and other
operating expenses) as is considered expedient by the Bank’s Board of Directors.
However, the Bank must obtain the approval of the Indiana Department of
Financial (DFI) Institutions for the payment of a dividend if the total of all
dividends declared by the Bank during the current year, including the proposed
dividend, would exceed the sum of retained net income for the year to date plus
its retained net income for the previous two years. For this purpose, “retained
net income,” means net income as calculated for call report purposes, less all
dividends declared for the applicable period. The aggregate amount of dividends,
which may be declared by the Bank in 2010, without prior DFI approval,
approximates $1.8 million plus current 2010 net profits. Moreover, the FDIC and
the Federal Reserve Board may prohibit the payment of dividends if it determines
that the payment of dividends would constitute an unsafe or unsound practice in
light of the financial condition of the Bank.  During the second
quarter of 2010, the Federal Reserve Bank of Chicago (the Reserve Bank) notified
the Bancorp’s management that future shareholder dividend payments would require
Reserve Bank permission in accordance with Supervisory Letter 09-4. The Reserve
Bank’s requirement to approve future dividend payments was a result of the
Bancorp’s $1.4 million net loss recorded during the third quarter of
2009.  During the third quarter of 2010, the FDIC notified the
Bancorp’s management that dividend payments from the Bank to the Bancorp would
require prior approval from the FDIC.  The FDIC’s requirement to
approve future dividend payments from the Bank to the Bancorp was a result of
the Bank’s elevated level of substandard assets. On September 23, 2010, the
Bancorp announced that the Board of Directors of the Bancorp declared a third
quarter dividend of $0.15 per share, as compared to $0.21 per share for the
prior quarter. The Bancorp’s third quarter dividend was paid to shareholders on
October 8, 2010. During September 2010, both the Reserve Bank of Chicago and the
FDIC approved the third quarter dividend payments. The change in dividend policy
is reflective of the Bancorp Board’s commitment that the shareholders long term
interests are best served through the preservation of capital in the current
stressed economic environment.


22





In addition to the matters described
above, on October 29, 2010, the Board of Directors of the Bank adopted a
resolution which, among other things, requires the Bank to obtain the prior
written consent of the FDIC and the DFI prior to the declaration or payment of
dividends. See “Part II – Other Information, Item 1. Legal Proceedings,” below.
The resolution was adopted at the direction of the FDIC and DFI.





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





For the
quarter ended September 30, 2010, the Bancorp reported net income of $1.0
million, compared to a net loss of $1.4 million for the quarter ended September
30, 2009, an increase of $2.4 million or 174.6%. For the current quarter the ROA
was 0.62%, compared to (0.84%) for the quarter ended September 30, 2009. The ROE
was 7.09% for the quarter ended September 30, 2010, compared to (10.02%) for the
quarter ended September 30, 2009.





Net
interest income for the three months ended September 30, 2010 was $6.3 million,
an increase of $515 thousand (9.0%), compared to $5.7 million for the quarter
ended September 30, 2009. During the current quarter, the Bancorp’s cost of
funds continue to be positively impacted by the Federal Reserve’s continued
action in maintaining a low short-term interest rate environment. The
weighted-average yield on interest-earning assets was 4.78% for the three months
ended September 30, 2010, compared to 5.03% for the three months ended September
30, 2009. The weighted-average cost of funds for the quarter ended September 30,
2010, was 0.75% compared to 1.37% for the quarter ended September 30, 2009. The
impact of the 4.78% return on interest earning assets and the 0.75% cost of
funds resulted in an interest rate spread of 4.03% for the current quarter
compared to 3.66% for the quarter ended September 30, 2009. During the current
quarter, total interest income decreased by $422 thousand (5.4 %) while total
interest expense decreased by $937 thousand (45.2%). The net interest margin was
4.05% for the three months ended September 30, 2010, compared to 3.70% for the
quarter ended September 30, 2009. On a tax equivalent basis, the Bancorp’s net
interest margin was 4.27% for the three months ended September 30, 2010,
compared to 3.91% for the quarter ended September 30, 2009.  Comparing
the net interest margin on a tax equivalent basis more accurately compares the
returns on tax-exempt loans and securities to those on taxable interest-earning
assets.





