SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549





FORM
10-Q





(Mark
One)


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





For the quarterly period ended
September 30, 2009, or





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





For the transition period from ________
to ________





Commission File Number:
0-26128





NorthWest Indiana
Bancorp(Exact
      name of registrant as specified in its
charter)


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





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





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





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





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


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


(Do not check if a smaller reporting company)





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





There
were 2,816,663 shares of the registrant’s Common Stock, without par value,
outstanding at September 30, 2009.





NorthWest
Indiana Bancorp


Index





PageNumberPART I.  Financial InformationItem 1.
                        Unaudited Financial StatementsConsolidated Balance Sheets, September 30, 2009 and December 31, 2008
                        
                        1Consolidated Statements of Income, Three and Nine months EndedSeptember 30, 2009 and 2008
                        
                        2Consolidated Statements of Changes in Stockholders' Equity, Three and Nine monthsEnded September 30, 2009 and 2008
                        
                        3Consolidated Statements of Cash Flows, Nine monthsEnded September 30, 2009 and 2008
                        
                        4Notes to Consolidated Financial Statements
                        
                        5-15Item 2.
                        Management’s Discussion and Analysis of Financial Condition andResults of Operations
                        
                        16-26Item 3.
                        Quantitative and Qualitative Disclosures About Market Risk
                        
                        26Item 4T.
                        Controls and Procedures
                        
                        26PART II.  Other Information
                        
                        27SIGNATURES
                        
                        28EXHIBITS31.1  Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2  Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1  Section 1350 Certifications







NorthWest
Indiana Bancorp


Consolidated
Balance Sheets





September 30,
                                                        
                                                        
                                                        December 31,2009
                                                        
                                                        
                                                        2008(Dollars
      in thousands)
                                                        
                                                        (unaudited)ASSETSCash
      and non-interest bearing balances in financial
institutions
                                                        
                                                        $
                                                        8,981
                                                        
                                                        
                                                        $
                                                        10,005Interest
      bearing balances in financial institutions
                                                        
                                                        
                                                        16,394
                                                        
                                                        
                                                        
                                                        -Federal
      funds sold
                                                        
                                                        
                                                        3,664
                                                        
                                                        
                                                        
                                                        1,291Total
      cash and cash equivalents
                                                        
                                                        
                                                        29,039
                                                        
                                                        
                                                        
                                                        11,296Securities
      available-for-sale
                                                        
                                                        
                                                        122,279
                                                        
                                                        
                                                        
                                                        108,207Securities
      held-to-maturity
                                                        
                                                        
                                                        21,280
                                                        
                                                        
                                                        
                                                        18,515Loans
      held for sale
                                                        
                                                        
                                                        906
                                                        
                                                        
                                                        
                                                        -Loans
      receivable
                                                        
                                                        
                                                        463,143
                                                        
                                                        
                                                        
                                                        489,509Less:
      allowance for loan losses
                                                        
                                                        
                                                        (5,173
                                                        )
                                                        
                                                        
                                                        (5,830
                                                        )Net
      loans receivable
                                                        
                                                        
                                                        457,970
                                                        
                                                        
                                                        
                                                        483,679Federal
      Home Loan Bank stock
                                                        
                                                        
                                                        3,650
                                                        
                                                        
                                                        
                                                        3,650Accrued
      interest receivable
                                                        
                                                        
                                                        2,893
                                                        
                                                        
                                                        
                                                        3,160Premises
      and equipment
                                                        
                                                        
                                                        19,511
                                                        
                                                        
                                                        
                                                        19,083Foreclosed
      real estate
                                                        
                                                        
                                                        3,617
                                                        
                                                        
                                                        
                                                        527Cash
      value of bank owned life insurance
                                                        
                                                        
                                                        11,948
                                                        
                                                        
                                                        
                                                        11,641Other
      assets
                                                        
                                                        
                                                        5,203
                                                        
                                                        
                                                        
                                                        4,974Total
      assets
                                                        
                                                        $
                                                        678,296
                                                        
                                                        
                                                        $
                                                        664,732LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Non-interest
      bearing
                                                        
                                                        $
                                                        52,201
                                                        
                                                        
                                                        $
                                                        43,367Interest
      bearing
                                                        
                                                        
                                                        505,069
                                                        
                                                        
                                                        
                                                        484,781Total
                                                        
                                                        
                                                        557,270
                                                        
                                                        
                                                        
                                                        528,148Borrowed
      funds
                                                        
                                                        
                                                        61,050
                                                        
                                                        
                                                        
                                                        74,795Accrued
      expenses and other liabilities
                                                        
                                                        
                                                        6,657
                                                        
                                                        
                                                        
                                                        9,016Total
      liabilities
                                                        
                                                        
                                                        624,977
                                                        
                                                        
                                                        
                                                        611,959Stockholders'
      Equity:Preferred
      stock, no par or stated value;10,000,000
      shares authorized, none outstanding
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Common
      stock, no par or stated value; 10,000,000 shares
    authorized;shares
      issued:  September 30, 2009 - 2,889,802
                                                        
                                                        
                                                        361
                                                        
                                                        
                                                        
                                                        361December
      31, 2008 - 2,887,452shares
      outstanding:  September 30, 2009 - 2,816,663December
      31, 2008 - 2,809,075Additional
      paid in capital
                                                        
                                                        
                                                        5,095
                                                        
                                                        
                                                        
                                                        5,064Accumulated
      other comprehensive income/(loss)
                                                        
                                                        
                                                        653
                                                        
                                                        
                                                        
                                                        (1,289
                                                        )Retained
      earnings
                                                        
                                                        
                                                        48,799
                                                        
                                                        
                                                        
                                                        50,365Treasury
      stock, common shares at cost:  September 30, 2009 -
      73,139December
      31, 2008 - 78,377
                                                        
                                                        
                                                        (1,589
                                                        )
                                                        
                                                        
                                                        (1,728
                                                        )Total
      stockholders' equity
                                                        
                                                        
                                                        53,319
                                                        
                                                        
                                                        
                                                        52,773Total
      liabilities and stockholders' equity
                                                        
                                                        $
                                                        678,296
                                                        
                                                        
                                                        $
                                                        664,732





See
accompanying notes to consolidated financial statements.


1




NorthWest
Indiana Bancorp


Consolidated
Statements of Income


(unaudited)





Three Months Ended
                
                
                Nine Months Ended(Dollars in thousands, except per share data)
                
                September 30,
                
                
                September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Interest
      income:Loans
      receivableReal
      estate loans
                
                $
                5,293
                
                
                $
                6,285
                
                
                $
                16,826
                
                
                $
                19,004Commercial
      loans
                
                
                954
                
                
                
                941
                
                
                
                2,767
                
                
                
                2,939Consumer
      loans
                
                
                29
                
                
                
                40
                
                
                
                93
                
                
                
                118Total
      loan interest
                
                
                6,276
                
                
                
                7,266
                
                
                
                19,686
                
                
                
                22,061Securities
                
                
                1,538
                
                
                
                1,482
                
                
                
                4,632
                
                
                
                4,243Other
      interest earning assets
                
                
                3
                
                
                
                13
                
                
                
                14
                
                
                
                59Total
      interest income
                
                
                7,817
                
                
                
                8,761
                
                
                
                24,332
                
                
                
                26,363Interest
      expense:Deposits
                
                
                1,636
                
                
                
                2,365
                
                
                
                5,687
                
                
                
                8,255Borrowed
      funds
                
                
                437
                
                
                
                607
                
                
                
                1,384
                
                
                
                1,738Total
      interest expense
                
                
                2,073
                
                
                
                2,972
                
                
                
                7,071
                
                
                
                9,993Net
      interest income
                
                
                5,744
                
                
                
                5,789
                
                
                
                17,261
                
                
                
                16,370Provision
      for loan losses
                
                
                4,675
                
                
                
                590
                
                
                
                6,490
                
                
                
                1,540Net
      interest income after provision for loan losses
                
                
                1,069
                
                
                
                5,199
                
                
                
                10,771
                
                
                
                14,830Noninterest
      income:Fees
      and service charges
                
                
                694
                
                
                
                782
                
                
                
                2,004
                
                
                
                2,185Gain
      on sale of loans, net
                
                
                167
                
                
                
                24
                
                
                
                1,032
                
                
                
                94Wealth
      management operations
                
                
                270
                
                
                
                201
                
                
                
                672
                
                
                
                618Gain
      on securities, net
                
                
                93
                
                
                
                41
                
                
                
                437
                
                
                
                187Increase
      in cash value of bank owned life insurance
                
                
                98
                
                
                
                106
                
                
                
                306
                
                
                
                311Other-than-temporary
      impairment of securities
                
                
                138
                
                
                
                0
                
                
                
                (145
                )
                
                
                0Portion
      of gain/(loss) recognized in other comprehensive income
                
                
                (182
                )
                
                
                0
                
                
                
                101
                
                
                
                0Gain/(loss)
      on foreclosed real estate
                
                
                (26
                )
                
                
                (40
                )
                
                
                (58
                )
                
                
                (21
                )Other
                
                
                11
                
                
                
                11
                
                
                
                23
                
                
                
                131Total
      noninterest income
                
                
                1,263
                
                
                
                1,125
                
                
                
                4,372
                
                
                
                3,505Noninterest
      expense:Compensation
      and benefits
                
                
                2,451
                
                
                
                2,243
                
                
                
                7,061
                
                
                
                6,577Occupancy
      and equipment
                
                
                782
                
                
                
                733
                
                
                
                2,315
                
                
                
                2,148Federal
      deposit insurance premiums
                
                
                246
                
                
                
                27
                
                
                
                986
                
                
                
                57Data
      processing
                
                
                222
                
                
                
                213
                
                
                
                652
                
                
                
                641Marketing
                
                
                153
                
                
                
                85
                
                
                
                368
                
                
                
                304Other
                
                
                924
                
                
                
                976
                
                
                
                2,896
                
                
                
                2,764Total
      noninterest expense
                
                
                4,778
                
                
                
                4,277
                
                
                
                14,278
                
                
                
                12,491Income
      before income tax expenses
                
                
                (2,446
                )
                
                
                2,047
                
                
                
                865
                
                
                
                5,844Income
      tax expenses/(benefit)
                
                
                (1,051
                )
                
                
                474
                
                
                
                (498
                )
                
                
                1,178Net
      income/(loss)
                
                $
                (1,395
                )
                
                $
                1,573
                
                
                $
                1,363
                
                
                $
                4,666Earnings/(loss)
      per common share:Basic
                
                $
                (0.50
                )
                
                $
                0.56
                
                
                $
                0.48
                
                
                $
                1.66Diluted
                
                $
                (0.50
                )
                
                $
                0.56
                
                
                $
                0.48
                
                
                $
                1.65Dividends
      declared per common share
                
                $
                0.32
                
                
                $
                0.36
                
                
                $
                1.00
                
                
                $
                1.08





See
accompanying notes to consolidated financial statements.


