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 March 31, 2010 oro
            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 or organization)
            
            (I.R.S.
      Employer Identification Number)9204 Columbia
      AvenueMunster,
      Indiana
            
            46321(Address of
      principal executive offices)
            
            (ZIP
      code)





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





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





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





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






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





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





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







NorthWest
Indiana Bancorp


Index









Page
              NumberPART I. Financial
      InformationItem
      1. Unaudited Financial StatementsConsolidated Balance
      Sheets, March 31, 2010 and December 31, 2009
            1Consolidated
      Statements of Income, Three Months EndedMarch
      31, 2010 and 2009
            2Consolidated
      Statements of Changes in Stockholders' Equity, Three MonthsEnded
      March 31, 2010 and 2009
            3Consolidated
      Statements of Cash Flows, Three MonthsEnded
      March 31, 2010 and 2009
            4Notes to
      Consolidated Financial Statements
            5-14Item
      2. Management’s Discussion and Analysis of Financial Condition andResults
      of Operations
            15-23Item 3. Quantitative
      and Qualitative Disclosures About Market Risk
            24Item 4T. Controls
      and Procedures
            24PART II. Other
      Information
            25SIGNATURES
            26




EXHIBITS


10.1  Amended
      Unfunded Deferred Compensation Plan for the Directors of Peoples Bank
      effective January 1,   2005 (amended as of February 26,
      2010)10.2  Amended
      Post 2004 Unfunded Deferred Compensation Plan for the Directors of Peoples
      Bank SB effective January 1, 2005 (amended as of February 26, 2010)31.1  Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2  Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1  Section
      1350 Certifications








NorthWest Indiana BancorpConsolidated
      Balance SheetsMarch
      31,
              
              
              December
      31,2010
              
              
              2009(Dollars
      in thousands)
              
              (unaudited)ASSETSCash
      and non-interest bearing balances in financial
institutions
              
              $
              6,612
              
              
              $
              8,705Interest
      bearing balances in financial institutions
              
              
              15,003
              
              
              
              447Federal
      funds sold
              
              
              2,733
              
              
              
              4,070Total
      cash and cash equivalents
              
              
              24,348
              
              
              
              13,222Securities
      available-for-sale
              
              
              139,584
              
              
              
              124,776Securities
      held-to-maturity
              
              
              18,624
              
              
              
              19,557Loans
      held for sale
              
              
              327
              
              
              
              1,025Loans
      receivable
              
              
              460,614
              
              
              
              458,245Less:
      allowance for loan losses
              
              
              (7,053
              )
              
              
              (6,114
              )Net
      loans receivable
              
              
              453,561
              
              
              
              452,131Federal
      Home Loan Bank stock
              
              
              3,650
              
              
              
              3,650Accrued
      interest receivable
              
              
              2,909
              
              
              
              2,878Premises
      and equipment
              
              
              19,298
              
              
              
              19,590Foreclosed
      real estate
              
              
              3,625
              
              
              
              3,747Cash
      value of bank owned life insurance
              
              
              12,149
              
              
              
              12,049Prepaid
      FDIC insurance premium
              
              
              3,067
              
              
              
              3,282Other
      assets
              
              
              4,540
              
              
              
              5,899Total
      assets
              
              $
              685,682
              
              
              $
              661,806LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Non-interest
      bearing
              
              $
              48,511
              
              
              $
              42,390Interest
      bearing
              
              
              519,023
              
              
              
              498,137Total
              
              
              567,534
              
              
              
              540,527Repurchase
      agreements
              
              
              20,594
              
              
              
              15,893Borrowed
      funds
              
              
              34,535
              
              
              
              47,129Accrued
      expenses and other liabilities
              
              
              8,700
              
              
              
              5,179Total
      liabilities
              
              
              631,363
              
              
              
              608,728Stockholders'
      Equity:Preferred
      stock, no par or stated value;10,000,000
      shares authorized, none outstanding
              
              
              -
              
              
              
              -Common
      stock, no par or stated value; 10,000,000 shares
    authorized;shares
      issued:  March 31, 2010 - 2,889,452
              
              
              361
              
              
              
              361December
      31, 2009 - 2,889,452shares
      outstanding:  March 31, 2010 - 2,820,842December
      31, 2009 - 2,818,578Additional
      paid in capital
              
              
              5,114
              
              
              
              5,104Accumulated
      other comprehensive income/(loss)
              
              
              224
              
              
              
              (170
              )Retained
      earnings
              
              
              50,075
              
              
              
              49,312Treasury
      stock, common shares at cost:  March 31, 2010 -
      68,610December
      31, 2009 - 70,874
              
              
              (1,455
              )
              
              
              (1,529
              )Total
      stockholders' equity
              
              
              54,319
              
              
              
              53,078Total
      liabilities and stockholders' equity
              
              $
              685,682
              
              
              $
              661,806See
      accompanying notes to consolidated financial statements.
  1


NorthWest Indiana BancorpConsolidated
      Statements of Income(unaudited)Three
      Months Ended(Dollars
      in thousands, except per share data)
                
                March
      31,2010
                
                
                2009Interest
      income:Loans
      receivableReal
      estate loans
                
                $
                5,156
                
                
                $
                5,923Commercial
      loans
                
                
                1,032
                
                
                
                897Consumer
      loans
                
                
                24
                
                
                
                34Total
      loan interest
                
                
                6,212
                
                
                
                6,854Securities
                
                
                1,530
                
                
                
                1,582Other
      interest earning assets
                
                
                7
                
                
                
                5Total
      interest income
                
                
                7,749
                
                
                
                8,441Interest
      expense:Deposits
                
                
                1,201
                
                
                
                2,166Repurchase
      agreements
                
                
                52
                
                
                
                87Borrowed
      funds
                
                
                269
                
                
                
                399Total
      interest expense
                
                
                1,522
                
                
                
                2,652Net
      interest income
                
                
                6,227
                
                
                
                5,789Provision
      for loan losses
                
                
                1,235
                
                
                
                700Net
      interest income after provision for loan losses
                
                
                4,992
                
                
                
                5,089Noninterest
      income:Fees
      and service charges
                
                
                609
                
                
                
                639Gain
      on sale of securities, net
                
                
                289
                
                
                
                140Wealth
      management operations
                
                
                281
                
                
                
                197Gain
      on sale of loans, net
                
                
                109
                
                
                
                566Increase
      in cash value of bank owned life insurance
                
                
                100
                
                
                
                105Gain/(loss)
      on foreclosed real estate, net
                
                
                22
                
                
                
                (37
                )Other-than-temporary
      impairment of securities
                
                
                (19
                )
                
                
                -Portion
      of loss recognized in other comprehensive income
                
                
                (94
                )
                
                
                -Other
                
                
                4
                
                
                
                3Total
      noninterest income
                
                
                1,301
                
                
                
                1,613Noninterest
      expense:Compensation
      and benefits
                
                
                2,409
                
                
                
                2,365Occupancy
      and equipment
                
                
                785
                
                
                
                783Data
      processing
                
                
                233
                
                
                
                215Federal
      deposit insurance premiums
                
                
                231
                
                
                
                186Marketing
                
                
                125
                
                
                
                67Other
                
                
                892
                
                
                
                932Total
      noninterest expense
                
                
                4,675
                
                
                
                4,548Income
      before income tax expenses
                
                
                1,618
                
                
                
                2,154Income
      tax expenses
                
                
                229
                
                
                
                449Net
      income
                
                $
                1,389
                
                
                $
                1,705Earnings
      per common share:Basic
                
                $
                0.49
                
                
                $
                0.61Diluted
                
                $
                0.49
                
                
                $
                0.61Dividends
      declared per common share
                
                $
                0.21
                
                
                $
                0.36See
      accompanying notes to consolidated financial statements.




2





NorthWest Indiana BancorpConsolidated
      Statements of Changes in Stockholders' Equity(unaudited)Three
      Months Ended(Dollars
      in thousands)
              
              March
      31,2010
              
              
              2009Balance
      at beginning of period
              
              $
              53,078
              
              
              $
              52,773Comprehensive
      income:Net
      income
              
              
              1,389
              
              
              
              1,705Net
      unrealized change on securitiesavailable-for-sale,
      net of reclassifications and tax effects
              
              
              396
              
              
              
              (246
              )Amortization
      of unrecognized gain
              
              
              (2
              )
              
              
              (2
              )Comprehensive
      income
              
              
              1,783
              
              
              
              1,457Issuance
      of common stock,under
      stock based compensation plan, including tax effects
              
              
              -
              
              
              
              4Stock
      based compensation expense
              
              
              10
              
              
              
              13Sale
      of treasury stock
              
              
              40
              
              
              
              -Adjustment
      to retained earnings for EITF 06-4
              
              
              -
              
              
              
              (63
              )Cash
      dividends
              
              
              (592
              )
              
              
              (1,011
              )Balance
      at end of period
              
              $
              54,319
              
              
              $
              53,173See
      accompanying notes to consolidated financial statements.