During
the three months ended September 30, 2010, interest income from loans decreased
by $343 thousand (5.5%), compared to the three months ended September 30, 2009.
The change was primarily due to lower average balances. The weighted-average
yield on loans outstanding was 5.38% for the current quarter, compared to 5.38%
for the three months ended September 30, 2009. Loan balances averaged $441.0
million for the current quarter, a decrease of $25.5 million (5.5%) from $466.5
million for the three months ended September 30, 2009. During the three months
ended September 30, 2010, interest income on securities and other interest
bearing balances decreased by $79 thousand (5.1%), compared to the quarter ended
September 30, 2009. The decrease was due to a decrease in the weighed-average
yield of the securities portfolio. The weighted-average yield on securities and
other interest bearing balances was 3.30%, for the current quarter, compared to
3.98% for the three months ended September 30, 2009. Securities balances
averaged $159.8 million for the current quarter, up $16.2 million (11.3%) from
$143.6 million for the three months ended September 30, 2009. The increase in
security average balances is a result of consistent investment growth. Other
interest bearing balances averaged $17.6 million for the current period, up $6.1
million (53.0%) from $11.5 million for the three months ended September 30,
2009. The increase in other interest bearing balances is a result of additional
liquidity primarily generated by deposit growth.





Interest
expense on deposits decreased by $937 thousand (45.2%) during the current
quarter compared to the three months ended September 30, 2009. The change was
primarily due to a decrease in the weighted-average rate paid on deposits. The
weighted-average rate paid on deposits for the three months ended September 30,
2010 was 0.64%, compared to 1.22%, for the quarter ended September 30, 2009.
Total deposit balances averaged $548.9 million for the current quarter, up $12.0
million (2.2%) from $536.9 million for the quarter ended September 30, 2009.
Interest expense on borrowed funds decreased by $159 thousand (43.1%) during the
current quarter due to a decrease in average daily balances and a decrease in
the weighted average rate paid for borrowed funds. The weighted-average cost of
borrowed funds was 1.94% for the current quarter compared to 2.59% for the three
months ended September 30, 2009. Borrowed funds averaged $52.9 million during
the quarter ended September 30, 2010, a decrease of $14.4 million (21.4%) from
$67.3 million for the quarter ended September 30, 2009.


23





Noninterest
income for the quarter ended September 30, 2010 was $1.28 million, an increase
of $12 thousand (1.0%) from $1.26 million for the quarter ended September 30,
2009. During the current quarter, fees and service charges totaled $652
thousand, a decrease of $42 thousand (6.1%) from $694 thousand for the quarter
ended September 30, 2009. The decrease in fees and service charges is a result
of a reduction in fees related to checking accounts. Gains from loan sales
totaled $335 thousand for the current quarter, an increase of $168 thousand
(100.6%), compared to $167 thousand for the quarter ended September 30, 2009.
The increase in gains from the sale of loans is a result of increased customer
refinance activity to low rate fixed rate mortgages. Fees from Wealth Management
operations totaled $353 thousand for the quarter ended September 30, 2010, an
increase of $83 thousand (30.7%) from $270 thousand for the quarter ended
September 30, 2009. The increase in Wealth Management income is related to
growth in assets under management and market value changes. Gains from the sale
of securities totaled $111 thousand for the current quarter, an increase of $18
thousand (19.4%) from $93 thousand for the quarter ended September 30, 2009.
Current market conditions provided opportunities to manage securities cash
flows, while recognizing gains from the sales of securities. Income from an
increase in the cash value of bank owned life insurance totaled $102 thousand
for the quarter ended September 30, 2010, an increase of $4 thousand (4.1%) from
$98 thousand for the quarter ended September 30, 2009.  For the
quarter ended September 30, 2010, a loss of $266 thousand on foreclosed real
estate was realized, compared to a $26 thousand loss for the quarter ended
September 30, 2009. During the current quarter, other noninterest income totaled
$3 thousand compared to $11 thousand for the quarter ended September 30,
2009.