2




NorthWest
Indiana Bancorp


Consolidated
Statements of Changes in Stockholders' Equity


(unaudited)





Three Months Ended
                    
                    
                    Nine Months Ended(Dollars in thousands)
                    
                    September 30,
                    
                    
                    September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Balance
      at beginning of period
                    
                    $
                    53,274
                    
                    
                    $
                    52,253
                    
                    
                    $
                    52,773
                    
                    
                    $
                    52,733Comprehensive
      income:Net
      income/(loss)
                    
                    
                    (1,395
                    )
                    
                    
                    1,573
                    
                    
                    
                    1,363
                    
                    
                    
                    4,666Net
      unrealized gain/(loss) on securitiesavailable-for-sale,
      net of reclassifications and tax effects
                    
                    
                    2,283
                    
                    
                    
                    (1,976
                    )
                    
                    
                    1,948
                    
                    
                    
                    (3,410
                    )Amortization
      of unrecognized gain
                    
                    
                    (2
                    )
                    
                    
                    (2
                    )
                    
                    
                    (6
                    )
                    
                    
                    (9
                    )Comprehensive
      income/(loss)
                    
                    
                    886
                    
                    
                    
                    (405
                    )
                    
                    
                    3,305
                    
                    
                    
                    1,247Issuance
      of common stock,under
      stock based compensation plan, including tax effects
                    
                    
                    -
                    
                    
                    
                    60
                    
                    
                    
                    4
                    
                    
                    
                    101Stock
      based compensation expense
                    
                    
                    9
                    
                    
                    
                    14
                    
                    
                    
                    33
                    
                    
                    
                    45Sale
      of treasury stock
                    
                    
                    52
                    
                    
                    
                    25
                    
                    
                    
                    101
                    
                    
                    
                    89Stock
      repurchase
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (226
                    )Adjustment
      to retained earnings for EITF 06-4
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (84
                    )
                    
                    
                    (20
                    )Cash
      dividends
                    
                    
                    (902
                    )
                    
                    
                    (1,011
                    )
                    
                    
                    (2,813
                    )
                    
                    
                    (3,033
                    )Balance
      at end of period
                    
                    $
                    53,319
                    
                    
                    $
                    50,936
                    
                    
                    $
                    53,319
                    
                    
                    $
                    50,936





See
accompanying notes to consolidated financial statements.


3




NorthWest
Indiana Bancorp


Consolidated
Statements of Cash Flows


(unaudited)





Nine Months Ended(Dollars in thousands)
                    
                    September30,2009
                    
                    
                    2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                    
                    $
                    1,363
                    
                    
                    $
                    4,666Adjustments
      to reconcile net income tonet
      cash provided by operating activities:Origination
      of loans for sale
                    
                    
                    (44,961
                    )
                    
                    
                    (3,940
                    )Sale
      of loans originated for sale
                    
                    
                    44,771
                    
                    
                    
                    3,812Depreciation
      and amortization, net of accretion
                    
                    
                    1,095
                    
                    
                    
                    1,149Amortization
      of mortgage servicing rights
                    
                    
                    113
                    
                    
                    
                    69Amortization
      of investment in real estate limited partnerships
                    
                    
                    142
                    
                    
                    
                    19Equity
      in (gain)/loss of investment in limited partnership,net
      of interest received
                    
                    
                    11
                    
                    
                    
                    73Stock
      based compensation expense
                    
                    
                    33
                    
                    
                    
                    45Net
      gains on sales and calls of securities
                    
                    
                    (437
                    )
                    
                    
                    (187
                    )Net
      gains on sale of loans
                    
                    
                    (1,032
                    )
                    
                    
                    (94
                    )Net
      losses due to other-than-temporary impairment of
securities
                    
                    
                    44
                    
                    
                    
                    -Net
      losses on foreclosed real estate
                    
                    
                    58
                    
                    
                    
                    21Provision
      for loan losses
                    
                    
                    6,490
                    
                    
                    
                    1,540Net
      change in:Interest
      receivable
                    
                    
                    267
                    
                    
                    
                    191Other
      assets
                    
                    
                    (1,373
                    )
                    
                    
                    (410
                    )Cash
      value of bank owned life insurance
                    
                    
                    (307
                    )
                    
                    
                    (311
                    )Accrued
      expenses and other liabilities
                    
                    
                    (2,442
                    )
                    
                    
                    (405
                    )Total
      adjustments
                    
                    
                    2,472
                    
                    
                    
                    1,572Net
      cash from operating activities
                    
                    
                    3,835
                    
                    
                    
                    6,238CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from maturities and pay downs of securities
    available-for-sale
                    
                    
                    17,254
                    
                    
                    
                    24,343Proceeds
      from sales of securities available-for-sale
                    
                    
                    21,023
                    
                    
                    
                    5,976Purchase
      of securities available-for-sale
                    
                    
                    (48,914
                    )
                    
                    
                    (39,612
                    )Purchase
      of securities held-to-maturity
                    
                    
                    (3,860
                    )
                    
                    
                    (2,171
                    )Proceeds
      from maturities and pay downs of securities
    held-to-maturity
                    
                    
                    1,073
                    
                    
                    
                    1,925Proceeds
      from sale of loans transferred to held-for-sale
                    
                    
                    10,651
                    
                    
                    
                    -Loan
      participations purchased
                    
                    
                    -
                    
                    
                    
                    (200
                    )Net
      change in loans receivable
                    
                    
                    5,578
                    
                    
                    
                    (19,138
                    )Purchase
      of Federal Home Loan Bank Stock
                    
                    
                    -
                    
                    
                    
                    (100
                    )Purchase
      of premises and equipment, net
                    
                    
                    (1,566
                    )
                    
                    
                    (3,082
                    )Proceeds
      from sale of foreclosed real estate
                    
                    
                    -
                    
                    
                    
                    109Net
      cash from investing activities
                    
                    
                    1,239
                    
                    
                    
                    (31,950
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Change
      in deposits
                    
                    
                    29,122
                    
                    
                    
                    29,065Proceeds
      from  FHLB advances
                    
                    
                    6,000
                    
                    
                    
                    30,000Repayment
      of FHLB advances
                    
                    
                    (13,000
                    )
                    
                    
                    (26,000
                    )Change
      in other borrowed funds
                    
                    
                    (6,745
                    )
                    
                    
                    (3,793
                    )Tax
      effect of nonqualified stock option exercise
                    
                    
                    -
                    
                    
                    
                    6Proceeds
      from issuance of common stock
                    
                    
                    4
                    
                    
                    
                    95Proceeds
      from sale of treasury stock
                    
                    
                    101
                    
                    
                    
                    89Dividends
      paid
                    
                    
                    (2,813
                    )
                    
                    
                    (3,034
                    )Treasury
      stock purchased
                    
                    
                    -
                    
                    
                    
                    (226
                    )Net
      cash from financing activities
                    
                    
                    12,669
                    
                    
                    
                    26,202Net
      change in cash and cash equivalents
                    
                    
                    17,743
                    
                    
                    
                    490Cash
      and cash equivalents at beginning of period
                    
                    
                    11,296
                    
                    
                    
                    12,111Cash
      and cash equivalents at end of period
                    
                    $
                    29,039
                    
                    
                    $
                    12,601SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
                    
                    $
                    7,128
                    
                    
                    $
                    10,379Income
      taxes
                    
                    $
                    990
                    
                    
                    $
                    1,390SUPPLEMENTAL
      NONCASH INFORMATION:Transfers
      from loans to foreclosed real estate
                    
                    $
                    3,529
                    
                    
                    $
                    821Transfers
      from loans to loans held for sale
                    
                    $
                    10,493
                    
                    
                    $
                    -





See
accompanying notes to consolidated financial statements.


4




NorthWest
Indiana Bancorp




Notes
to Consolidated Financial Statements





Note
1 - Basis of Presentation


The consolidated financial statements
include the accounts of NorthWest Indiana Bancorp (the “Bancorp”), its
wholly-owned subsidiary, Peoples Bank SB (the “Bank”), and the Bank’s
wholly-owned subsidiaries, Peoples Service Corporation, NWIN, LLC and NWIN
Funding, Inc.  The Bancorp has no other business activity other than
being a holding company for the Bank.  The Bancorp’s earnings are
dependent upon the earnings of the Bank.  The accompanying unaudited
consolidated financial statements were prepared in accordance with instructions
for Form 10-Q and, therefore, do not include all disclosures required by U.S.
generally accepted accounting principles for complete presentation of financial
statements.  In the opinion of management, the consolidated financial
statements contain all adjustments necessary to present fairly the consolidated
balance sheets of the Bancorp as of September 30, 2009 and December 31, 2008,
and the consolidated statements of income and changes in stockholders’ equity
for the three and nine months ended September 30, 2009 and 2008, and cash flows
for the nine months ended September 30, 2009 and 2008.  The income
reported for the nine-month period ended September 30, 2009 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 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
                      
                      
                      Value9/30/2009U.S.
      government sponsored entities
                      
                      $
                      1,992
                      
                      
                      $
                      73
                      
                      
                      $
                      -
                      
                      
                      $
                      2,065CMO
      and residential mortgage-backed securities
                      
                      
                      62,670
                      
                      
                      
                      2,716
                      
                      
                      
                      -
                      
                      
                      
                      65,386Municipal
      securities
                      
                      
                      33,438
                      
                      
                      
                      2,007
                      
                      
                      
                      (59
                      )
                      
                      
                      35,386Corporate
      debt securities
                      
                      
                      3,026
                      
                      
                      
                      89
                      
                      
                      
                      (11
                      )
                      
                      
                      3,104CMO
      government sponsored entities
                      
                      
                      14,805
                      
                      
                      
                      270
                      
                      
                      
                      (11
                      )
                      
                      
                      15,064Collateralized
      debt obligations
                      
                      
                      5,435
                      
                      
                      
                      -
                      
                      
                      
                      (4,161
                      )
                      
                      
                      1,274Total
      debt securities
                      
                      $
                      121,366
                      
                      
                      $
                      5,155
                      
                      
                      $
                      (4,242
                      )
                      
                      $
                      122,27912/31/2008U.S.
      government sponsored entities
                      
                      $
                      5,484
                      
                      
                      $
                      137
                      
                      
                      $
                      -
                      
                      
                      $
                      5,621CMO
      and residential mortgage-backed securities
                      
                      
                      63,520
                      
                      
                      
                      1,856
                      
                      
                      
                      (7
                      )
                      
                      
                      65,369Municipal
      securities
                      
                      
                      26,952
                      
                      
                      
                      259
                      
                      
                      
                      (532
                      )
                      
                      
                      26,679Corporate
      debt securities
                      
                      
                      5,079
                      
                      
                      
                      -
                      
                      
                      
                      (266
                      )
                      
                      
                      4,813CMO
      government sponsored entities
                      
                      
                      3,756
                      
                      
                      
                      97
                      
                      
                      
                      (1
                      )
                      
                      
                      3,852Collateralized
      debt obligations
                      
                      
                      5,481
                      
                      
                      
                      -
                      
                      
                      
                      (3,608
                      )
                      
                      
                      1,873Total
      debt securities
                      
                      $
                      110,272
                      
                      
                      $
                      2,349
                      
                      
                      $
                      (4,414
                      )
                      
                      $
                      108,207




5





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





(Dollars in thousands)Gross
                
                
                GrossCarrying
                
                
                Unrecognized
                
                
                Unrecognized
                
                
                FairAmount
                
                
                Gains
                
                
                Losses
                
                
                Value9/30/2009Municipal
      securities
                
                $
                20,256
                
                
                $
                906
                
                
                $
                (4
                )
                
                $
                21,158Residential
      mortgage-backed securities
                
                
                1,024
                
                
                
                34
                
                
                
                (4
                )
                
                
                1,054Total
      debt securities
                
                $
                21,280
                
                
                $
                940
                
                
                $
                (8
                )
                
                $
                22,21212/31/2008Municipal
      securities
                
                $
                18,127
                
                
                $
                117
                
                
                $
                (263
                )
                
                $
                17,981Residential
      mortgage-backed securities
                
                
                388
                
                
                
                16
                
                
                
                -
                
                
                
                404Total
      debt securities
                
                $
                18,515
                
                
                $
                133
                
                
                $
                (263
                )
                
                $
                18,385




The fair value of debt securities and
carrying amount, if different, at September 30, 2009 by contractual maturity
were as follows.  Securities not due at a single maturity date,
primarily mortgage-backed securities, are shown separately.