3




NorthWest
      Indiana BancorpConsolidated
      Statements of Cash Flows(unaudited)Three
      Months Ended(Dollars
      in thousands)
              
              March
      31,2010
              
              
              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
              
              $
              1,389
              
              
              $
              1,705Adjustments
      to reconcile net income tonet
      cash provided by operating activities:Origination
      of loans for sale
              
              
              (3,680
              )
              
              
              (20,889
              )Sale
      of loans originated for sale
              
              
              4,477
              
              
              
              20,180Depreciation
      and amortization, net of accretion
              
              
              467
              
              
              
              326Amortization
      of mortgage servicing rights
              
              
              30
              
              
              
              26Amortization
      of investment in real estate limited partnerships
              
              
              2
              
              
              
              48Equity
      in loss of investment in limited partnership,net
      of interest received
              
              
              37
              
              
              
              6Stock
      based compensation expense
              
              
              10
              
              
              
              13Net
      gains on sales and calls of securities
              
              
              (289
              )
              
              
              (140
              )Net
      gains on sale of loans
              
              
              (109
              )
              
              
              (566
              )Net
      losses due to other-than-temporary impairment of
securities
              
              
              113
              
              
              
              -Net
      (gains)/losses on foreclosed real estate
              
              
              (22
              )
              
              
              37Provision
      for loan losses
              
              
              1,235
              
              
              
              700Net
      change in:Interest
      receivable
              
              
              (31
              )
              
              
              28Other
      assets
              
              
              1,304
              
              
              
              (1,280
              )Cash
      value of bank owned life insurance
              
              
              (100
              )
              
              
              (105
              )Accrued
      expenses and other liabilities
              
              
              3,521
              
              
              
              (3,872
              )Total
      adjustments
              
              
              6,965
              
              
              
              (5,488
              )Net
      cash - operating activities
              
              
              8,354
              
              
              
              (3,783
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from maturities and pay downs of securities
    available-for-sale
              
              
              6,034
              
              
              
              5,416Proceeds
      from sales of securities available-for-sale
              
              
              5,683
              
              
              
              2,521Purchase
      of securities available-for-sale
              
              
              (25,815
              )
              
              
              (10,454
              )Proceeds
      from maturities and pay downs of securities
    held-to-maturity
              
              
              926
              
              
              
              4Proceeds
      from sale of loans transferred to held-for-sale
              
              
              -
              
              
              
              10,651Net
      change in loans receivable
              
              
              (2,858
              )
              
              
              3,070Purchase
      of premises and equipment, net
              
              
              (97
              )
              
              
              (577
              )Proceeds
      from sale of foreclosed real estate
              
              
              337
              
              
              
              -Net
      cash - investing activities
              
              
              (15,790
              )
              
              
              10,631CASH
      FLOWS FROM FINANCING ACTIVITIES:Change
      in deposits
              
              
              27,007
              
              
              
              23,497Proceeds
      from  FHLB advances
              
              
              4,000
              
              
              
              -Repayment
      of FHLB advances
              
              
              (8,000
              )
              
              
              (4,000
              )Change
      in other borrowed funds
              
              
              (3,893
              )
              
              
              (2,802
              )Proceeds
      from issuance of common stock
              
              
              -
              
              
              
              5Proceeds
      from sale of treasury stock
              
              
              40
              
              
              
              -Dividends
      paid
              
              
              (592
              )
              
              
              (1,011
              )Net
      cash - financing activities
              
              
              18,562
              
              
              
              15,689Net
      change in cash and cash equivalents
              
              
              11,126
              
              
              
              22,537Cash
      and cash equivalents at beginning of period
              
              
              13,222
              
              
              
              11,296Cash
      and cash equivalents at end of period
              
              $
              24,348
              
              
              $
              33,833SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
              
              $
              1,546
              
              
              $
              2,697Income
      taxes
              
              $
              50
              
              
              $
              45SUPPLEMENTAL
      NONCASH INFORMATION:Transfers
      from loans to foreclosed real estate
              
              $
              237
              
              
              $
              48Transfers
      from loans to loans held for sale
              
              $
              -
              
              
              $
              10,493See
      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 March 31, 2010 and December 31, 2009, and the consolidated
statements of income, changes in stockholders’ equity, and cash flows for the
three months ended March 31, 2010 and 2009. The income reported for the
three-month period ended March 31, 2010 is not necessarily indicative of the
results to be expected for the full year.





Note
2 - Use of Estimates


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





Note
3 – Securities


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




(Dollars
      in thousands)Gross
              
              
              GrossCost
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairBasis
              
              
              Gains
              
              
              Losses
              
              
              Value3/31/2010U.S.
      government sponsored entities
              
              $
              2,000
              
              
              $
              28
              
              
              $
              -
              
              
              $
              2,028CMO
      and residential mortgage-backed securities
              
              
              64,673
              
              
              
              1,705
              
              
              
              (69
              )
              
              $
              66,309Municipal
      securities
              
              
              33,299
              
              
              
              1,522
              
              
              
              (78
              )
              
              $
              34,743CMO
      government sponsored entities
              
              
              34,118
              
              
              
              1,075
              
              
              
              (20
              )
              
              $
              35,173Collateralized
      debt obligations
              
              
              5,230
              
              
              
              -
              
              
              
              (3,899
              )
              
              $
              1,331Total debt
      securities
              
              $
              139,320
              
              
              $
              4,330
              
              
              $
              (4,066
              )
              
              $
              139,58412/31/2009U.S.
      government sponsored entities
              
              $
              1,993
              
              
              $
              52
              
              
              $
              -
              
              
              $
              2,045CMO
      and residential mortgage-backed securities
              
              
              61,095
              
              
              
              2,302
              
              
              
              (82
              )
              
              
              63,315Municipal
      securities
              
              
              34,151
              
              
              
              1,516
              
              
              
              (94
              )
              
              
              35,573CMO
      government sponsored entities
              
              
              22,534
              
              
              
              168
              
              
              
              (209
              )
              
              
              22,493Collateralized
      debt obligations
              
              
              5,343
              
              
              
              -
              
              
              
              (3,993
              )
              
              
              1,350Total debt
      securities
              
              $
              125,116
              
              
              $
              4,038
              
              
              $
              (4,378
              )
              
              $
              124,776
  5


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




(Dollars
      in thousands)Gross
              
              GrossCost
              
              
              Unrecognized
              
              Unrecognized
              
              
              FairBasis
              
              
              Gains
              
              Losses
              
              
              Value3/31/2010Municipal
      securities
              
              $
              17,611
              
              
              $
              852
              
              $
              -
              
              
              $
              18,463Residential
      mortgage-backed securities
              
              
              1,013
              
              
              
              30
              
              
              (6
              )
              
              
              1,037Total debt
      securities
              
              $
              18,624
              
              
              $
              882
              
              $
              (6
              )
              
              $
              19,50012/31/2009Municipal
      securities
              
              $
              18,539
              
              
              $
              724
              
              $
              -
              
              
              $
              19,263Residential
      mortgage-backed securities
              
              
              1,018
              
              
              
              28
              
              
              (6
              )
              
              
              1,040Total debt
      securities
              
              $
              19,557
              
              
              $
              752
              
              $
              (6
              )
              
              $
              20,303






The fair value of debt securities and
carrying amount, if different, at March 31, 2010 by contractual maturity were as
follows. Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.