Noninterest
expense for the quarter ended September 30, 2010 was $4.784 million, an increase
of $6 thousand (0.1%) from $4.778 million for the three months ended September
30, 2009. During the current quarter, compensation and benefits totaled $2.4
million, a decrease of $25 thousand (1.0%) from $2.5 million for the quarter
ended September 30, 2009. Occupancy and equipment expense totaled $794 thousand
for the current quarter, an increase of $12 thousand (1.5%) compared to $782
thousand for the quarter ended September 30, 2009. The increase
in  occupancy and equipment expense is related to the opening of the
Valparaiso, Indiana Banking Center in June 2009.  Federal deposit
insurance premium expense totaled $231 thousand for the three months ended
September 30, 2010, a decrease of $15 thousand (6.1%) from $246 thousand for the
three months ended September 30, 2009. Data processing expense totaled $236
thousand for the three months ended September 30, 2010, an increase of $14
thousand (6.3%) from $222 thousand for the three months ended September 30,
2009. Marketing expense related to banking products totaled $90 thousand for the
current quarter, a decrease of $63 thousand (41.2%) from $153 thousand for the
three months ended September 30, 2009. Other expenses related to banking
operations totaled $1.0 million for the quarter ended September 30, 2010, an
increase of $83 thousand (9.0%) from $924 thousand for the quarter ended
September 30, 2009. The Bancorp’s efficiency ratio was 63.5% for the quarter
ended September 30, 2010, compared to 68.2% for the three months ended September
30, 2009. The ratio is determined by dividing total noninterest expense by the
sum of net interest income and total noninterest income for the
period.





Income
tax expenses for the three months ended September 30, 2010 totaled $94 thousand,
compared to an income tax benefit of $1.1 million for the three months ended
September 30, 2009, an increase of $1.1 million (108.9%). The combined effective
federal and state tax rate for the Bancorp was 8.3% for the three months ended
September 30, 2010, compared to (43.0)% for the three months ended September 30,
2009. The Bancorp’s higher current quarter effective tax rate is a result of the
Bank’s improved earnings before tax results.





Results
of Operations - Comparison of the Nine Months Ended September 30, 2010 to the
Nine Months Ended September 30, 2009





For the
nine months ended September 30, 2010, the Bancorp reported net income of $4.0
million, compared to net income of $1.4 million for the nine months ended
September 30, 2009, an increase of $2.7 million (196.8%). For the current nine
months the ROA was 0.80%, compared to 0.27% for the nine months ended September
30, 2009. The ROE was 9.50% for the nine months ended September 30, 2010,
compared to 3.32% for the nine months ended September 30, 2009.


24





Net
interest income for the nine months ended September 30, 2010 was $19.0 million,
an increase of $1.7 million (9.8%), compared to $17.3 million for the nine
months ended September 30, 2009. During the current nine months, the Bancorp’s
cost of funds continue to be positively impacted by the Federal Reserve’s
continued action in maintaining a low short-term interest rate environment. The
weighted-average yield on interest-earning assets was 4.88% for the nine months
ended September 30, 2010, compared to 5.19% for the nine months ended September
30, 2009. The weighted-average cost of funds for the nine months ended September
30, 2010, was 0.87% compared to 1.55% for the nine months ended September 30,
2009. The impact of the 4.88% return on interest earning assets and the 0.87%
cost of funds resulted in an interest rate spread of 4.01% for the current nine
months compared to 3.64% for the nine months ended September 30, 2009. During
the current nine months, total interest income decreased by $1.4 million (5.7%)
while total interest expense decreased by $3.1 million (43.5%). The net interest
margin was 4.03% for the nine months ended September 30, 2010, compared to 3.68%
for the nine months ended September 30, 2009. On a tax equivalent basis, the
Bancorp’s net interest margin was 4.24% for the nine months ended September 30,
2010, compared to 3.68% for the nine months ended September 30,
2009.  Comparing the net interest margin on a tax equivalent basis
more accurately compares the returns on tax-exempt loans and securities to those
on taxable interest-earning assets.





During
the nine months ended September 30, 2010, interest income from loans decreased
by $1.3 million (6.7%), compared to the nine months ended September 30, 2009.
The change was primarily due to a decrease in the weighted-average yield of the
loan portfolio and lower average balances. The weighted-average yield on loans
outstanding was 5.40% for the current nine months, compared to 5.53% for the
nine months ended September 30, 2009. Loan balances averaged $453.7 million for
the current nine months, a decrease of $21.4 million (4.5%) from $475.1 million
for the nine months ended September 30, 2009. During the nine months ended
September 30, 2010, interest income on securities and other interest bearing
balances decreased by $76 thousand (1.7%), compared to the nine months ended
September 30, 2009. The decrease was due to a decrease in the weighted-average
yield of the securities portfolio. The weighted-average yield on securities and
other interest bearing balances was 3.51%, for the current nine months, compared
to 4.13% for the nine months ended September 30, 2009. Securities balances
averaged $155.7 million for the current nine months, up $18.9 million (13.8%)
from $136.8 million for the nine months ended September 30, 2009. The increase
in security average balances is a result of ongoing, consistent investment
growth. Other interest bearing balances averaged $17.7 million for the current
period, up $4.4 million (33.1%) from $13.3 million for the nine months ended
September 30, 2009. The increase in other interest bearing balances is a result
of additional liquidity primarily generated by deposit growth.