(Dollars in thousands)Available-for-sale
                  
                  
                  Held-to-maturityFair
                  
                  
                  Carrying
                  
                  FairValue
                  
                  
                  Amount
                  
                  ValueDue
      in one year or less
                  
                  $
                  192
                  
                  
                  $
                  -
                  
                  
                  $
                  -Due
      from one to five years
                  
                  
                  6,239
                  
                  
                  
                  -
                  
                  
                  
                  -Due
      over five years
                  
                  
                  35,398
                  
                  
                  
                  20,256
                  
                  
                  
                  21,158CMO
      and residential mortgage-backed securities
                  
                  
                  80,450
                  
                  
                  
                  1,024
                  
                  
                  
                  1,054Total
                  
                  $
                  122,279
                  
                  
                  $
                  21,280
                  
                  
                  $
                  22,212




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





(Dollars in thousands)9/30/2009
                  
                  
                  12/31/2008Proceeds
                  
                  $
                  21,023
                  
                  
                  $
                  11,203Gross
      gains
                  
                  
                  437
                  
                  
                  
                  214Gross
      losses
                  
                  
                  (344
                  )
                  
                  
                  (5
                  )





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




(Dollars in thousands)Unrealizedgains
                                                  (losses)on
                                                  securitiesavailable
                                                  forsaleBeginning
      balance, June 30, 2009
                                                
                                                $
                                                (1,375
                                                )Current
      period change
                                                
                                                
                                                1,948Ending
      balance, September 30, 2009
                                                
                                                $
                                                573





Securities with carrying values of
$30,010,000 and $37,414,000 were pledged as of September 30, 2009 and December
31, 2008, respectively, as collateral for repurchase agreements and public funds
and for other purposes as permitted or required by law.


6





Securities with unrealized losses at
September 30, 2009 and December 31, 2008 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
                      
                      
                      Losses9/30/2009Description
      of Securities:U.S.
      governmentsponsored
      entities
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -CMO
      and residential mortgage-backed
      securities
                      
                      
                      4,325
                      
                      
                      
                      (15
                      )
                      
                      
                      39
                      
                      
                      
                      -
                      
                      
                      
                      4,365
                      
                      
                      
                      (15
                      )Municipal
      securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,882
                      
                      
                      
                      (63
                      )
                      
                      
                      1,882
                      
                      
                      
                      (63
                      )Corporate
      debt securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,105
                      
                      
                      
                      (11
                      )
                      
                      
                      3,105
                      
                      
                      
                      (11
                      )Collateralized
      debt obligations
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,274
                      
                      
                      
                      (4,047
                      )
                      
                      
                      1,274
                      
                      
                      
                      (4,047
                      )Total
      temporarily impaired
                      
                      $
                      4,325
                      
                      
                      $
                      (15
                      )
                      
                      $
                      6,300
                      
                      
                      $
                      (4,121
                      )
                      
                      $
                      10,626
                      
                      
                      $
                      (4,136
                      )





(Dollars in thousands)Lessthan12months
                      
                      
                      12monthsorlonger
                      
                      
                      TotalFair
                      
                      
                      Unrealized
                      
                      
                      Fair
                      
                      
                      Unrealized
                      
                      
                      Fair
                      
                      
                      UnrealizedValue
                      
                      
                      Losses
                      
                      
                      Value
                      
                      
                      Losses
                      
                      
                      Value
                      
                      
                      Losses12/31/2008Description
      of Securities:U.S.
      governmentsponsored
      entities
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      104
                      
                      
                      $
                      (1
                      )
                      
                      $
                      104
                      
                      
                      $
                      (1
                      )CMO
      and residential mortgage-backed
      securities
                      
                      
                      1,368
                      
                      
                      
                      (3
                      )
                      
                      
                      371
                      
                      
                      
                      (4
                      )
                      
                      
                      1,739
                      
                      
                      
                      (7
                      )Municipal
      securities
                      
                      
                      25,924
                      
                      
                      
                      (795
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      25,924
                      
                      
                      
                      (795
                      )Corporate
      debt securities
                      
                      
                      4,813
                      
                      
                      
                      (266
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,813
                      
                      
                      
                      (266
                      )Collateralized
      debt obligations
                      
                      
                      1,409
                      
                      
                      
                      (2,640
                      )
                      
                      
                      464
                      
                      
                      
                      (968
                      )
                      
                      
                      1,873
                      
                      
                      
                      (3,608
                      )Total
      temporarily impaired
                      
                      $
                      33,514
                      
                      
                      $
                      (3,704
                      )
                      
                      $
                      939
                      
                      
                      $
                      (973
                      )
                      
                      $
                      34,453
                      
                      
                      $
                      (4,677
                      )




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.


7





Note
4 – Loans Receivable


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





(Dollars in thousands)9/30/2009
                
                
                12/31/2008Loans
      past due over 90 days still on accrual
                
                $
                1,770
                
                
                $
                1,476Non-accrual
      loans
                
                
                17,337
                
                
                
                10,937





Impaired
loans at period-end were as follows:





(Dollars in thousands)9/30/2009
                                    
                                    
                                    12/31/2008Period-end
      loans with no allocatedallowance
      for loan losses
                                    
                                    $
                                    14,037
                                    
                                    
                                    $
                                    1,748Period-end
      loans with allocatedallowance
      for loan losses
                                    
                                    
                                    803
                                    
                                    
                                    
                                    6,819Total
                                    
                                    $
                                    14,840
                                    
                                    
                                    $
                                    8,567Amount
      of the allowance forloan
      losses allocated
                                    
                                    $
                                    201
                                    
                                    
                                    $
                                    1,683Average
      of impaired loansduring
      the period
                                    
                                    $
                                    11,784
                                    
                                    
                                    $
                                    7,393Interest
      income recognizedduring
      impairment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Cash-basis
      interest incomerecognized
      during impairment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -





Note
5 - 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
6 – Earnings Per Share


Earnings per common share is computed
by dividing net income/(loss) by the weighted average number of common shares
outstanding.   A reconciliation of the numerators and
denominators of the basic and diluted earnings per common share computation for
the three and nine months ended September 30, 2009 and September 30, 2008 are
presented below:


(Dollars in thousands, except per share data)


Three Months Ended
                          
                          
                          Nine Months EndedSeptember 30,
                          
                          
                          September 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Basic
      earnings per common share:Net
      income as reported
                          
                          $
                          (1,395
                          )
                          
                          $
                          1,573
                          
                          
                          $
                          1,363
                          
                          
                          $
                          4,666Weighted
      average common shares outstanding:
                          
                          
                          2,816,600
                          
                          
                          
                          2,807,103
                          
                          
                          
                          2,813,031
                          
                          
                          
                          2,809,244Basic
      earnings per common share:
                          
                          $
                          (0.50
                          )
                          
                          $
                          0.56
                          
                          
                          $
                          0.48
                          
                          
                          $
                          1.66Diluted
      earnings per common share:Net
      income as reported
                          
                          $
                          (1,395
                          )
                          
                          $
                          1,573
                          
                          
                          $
                          1,363
                          
                          
                          $
                          4,666Weighted
      average common shares outstanding:
                          
                          
                          2,816,600
                          
                          
                          
                          2,807,103
                          
                          
                          
                          2,813,031
                          
                          
                          
                          2,809,244Add:  Dilutive
      effect of assumed stockoption
      exercises:
                          
                          
                          -
                          
                          
                          
                          17,698
                          
                          
                          
                          -
                          
                          
                          
                          17,006Weighted
      average common and dilutivepotential
      common shares outstanding:
                          
                          
                          2,816,600
                          
                          
                          
                          2,824,801
                          
                          
                          
                          2,813,031
                          
                          
                          
                          2,826,250Diluted
      earnings per common share:
                          
                          $
                          (0.50
                          )
                          
                          $
                          0.56
                          
                          
                          $
                          0.48
                          
                          
                          $
                          1.65




8


Note
7 – 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 nine months ended September 30, 2009, stock based
compensation expense of $33,000 was recorded, compared to $45,000 for the nine
months ended September 30, 2008.  It is anticipated that current
outstanding vested and unvested options will result in additional compensation
expense of approximately $11,000 in 2009 and $42,000 in 2010.





There were 2,500 shares of restricted
stock granted during the first nine months of 2009, compared to 600 shares
during the first nine months of 2008.





A summary of option activity under the
Bancorp’s incentive stock option plan for the three and nine months ended
September 30, 2009 is presented below:





Weighted-Weighted-
                                    
                                    AverageAverage
                                    
                                    Remaining
                                    
                                    AggregateExercise
                                    
                                    Contractual
                                    
                                    IntrinsicOptions
                                    
                                    Shares
                                    
                                    
                                    Price
                                    
                                    Term
                                    
                                    ValueOutstanding
      at January 1, 2009
                                    
                                    
                                    70,597
                                    
                                    
                                    $
                                    23.56Granted
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    -Exercised
                                    
                                    
                                    (200
                                    )
                                    
                                    $
                                    20.50Forfeited
      or expired
                                    
                                    
                                    (3,650
                                    )
                                    
                                    $
                                    22.00Outstanding
      at September 30, 2009
                                    
                                    
                                    66,747
                                    
                                    
                                    $
                                    23.65
                                    
                                    2.5
                                    
                                    -Exercisable
      at September 30, 2009
                                    
                                    
                                    65,746
                                    
                                    
                                    $
                                    23.58
                                    
                                    2.4
                                    
                                    -





There
were no options granted during the first nine months of 2009. The total
intrinsic value of options exercised during the nine months ended September 30,
2009 and 2008, was $700 and $30,388.





Note 8 – Adoption of New Accounting
Standards


Effective
for periods on or after September 15, 2009, references to GAAP issued by the
FASB in these footnotes are to the FASB Accounting Standards
Codification, which is sometimes referred to as the Codification or
ASC.  The Codification does not change how NorthWest Indiana Bancorp
accounts for its transactions or the nature of related disclosures
made.  However, when referring to GAAP, the Bancorp refers to topics
in the ASC. We have updated references to GAAP to reflect the guidance in the
Codification.





The Fair
Value Measurements Topic of the ASC (formerly known as FAS No. 157), establishes
a framework for measuring fair value and expands disclosures about fair value
measurements.  This Topic establishes a fair value hierarchy about the
assumptions used to measure fair value and clarifies assumptions about risk and
the effect of a restriction on the sale or use of an asset.  The Topic
was effective for fiscal years beginning after November 15, 2007.  In
February 2008, this Topic was updated (formerly FSP 157-2) to delay the
effective date of  the Standard for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value on a recurring basis (at least annually) to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. In October
2008, the Topic was updated (formerly FSP 157-3) to clarify the application of
the Topic in a market that is not active.  In April 2009, the Topic
was updated  (formerly FSP 157-4)  to provide additional
guidance for estimating fair value in accordance with the Topic when the volume
and level of activity for the asset or liability being measured have
significantly decreased.  This update also included guidance on
identifying circumstances that indicate a transaction is not
orderly.  This update was effective for reporting periods ending after
June 15, 2009.





The
Compensation – Retirement Benefits Aspects Topic (formerly known as EITF No.
06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects
of Endorsement Split-Dollar Life Insurance Arrangements”) requires that a
liability be recorded during the service period when a split-dollar life
insurance agreement continues after participants’ employment or
retirement.  The required accrued liability will be based on either
the post-employment benefit cost for the continuing life insurance or based on
the future death benefit depending on the contractual terms of the underlying
agreement.  This issue was effective for fiscal years beginning after
December 15, 2007.  A liability of $104,000 has been recorded and
reflected as an adjustment to retained earnings since adoption.


9





The
Financial Instruments Topic was updated (formerly FSP FAS 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial Instruments”) to require
disclosures about fair value of financial instruments in interim reporting
periods of publicly traded companies that were previously only required to be
disclosed in annual financial statements.  This update was effective for
the Bancorp’s interim period ending on June 30, 2009 and has been included as
part of Note 9, Fair Value.