(Dollars
      in thousands)Available-for-sale
              
              Held-to-maturityFair
              
              Carrying
              
              FairValue
              
              Amount
              
              ValueDue
      in one year or less
              
              $
              196
              
              
              $
              -
              
              
              $
              -Due
      from one to five years
              
              
              4,166
              
              
              
              560
              
              
              
              603Due
      over five years
              
              
              33,740
              
              
              
              17,051
              
              
              
              17,860CMO
      and residential mortgage-backed securities
              
              
              101,482
              
              
              
              1,013
              
              
              
              1,037Total
              
              $
              139,584
              
              
              $
              18,624
              
              
              $
              19,500
   Sales of available-for-sale securities
were as follows:
  (Dollars
      in thousands)3/31/2010
              
              3/31/2009Proceeds
              
              $
              5,683
              
              
              $
              2,521Gross
      gains
              
              
              289
              
              
              
              140Gross
    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
              
              
              396Ending
      balance, March 31, 2010
              
              $
              149






Securities with carrying values of
$23,894,000 and $27,394,000 were pledged as of March 31, 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
March 31, 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
              
              
              Losses3/31/2010Description
      of Securities:CMO
      and residential mortgage-backed
      securities
              
              $
              16,123
              
              
              $
              (95
              )
              
              $
              -
              
              
              $
              -
              
              
              $
              16,123
              
              
              $
              (95
              )Municipal
      securities
              
              
              2,267
              
              
              
              (11
              )
              
              
              1,487
              
              
              
              (67
              )
              
              
              3,754
              
              
              
              (78
              )Collateralized
      debt obligations
              
              
              -
              
              
              
              -
              
              
              
              1,331
              
              
              
              (3,899
              )
              
              
              1,331
              
              
              
              (3,899
              )Total
      temporarily impaired
              
              $
              18,390
              
              
              $
              (106
              )
              
              $
              2,818
              
              
              $
              (3,966
              )
              
              $
              21,208
              
              
              $
              (4,072
              )Number
      of securities
              
              
              
              
              
              
              13
              
              
              
              
              
              
              
              8
              
              
              
              
              
              
              
              21
     (Dollars in
      thousands)Less
      than 12 months
              
              
              12
      months or longer
              
              
              TotalFair
              
              Unrealized
              
              
              Fair
              
              
              Unrealized
              
              
              Fair
              
              
              UnrealizedValue
              
              Losses
              
              
              Value
              
              
              Losses
              
              
              Value
              
              
              Losses12/31/2009Description
      of Securities:CMO
      and residential mortgage-backed
      securities
              
              $
              15,604
              
              
              $
              (297
              )
              
              $
              13
              
              
              $
              -
              
              
              $
              15,617
              
              
              $
              (297
              )Municipal
      securities
              
              
              2,443
              
              
              
              (15
              )
              
              
              1,476
              
              
              
              (79
              )
              
              
              3,919
              
              
              
              (94
              )Collateralized
      debt obligations
              
              
              -
              
              
              
              -
              
              
              
              1,350
              
              
              
              (3,993
              )
              
              
              1,350
              
              
              
              (3,993
              )Total
      temporarily impaired
              
              $
              18,047
              
              
              $
              (312
              )
              
              $
              2,839
              
              
              $
              (4,072
              )
              
              $
              20,886
              
              
              $
              (4,384
              )Number
      of securities
              
              
              
              
              
              
              16
              
              
              
              
              
              
              
              7
              
              
              
              
              
              
              
              23






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





Note
4 – Loans Receivable


Non-performing
      loans at period-end were as follows:(Dollars
      in thousands)3/31/2010
              
              
              12/31/2009Loans
      past due over 90 days still on accrual
              
              $
              1,123
              
              
              $
              1,491Non-accrual
      loans
              
              
              17,705
              
              
              
              17,074
  Impaired
      loans at period-end were as follows:(Dollars
      in thousands)3/31/2010
              
              
              12/31/2009Period-end
      loans with no allocatedallowance
      for loan losses
              
              $
              7,747
              
              
              $
              3,853Period-end
      loans with allocatedallowance
      for loan losses (including troubled debt restructurings of $12,043 and
      $7,199
              
              
              15,534
              
              
              
              13,112Total
              
              $
              23,281
              
              
              $
              16,965Amount
      of the allowance forloan
      losses allocated
              
              $
              1,721
              
              
              $
              1,179Average
      of impaired loansduring
      the period
              
              
              20,123
              
              
              
              12,820Interest
      income recognizedduring
      impairment
              
              
              37
              
              
              
              10Cash-basis
      interest incomerecognized
      during impairment
              
              
              170
              
              
              
              95





7


Note
5 – Foreclosed Real Estate





Foreclosed
real estate at period-end is summarized below:




(Dollars
      in thousands)3/31/2010
              
              
              12/31/2009Commercial
      real estate and other dwelling
              
              $
              1,897
              
              
              $
              1,897Residential
      real estate
              
              
              1,057
              
              
              
              1,082Construction
      and land development
              
              
              521
              
              
              
              768Commercial
      and industrial
              
              
              150
              
              
              
              -Total
              
              $
              3,625
              
              
              $
              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 months
ended March 31, 2010 and 2009 are presented below:





(Dollars
      in thousands, except per share data)Three
      Months EndedMarch
      31,2010
              
              
              2009Basic
      earnings per common share:Net
      income as reported
              
              $
              1,389
              
              
              $
              1,705Weighted
      average common shares outstanding:
              
              
              2,820,842
              
              
              
              2,809,270Basic
      earnings per common share:
              
              $
              0.49
              
              
              $
              0.61Diluted
      earnings per common share:Net
      income as reported
              
              $
              1,389
              
              
              $
              1,705Weighted
      average common shares outstanding:
              
              
              2,820,842
              
              
              
              2,809,270Add:  Dilutive
      effect of assumed stockoption
      exercises:
              
              
              -
              
              
              
              6,067Weighted
      average common and dilutivepotential
      common shares outstanding:
              
              
              2,820,842
              
              
              
              2,815,337Diluted
      earnings per common share:
              
              $
              0.49
              
              
              $
              0.61




Note
8 – Stock Based Compensation


The Bancorp’s 2004 Stock Option Plan
(the Plan), which is stockholder-approved, permits the grant of share options to
its employees for up to 250,000 shares of common stock. Awards granted under the
Plan may be in the form of incentive stock options, non-incentive stock options,
or restricted stock. As required by the Compensation – Stock Compensation Topic
(formerly Financial Accounting Standards No. 123R (FAS 123R,), “Share-Based
Payments”), companies are required to record compensation cost for stock options
provided to employees in return for employment service. The cost is measured at
the fair value of the options when granted, and this cost is expensed over the
employment service period, which is normally the vesting period of the options.
Compensation cost will also be recorded for prior option grants that vest after
the date of adoption. For the three months ended March 31, 2010, stock based
compensation expense of $10,000 was recorded, compared to $13,000 for the three
months ended March 31, 2009. It is anticipated that current outstanding vested
and unvested options will result in additional compensation expense of
approximately $30,000 in 2010 and $37,000 in 2011.





8


A summary of option activity under the
Bancorp’s incentive stock option plan for the three months ended March 31, 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
      or expired
              
              
              (11,700
              )
              
              $
              21.13Outstanding
      at March 31, 2010
              
              
              54,047
              
              
              $
              24.25
              
              2.5
              
              -Exercisable
      at March 31, 2010
              
              
              53,047
              
              
              $
              24.17
              
              2.4
              
              -







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 for 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.








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.





9


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





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





At
the end of each reporting period, securities held in the investment portfolio
are evaluated on an individual security level for other-than-temporary
impairment in accordance with the Investments – Debt and Equity Securities
Topic.  Significant judgments are required in determining impairment,
which include making assumptions regarding the estimated prepayments, loss
assumptions and the change in interest rates. We consider the following factors
when determining an other-than-temporary impairment for a security: the length
of time and the extent to which the market value has been less than amortized
cost; the financial condition and near-term prospects of the issuer; the
underlying fundamentals of the relevant market and the outlook for such market
for the near future; an assessment of whether the Bancorp has (1) the intent to
sell the debt securities or (2) more likely than not will be required to sell
the debt securities before its anticipated market recovery. If either of these
conditions is met, management will recognize other-than-temporary impairment.
If, in management’s judgment, an other-than-temporary impairment exists, the
cost basis of the security will be written down for the credit loss, and the
unrealized loss will be transferred from accumulated other comprehensive loss as
an immediate reduction of current earnings.