Interest
expense on deposits decreased by $2.6 million (44.9%) during the current nine
months compared to the nine months ended September 30, 2009. The change was
primarily due to a decrease in the weighted-average rate paid on deposits. The
weighted-average rate paid on deposits for the nine months ended September 30,
2010 was 0.75%, compared to 1.41%, for the nine months ended September 30, 2009.
Total deposit balances averaged $558.6 million for the current nine months, up
$20.8 million (3.9%) from $537.8 million for the nine months ended September 30,
2009. Interest expense on borrowed funds decreased by $470 thousand (39.7%)
during the current nine months due to a decrease in average daily balances and a
decrease in the weighted average rate paid for borrowing funds. The
weighted-average cost of borrowed funds was 2.13% for the current nine months
compared to 2.62% for the nine months ended September 30, 2009. Borrowed funds
averaged $53.9 million during the nine months ended September 30, 2010, a
decrease of $16.6 million (23.6%) from $70.5 million for the nine months ended
September 30, 2009.





Noninterest
income for the nine months ended September 30, 2010 was $4.2 million, a decrease
of $140 thousand (3.2%) from $4.4 million for the nine months ended September
30, 2009. During the current nine months, fees and service charges totaled $1.9
million, a decrease of $108 thousand (5.4%) from $2.0 million for the nine
months ended September 30, 2009. The decrease in fees and service charges is a
result of a reduction in fees related to checking accounts. Gains from loan
sales totaled $607 thousand for the current nine months, a decrease of $425
thousand (41.2%), compared to $1.0 million for the nine months ended September
30, 2009. The decrease in gains from the sale of loans is a result of decreased
customer refinance activity to low rate fixed rate mortgages. Fees from Wealth
Management operations totaled $887 thousand for the nine months ended September
30, 2010, an increase of $215 thousand (32.0%) from $672 thousand for the nine
months ended September 30, 2009. The increase in Wealth Management income is
related to growth in assets under management and market value changes. Gains
from the sale of securities totaled $853 thousand for the current nine months,
an increase of $416 thousand (95.2%) from $437 thousand for the nine months
ended September 30, 2009. Current market conditions provided opportunities to
manage securities cash flows, while recognizing gains from the sales of
securities. Income from the cash value of bank owned life insurance totaled $306
thousand for the nine months ended September 30, 2010, which is the same as the
nine months ended September 30, 2009. During the first quarter of 2010, the
Bancorp recognized a $113 thousand other-than-temporary impairment for one of
its trust preferred securities. Additional impairments of $15 thousand where
required during the third quarter of 2010. For the nine months ended September
30, 2010, a loss of $201 thousand on foreclosed real estate was realized,
compared to a $58 thousand loss for the nine months ended September 30, 2009.
Other noninterest income totaled $12 thousand for the nine months ended
September 30, 2010 and $23 thousand for the nine months ended September 30,
2009.


25


Noninterest
expense for the nine months ended September 30, 2010 was $14.3 million, an
increase of $63 thousand (0.4%) from $14.3 million for the nine months ended
September 30, 2009. During the current nine months, compensation and benefits
totaled $7.3 million, an increase of $232 thousand (3.3%) from $7.1 million for
the nine months ended September 30, 2009. Occupancy and equipment expense
totaled $2.4 million for the current nine months, an increase of $71 thousand
(3.1%) compared to $2.3 million for the nine months ended September 30,
2009.  The increase in compensation and benefits, and occupancy and
equipment expense is related to the opening of the Valparaiso, Indiana Banking
Center in June 2009. Federal deposit insurance premium expense totaled $727
thousand for the nine months ended September 30, 2010, a decrease of $259
thousand (26.3%) from $986 thousand for the nine months ended September 30,
2009. The decrease was the result of an industry wide FDIC special assessment at
June 30, 2009 that was not repeated in 2010.  Data processing expense
totaled $700 thousand for the nine months ended September 30, 2010, an increase
of $48 thousand (7.4%) from $652 thousand for the nine months ended September
30, 2009. Marketing expense related to banking products totaled $329 thousand
for the current nine months, a decrease of $39 thousand (10.6%) from $368
thousand for the nine months ended September 30, 2009. Other expenses related to
banking operations totaled $2.9 million for the nine months ended September 30,
2010, an increase of $10 thousand (0.3%) from $2.9 million for the nine months
ended September 30, 2009. The Bancorp’s efficiency ratio was 61.9% for the nine
months ended September 30, 2010, compared to 66.0% for the nine months ended
September 30, 2009. The ratio is determined by dividing total noninterest
expense by the sum of net interest income and total noninterest income for the
period.