The
Investments – Debt and Equity Securities Topic was updated (formerly FSP FAS
115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”) to amend current other-than-temporary impairment guidance in the
Topic for debt securities to make the guidance more operational and to improve
the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements.  This update does not amend
existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities.  The Topic is effective for the Bancorp’s
interim period ending on June 30, 2009.





The
Subsequent Events Topic (formerly FAS No. 165, “Subsequent Events”) establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued.  In particular, this Topic sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date.  In accordance with this Topic, an entity should apply the
requirements to interim or annual financial periods ending after June 15,
2009.





The
Transfers and Servicing Topic was updated (formerly FAS No. 166, “Accounting for
Transfers of Financial Assets—an amendment of FASB Statement No. 140”) to remove
the concept of a qualifying special-purpose entity from the Topic and removes
the exception from applying the Consolidations Topic (formerly FASB
Interpretation No. 46R)  The objective in issuing this update is to
improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement, if any, in transferred financial assets.  This update
must be applied as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009, for interim periods within
that first annual reporting period and for interim and annual reporting periods
thereafter.  The impact of adoption is not expected to be
material.





The
Consolidations Topic was amended (formerly FAS No. 167, “Amendments to FASB
Interpretation No. 46(R)”) to improve financial reporting by enterprises
involved with variable interest entities.  The amendment addresses (1)
the effects on certain provisions of the Topic as they relate to the elimination
of the qualifying special-purpose entity concept in the Transfers and Servicing
Topic and (2) constituent concerns about the application of certain key
provisions of the Topic including those in which the accounting and disclosures
under the Topic do not always provide timely and useful information about an
enterprise’s involvement in a variable interest entity.  This
amendment shall be effective as of the beginning of each reporting entity’s
first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period, and for interim and annual
reporting periods thereafter.  The impact of adoption is not expected
to be material.





Note 9 – Fair
Value


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





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





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





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


10





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





At
the end of each reporting period securities held in the investment portfolio are
evaluated on an individual security level for other-than-temporary impairment in
accordance with the Investments – Debt and Equity Securities
Topic.  An impairment is other-than-temporary if the decline in the
fair value of the security is below its amortized cost and it is probable that
all amounts due according to the contractual terms of a debt security will not
be received.  Significant judgments are required in determining
impairment, which include making assumptions regarding the estimated
prepayments, loss assumptions and the change in interest rates.  We
consider the following factors when determining an other-than-temporary
impairment for a security: the length of time and the extent to which the market
value has been less than amortized cost; the financial condition and near-term
prospects of the issuer; the underlying fundamentals of the relevant market and
the outlook for such market for the near future; an assessment of whether the
Bancorp has (1) the intent to sell the debt securities or (2) more likely than
not will be required to sell the debt securities before its anticipated market
recovery.  If either of these conditions is met, management will
recognize other-than-temporary impairment.  If, in management’s
judgment, an other-than-temporary impairment exists, the cost basis of the
security 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 quarter ended September 30,
2009, the Bancorp’s management performed an other-than-temporary impairment
analysis for each of its four pooled trust preferred securities.  The
analysis utilizes analytical models used to project future cash flows for the
pooled trust preferred securities based on current assumptions for prepayments,
default and deferral rates, and recoveries.  The projected cash flows
are than tested for impairment consistent with the Investments – Other Topic
(formerly FSP EITF 99-20-1) and the Investments – Debt and Equity Securities
Topic (formerly FSP FAS 115-2 and FAS 124-2).  The
other-than-temporary impairment testing compares the present value of the cash
flows from quarter to quarter to determine if there is a “favorable” or
“adverse” change.  Other-than-temporary impairment is recorded if the
projected present value 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, for the performing collateral, management
monitors the level of non-performing assets and capital adequacy to determine
trends of future defaults or deferrals.  The other-than-temporary
impairment analysis indicated that one of the trust preferred securities has
other-than-temporary impairment in the amount of $44 thousand.  The
unrealized loss for the remaining three trust preferred securities represents a
decline in value that is considered a temporary impairment.  These
investments are collateralized by underlying investments in trust preferred
securities issued by many different banks and insurance companies.  We
believe the increase in the net unrealized loss is the result of the current
economic decline, the low trade volume of the security, and the lack of
confidence in the financial services industry.





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
                    obligations other-
                    than-temporarily
                    impairedBeginning
      balance, June 30, 2009
                  
                  $
                  -Additions
      not previously recongnized
                  
                  
                  44Ending
      balance, September 30, 2009
                  
                  $
                  44


11





Below is a table containing information
regarding the Bancorp’s pooled trust preferred securities as of September 30,
2009:





Deal
      name
                
                PreTSL
      XXIV
                
                
                PreTSL
      XXVII
                
                
                Alesco
      IX
                
                
                Alesco
      XVIIClass
                
                
                B-1
                
                
                
                C-1
                
                
                
                A-2A
                
                
                
                BBook
      value
                
                
                1,272,986
                
                
                
                1,427,774
                
                
                
                1,322,816
                
                
                
                1,411,090Fair
      value
                
                
                394,483
                
                
                
                360,208
                
                
                
                330,000
                
                
                
                188,821Unrealized
      gains/(losses)
                
                
                (878,503
                )
                
                
                (1,067,566
                )
                
                
                (992,816
                )
                
                
                (1,222,269
                )Lowest
      credit rating assigned
                
                Caa3
                
                
                Ca
                
                
                BB
                
                
                CaNumber
      of performing banks
                
                
                57
                
                
                
                31
                
                
                
                52
                
                
                
                42Number
      of performing insurance companies
                
                
                13
                
                
                
                7
                
                
                
                11
                
                
                
                n/aNumber
      of issuers in deferral or default
                
                
                23
                
                
                
                11
                
                
                
                7
                
                
                
                13Defaults
      & deferrals as a % of performing collateral
                
                
                28.50
                %
                
                
                20.00
                %
                
                
                16.55
                %
                
                
                31.51
                %Excess
      subordination:As
      a % of performing collateral
                
                
                -8.57
                %
                
                
                -10.88
                %
                
                
                29.60
                %
                
                
                3.80
                %As
      a % of performing collateral - adjusted for projected future
      defaults
                
                
                -16.78
                %
                
                
                -12.60
                %
                
                
                24.66
                %
                
                
                -1.20
                %Other-than-temporary
      impairment model assumptions:Defaults:Year
      1
                
                
                4.00
                %
                
                
                2.00
                %
                
                
                5.00
                %
                
                
                0.25
                %Year
      2
                
                
                0.25
                %
                
                
                0.25
                %
                
                
                0.25
                %
                
                
                0.25
                %Year
      3
                
                
                3.50
                %
                
                
                0.25
                %
                
                
                2.00
                %
                
                
                0.25
                %>
      3 Years
                
                
                0.25
                %
                
                
                0.25
                %
                
                
                0.25
                %
                
                
                0.25
                %Discount
      rate
                
                
                1.58
                %
                
                
                1.24
                %
                
                
                1.29
                %
                
                
                1.46
                %Recovery
      assumptions
                
                25% - 5 year lag
                
                
                25% - 5 year lag
                
                
                12% - 5 year lag
                
                
                
                0
                %Prepayments
                
                
                1.00
                %
                
                
                1.00
                %
                
                
                1.00
                %
                
                
                1.00
                %Other-than-temporary
      impairment
                
                
                25,086
                
                
                
                0
                
                
                
                15,884
                
                
                
                2,563




In the table above, the Bancorp’s
excess 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 excess subordination assuming future collateral
defaults by utilizing the default/deferral assumptions in the Bancorp’s OTTI
analysis.  Excess subordination assuming future default/deferral
assumptions is calculated by deducting future defaults from the current
performing collateral.  At September 30, 2009, management reviewed the
excess 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.




In the table above, 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:  All defaulted collateral was
identified and removed from the bank pool; no cash flows were assumed from the
banks currently in deferral, with the exception of the recovery assumptions; and
for each bank remaining in the bank pool the most recent financial data
submitted by the banks for regulatory purposes was used to identify
capitalization levels and asset quality.  The default and recovery
assumptions were calculated based on the level of capital adequacy and asset
quality for each bank contained in the collateral pool.  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.  The assumption for prepayments was 1% for each
of the four pooled trust preferred securities.  At September 30, 2009,
based on the current information available regarding the specific collateral
underlying the securities, management’s OTTI analysis indicated that three of
the four trust preferred securities had other-than-temporary impairment of $44
thousand in the aggregate.




At September 30, 2009, three of the
trust preferred securities with a cost basis of $4.2 million have been placed in
“payment in kind” status.   The Bancorp’s securities that are
classified as “payment in kind” are a result of not receiving the scheduled
quarterly interest payments.  For the securities in “payment in kind”
status, management anticipates to receive the unpaid contractual interest
payments from the issuer, because of the self correcting cash flow waterfall
provisions within the structure of the securities.  When a tranche
senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest
cash flows are paid to the senior tranche and recorded as a reduction of
principal.  The coverage test represents an over collateralization
target by stating the balance of the performing collateral as a percentage of
the balance of the Bancorp’s tranche, plus the balance of all senior
tranches.  The principal reduction in the senior tranche continues
until the appropriate coverage test is passed.  As a result of the
principal reduction in the senior tranche, more cash is available for future
payments to the Bancorp’s tranche.  Consistent with the Investments –
Debt and Equity Securities Topic management considered the failure of the issuer
of the security to make scheduled interest payments in determining whether a
credit loss existed.  Management will not capitalize the
“payment in kind” interest payments to the book value of the securities and will
keep these securities in non-accrual status until the quarterly interest
payments resume.


12


Assets and Liabilities
Measured on a Recurring Basis


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





(Dollars in thousands)
                      
                      
                      
                      
                      FairValueMeasurementsatSeptember30,2009Using30-Sep-09
                      
                      
                      QuotedPricesin
                        ActiveMarketsfor
                        IdenticalAssets
                        (Level1)
                      
                      SignificantOther
                        ObservableInputs
                        (Level2)
                      
                      Significant
                        UnobservableInputs
                        (Level3)Assets:Available
      for sale securities
                      
                      $
                      122,279
                      
                      
                      $
                      -
                      
                      $
                      121,005
                      
                      $
                      1,274





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





(Dollars in thousands)
                  
                  Fair Value Measurements at
                    September 30, 2009 Using
                    Significant Unobservable
                    Inputs
                    (Level 3)Available for
                    sale securitiesBeginning
      balance, December 31, 2008
                  
                  $
                  1,003Total
      realized/unrealized lossesIncluded
      in earnings
                  
                  
                  (44
                  )Included
      in other comprehensive income
                  
                  
                  (135
                  )Transfers
      in and/or (out) of Level 3
                  
                  
                  450Ending
      balance, September 30, 2009
                  
                  $
                  1,274





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




(Dollars in thousands)
                
                
                
                
                Fair Value Measurements at September 30, 2009 Using30-Sep-09
                
                
                Quoted Prices in
                  Active Markets for
                  Identical Assets
                  (Level 1)
                
                
                Significant Other
                  Observable Inputs
                  (Level 2)
                
                
                Significant
                  Unobservable Inputs
                  (Level 3)Assets:Impaired
      loans
                
                $
                4,724
                
                
                $
                -
                
                
                $
                4,724
                
                
                $
                -Foreclosed
      real estate
                
                
                3,617
                
                
                
                
                
                
                
                1,719
                
                
                
                1,898




13




The fair
value of impaired loans with specific allocations of the allowance for loan
losses is generally based on recent real estate appraisals.  These
appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income
approach.  Impaired loans, which are measured for impairment using the
fair value of the collateral for collateral dependent loans, had a carrying
amount of $4.9 million, with a valuation allowance of $201 thousand, resulting
in no additional provision for the quarter.  Fair value is determined,
where possible, using market prices derived from an appraisal or evaluation,
which are considered to be level 2.  However, certain assumptions and
unobservable inputs are used many times by the appraiser, therefore, qualifying
the assets as Level 3 in the fair value hierarchy.