For the period ended March 31, 2010,
the Bancorp’s management utilized a specialist to perform an
other-than-temporary impairment analysis for each of its four pooled trust
preferred securities. The analysis utilizes analytical models used to project
future cash flows for the pooled trust preferred securities based on current
assumptions for prepayments, default and deferral rates, and recoveries. The
projected cash flows are then tested for impairment consistent with the
Investments – Other Topic (formerly FSP EITF 99-20-1) and the Investments – Debt
and Equity Securities Topic (formerly FSP FAS 115-2 and FAS 124-2). The
other-than-temporary impairment testing compares the present value of the cash
flows from quarter to quarter to determine if there is a “favorable” or
“adverse” change. Other-than-temporary impairment is recorded if the projected
present value of cash flows is lower than the book value of the security. To
perform the quarterly other-than-temporary impairment analysis, management
utilizes current reports issued by the trustee, which contains principal and
interest tests, waterfall distributions, note valuations, collection detail and
credit ratings for each pooled trust preferred security. In addition, a detailed
review of the performing collateral was performed. The review of the collateral
began with a review of financial information provided by SNL Financial, a
comprehensive database, widely used in the industry, which gathers financial
data on banks and thrifts from GAAP financial statements for public companies
(annual and quarterly reports on Forms 10-K and 10-Q, respectively), as well as
regulatory reports for private companies, including consolidated financial
statements for bank holding companies (FR Y-9C reports) and parent company-only
financial statements for bank holding companies (FR Y-9LP reports) filed with
the Federal Reserve, bank call reports filed with the FDIC and thrift financial
reports provided by the Office of Thrift Supervision. Using the information
sources described above, for each bank and thrift examined the following items
were examined: nature of the issuer’s business, years of operating history,
corporate structure, loan composition and loan concentrations, deposit mix,
asset growth rates, geographic footprint and local economic environment. The
issuers’ historical financial performance was reviewed and their financial
ratios were compared to appropriate peer groups of regional banks or thrifts
with similar asset size. The analysis focused on six broad categories:
profitability (revenue streams and earnings quality, return on assets and
shareholder’s equity, net interest margin and interest rate sensitivity), credit
quality (charge-offs and recoveries, non-current loans and total non-performing
assets as a percentage of total loans, loan loss reserve coverage and the
adequacy of the loan loss provision), operating efficiency (non-interest expense
compared to total revenue), capital adequacy (Tier-1, total capital and leverage
ratios and equity capital growth), leverage (tangible equity as a percentage of
tangible assets, short-term and long-term borrowings and double leverage at the
holding company) and liquidity (the nature and availability of funding sources,
net non-core funding dependence and quality of deposits). In addition, for
publicly traded companies stock price movements were reviewed and the market
price of publicly traded debt instruments was examined. The other-than-temporary
impairment analysis indicated that the Bancorp’s four pooled trust preferred
securities had other-than-temporary impairment in the amount of $249 thousand,
as of March 31, 2010.





10


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




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


Below is a table containing information
regarding the Bancorp’s pooled trust preferred securities as of March 31,
2010:




Deal
      name
              
              PreTSL
      XXIV
              
              
              PreTSL
      XXVII
              
              
              Alesco
      IX
              
              
              Alesco
      XVIIClass
              
              
              B-1
              
              
              
              C-1
              
              
              
              A-2A
              
              
              
              BBook
      value
              
              
              1,258,772
              
              
              
              1,296,077
              
              
              
              1,323,252
              
              
              
              1,351,903Fair
      value
              
              
              257,059
              
              
              
              189,386
              
              
              
              621,600
              
              
              
              262,895Unrealized
      gains/(losses)
              
              
              (1,001,712
              )
              
              
              (1,106,692
              )
              
              
              (701,652
              )
              
              
              (1,089,008
              )Lowest
      credit rating assigned
              
              Caa3
              
              
              Ca
              
              
              BB
              
              
              CaNumber
      of performing banks
              
              
              53
              
              
              
              24
              
              
              
              49
              
              
              
              42Number
      of performing insurance companies
              
              
              12
              
              
              
              7
              
              
              
              10
              
              
              
              n/aNumber
      of issuers in default
              
              
              10
              
              
              
              6
              
              
              
              7
              
              
              
              4Number
      of issuers in deferral
              
              
              18
              
              
              
              12
              
              
              
              10
              
              
              
              10Defaults
      & deferrals as a % of performing collateral
              
              
              45.75
              %
              
              
              33.47
              %
              
              
              41.49
              %
              
              
              43.49
              %Subordination:As
      a % of performing collateral
              
              
              -13.11
              %
              
              
              -18.54
              %
              
              
              15.52
              %
              
              
              -4.61
              %As
      a % of performing collateral - adjusted for projected future
      defaults
              
              
              -21.37
              %
              
              
              -25.04
              %
              
              
              6.55
              %
              
              
              -11.64
              %Other-than-temporary
      impairment model assumptions:Defaults:Year
      1
              
              
              5.00
              %
              
              
              3.30
              %
              
              
              7.20
              %
              
              
              4.50
              %Year
      2
              
              
              1.10
              %
              
              
              1.20
              %
              
              
              1.60
              %
              
              
              1.30
              %Year
      3
              
              
              0.70
              %
              
              
              0.70
              %
              
              
              0.80
              %
              
              
              0.50
              %>
      3 Years
              
              
              (1
              )
              
              
              (1
              )
              
              
              (1
              )
              
              
              (1
              )Discount
      rate - 3 month Libor, plus implicit yield spread at
    purchase
              
              
              1.48
              %
              
              
              1.23
              %
              
              
              1.27
              %
              
              
              1.44
              %Recovery
      assumptions
              
              
              (2
              )
              
              
              (2
              )
              
              
              (2
              )
              
              
              (2
              )Prepayments
              
              
              0.00
              %
              
              
              0.00
              %
              
              
              0.00
              %
              
              
              0.00
              %Other-than-temporary
      impairment
              
              
              39,300
              
              
              
              132,000
              
              
              
              15,884
              
              
              
              61,950(1)
      - Default rates > 3 years are evaluated on a issuer by issuer basis and
      range from 0.25% to 5.00%.(2)
      - Recovery assumptions are evaluated on a issuer by issuer basis and range
      from 0% to 75% 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 March 31, 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.




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.




11


At March 31, 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 March 31, 2010. Assets and liabilities
measured at fair value on a recurring basis are summarized below:




(Dollars
      in thousands)
              
              
              
              
              Fair
      Value Measurements at March 31, 2010 Using3/31/2010
              
              
              Quoted
      Prices in Active Markets for Identical Assets
                (Level
      1)
              
              
              Significant
      Other Observable Inputs
                (Level
      2)
              
              
              Significant
      Unobservable Inputs
                (Level
      3)Assets:Available-for-sale
      debt securitiesU.S.
      government sponsored entities
              
              $
              2,028
              
              
              $
              -
              
              
              $
              2,028
              
              
              $
              -CMO
      and residential mortgage-backed securities
              
              
              66,309
              
              
              
              -
              
              
              
              66,309
              
              
              
              -Municipal
      securities
              
              
              34,743
              
              
              
              -
              
              
              
              34,743
              
              
              
              -CMO
      government sponsored entities
              
              
              35,173
              
              
              
              -
              
              
              
              35,173
              
              
              
              -Collateralized
      debt obligations
              
              
              1,331
              
              
              
              -
              
              
              
              -
              
              
              
              1,331Total
      available for sale debt securities
              
              $
              139,584
              
              
              $
              -
              
              
              $
              138,253
              
              
              $
              1,331





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





12


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




(Dollars
      in thousands)
              
              Fair
      Value Measurements at March 31, 2010 Using Significant Unobservable
      Inputs
                (Level
      3)Available
      for
                sale
      debt securitiesCollateralized
      Debt ObligationsBeginning
      balance, December 31, 2009
              
              $
              1,350Transfers
      in and/or (out) of Level 3
              
              
              -Total
      gains or (losses)Included
      in earnings
              
              
              (113
              )Included
      in other comprehensive income
              
              
              94Purchases,
      issuances, sales, and settlementsPurchases
              
              
              -Issuances
              
              
              -Sales
              
              
              -Settlements
              
              
              -Ending
      balance, March 31, 2010
              
              $
              1,331








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





(Dollars
      in thousands)
              
              
              
              
              Fair
      Value Measurements at March 31, 2010 Using3/31/2010
              
              
              Quoted
      Prices in Active Markets for Identical Assets
                (Level
      1)
              
              
              Significant
      Other Observable Inputs
                (Level
      2)
              
              
              Significant
      Unobservable Inputs
                (Level
      3)Assets:Impaired
      loans
              
              $
              13,813
              
              
              $
              -
              
              
              $
              -
              
              
              $
              13,813Foreclosed
      real estate
              
              
              3,625
              
              
              
              -
              
              
              
              -
              
              
              
              3,625
  (Dollars
      in thousands)
                
                
                
                
                Fair
      Value Measurements at December 31, 2009 Using12/31/2009
                
                
                Quoted
      Prices in Active Markets for Identical Assets
                  (Level
      1)
                