Income
tax expenses for the nine months ended September 30, 2010 totaled $669 thousand,
compared to an income tax benefit of $498 thousand for the nine months ended
September 30, 2009, an increase of $1.2 million (234.3%). The combined effective
federal and state tax rate for the Bancorp was 14.2% for the nine months ended
September 30, 2010, compared to (57.6%) for the nine months ended September 30,
2009. The Bancorp’s higher current effective tax rate is a result of the Bank’s
improved earnings before tax results.





Critical
Accounting Policies





Critical
accounting policies are those accounting policies that management believes are
most important to the portrayal of the Bancorp’s financial condition and that
require management’s most difficult, subjective or complex judgments. The
Bancorp’s critical accounting policies from December 31, 2009 remain
unchanged.





Forward-Looking
Statements





Statements
contained in this report that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The words or phrases “would be,” “will allow,” “intends to,” “will likely
result,” “are expected to,” “will continue,” “is anticipated,” “estimate,”
“project,” or similar expressions are also intended to identify “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act.
The Bancorp cautions readers that forward-looking statements, including without
limitation those relating to the Bancorp’s future business prospects, interest
income and expense, net income, liquidity, and capital needs are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward-looking statements, due to, among
other things, factors identified in this report, including those identified in
the Bancorp’s 2009 Form 10-K.





Item 3. Quantitative and Qualitative
Disclosures About Market Risk





Not
Applicable.


26





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 Securities and Exchange Commission’s (“SEC”) 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
September 30, 2010, the Bancorp’s chief executive officer and chief financial
officer have concluded that such disclosure controls and procedures were
effective as of that date in ensuring that information required to be disclosed
by the Bancorp under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms.





(b)         Changes in Internal Control
Over Financial Reporting.





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


27





PART II - Other
Information





Item
1.        Legal
Proceedings


During
the third quarter of 2010, the FDIC and DFI conducted a review of the
Bank.  As a result of that review, on October 29, 2010, the Board of
Directors of the Bank adopted a resolution whereby the Bank agrees, among other
things, to (1) adopt a written action plan to reduce the Bank’s risk position in
certain classified assets; (2) conduct certain reviews of the Bank’s ALL; (3)
develop and implement a written capital plan; (4) maintain a minimum Tier 1
leverage ratio of 8% through December 31, 2010 and achieve an 8.5% ratio by June
30, 2011, and maintain a 12% minimum total risk-based capital ratio through
December 31, 2010; (5) obtain the prior written consent of the FDIC and DFI
prior to the declaration or payment of dividends; and (6) submit quarterly
progress reports to the FDIC and DFI.  The resolution was adopted at
the direction of the FDIC and DFI.  The Bank’s management is committed
to implementing the actions addressed in the resolution as promptly as
possible.





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





Item
1A.     Risk
Factors


Not
Applicable.





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


There are
no matters reportable under this item.





Item
3.        Defaults Upon Senior
Securities


There are
no matters reportable under this item.





Item
4.        (Removed and
Reserved)





Item
5.        Other
Information


There are
no matters reportable under this item.





Item
6.        Exhibits





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


28





SIGNATURES





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





NORTHWEST INDIANA
BANCORPDate:  October
      29, 2010
              /s/ David A. BochnowskiDavid
      A. BochnowskiChairman
      of the Board and Chief Executive OfficerDate:  October
      29, 2010
              /s/ Robert T. LowryRobert
      T. LowrySenior
      Vice President, Chief Financial Officerand
      Treasurer


29