14




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)September30,2009Carrying
                      
                      
                      EstimatedValue
                      
                      
                      Fair ValueFinancial assets:Cash
      and cash equivalents
                      
                      $
                      29,039
                      
                      
                      $
                      29,039Securities
      available-for-sale
                      
                      
                      122,279
                      
                      
                      
                      122,279Securities
      held-to-maturity
                      
                      
                      21,280
                      
                      
                      
                      22,212Loans
      receivable, net
                      
                      
                      457,970
                      
                      
                      
                      505,993Federal
      Home Loan Bank stock
                      
                      
                      3,650
                      
                      
                      
                      3,650Accrued
      interest receivable
                      
                      
                      2,893
                      
                      
                      
                      2,893Financial liabilities:Demand
      and savings deposits
                      
                      
                      313,982
                      
                      
                      
                      313,982Certificates
      of deposit
                      
                      
                      243,288
                      
                      
                      
                      244,540Borrowed
      funds
                      
                      
                      61,050
                      
                      
                      
                      61,161Accrued
      interest payable
                      
                      
                      198
                      
                      
                      
                      198





(Dollars in thousands)December31,2008Carrying
                      
                      
                      EstimatedValue
                      
                      
                      Fair ValueFinancial assets:Cash
      and cash equivalents
                      
                      $
                      11,296
                      
                      
                      $
                      11,296Securities
      available-for-sale
                      
                      
                      108,207
                      
                      
                      
                      108,207Securities
      held-to-maturity
                      
                      
                      18,515
                      
                      
                      
                      18,385Loans
      receivable, net
                      
                      
                      483,679
                      
                      
                      
                      533,377Federal
      Home Loan Bank stock
                      
                      
                      3,650
                      
                      
                      
                      3,650Accrued
      interest receivable
                      
                      
                      3,160
                      
                      
                      
                      3,160Financial liabilities:Demand
      and savings deposits
                      
                      
                      297,076
                      
                      
                      
                      297,076Certificates
      of deposit
                      
                      
                      231,072
                      
                      
                      
                      232,926Borrowed
      funds
                      
                      
                      74,795
                      
                      
                      
                      75,166Accrued
      interest payable
                      
                      
                      256
                      
                      
                      
                      256





For
purposes of the above disclosures of estimated fair value, the following
assumptions were used as of September 30, 2009 and December 31,
2008.  The estimated fair value for cash and cash equivalents, Federal
Home Loan Bank stock, and accrued interest receivable and payable are considered
to approximate carrying book value.  The estimated fair value for
loans is based on estimates of the rate the Bancorp would charge for similar
such loans at September 30, 2009 and December 31, 2008, applied for the time
period until estimated repayment.  For commercial loans the fair value
includes a liquidity adjustment to reflect current market
conditions.  The estimated fair value for demand and savings deposits
is based on their carrying value.  The estimated fair value for
certificates of deposits is based on estimates of the rate the Bancorp would pay
on such deposits at September 30, 2009 and December 31, 2008, applied for the
time period until maturity.  The estimated fair value for borrowed
funds is based on current rates for similar financings.  The estimated
fair value of other financial instruments, and off-balance sheet loan
commitments approximate cost and are not considered significant to this
presentation.


15




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
September 30, 2009, the Bancorp had total assets of $678.3 million, total loans
of $463.1 million and total deposits of $557.3 million.  Stockholders'
equity totaled $53.3 million or 7.86% of total assets, with book value per share
at $18.93.  For the quarter ended September 30, 2009, the Bancorp
recorded a net loss of $1.4 million, or ($0.50) earnings per basic share and
($0.52) earnings per diluted shares.  For the quarter ended September
30, 2009, the return on average assets (ROA) was (0.84%), while the return on
average stockholders’ equity (ROE) was (10.02%).  Net income for the
nine months ended September 30, 2009, was $1.4 million, or ($0.48) earnings per
basic share and ($0.46) earnings per diluted shares.  For the nine
months ended September 30, 2009, the return on average assets (ROA) was 0.41%,
while the return on average stockholders’ equity (ROE) was 4.98%.





Recent
Developments





On May
14, 2009, the Bancorp announced that John Diederich had joined both the Bancorp
and the Bank as an Executive Vice-President.  Mr. Diederich has more
than 35 years of experience in the financial services industry, and most
recently served as Regional President for JPMorgan Chase in Northwest
Indiana.





In
response to the financial crisis affecting the banking system and financial
markets, on October 3, 2008, the Emergency Economic Stabilization Act of
2008 (the “EESA”) was signed into law creating the Troubled Asset Relief Program
(“TARP”). Pursuant to the EESA, the U.S. Department of Treasury (the “Treasury”)
has the authority to, among other things, purchase up to $700 billion of
mortgages, mortgage-backed securities and certain other financial instruments
from financial institutions for the purpose of stabilizing and providing
liquidity to the U.S. financial markets.





On
October 14, 2008, the Treasury also announced it would offer to qualifying
U.S. banking organizations the opportunity to sell preferred stock, along with
warrants to purchase common stock, to the Treasury on what may be considered
attractive terms under the TARP Capital Purchase Program (the “CPP”). The CPP
allows financial institutions to issue nonvoting preferred stock to the Treasury
in an amount ranging between 1% and 3% of its total risk weighted assets. After
a careful review of the terms of participation in the CPP, along with
consideration of the capital requirements applicable to the Bancorp and the
Bank, both of which have remained above the “well-capitalized” regulatory
guidelines, the Bancorp’s board of directors decided it is not in the best
interests of the Bancorp and its shareholders to participate in the
CPP.





On
February 17, 2009, President Obama signed into law the American Recovery
and Reinvestment Act of 2009 (the “ARRA”), which contains a comprehensive set of
government spending initiatives and tax incentives aimed at stimulating the U.S.
economy. The ARRA also amends, among other things, the TARP program legislation
by directing the Treasury to issue regulations implementing strict limitations
on compensation paid or accrued by financial institutions participating in the
TARP, which regulations do not apply to the Bancorp.





EESA and
ARRA followed, and have been followed by, numerous actions by the Federal
Reserve, Congress, Treasury, the SEC and others to address the current liquidity
and credit crisis that has followed the sub-prime meltdown that commenced in
2007. These measures include homeowner relief that encourage loan restructuring
and modification; the establishment of significant liquidity and credit
facilities for financial institutions and investment banks; the lowering of the
federal funds rate, including two 50 basis point decreases in October of 2008;
emergency action against short selling practices; a temporary guaranty program
for money market funds; the establishment of a commercial paper funding facility
to provide back-stop liquidity to commercial paper issuers; and coordinated
international efforts to address illiquidity and other weaknesses in the banking
sector. It is not clear at this time what impact the EESA, ARRA, the CPP, the
TARP, other liquidity and funding initiatives of the Federal Reserve and other
agencies that have been previously announced, and any additional programs that
may be initiated in the future will have on the financial markets, including the
extreme levels of volatility and limited credit availability currently being
experienced, or on the U.S. banking and financial industries and the broader
U.S. and global economies. Further adverse effects could have an adverse effect
on the Bancorp and its business.


16




Financial
Condition





During
the nine months ended September 30, 2009, total assets increased by $13.6
million (2.0%), with interest-earning assets increasing by $10.1 million
(1.6%).  At September 30, 2009, interest-earning assets totaled $631.3
million and represented 93.1% of total assets.





Loans
receivable totaled $463.1 million at September 30, 2009, compared to $489.5
million at December 31, 2008.  The decrease in loans during the nine
month period is a result of management’s interest rate risk reduction strategy
of selling fixed rate mortgage loans to the secondary market.  During
2009, management sold $44.8 million in newly originated fixed rate mortgage
loans and $10.5 million in seasoned fixed rate mortgage loans.  At
September 30, 2009, loans receivable represented 73.5% of interest earning
assets, 68.4% of total assets and 83.3% 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 $54.8 million (11.8%) in
construction and development loans, $159.1 million (34.3%) in residential
mortgage loans, $8.5 million (1.8%) in multifamily loans, $130.2 million (28.1%)
in commercial real estate loans, $1.6 million (0.4%) in consumer loans, $60.7
million (13.1%) in commercial business loans and $20.2 million (4.4%) in
government and other loans.  Adjustable rate loans comprised 45.7% of
total loans at September 30, 2009.  During the nine months ended
September 30, 2009, loans decreased by $26.4 million (5.2%).  During
the nine months ended September 30, 2009, $11.4 million in growth occurred in
commercial business loans and $5.4 million in government loan
balances.





The
Bancorp is primarily a portfolio lender.  Mortgage banking activities
are generally limited to the sale of fixed rate mortgage loans with contractual
maturities greater than 15 years.  However, as a result of the low
interest rate environment, during the first nine months of 2009, management sold
newly originated 10 and 15 year fixed rate mortgage loans in an effort to
minimize future interest rate risk.  These loans are identified as
held for sale when originated and sold, on a case-by-case basis, in the
secondary market.  During the nine months ended September 30, 2009,
the Bancorp sold $44.8 million in fixed rate mortgage loans, compared to $3.8
million during the nine months ended September 30, 2008.  During the
current nine month period, loan sales increased primarily as a result of the
Federal Reserve’s successful effort to lower long-term interest rates. Lower
long-term interest rates also created mortgage loan refinance opportunities for
borrowers within the Bank’s market area.  In addition, during the
first quarter of 2009, the Bancorp conducted a $10.5 million one-time sale of
portfolio fixed rate mortgage loans, which were sold to reduce interest rate
risk.  Net gains realized from mortgage loan sales totaled $1.0
million for the nine months ended September 30, 2009, compared to $94 thousand
for the nine months ended September 30, 2008.  At September 30, 2009,
the Bancorp had $906 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 year provision and the overall adequacy of the
ALL are determined through a disciplined and consistently applied quarterly
process that reviews the Bancorp’s current credit risk within the loan portfolio
and identifies the required allowance for loan losses given the current risk
estimates.





To
determine the appropriate level for the allowance for loan losses, management
applies quantitative historical loss risk factors to non-classified residential
real estate, consumer, commercial real estate and commercial business loan
balances.  In addition, loans classified as substandard or doubtful
are assigned loss risk factors based on current collateral
deficiencies.  Management also assigns qualitative loss risk factors
to non-classified loans.  The qualitative risk factors are based on
current risks attributable to: local and national economic factors, loan growth
and changes in loan composition, organizational structure, composition of loan
staff, loan concentrations, stress analysis, policy changes and out of market
lending activity.  Lastly, management establishes specific reserves
within the allowance for loan losses for impaired loans that have collateral
deficiencies.  By applying the aggregate loss risk factors to the
current loan balances and identifying the required specific reserves for the
period, management records loan loss provisions, which establishes the
appropriate level for the allowance for loan losses.





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 and concluded in the third quarter of
2007.  As of September 30, 2009, the Bancorp’s commercial real estate
participation loan portfolio consisted of eleven loans with an aggregate balance
of $32.8 million, and an additional $5.3 million in funding commitments for five
of the eleven loans.  Of the $32.8 million in commercial real estate
participation loans, $11.7 million has been purchased within the Bancorp’s
primary market area and $21.1 million outside of the primary
market.  At September 30, 2009, $12.7 million or 38.8% of the
Bancorp’s commercial real estate participation loans have been internally
classified as substandard and placed in non-accrual status.  Of the
$12.7 million in commercial real estate participation loans placed in
non-accrual status, $9.1 million are located outside of the Bancorp’s primary
market area.  The discussion in the paragraphs that follow regarding
non-performing loans, internally classified loans and impaired loans include
loans from the Bancorp’s commercial real estate participation loan
portfolio.