                
                Significant
      Other Observable Inputs
                  (Level
      2)
                
                
                Significant
      Unobservable Inputs
                  (Level
      3)Assets:Impaired
      loans
                
                $
                11,933
                
                
                $
                -
                
                
                $
                -
                
                
                $
                11,933Foreclosed
      real estate
                
                
                3,747
                
                
                
                -
                
                
                
                -
                
                
                
                3,747





The fair
value of impaired loans with specific allocations of the allowance for loan
losses and foreclosed real estate, which has been written down to fair value, is
generally based on recent real estate appraisals. These appraisals may utilize a
single valuation approach or a combination of approaches including comparable
sales and the income approach. Impaired loans, which are measured for impairment
using the fair value of the collateral for collateral dependent loans, had a
fair value of $13.8 million, with a valuation allowance of $1.7 million,
resulting in an additional provision for the quarter of $542 thousand. 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)March
      31, 2010Carrying
              
              
              EstimatedValue
              
              
              Fair
      ValueFinancial
      assets:Cash
      and cash equivalents
              
              $
              24,348
              
              
              $
              24,348Securities
      available-for-sale
              
              
              139,584
              
              
              
              139,584Securities
      held-to-maturity
              
              
              18,624
              
              
              
              19,500Loans
      held for sale
              
              
              327
              
              
              
              327Loans
      receivable, net
              
              
              453,561
              
              
              
              498,742Federal
      Home Loan Bank stock
              
              
              3,650
              
              
              
              3,650Accrued
      interest receivable
              
              
              2,909
              
              
              
              2,909Financial
      liabilities:Demand
      and savings deposits
              
              
              333,125
              
              
              
              333,125Certificates
      of deposit
              
              
              234,409
              
              
              
              235,148Repurchase
      agreements
              
              
              20,594
              
              
              
              20,008Borrowed
      funds
              
              
              34,535
              
              
              
              34,792Accrued
      interest payable
              
              
              126
              
              
              
              126
  (Dollars
      in thousands)December
      31, 2009Carrying
                
                
                EstimatedValue
                
                
                Fair
      ValueFinancial assets:Cash
      and cash equivalents
                
                $
                13,222
                
                
                $
                13,222Securities
      available-for-sale
                
                
                124,776
                
                
                
                124,776Securities
      held-to-maturity
                
                
                19,557
                
                
                
                20,303Loans
      held for sale
                
                
                1,025
                
                
                
                1,025Loans
      receivable, net
                
                
                452,131
                
                
                
                498,005Federal
      Home Loan Bank stock
                
                
                3,650
                
                
                
                3,650Accrued
      interest receivable
                
                
                2,878
                
                
                
                2,878Financial liabilities:Demand
      and savings deposits
                
                
                313,669
                
                
                
                313,669Certificates
      of deposit
                
                
                226,858
                
                
                
                227,672Repurchase
      agreements
                
                
                15,893
                
                
                
                15,525Borrowed
      funds
                
                
                47,129
                
                
                
                38,932Accrued
      interest payable
                
                
                150
                
                
                
                150




For
purposes of the above disclosures of estimated fair value, the following
assumptions were used as of March 31, 2010 and December 31, 2009. The estimated
fair value for cash and cash equivalents, Federal Home Loan Bank stock, and
accrued interest receivable and payable are considered to approximate carrying
book value. The estimated fair value for loans is based on estimates of the rate
the Bancorp would charge for similar such loans at March 31, 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 March
31, 2010 and December 31, 2009, applied for the time period until maturity. The
estimated fair value for borrowed funds is based on current rates for similar
financings. The estimated fair value of other financial instruments, and
off-balance sheet loan commitments approximate cost and are not considered
significant to this presentation.





14


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





Summary





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




At March
31, 2010, the Bancorp had total assets of $685.7 million, total loans of $460.6
million and total deposits of $567.5 million. Stockholders' equity totaled $54.3
million or 7.92% of total assets, with book value per share at $19.26. For the
quarter ended March 31, 2010, the Bancorp recorded net income of $1.4 million,
or $0.49 earnings per basic share and $0.49 earnings per diluted share. For the
quarter ended March 31, 2010, the return on average assets (ROA) was 0.82%,
while the return on average stockholders’ equity (ROE) was 10.07%.





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 27
months.  The risks associated with our business become more acute in
periods of a slowing economy or slow growth.  Financial institutions
continue to be affected by sharp declines in the real estate market and
constrained financial markets.  While we are taking steps to decrease
and limit our exposure to problem loans, we nonetheless retain direct exposure
to the residential and commercial real estate markets, and we are affected by
these events.





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





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





15


Difficult Market Conditions Have
Adversely Affected Our Industry.We are particularly exposed to downturns
in the U.S. housing market.  Dramatic declines in the housing market
over the past two-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 us and others in the financial institutions
industry.  In particular, we may face the following risks in
connection with these events:





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





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





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





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





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





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





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





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





Financial
Condition





During
the three months ended March 31, 2010, total assets increased by $23.9 million
(3.6%), with interest-earning assets increasing by $29.6 million (4.8%). At
March 31, 2010, interest-earning assets totaled $640.5 million and represented
93.4% of total assets.





Loans
receivable totaled $460.6 million at March 31, 2010, compared to $458.2 million
at December 31, 2009. At March 31, 2010, loans receivable represented 71.9% of
interest earning assets, 67.2% of total assets and 81.2% 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 $53.5 million (11.6%) in construction and
development loans, $179.3 million (39.0%) in residential mortgage loans, $9.1
million (2.0%) in multifamily loans, $135.9 million (29.5%) in commercial real
estate loans, $1.4 million (0.3%) in consumer loans, $64.7 million (14.0%) in
commercial business loans and $16.7 million (3.6%) in government and other
loans. Adjustable rate loans comprised 41.5% of total loans at March 31,
2010.





16


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 three months ended March
31, 2010, the Bancorp sold $4.5 million in fixed rate mortgage loans, compared
to $20.2 million during the three months ended March 31, 2009.  During
2009, a high level of loan sales occurred as a result of refinancing activity
associated with the Federal Reserve’s successful effort to lower long-term
interest rates.  Also, during the first quarter of 2009, the Bancorp
conducted a $10.5 million one-time sale of portfolio fixed rate mortgage loans,
which were sold to reduce interest rate risk. Net gains realized from mortgage
loan sales totaled $109 thousand for the three months ended March 31, 2010,
compared to $566 thousand for the three months ended March 31,
2009.  At March 31, 2010, the Bancorp had $327 thousand in loans that
were classified as held for sale.





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





Historically,
the Bancorp has successfully originated commercial real estate loans within its
primary market area.  However, beginning in the fourth quarter of
2005, in a response to a decrease in local loan demand and in an effort to
reduce the potential credit risk associated with geographic concentrations, a
strategy was implemented to purchase commercial real estate participation loans
outside of the Bancorp’s primary market area.  The strategy to
purchase these commercial real estate participation loans was limited to 10% of
the Bancorp’s loan portfolio.  The Bancorp’s management discontinued
the strategy during the third quarter of 2007.  As of March 31, 2010,
the Bancorp’s commercial real estate participation loan portfolio consisted of
eleven loans with an aggregate balance of $32.0 million, and an additional $1.9
million in funding commitments for three of the eleven loans.  Of the
$32.0 million in commercial real estate participation loans, $12.1 million has
been purchased within the Bancorp’s primary market area and $19.9 million
outside of the primary market.  At March 31, 2010, $11.6 million or
36.3% of the Bancorp’s commercial real estate participation loans have been
internally classified as substandard and placed in non-accrual
status.  Of the $11.6 million in commercial real estate participation
loans placed in non-accrual status, $8.1 million are located outside of the
Bancorp’s primary market area.  The discussion in the paragraphs that
follow regarding non-performing loans, internally classified loans and impaired
loans include loans from the Bancorp’s commercial real estate participation loan
portfolio.