17





For all
of its commercial real estate participation loans, the Bancorp’s management
requires that the lead lenders obtain external appraisals to determine the fair
value of the underlying collateral for these collateral dependent
loans.  The Bancorp’s management requires current appraisals 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 September 30, 2009
reporting period.  The Bancorp’s management relies on up to date
external appraisals to determine the current value of its commercial real estate
participation loans.  These values are appropriately adjusted to
reflect changes in market value and, when necessary, are the basis for
establishing the appropriate allowance for loan loss reserve.  If an
updated external appraisal for a commercial real estate participation loan is
received after the balance sheet date, but before the annual or quarterly
financial statements are issued, material changes in appraised values are
“pushed back” in the yet to be issued financial statements in order that
appropriate loan loss provision is recorded for the current reporting
period.  The Bancorp’s management consistently records loan
charge-offs based on the fair value of the collateral as presented in the
current external appraisal.





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
$19.1 million at September 30, 2009, compared to $12.4 million at December 31,
2008, an increase of $6.7 million or 54.2%.  The increase in
non-performing loans is related to four commercial real estate participation
loans in the aggregate of $12.7 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 $2.5 million, which is classified as
substandard.  For this project, based on current information provided
by the lead lender and the banking regulators “Shared National Credit Report”,
management charged-off $2.5 million of the $5.0 million balance during the third
quarter of 2009.  The second commercial real estate participation loan
is an end loan for a hotel located in Dundee, Michigan, with a current balance
of $1.6 million, which is classified as substandard.  Based on current
operating projections provided by the borrower to the lead lender, management
charged-off $1.4 million of the $3.0 million balance during the third quarter of
2009.  The third commercial real estate participation loan is an end
loan for a hotel located in Fort Worth, Texas, with a balance of $5.0 million,
which is classified as substandard.  Based on current information
provided by the lead lender, management has estimated a collateral sufficiency
for this loan.  The fourth commercial real estate participation loan
is 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 collateral
sufficiency 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 4.13% at September 30, 2009,
compared to 2.54% at December 31, 2008.  The ratio of non-performing
loans to total assets was 2.82% at September 30, 2009, compared to 1.87% at
December 31, 2008.  The September 30, 2009, non-performing loan
balances include $17.4 million in loans accounted for on a non-accrual basis and
$1.8 million in accruing loans, which were contractually past due 90 days or
more.  Loans, internally classified as substandard, totaled $21.2
million at September 30, 2009, compared to $11.4 million at December 31,
2008.  The increase in substandard loans is related to the previously
mentioned $12.7 million commercial real estate participation loans that were
classified as non-performing and substandard during 2009.  No loans
were internally classified as doubtful at September 30, 2009, compared to $2.0
million classified as doubtful at December 31, 2008.  No loans were
classified as loss at September 30, 2009 or December 31,
2008.  Substandard loans include non-performing loans and potential
problem loans, where information about possible credit issues or other
conditions causes management to question the ability of such borrowers to comply
with loan covenants or repayment terms.   In addition to
identifying and monitoring non-performing and other classified loans, management
maintains a list of watch loans.  Watch loans represent loans
management is closely monitoring due to one or more factors that may cause the
loan to become classified.  Watch loans totaled $18.0 million at
September 30, 2009, compared to $22.7 million at December 31,
2008.  The decrease in watch loans for 2009 is a result of two
commercial real estate participation loans that were reclassified as substandard
loans.


18





A loan is
considered impaired when, based on current information and events, it is
probable that a borrower will be unable to pay all amounts due according to the
contractual terms of the loan agreement.  At September 30, 2009,
impaired loans totaled $14.8 million, compared to $8.6 million at December 31,
2008.  The September 30, 2009, impaired loan balances consist of
fourteen commercial real estate and commercial business loans that are secured
by business assets and real estate, and are personally guaranteed by the owners
of the businesses.  The September 30, 2009 ALL contained $201 thousand
in specific allowances for collateral deficiencies, compared to $1.7 million in
specific allowances at December 31, 2008.  During the third quarter of
2009, one additional commercial real estate participation loan totaling $3.6
million was classified as impaired.  Management’s current estimate
indicates there is a collateral sufficiency for this loan.  In
addition, during the current quarter, the Bancorp’s Ann Arbor, Michigan
commercial real estate participation loan in the amount of $3.8 million was
transferred to foreclosed real estate and removed from impaired
status.  Prior to foreclosure, the lead lender for this commercial
real estate participation loan provided management with an updated appraisal
that indicated a further decline in market value.  As a result, a
charge-off of $1.9 million was recorded during September and the remaining loan
balance of $1.9 million transferred to foreclosed real estate.  For
the Ann Arbor commercial real estate participation loan, during the first
quarter of 2008, management filed a lawsuit against the lead lender to actively
pursue potential material violations of the participation agreement and the
underlying loan documentation.   Management and its legal counsel
will continue to actively pursue the claims asserted within the
lawsuit.  As of September 30, 2009, all loans classified as impaired
were also included in the previously discussed substandard loan
balances.  There were no other loans considered to be impaired loans
for the nine months ended, September 30, 2009.  Typically, management
does not individually classify smaller-balance homogeneous loans, such as
mortgage or consumer, as impaired.





As
September 30, 2009, the Bancorp’s management was notified that the quarterly
interest payments for three of its four investments in trust preferred
securities have been placed in “payment in kind” status.  Payment in
kind status results in a temporary delay in the payment interest.  As
a result of a delay in the collection of the interest payments, management
placed these securities in non-accrual status.  At September 30, 2009,
the book value of the three trust preferred securities in non-accrual status
totaled $4.2 million.  Current estimates indicate that the interest
payment delays may exceed five years.  One trust preferred securities
with a book value of $1.3 million remains in accrual status.





At
September 30, 2009, management is of the opinion that there are no loans or
securities, except those discussed above, where known information about possible
credit problems of borrowers causes management to have serious doubts as to the
ability of such borrowers to comply with the present loan repayment terms and
which may result in disclosure of such loans as non-accrual, past due or
restructured loans.  Also, at September 30, 2009, no other interest
bearing assets were required to be disclosed as non-accrual, past due or
restructured.  Management does not presently anticipate that any of
the non-performing loans or classified loans would materially impact future
operations, liquidity or capital resources.





The
Bancorp is a party to financial instruments in the normal course of business to
meet financing needs of its customers.  These financial instruments,
which include commitments to make loans and standby letters of credit, are not
reflected in the accompanying consolidated financial statements.  Such
financial instruments are recorded when they are funded.  The Bancorp
has a $1.1 million participation in a $6.4 million letter of credit, which acts
as payment support to bondholders.  Our portion of the letter of
credit is also secured by a cash collateral account 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.  Management will continue to monitor
the letter of credit, bond repayments and the operating results of the new
tenant.





For the
nine months ended September 30, 2009, $6.5 million in provisions to the ALL
account were required, compared to $1.5 million for the nine months ended
September 30, 2008.  The increase in the 2009 ALL provision was
related to the need for additional specific allowances for the collateral
deficiencies and subsequent charge-offs for the previously mentioned commercial
real estate participation loans.  Charge-offs, net of recoveries,
totaled $7.1 million for the nine months ended September 30, 2009, compared to
$552 thousand for the nine months ended September 30, 2008.  The ALL
provisions take into consideration management’s current judgments about the
credit quality of the loan portfolio, loan portfolio balances, changes in the
portfolio mix and local economic conditions.  In determining the
provision for loan losses for the current period, management has given
consideration to increased risks associated within the local economy, changes in
loan balances and mix, and asset quality.


19


The ALL
to total loans was 1.12% at September 30, 2009, compared to 1.19% at December
31, 2008.  The ALL to non-performing loans (coverage ratio) was 27.0%
at September 30, 2009, compared to 47.0% at December 31, 2008.  The
September 30, 2009 balance in the ALL account of $5.2 million is considered
adequate by management after evaluation of the loan portfolio, past experience
and current economic and market conditions.  While management may
periodically allocate portions of the allowance for specific problem loans, the
whole allowance is available for any loan charge-offs that occur.  The
allocation of the ALL reflects performance and growth trends within the various
loan categories, as well as consideration of the facts and circumstances that
affect the repayment of individual loans, and loans which have been pooled as of
the evaluation date, with particular attention given to non-performing loans and
loans which have been classified as substandard, doubtful or
loss.  Management has allocated reserves to both performing and
non-performing loans based on current information available.





At
September 30, 2009, the Bancorp had eighteen properties in foreclosed real
estate totaling $3.6 million, compared to seven properties totaling $527
thousand at December 31, 2008.  The increase is primarily related to a
foreclosure during September of a commercial real estate participation loan in
Ann Arbor, Michigan, with a post charge-off balance of $1.9
million.  During 2009, foreclosed real estate also increased as the
result of the addition of seven commercial real estate loans for one borrower
totaling $654 thousand.





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 $139.6 million at September 30, 2009, compared to $126.7
million at December 31, 2008, an increase of $16.8 million
(13.3%).  The increase in securities is a result of investing excess
liquidity in short-term investments.  At September 30, 2009, the
securities portfolio represented 22.7% of interest-earning assets and 21.2% of
total assets.  The securities portfolio was comprised of 1.4% in U.S.
government agency debt securities, 56.8% in U.S. government agency
mortgage-backed securities and collateralized mortgage obligations, 38.8% in
municipal securities, 2.1% in corporate securities, and 0.9% in pooled trust
preferred securities.  At September 30, 2009, securities
available-for-sale (“AFS”) totaled $122.3 million or 85.2% 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 September 30, 2009, as a result of the
increased liquidity from deposit growth and mortgage loans sales, the Bancorp
carried $16.4 million in interest bearing balances in financial institutions and
$3.7 million in Fed funds sold at the end of the current quarter.  At
September 30, 2009, the Bancorp had Federal Home Loan Bank (FHLB) stock balance
of $3.7 million.





Deposits
are a fundamental and cost-effective source of funds for lending and other
investment purposes.  The Bancorp offers a variety of products
designed to attract and retain customers, with the primary focus on building and
expanding relationships.  At September 30, 2009, deposits totaled
$557.3 million.  During the nine months ended September 30, 2009,
deposits increased by $29.1 million (5.5%).  Checking account balances
increased by $9.6 million (7.3%). Savings account balances increased by $4.1
million (7.8%) during the current period.  Money market deposit
accounts (MMDA’s) increased by $3.3 million (2.9%).  Certificates of
deposit increased by $12.2 million (5.3%).  At September 30, 2009, the
deposit base was comprised of 25.2% checking accounts, 21.0% MMDA’s, 10.1%
savings accounts and 43.7% certificates of deposit.





The
Bancorp’s borrowed funds are primarily used to fund asset growth not supported
by deposit generation.  At September 30, 2009, borrowed funds totaled
$61.1 million compared to $74.8 million at December 31, 2008, a decrease of
$13.7 million (18.4%).  During 2009, management repaid borrowed funds
as a result of additional liquidity provided by strong deposit
growth.  As a result of   The Bancorp’s borrowed funds
at September 30, 2009, are comprised of $42.0 million in Federal Home Loan Bank
(FHLB) fixed advances, $18.7 million in retail repurchase agreements, and $382
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 and advances from the FHLB and federal funds
purchased) as a source of funds.