For all
of its commercial real estate participation loans, the Bancorp’s management
requires that the lead lenders obtain external appraisals to determine the fair
value of the underlying collateral for these collateral dependent
loans.  The Bancorp’s management requires current external appraisals
when entering into a new lending relationship or when events have occurred that
materially change the assumptions in the existing appraisal, such as loan
impairment.  The lead lenders receive external appraisals from
qualified appraisal firms that have expertise in valuing commercial properties
and are able to comply with the required scope of the
engagement.  After the lead lender receives the external appraisal and
performs its compliance review, the appraisal is forwarded to the Bancorp for
review.  The Bancorp’s management validates the external appraisal by
conducting an internal in-house review by personnel with expertise in commercial
real estate developments.  If additional expertise is needed, an
independent review appraiser is obtained to assist in the evaluation of the
appraisal.  The Bancorp is not aware of any significant time lapses
during this process.  Periodically, the Bancorp’s management may make
adjustments to the external appraisal assumptions if additional known
quantifiable data becomes available that materially impacts the value of a
project.  Examples of adjustments that may occur are changes in
property tax assumptions or changes in capitalization rates.  No
adjustments were made to the appraisals that affected the March 31, 2010
reporting period.  The Bancorp’s management relies on up to date
external appraisals to determine the current value of its commercial real estate
participation loans.  These values are appropriately adjusted to
reflect changes in market value and, when necessary, are the basis for
establishing the appropriate allowance for loan loss reserve.  If an
updated external appraisal for a commercial real estate participation loan is
received after the balance sheet date, but before the annual or quarterly
financial statements are issued, material changes in appraised values are
“pushed back” in the yet to be issued financial statements in order that
appropriate loan loss provision is recorded for the current reporting
period.  The Bancorp’s management consistently records loan
charge-offs based on the fair value of the collateral as presented in the
current external appraisal.





17


Non-performing
loans include those loans that are 90 days or more past due and those loans that
have been placed in non-accrual status.  Non-performing loans totaled
$18.8 million at March 31, 2010, compared to $18.6 million at December 31, 2009,
an increase of $263 thousand or 1.4%.  The current level of
non-performing loans is concentrated with four commercial real estate
participation loans in the aggregate of $11.6 million that were placed in
non-accrual status during 2009.  As previously reported, one
commercial real estate participation loan is a condominium construction project
in Orlando, Florida, with a current balance of $1.6 million, which is classified
as substandard.  The carrying value of this loan is based on the
current fair value of the project’s collateral.  The second commercial
real estate participation loan is an end loan for a hotel located in Dundee,
Michigan, with a current balance of $1.5 million, which is classified as
substandard.  The carrying value of this loan is based on the current
fair value of the hotel.  The third commercial real estate
participation loan is an end loan for a hotel located in Fort Worth, Texas, with
a balance of $5.0 million, which is classified as substandard.  Based
on current information provided by the lead lender, management has estimated a
collateral sufficiency for this loan.  The fourth commercial real
estate participation loan is a condominium construction project located in
Chicago, Illinois, with a balance of $3.6 million, which is classified as
substandard.  Based on current information provided by the lead
lender, management has estimated a $351 thousand collateral deficiency for this
loan.  For these four commercial real estate participation loans, to
the extent that actual cash flows, collateral values and strength of personal
guarantees differ from current estimates, additional provisions to the allowance
for loan losses may be required.





The ratio
of non-performing loans to total loans was 4.09% at March 31, 2010, compared to
4.05% at December 31, 2009.  The ratio of non-performing loans to
total assets was 2.75% at March 31, 2010, compared to 2.81% at December 31,
2009.  The March 31, 2010, non-performing loan balances include $17.7
million in loans accounted for on a non-accrual basis and $1.1 million in
accruing loans, which were contractually past due 90 days or
more.  Loans, internally classified as substandard, totaled $31.3
million at March 31, 2010, compared to $22.7 million at December 31,
2009.  The increase in substandard loans is primarily attributable to
one commercial real estate hotel loan in the amount of $5.0
million.  In addition, $2.0 million in commercial related loans to
five borrowers were added to substandard loans during the current
quarter.  No loans were internally classified as doubtful or loss at
March 31, 2010 or December 31, 2009.  Substandard loans include
non-performing loans and potential problem loans, where information about
possible credit issues or other conditions causes management to question the
ability of such borrowers to comply with loan covenants or repayment
terms.   In addition to identifying and monitoring non-performing
and other classified loans, management maintains a list of watch
loans.  Watch loans represent loans management is closely monitoring
due to one or more factors that may cause the loan to become
classified.  Watch loans totaled $22.0 million at March 31, 2010,
compared to $26.7 million at December 31, 2009.





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 March 31, 2010, impaired
loans totaled $23.3 million, compared to $17.0 million at December 31,
2009.  The March 31, 2010, impaired loan balances consist of one
residential loan and twenty-six 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 March 31, 2010 ALL
contained $1.7 million in specific allowances for collateral deficiencies,
compared to $1.2 million in specific allowances at December 31,
2009.  During the first quarter of 2010, three additional commercial
real estate loans totaling $5.6 million, four additional commercial business
loans totaling $312 thousand and three additional land development loans
totaling $998 thousand were newly classified as
impaired.  Management’s current estimates indicate a collateral
deficiency of $997 thousand for these loans.  As of March 31, 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 March 31, 2010.  Typically, management does not
individually classify smaller-balance homogeneous loans, such as mortgage or
consumer, as impaired.





At March 31, 2010, the Bancorp
classified four loans totaling $12.0 million as troubled debt restructurings,
which involves modifying the terms of a loan to forego a portion of interest or
principal or reducing the interest rate on the loan to a rate materially less
than market rates.  The troubled debt restructurings are comprised of
one construction development participation hotel loan in the amount of $1.5
million, for which a significant deferral of principal repayment was
granted.  The second troubled debt restructuring is for a commercial
real estate participation hotel loan in the amount of $5.0 million, for which a
significant deferral of principal repayment and extension in maturity was
granted.  The third troubled debt restructuring, which is currently in
bankruptcy proceedings is for a commercial real estate loan in the amount of
$568 thousand, for which a significant deferral of principal repayment was
granted.  The three loans classified as troubled debt restructurings
are currently in nonaccrual status and classified as impaired.  One
additional commercial real estate hotel loan for $5.0 million has been
classified as a troubled debt restructuring, for which a significant deferral of
principal repayment was granted.  This loan is in accrual status and
classified as impaired.  The valuation basis for the Bancorp’s
troubled debt restructurings is based on the fair value of the collateral
securing these loans.





18


As of
March 31, 2010, the Bancorp’s management was notified that the quarterly
interest payments for three of its four investments in trust preferred
securities are in “payment in kind” status.  Payment in kind status
results in a temporary delay in the payment of interest.  As a result
of a delay in the collection of the interest payments, management placed these
securities in non-accrual status.  At March 31, 2010, the cost basis
of the three trust preferred securities in non-accrual status totaled $3.9
million.  Current estimates indicate that the interest payment delays
may exceed ten years.  One trust preferred security with a cost basis
of $1.3 million remains in accrual status.





At March
31, 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 March 31, 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.





The
Bancorp is a party to financial instruments in the normal course of business to
meet financing needs of its customers.  These financial instruments,
which include commitments to make loans and standby letters of credit, are not
reflected in the accompanying consolidated financial statements.  Such
financial instruments are recorded when they are funded.  The Bancorp
has a $1.1 million participation in a $6.4 million letter of credit, which acts
as payment support to bondholders.  The letter of credit is secured by
a cash collateral account in the amount of $2.2 million and a collateralized
guarantee in the amount of $1.0 million.  For the past two years, the
cash flows from the security collateralizing the letter of credit have been
negatively impacted as the property was vacant.  Currently, the letter
of credit participants have secured a signed lease from a new tenant that opened
for operations during May 2009.  The signing of the lease resolved one
of the defaults that existed under the letter of credit
document.  During the first quarter of 2010, all prior remaining
defaults have been resolved.  Management will continue to monitor the
letter of credit, bond repayments and the operating results of the new
tenant.





For the
year three months ended March 31, 2010, $1.2 million in provisions to the ALL
account were required, compared to $700 million for the three months ended March
31, 2009.  The increase in the 2010 ALL provision was related to the
need for additional specific allowances for the collateral deficiencies related
to the previously mentioned newly classified substandard loans during the
current quarter.  Charge-offs, net of recoveries, totaled $295
thousand for the quarter ended March 31, 2010, compared to $553 thousand for the
quarter ended March 31, 2009.  The ALL provisions take into
consideration management’s current judgments about the credit quality of the
loan portfolio, loan portfolio balances, changes in the portfolio mix and local
economic conditions.  In determining the provision for loan losses for
the current period, management has given consideration to increased risks
associated with in the local economy, changes in loan balances and mix, and
asset quality.