20





During
the nine months ended September 30, 2009, cash and cash equivalents increased by
$17.7 million compared to a $490 thousand increase for the nine months ended
September 30, 2008.  The primary sources of cash were proceeds from
loan sales, pay downs of securities, loan repayments and funds from deposit
growth, FHLB advances and other borrowed funds.  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 $3.8 million
for the nine months ended September 30, 2009, compared to $6.2 million for the
nine month period ended September 30, 2008.  The decrease in cash from
operating activities was a result of lower net income for the nine month
period.  Cash inflows from investing activities totaled $1.2 million
for the current period, compared to cash outflows of $32.0 million for the nine
months ended September 30, 2008.  The change for the current nine
months was primarily related to the decrease in loan balances, as a result of
the sale of fixed rate mortgage loans.  Net cash inflows from
financing activities totaled $12.7 million during the current period compared
$26.2 million for the nine months ended September 30, 2008.  The
change in net cash inflows from financing activities was a result of reduced
borrowing requirement for the period.  The Bancorp paid dividends on
common stock of $2.8 million for the nine months ended September 30, 2009,
compared to $3.0 million for the nine months ended September 30,
2008.





At
September 30, 2009, outstanding commitments to fund loans totaled $72.0
million.  Approximately 30.3% 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 $2.6 million at September 30, 2009.  Management
believes that the Bancorp has sufficient cash flow and borrowing capacity to
fund all outstanding commitments and letters of credit, while maintaining proper
levels of liquidity.





Management
strongly believes that maintaining a high level of capital enhances safety and
soundness.  During the nine months ended September 30, 2009,
stockholders' equity increased by $546 thousand (1.0%).  During the
current nine months, stockholders’ equity was increased by net income of $1.3
million, the net change in the valuation of the available-for-sale securities of
$1.9 million and $101 thousand in treasury stock sales.  Items
decreasing stockholders’ equity were the declaration of $2.8 million in cash
dividends and an establishment of an $84 thousand bank owned split dollar
postretirement benefit liability.





On
May 22, 2009, the Board of Directors of the Bancorp declared a quarterly
dividend of $0.32 per share payable on July 2, 2009 to shareholders of record as
of June 19, 2009.  The quarterly dividend was reduced by $0.04
(11.1%), compared to the dividend declared during the previously
quarter.  The dividend reduction was prompted by the action of the
Federal Deposit Insurance Corporation to levy a special assessment on all
federally insured banks.  The Bancorp’s special assessment totaled
$305 thousand and was paid to the FDIC on September 30, 2009.  On
August 21, 2009, the Board of Directors of the Bancorp declared its’ third
quarter dividend of $0.32, unchanged from the previous quarter.





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





The
following table shows that, at September 30, 2009, and December 31, 2008, 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 new regulatory requirements
state that when 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 in the amount $5.5
million.  These investments currently have ratings that are below
investment grade.  As a result, approximately $51.1 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
September 30, 2009 and December 31, 2008.  The dollar amounts are in
millions.


21





(Dollars in millions)
                
                
                
                
                
                
                
                Required for
                
                
                To be wellActual
                
                
                adequate capital
                
                
                capitalizedAtSeptember30,2009
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioTotal
      capital to risk-weighted assets
                
                $
                57.8
                
                
                
                11.0
                %
                
                $
                42.1
                
                
                
                8.0
                %
                
                $
                52.6
                
                
                
                10.0
                %Tier
      1 capital to risk-weighted assets
                
                $
                52.7
                
                
                
                10.0
                %
                
                $
                21.0
                
                
                
                4.0
                %
                
                $
                31.6
                
                
                
                6.0
                %Tier
      1 capital to adjusted average assets
                
                $
                52.7
                
                
                
                7.9
                %
                
                $
                20.0
                
                
                
                3.0
                %
                
                $
                33.3
                
                
                
                5.0
                %





Required for
                
                
                To be wellActual
                
                
                adequate capital
                
                
                capitalizedAtDecember31,2008
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioTotal
      capital to risk-weighted assets
                
                $
                59.9
                
                
                
                12.0
                %
                
                $
                39.9
                
                
                
                8.0
                %
                
                $
                50.0
                
                
                
                10.0
                %Tier
      1 capital to risk-weighted assets
                
                $
                54.1
                
                
                
                10.8
                %
                
                $
                20.0
                
                
                
                4.0
                %
                
                $
                29.9
                
                
                
                6.0
                %Tier
      1 capital to adjusted average assets
                
                $
                54.1
                
                
                
                8.2
                %
                
                $
                20.0
                
                
                
                3.0
                %
                
                $
                33.1
                
                
                
                5.0
                %





The Bancorp’s ability to pay dividends
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 2009, without prior regulatory approval,
approximates $3,685,000 plus current 2009 net profits.





Results
of Operations - Comparison of the Quarter Ended September 30, 2009 to the
Quarter Ended September 30, 2008





For the
quarter ended September 30, 2009, the Bancorp reported a net loss of $1.4
million, compared to net income of $1.6 million for the quarter ended September
30, 2008, a decrease of $3.0 million (188.7%).  For the current
quarter the ROA was (0.84%), compared to 0.96% for the quarter ended September
30, 2008.  The ROE was (10.02%) for the quarter ended September 30,
2009, compared to 11.75% for the quarter ended September 30,
2008.  The net loss for the quarter ended September 30, 2009, was a
result of required loan loss provisions of $4.7 million.  The
additional loan loss provisions were required as $6.3 million in loan
charge-offs were recorded during the current quarter.





Net
interest income for the three months ended September 30, 2009 was $5.7 million,
a decrease of $45 thousand (0.8%), compared to $5.8 million for the quarter
ended September 30, 2008.  The decrease in net interest income has
been negatively impacted by a decrease in loan interest income, as a result of
an increase in the sale of fixed rate mortgage loans during
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 5.03% for the three months
ended September 30, 2009, compared to 5.73% for the three months ended September
30, 2008.  The weighted-average cost of funds for the quarter ended
September 30, 2009, was 1.37% compared to 2.00% for the quarter ended September
30, 2008.  The impact of the 5.03% return on interest earning assets
and the 1.37% cost of funds resulted in an interest rate spread of 3.66% for the
current quarter compared to 3.73% for the quarter ended September 30,
2008.  During the current quarter, total interest income decreased by
$944 thousand (10.8%) while total interest expense decreased by $899 thousand
(30.2%).  The net interest margin was 3.45% for the three months ended
September 30, 2009, compared to 3.79% for the quarter ended September 30,
2008.  On a tax equivalent basis, the Bancorp’s net interest margin
was 3.91% for the three months ended September 30, 2009, compared to 3.94% for
the quarter ended September 30, 2008.   Comparing the net
interest margin on a tax equivalent basis more accurately compares the returns
on tax-exempt loans and securities to those on taxable interest-earning
assets.


22




During
the three months ended September 30, 2009, interest income from loans decreased
by $990 thousand (13.6%), compared to the three months ended September 30,
2008.  The change was primarily due to a decrease in the
weighted-average yield of the loan portfolio and lower average
balances.  The weighted-average yield on loans outstanding was 5.38%
for the current quarter, compared to 5.97% for the three months ended September
30, 2008.  Loan balances averaged $466.5 million for the current
quarter, a decrease of $20.1 million (4.1%) from $486.6 million for the three
months ended September 30, 2008.  During the three months ended
September 30, 2009, interest income on securities and other interest bearing
balances increased by $46 (3.0%), compared to the quarter ended September 30,
2008.  The increase was due to an increase in securities balances,
slightly offset by a decrease in average yield.  The weighted-average
yield on securities and other interest bearing balances was 4.28%, for the
current quarter, compared to 4.78% for the three months ended September 30,
2008.  Securities balances averaged $143.6 million for the current
quarter, up $21.6 million (17.7%) from $122.0 million for the three months ended
September 30, 2008.  The increase in security average balances is a
result consistent investment growth during 2009.  Other interest
bearing balances averaged $11.5 million for the current period, up $8.4 million
(271.0%) from $3.1 million for the three months ended September 30,
2008.  The increase in other interest bearing balances is a result of
additional liquidity primarily generated by loan sales during 2009.





Interest
expense on deposits decreased by $729 thousand (30.8%) during the current
quarter compared to the three months ended September 30, 2008.  The
change was primarily due to a decrease in the weighted-average rate paid on
deposits.  The weighted-average rate paid on deposits for the three
months ended September 30, 2009 was 1.22%, compared to 1.84%, for the quarter
ended September 30, 2008.  Total deposit balances averaged $536.9
million for the current quarter, up $38.1 million (4.7%) from $513.0 million for
the quarter ended September 30, 2008.  Interest expense on borrowed
funds decreased by $170 thousand (28.0%) during the current quarter due to a
decrease in average daily balances and a decrease in the weighted average paid
for borrowing funds.  The weighted-average cost of borrowed funds was
2.59% for the current quarter compared to 2.97% for the three months ended
September 30, 2008.  Borrowed funds averaged $67.3 million during the
quarter ended September 30, 2009, a decrease of $14.3 million (17.5%) from $81.6
million for the quarter ended September 30, 2008.





Noninterest
income for the quarter ended September 30, 2009 was $1.3 million, an increase of
$138 thousand (12.3%) from $1.1 million for the quarter ended September 30,
2008.  During the current quarter, fees and service charges totaled
$694 thousand, a decrease of $88 thousand (11.3%) from $782 thousand for the
quarter ended September 30, 2008.  The decrease in fees and service
charges is a result of a reduction in fee related deposit
accounts.  Gains from loan sales totaled $167 thousand for the current
quarter, an increase of $143 thousand (595.8%), compared to $24 thousand for the
quarter ended September 30, 2008.  The increase in gains from the sale
of loans is a result of increased customer refinance activity to low rate fixed
rate mortgages.  Fees from Wealth Management operations totaled $270
thousand for the quarter ended September 30, 2009, a increase of $69 thousand
(34.3%) from $201 thousand for the quarter ended September 30,
2008.  The increase in Wealth Management income is related to growth
in assets under management.  Gains from the sale of securities totaled
$93 thousand for the current quarter, an increase of $52 thousand (126.8%) from
$41 thousand for the quarter ended September 30, 2008.  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 $98 thousand for
the quarter ended September 30, 2009, a decrease of $8 thousand (7.5%), compared
to $106 thousand for the quarter ended September 30, 2008.  At
September 30, 2009, the Bancorp recognized a $44 thousand other-than-temporary
impairment for one of its trust preferred securities.  For the quarter
ended September 30, 2009, a loss of $26 thousand on foreclosed real estate was
realized, compared to a $40 thousand loss for the quarter ended December 31,
2008.  During the current quarter, other noninterest income totaled $7
thousand, quarters ended September 30, 2008 and 2009.





Noninterest
expense for the quarter ended September 30, 2009 was $4.8 million, an increase
of $501 thousand (11.7%) from $4.3 million for the three months ended September
30, 2008.  During the current quarter, compensation and benefits
totaled $2.4 million, an increase of $208 thousand (9.3%) from $2.2 million for
the quarter ended September 30, 2008.  The change in compensation and
benefits is related to the increase in additional personnel for retail banking
activities related to the newly opened Gary, Indiana and Valparaiso, Indiana
banking centers, and annual compensation increases for bank
personnel.  Occupancy and equipment totaled $782 thousand for the
current quarter, an increase of $49 thousand (6.7%) compared to $733 thousand
for the quarter ended September 30, 2008.  The increase is related to
the operations of the new banking center in Gary and
Valparaiso.  Federal deposit insurance premium expense totaled $246
thousand for the three months ended September 30, 2009, an increase of $219
thousand (811.1%) from $27 thousand for the three months ended September 30,
2008.  The change is a result of an industry wide increase in the FDIC
insurance premium assessment rates, elimination of 2008 premium credits and an
industry wide FDIC special assessment that was recorded as of September 30,
2009.  The FDIC special assessment totaled $305
thousand.  Data processing expense totaled $222 thousand for the three
months ended September 30, 2009, an increase of $9 thousand (4.2%) from $213.4
thousand for the three months ended September 30, 2008.  Marketing
expense related to banking products totaled $153 thousand for the current
quarter, an increase of $68 thousand (80.0%) from $85 thousand for the three
months ended September 30, 2008.  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 $924
thousand for the quarter ended September 30, 2009, a decrease of $52 thousand
(5.3%) from $976 thousand for the quarter ended September 30,
2008.  The Bancorp’s efficiency ratio was 68.19% for the quarter ended
September 30, 2009, compared to 61.9% for the three months ended September 30,
2008.  The ratio is determined by dividing total noninterest expense
by the sum of net interest income and total noninterest income for the
period.  The increase in the efficiency ratio for the quarter ended
September 30, 2009 is related the additional noninterest expense for FDIC
insurance premiums.