The ALL
to total loans was 1.53% at March 31, 2010, compared to 1.33% at December 31,
2009.  The ALL to non-performing loans (coverage ratio) was 37.5% at
March 31, 2010, compared to 32.9% at December 31, 2009.  The March 31,
2010 balance in the ALL account of $7.1 million is considered adequate by
management after evaluation of the loan portfolio, past experience and current
economic and market conditions.  While management may periodically
allocate portions of the allowance for specific problem loans, the whole
allowance is available for any loan charge-offs that occur.  The
allocation of the ALL reflects performance and growth trends within the various
loan categories, as well as consideration of the facts and circumstances that
affect the repayment of individual loans, and loans which have been pooled as of
the evaluation date, with particular attention given to non-performing loans and
loans which have been classified as substandard, doubtful or
loss.  Management has allocated reserves to both performing and
non-performing loans based on current information available.





At March
31, 2010, the Bancorp had seventeen properties in foreclosed real estate
totaling $3.6 million, compared to twenty-one properties totaling $3.7 million
at December 31, 2009.  Foreclosed real estate currently includes a
$1.9 million commercial real estate participation loan located in Ann Arbor,
Michigan.  During the first quarter of 2008, the Bancorp’s management
filed a lawsuit against the lead lender to actively pursue potential material
violations of the participation agreement and the underlying loan
documentation.   Management and its legal counsel continue to
actively pursue the claims asserted within the lawsuit.  The remainder
of the Bancorp’s foreclosed real estate is located within its primary market
area.





The
primary objective of the Bancorp’s investment portfolio is to provide for the
liquidity needs of the Bancorp and to contribute to profitability by providing a
stable flow of dependable earnings. Funds are generally invested in federal
funds, interest bearing balances in financial institutions, U.S. government
securities, federal agency obligations, obligations of state and local
municipalities and corporate securities. The securities portfolio totaled $158.2
million at March 31, 2010, compared to $144.3 million at December 31, 2009, an
increase of $13.9 million (9.6%). The increase in securities is a result of
investing excess liquidity in the securities portfolio. At March 31, 2010, the
securities portfolio represented 24.7% of interest-earning assets and 23.1% of
total assets. The securities portfolio was comprised of 1.3% in U.S. government
agency debt securities, 64.8% in U.S. government agency mortgage-backed
securities and collateralized mortgage obligations, 33.1 % in municipal
securities, and 0.8% in pooled trust preferred securities. At March 31, 2010,
securities available-for-sale (“AFS”) totaled $139.6 million or 88.2% 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
March 31, 2010, as a result of the increased liquidity from deposit growth and
mortgage loans sales, the Bancorp carried $15.0 million in interest bearing
balances in financial institutions and $2.7 million in Fed funds sold at the end
of the current quarter. At March 31, 2010, the Bancorp had a Federal Home Loan
Bank (FHLB) stock balance of $3.7 million.





19


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 March 31, 2010, deposits totaled $567.5 million. During the
three months ended March 31, 2010, deposits increased by $27.0 million (5.0%).
Checking account balances increased by $13.1 million (9.1%). Savings account
balances increased by $3.2 million (5.7%) during the current period. Money
market deposit accounts (MMDA’s) increased by $3.1 million (2.8%). Certificates
of deposit increased by $7.6 million (3.3%). At March 31, 2010, the deposit base
was comprised of 27.8% checking accounts, 20.3% MMDA’s, 10.6% savings accounts
and 41.3% certificates of deposit.





The
Bancorp’s borrowed funds are primarily used to fund asset growth not supported
by deposit generation. At March 31, 2010, borrowed funds and repurchase
agreements totaled $55.1 million compared to $63.0 million at December 31, 2009,
a decrease of $7.9 million (12.5%). During 2010, management repaid borrowed
funds as a result of additional liquidity provided by strong deposit growth. As
a result, the Bancorp’s borrowed funds at March 31, 2010, are comprised of $34.0
million in Federal Home Loan Bank (FHLB) fixed advances, $20.6 million in retail
repurchase agreements, and $535 thousand other short term
borrowings.





Liquidity
and Capital Resources





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





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





During
the three months ended March 31, 2010, cash and cash equivalents increased by
$11.1 million compared to a $22.5 million increase for the three months ended
March 31, 2009. The primary sources of cash were proceeds from loan sales, pay
downs of securities, loan repayments and funds from deposit growth. The primary
uses of cash were the purchase of securities, loan originations, funding of
deposit withdrawals, repayment of FHLB advances and the payment of common stock
dividends. Cash provided by operating activities totaled $8.4 million for the
three months ended March 31, 2010, compared to $3.8 million required for the
three month period ended March 31, 2009. The increase in cash from operating
activities was a result of an increase in other liabilities due to the clearing
of customer ACH transactions and an account payable for the proceeds of two
security purchases with settlement dates after March 31, 2010. Cash outflows
from investing activities totaled $15.8 million for the current period, compared
to cash inflows of $10.6 million for the three months ended March 31, 2009. The
change for the current three months was primarily related to the sale of fixed
rate mortgage loans that occurred in the first quarter of last year and
increased purchases of securities. Net cash inflows from financing activities
totaled $18.6 million during the current period compared to $15.7 million for
the three months ended March 31, 2009. The change in net cash inflows from
financing activities was a result of reduced borrowing and increased deposits
for the period. The Bancorp paid dividends on common stock of $592 thousand for
the three months ended March 31, 2010, compared to $1.0 million for the three
months ended March 31, 2009.





At March
31, 2010, outstanding commitments to fund loans totaled $74.5 million.
Approximately 43.4% 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 $2.3 million at March
31, 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.





20


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.  The facility is expected to open in the fall of 2010 and
will not have a material impact on noninterest expense during the current
year.  The new facility will provide opportunities to expand market
share for the Bancorp’s products and services within the town of St. John and
nearby communities.





Management
strongly believes that maintaining a high level of capital enhances safety and
soundness. During the three months ended March 31, 2010, stockholders' equity
increased by $1.2 million (2.3%). During the current three months, stockholders’
equity was increased by net income of $1.4 million and the net change in the
valuation of the available-for-sale securities of $396 thousand. Decreasing
stockholders’ equity was the declaration of $592 thousand in cash
dividends.





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





The
following table shows that, at March 31, 2010, and December 31, 2009, the
Bancorp’s capital exceeded all regulatory capital requirements. During the
quarter, 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 $32.1 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 March 31, 2010 and December
31, 2009. The dollar amounts are in millions.





(Dollars
      in millions)
              
              
              
              
              
              
              
              Required
      for
              
              
              To
      be wellActual
              
              
              adequate
      capital
              
              
              capitalizedAt
      March 31, 2010
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioTotal
      capital to risk-weighted assets
              
              $
              59.7
              
              
              
              11.9
              %
              
              $
              40.3
              
              
              
              8.0
              %
              
              $
              50.4
              
              
              
              10.0
              %Tier
      1 capital to risk-weighted assets
              
              $
              53.4
              
              
              
              10.6
              %
              
              $
              20.2
              
              
              
              4.0
              %
              
              $
              30.2
              
              
              
              6.0
              %Tier
      1 capital to adjusted average assets
              
              $
              53.4
              
              
              
              7.9
              %
              
              $
              20.3
              
              
              
              3.0
              %
              
              $
              33.8
              
              
              
              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 Institutions for the payment of a dividend if the total of all
dividends declared by the Bank during the current year, including the proposed
dividend, would exceed the sum of retained net income for the year to date plus
its retained net income for the previous two years. For this purpose, “retained
net income,” means net income as calculated for call report purposes, less all
dividends declared for the applicable period. Moreover, the FDIC and the Federal
Reserve Board may prohibit the payment of dividends if it determines that the
payment of dividends would constitute an unsafe or unsound practice in light of
the financial condition of the Bank. The aggregate amount of dividends, which
may be declared by the Bank in 2010, without prior regulatory approval,
approximates $1,775,000 plus current 2010 net profits.





21


Results
of Operations - Comparison of the Quarter Ended March 31, 2010 to the Quarter
Ended March 31, 2009





For the
quarter ended March 31, 2010, the Bancorp reported net income of $1.4 million,
compared to net income of $1.7 million for the quarter ended March 31, 2009, a
decrease of $316 thousnd (18.5%). For the current quarter the ROA was 0.82%,
compared to 1.02% for the quarter ended March 31, 2009. The ROE was 10.07% for
the quarter ended March 31, 2010, compared to 12.65% for the quarter ended March
31, 2009.