23





Income
tax benefits for the three months ended September 30, 2009 totaled ($1.1)
million, compared to income tax expense of $474 thousand for the three months
ended September 30, 2008, a decrease of $1.5 million (321.7%).  The
combined effective federal and state tax rates for the Bancorp was -43.0% for
the three months ended September 30, 2009, compared to 23.2% for the three
months ended September 30, 2008.  The Bancorp’s current effective tax
rate is a result of tax benefits recorded as a result of the current quarter’s
net loss.





Results
of Operations - Comparison of the Nine months Ended September 30, 2009 to the
Nine months Ended September 30, 2008





Net
income for the nine months ended September 30, 2009 was $1.4 million, compared
to $4.7 million for the nine months ended September 30, 2008, a decrease of $3.3
million (70.8%).  The earnings represent a ROA of 0.27% for the nine
months ended September 30, 2009, compared to 0.96% for the nine months ended
September 30, 2008.  The ROE was 3.32% for the nine months ended
September 30, 2009, compared to 11.37% for the nine months ended September 30,
2008.  The decrease in net income for 2009 was a result of required
loan loss provisions of $6.5 million, as $7.3 million in loan charge-offs were
recorded during the year.





Net
interest income for the nine months ended September 30, 2009 was $17.3 million,
an increase of $891 thousand (5.4%), compared to $16.4 million for the nine
months ended September 30, 2008.  The increase in net interest income
has been positively impacted by the decrease in the Bancorp’s cost of funds as a
result the Federal Reserve’s continued action in maintaining a low short-term
interest rate environment.  The weighted-average yield on
interest-earning assets was 5.19% for the nine months ended September 30, 2009,
compared to 5.80% for the nine months ended September 30, 2008.  The
weighted-average cost of funds for the nine months ended September 30, 2009, was
1.55% compared to 2.27% for the nine months ended September 30,
2008.  The impact of the 5.19% return on interest earning assets and
the 1.55% cost of funds resulted in an interest rate spread of 3.64% for the
current nine months compared to 3.53% for the nine months ended September 30,
2008.  During the current nine months, total interest income decreased
by $2.0 million (7.7%) while total interest expense decreased by $2.9 million
(29.2%).  The net interest margin was 3.44% for the nine months ended
September 30, 2009, compared to 3.38% for the nine months ended September 30,
2008.  On a tax equivalent basis, the Bancorp’s net interest margin
was 3.90% for the nine months ended September 30, 2009, compared to 3.76% for
the nine months ended September 30, 2008.   Comparing the net
interest margin on a tax equivalent basis more accurately compares the returns
on tax-exempt loans and securities to those on taxable interest-earning
assets.





During
the nine months ended September 30, 2009, interest income from loans decreased
by $2.4 million (10.8%), compared to the nine months ended September 30,
2008.  The change was primarily due to a decrease in the
weighted-average yield of the loan portfolio and lower average
balances.  The weighted-average yield on loans outstanding was 5.53%
for the current nine months, compared to 6.09% for the nine months ended
September 30, 2008.  Loan balances averaged $475.1 million for the
current nine months, a decrease of $8.2 million (1.7%) from $483.3 million for
the nine months ended September 30, 2008.





During
the nine months ended September 30, 2009, interest income on securities and
other interest bearing balances increased by $344 (8.0%), compared to the nine
ended September 30, 2008.  The increase was due to an increase in
securities balances, slightly offset by a decrease in average
yield.  The weighted-average yield on securities and other interest
bearing balances was 4.13%, for the current nine months, compared to 4.68% for
the nine months ended September 30, 2008.  Securities balances
averaged $136.8 million for the current quarter, up $17.8 million (15.0%) from
$119.0 million for the three months ended September 30, 2008.  The
increase in security average balances is a result consistent investment growth
during 2009.  Other interest bearing balances averaged $13.3 million
for the current period, up $9.9 million (291.2%) from $3.4 million for the three
months ended September 30, 2008.  The increase in other interest
bearing balances is a result of additional liquidity primarily generated by loan
sales during 2009.


24





Interest
expense on deposits decreased by $2.6 million (31.1%) during the current nine
months compared to the nine months ended September 30, 2008.  The
change was primarily due to a decrease in the weighted-average rate paid on
deposits.  The weighted-average rate paid on deposits for the nine
months ended September 30, 2009 was 1.41%, compared to 2.14% for the nine months
ended September 30, 2008.  Total deposit balances averaged $537.8
million for the current nine months, up $22.6 million (4.4%) from $515.2 million
for the nine months ended September 30, 2008.  Interest expense on
borrowed funds decreased by $354 thousand (20.4%) during the current nine months
due to a decrease in average daily balances and a decrease in the weighted
average paid for borrowing funds.  The weighted-average cost of
borrowed funds was 2.62% for the current nine months compared to 3.22% for the
nine months ended September 30, 2008.  Borrowed funds averaged $70.5
million during the nine months ended September 30, 2009, a decrease of $1.5
million (2.1%) from $72.0 million for the nine months ended September 30,
2008.





Noninterest
income for the nine months ended September 30, 2009 was $4.4 million, an
increase of $867 thousand (24.7%) from $3.5 million for the nine months ended
September 30, 2008.  During the current nine months, fees and service
charges totaled $2.0 million, a decrease of $181 thousand (8.3%) from $2.2
million for the nine months ended September 30, 2008.  The decrease in
fees and service charges is a result of a reduction in fee related deposit
accounts.  Gains from loan sales totaled $1.0 million for the current
nine months, an increase of $938 thousand (997.9%), compared to $94 thousand for
the nine months ended September 30, 2008.  The increase in gains from
the sale of loans is a result of increased customer refinance activity to low
rate fixed rate mortgages and a one-time sale of portfolio fixed rate mortgage
loans, which the Bancorp sold to reduce interest rate risk on its balance
sheet.  Fees from Wealth Management operations totaled $672 thousand
for the nine months ended September 30, 2009, an increase of $54 thousand (8.7%)
from $618 thousand for the nine months ended September 30, 2008.  The
increase in Wealth Management income is related to growth in assets under
management.  Gains from the sale of securities totaled $437 thousand
for the current nine months, an increase of $250 thousand (133.7%) from $187
thousand for the nine months ended September 30, 2008.  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 $306 thousand
for the nine months ended September 30, 2009, an decrease of $5 thousand (1.6%),
compared to $311 thousand for the nine months ended September 30,
2008.  At September 30, 2009, the Bancorp recognized a $44 thousand
other-than-temporary impairment for one of its trust preferred.  For
the quarter ended September 30, 2009, a loss of $58 thousand on foreclosed real
estate was realized, compared to a $21 thousand loss for the quarter ended
December 31, 2008.  During the current nine months, other noninterest
income totaled $23 thousand, a decrease of $108 thousand (82.4%) from $131
thousand for the nine months ended September 30, 2008.  The decrease
in other noninterest income was due to the reversal of an allowance for a
previous impairment on a letter of credit.





Noninterest
expense for the nine months ended September 30, 2009 was $14.3 million, an
increase of $1.8 million (14.3%) from $12.5 million for the nine months ended
September 30, 2008.  During the current nine months, compensation and
benefits totaled $7.1 million, an increase of $484 thousand (7.4%) from $6.58
million for the nine months ended September 30, 2008.  The change in
compensation and benefits is related to the increase in additional personnel for
retail banking activities related to the newly opened Gary, Indiana and
Valparaiso, Indiana banking centers, and annual compensation increases for bank
personnel.  Occupancy and equipment totaled $2.3 million for the
current nine months, an increase of $167 thousand (7.8%) compared to $2.1
million for the nine months ended September 30, 2008.  The increase is
related to the operations of the new banking center in Gary and
Valparaiso.





Federal
deposit insurance premium expense totaled $986 thousand for the nine months
ended September 30, 2009, an increase of $929 thousand (1629.8%) from $57
thousand for the nine months ended September 30, 2008.  The change is
a result of an industry wide increase in the FDIC insurance premium assessment
rates, elimination of 2008 premium credits and an industry wide FDIC special
assessment that was recorded as of September 30, 2009.  The FDIC
special assessment totaled $305 thousand.  Data processing expense
totaled $652 thousand for the nine months ended September 30, 2009, an increase
of $11 thousand (1.7%) from $641 thousand for the nine months ended September
30, 2008.  Marketing expense related to banking products totaled $368
thousand for the current nine months, an increase of $64 thousand (21.1%) from
$304 thousand for the nine months ended September 30, 2008.  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 $2.9 million for the nine months ended September 30,
2009, an increase of $132 thousand (4.8%) from $2.8 million for the nine months
ended September 30, 2008.  The change in other expenses is a result of
an increase in third party professional services.  The Bancorp’s
efficiency ratio was 66.0% for the nine months ended September 30, 2009,
compared to 62.8% for the nine months ended September 30, 2008.  The
increase in the efficiency ratio for the nine months ended September 30, 2009 is
related the additional noninterest expense for FDIC insurance
premiums.


25




Income
tax benefits for the nine months ended September 30, 2009 totaled ($498)
thousand, compared to income tax expense of $1.2 million for the nine months
ended September 30, 2008, a decrease of $1.7 million (142.3%).  The
combined effective federal and state tax rates for the Bancorp was (57.6%) for
the nine months ended September 30, 2009, compared to 20.2% for the nine months
ended September 30, 2008.  The Bancorp’s current effective tax rate is
a result of tax benefits recorded as a result of the current year’s lower net
income.





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, 2008 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 2008 Form
10-K.





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 September 30, 2009, the Bancorp’s chief executive officer and chief financial
officer have concluded that such disclosure controls and procedures were
effective as of that date in ensuring that information required to be disclosed
by the Bancorp under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms.





(b)           Changes in Internal Control
Over Financial Reporting.





There was no change in the Bancorp's
internal control over financial reporting identified in connection with the
Bancorp’s evaluation of controls that occurred during the three months ended
September 30, 2009 that has materially affected, or is reasonably likely to
materially affect, the Bancorp's internal control over financial
reporting.


26





PART II - Other
Information





Item
      1.
            Legal
      Proceedings


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





Item
      1A.
            Risk
      Factors


Not
Applicable.





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


There are
no matters reportable under this item.





Item
      3.
            Defaults Upon Senior
      Securities


There are
no matters reportable under this item.





Item
      4.
              Submission of Matters
      to a Vote of Security
Holders


There are
no matters reportable under this item.





Item
      5.
              Other
      Information


There are
no matters reportable under this item.





Item
      6.
            Exhibits





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




27




SIGNATURES





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





NORTHWEST INDIANA
BANCORPDate:  November
      16, 2009
                  /s/ David A. BochnowskiDavid
      A. BochnowskiChairman
      of the Board and Chief Executive
Officer




Date:  November
      16, 2009
                /s/
      Robert T. LowryRobert
      T. LowrySenior
      Vice President, Chief Financial Officerand
      Treasurer




28