Net
interest income for the three months ended March 31, 2010 was $6.2 million, an
increase of $438 thousand (7.6%), compared to $5.8 million for the quarter ended
March 31, 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 4.94% for the three months ended March 31,
2010, compared to 5.40% for the three months ended March 31, 2009. The
weighted-average cost of funds for the quarter ended March 31, 2010, was 0.99%
compared to 1.74% for the quarter ended March 31, 2009. The impact of the 4.94%
return on interest earning assets and the 0.99% cost of funds resulted in an
interest rate spread of 3.95% for the current quarter compared to 3.66% for the
quarter ended March 31, 2009. During the current quarter, total interest income
decreased by $692 thousand (8.2 %) while total interest expense decreased by
$1.1 million (42.6%). The net interest margin was 3.68% for the three months
ended March 31, 2010, compared to 3.71% for the quarter ended March 31, 2009. On
a tax equivalent basis, the Bancorp’s net interest margin was 4.19% for the
three months ended March 31, 2010, compared to 3.92% for the quarter ended March
31, 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 March 31, 2010, interest income from loans decreased by
$642 thousand (9.4%), compared to the three months ended March 31, 2009. The
change was primarily due to a decrease in the weighted-average yield of the loan
portfolio and lower average balances. The weighted-average yield on loans
outstanding was 5.41% for the current quarter, compared to 5.65% for the three
months ended March 31, 2009. Loan balances averaged $459.7 million for the
current quarter, a decrease of $25.8 million (5.3%) from $485.5 million for the
three months ended March 31, 2009. During the three months ended March 31, 2010,
interest income on securities and other interest bearing balances decreased by
$50 thousand (3.2%), compared to the quarter ended March 31, 2009. The decrease
was due to a decrease in average yield. The weighted-average yield on securities
and other interest bearing balances was 3.65%, for the current quarter, compared
to 4.56% for the three months ended March 31, 2009. Securities balances averaged
$148.8 million for the current quarter, up $20.0 million (15.5%) from $128.8
million for the three months ended March 31, 2009. The increase in security
average balances is a result consistent investment growth during 2009 and 2010.
Other interest bearing balances averaged $19.4 million for the current period,
up $9.0 million (86.5%) from $10.4 million for the three months ended March 31,
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 $965 thousand (44.6%) during the current
quarter compared to the three months ended March 31, 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 March 31, 2010
was 0.86%, compared to 1.63%, for the quarter ended March 31, 2009. Total
deposit balances averaged $560.0 million for the current quarter, up $26.9
million (5.0%) from $533.1 million for the quarter ended March 31, 2009.
Interest expense on borrowed funds decreased by $165 thousand (34.0%) during the
current quarter due to a decrease in average daily balances and a decrease in
the weighted average rate paid for borrowing funds. The weighted-average cost of
borrowed funds was 2.30% for the current quarter compared to 2.57% for the three
months ended March 31, 2009. Borrowed funds averaged $55.8 million during the
quarter ended March 31, 2010, a decrease of $19.7 million (26.1%) from $75.5
million for the quarter ended March 31, 2009.





Noninterest
income for the quarter ended March 31, 2010 was $1.3 million, a decrease of $312
thousand (19.3%) from $1.6 million for the quarter ended March 31, 2009. During
the current quarter, fees and service charges totaled $609 thousand, a decrease
of $30 thousand (4.7%) from $639 thousand for the quarter ended March 31, 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 $109 thousand for
the current quarter, a decrease of $457 thousand (80.7%), compared to $566
thousand for the quarter ended March 31, 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 $281
thousand for the quarter ended March 31, 2010, an increase of $84 thousand
(42.6%) from $197 thousand for the quarter ended March 31, 2009. The increase in
Wealth Management income is related to growth in assets under management. Gains
from the sale of securities totaled $289 thousand for the current quarter, an
increase of $149 thousand (106.4%) from $140 thousand for the quarter ended
March 31, 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
$100 thousand for the quarter ended March 31, 2010, a decrease of $5 thousand
(4.8%), compared to $105 thousand for the quarter ended March 31, 2009. At March
31, 2010, the Bancorp recognized a $113 thousand other-than-temporary impairment
for one of its trust preferred securities. For the quarter ended March 31, 2010,
a gain of $22 thousand on foreclosed real estate was realized, compared to a $37
thousand loss for the quarter ended March 31, 2009. During the current quarter,
other noninterest income totaled $4 thousand for the quarters ended March 31,
2010 and $3 thousand for the quarter ended March 31, 2009.





22


Noninterest
expense for the quarter ended March 31, 2010 was $4.7 million, an increase of
$127 thousand (2.8%) from $4.5 million for the three months ended March 31,
2009. During the current quarter, compensation and benefits totaled $2.4
million, an increase of $44 thousand (1.9%) from $2.4 million for the quarter
ended March 31, 2009. The change in compensation and benefits is related to
annual compensation increases for bank personnel. Occupancy and equipment
totaled $785 thousand for the current quarter, an increase of $2 thousand (0.3%)
compared to $783 thousand for the quarter ended March 31, 2009. Federal deposit
insurance premium expense totaled $231 thousand for the three months ended March
31, 2010, an increase of $45 thousand (24.2%) from $186 thousand for the three
months ended March 31, 2009. The change is a result of an industry wide increase
in the FDIC insurance premium assessment rates. Data processing expense totaled
$233 thousand for the three months ended March 31, 2010, an increase of $18
thousand (8.4%) from $215 thousand for the three months ended March 31, 2009.
Marketing expense related to banking products totaled $125 thousand for the
current quarter, an increase of $58 thousand (86.6%) from $67 thousand for the
three months ended March 31, 2009. The increase in marketing expense was a
result of additional brand and product advertising during the current quarter.
Other expenses related to banking operations totaled $892 thousand for the
quarter ended March 31, 2010, a decrease of $40 thousand (4.3%) from $932
thousand for the quarter ended March 31, 2009. The Bancorp’s efficiency ratio
was 62.1% for the quarter ended March 31, 2010, compared to 61.4% for the three
months ended March 31, 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 March 31, 2010 totaled $229 thousand,
compared to income tax expense of $449 thousand for the three months ended March
31, 2009, a decrease of $220 thousand (49.0 %). The combined effective federal
and state tax rates for the Bancorp was 14.1% for the three months ended March
31, 2010, compared to 20.8% for the three months ended March 31, 2009. The
Bancorp’s lower current quarter effective tax rate is a result of the Bank’s
investment subsidiary, real estate investment trust, affordable housing tax
credits, and continued investments in government loans and municipal
securities.





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.





23


Item 3. Quantitative and Qualitative
Disclosures About Market Risk





Not Applicable.





Item
4T.  Controls and Procedures





(a)           Evaluation of Disclosure
Controls and Procedures.





The Bancorp maintains disclosure
controls and procedures (as defined in Sections 13a – 15(e) and 15d – 15(e)) of
regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange
Act”) that are designed to ensure that information required to be disclosed by
the Bancorp in the reports that it files or submits under the "Exchange Act" is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. These disclosure controls and procedures include
controls and procedures designed to ensure that information required to be
disclosed by the Bancorp in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Bancorp's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure. The
Bancorp's chief executive officer and chief financial officer evaluate the
effectiveness of the Bancorp's disclosure controls and procedures as of the end
of each quarter. Based on that evaluation as of March 31, 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
March 31, 2010 that has materially affected, or is reasonably likely to
materially affect, the Bancorp's internal control over financial
reporting.





24


PART II - Other
Information





Item
1.              Legal
Proceedings


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





Item
1A.           Risk
Factors


Not
Applicable.





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


There are
no matters reportable under this item.





Item
3.              Defaults Upon Senior
Securities


There are
no matters reportable under this item.





Item
4.              (Removed and
Reserved)





Item
5.              Other
Information


There are
no matters reportable under this item.





Item
6.              Exhibits





Exhibit


Number                 Description





10.1
            Amended
      Unfunded Deferred Compensation Plan for the Directors of Peoples Bank
      effective January 1, 2005 (amended as of February 26,
  2010)





10.2
            Amended
      Post 2004 Unfunded Deferred Compensation Plan for the Directors of Peoples
      Bank SB effective January 1, 2005 (amended as of February 26,
      2010)





31.1
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer


31.2
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer
 32.1
                Section
      1350 Certifications
 
 25


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:  April
      21, 2010
              By:
              /s/ David
      A. BochnowskiDavid
      A. BochnowskiChairman
      of the Board and Chief Executive Officer




Date:  April
      21, 2010
              By:
              /s/ Robert
      T. LowryRobert
      T. LowrySenior
      Vice President, Chief Financial Officerand
      Treasurer






26